This Week: The Pisani Paradox

Stock market trend: Up But Tired 

Market Pulse

[Thanks to all of for buying Always a Winner last Friday.  You helped the book make the Top 100 in business and investing books!!!]

I had the great pleasure of meeting one of my CNBC favorites last week at a conference, Bob Pisani.  What I love about Bob is his opinion-free market analysis that is based on facts rather than rants.

What struck me in my conversation with Bob was a paradox that has been bothering me.  He indicated that while many of the traders he talked to were bearish, most of them had long positions because that’s the direction the market was going.

I’ve been dealing with this same paradox.  I look at all of economic fundamentals and I see a general improvement globally and a lift out of the recession.  I look at all the technical indicators and virtually everything is pointing up rather than down.  Yet something still bothers me.

I think I may have figured out the Pisani Paradox.  The problem is that we are in the midst of a recovery being propelled artificially by a massive and unsustainable fiscal and monetary stimulus.  Yet, despite the current upward trajectory, even the best projections show very high employments rates through the end of next year. 

Worst still, while GDP growth rates are heading into the positive, few countries other than China and maybe India can look forward to growth rates that are at full potential output for any sustained period.  That means a slow growth recovery, which can’t possibly be bullish.

On top of this, many countries – including the U.S. and most of the Eurozone – are dramatically increasing their public debt to GDP ratios; this will create enormous pressures on interest rates down the road and constrain both fiscal and monetary policy.

I add all of this up and come to the conclusion that resolution of the Pisani Paradox likely lies in a range-bound market for several years that only the most nimble of traders will generate robust returns from.  The question of course is whether we are now reaching the upper end of that range.

I, for one, have begun to take some significant defensive measures.  Never one to be greedy, and after the best six months I”ve ever had in the markets, I have now closed all of my positions in cycle-sensitive stocks save my GE 2011 12.50 leaps.  However, for now, I have hedged those leaps with a short on GE stock. 

In addition, to hedge my other holdings (primarily biotechs), I have put on my favorite market hedge, TWM.  This is the UltraShort Russell2000 ProShares exchange-traded fund,

I like using TWM because it has more volatility the instruments one might use to short the Dow or S&P 500.  I also like using the UltraShort feature because I can buy fewer shares to achieve my desired hedge.

I have set stop losses on both of my hedges at levels which would indicate a breakout for the market over the resistance levels currently being encountered, e.g., Dow above 10,000.

My bottom line is that the best way to make money in the market is in bursts that leverage the trend.  Right now the trend is up but tired and I want to give my capital a well-earned rest and breather from risk.  And down the line, we will see if the Pisani Paradox was really a paradox or simply skitterishness on the part of traders who can’t accept a bull market.  Either way, I’m hedged for now.

This Week: Gee, Let’s Buy GE Options

Stock market trend: Up 

Market Pulse

It always nice when the market geniuses catch up to one of your trades.  Case in point is the action last week in GE call options and the follow-up article in this week’s Barron’s (“A Bullish Sign for GE).  Back in late February just as the market was approaching its March low, I put indicated in the newsletter that I was stocking up on GE 2011 leaps.

My reasoning at the time was that economic recovery was likely, that GE was grossly undervalued because of the drag of GE Capital on its balance sheet, and that when recovery came, GE would like enjoy a very strong move.  In addition, the beauty of buying GE as a market proxy is that, unlike buying SPY (the ETF for the S&P 500), GE also offers some hedging against a falling dollar because of its international operations.  Of course, the logic of buying GE leaps rather than GE shares was that I could limit my losses AND control a lot more shares with a lot less money.

What amused me about the Barron’s story is that the reporter Steven Sears remarks that “the bullish options angle…is new” and that “normally, the industrial conglomerate’s options were used to hedge against a decline in the stock.”   Well, new to the newbies maybe but not to this column’s readers.

Switching gears, a few brief words on the upcoming G-20 summit in Pittsburgh may be useful.  The big question is what will Barack Obama says to China’s President Hu Jintao.  Maybe something like: “How the Hankook are you?”  I’m referring of course to the tire tariff blowup last week and what this might mean for trade reform with China.

Will we get Mr. Obama in the conciliatory kowtow position begging for Mr. Hu to finance our budget deficit?  Or will Barack, in the vernacular of the street and now primetime television, “grow a pair” and challenge Mr. Hu to stop manipulating the Chinese currency and to end China’s massive mercantilist export subsidies.  What’s at stake is the viability of any long term recovery.  Without a rebirth of cities like Pittsburgh and Detroit and Akron in the manufacturing arena, Obama will be a one-term president providing over a slow-growing former superpower eating Chinese dust (and breathing its polluted air).

Last take: Let’s get the hell of Afghanistan.  (More to follow on this.)

This Week: October Crash

Stock market trend: Up. 

Market Pulse

We survived the brief market pullback so thus far September looks a bit safer than in previous years.  The big question hanging over this market is whether the investment-led recovery will be given legs by a revival of consumption.  The jury remains out on this as consumers are clearly saving more and undergoing an interesting transformation from spendthrift bubblemeisters to far more thrifty families.  The danger is that we may catch Japan’s “paradox of thrift” disease: Japanese citizens have been so paranoid about the economy that they never spend enough to restore robust growth to the Land of the Setting Economic Sun.

For a more detailed analysis of whether consumers will fail in the follow-through and lead us into an October stock market crash, I strongly urge you to view my latest video at TheStreet.com.  I do these videos in lieu of the lengthy newsletter at least partly because it’s a lot easier to add chart content to the video.   I guarantee that if you view this one, you will learn a lot about how to forecast the stock market trend.  Click here to view October Crash at TheStreet.com.  Do let me know what you think.