I Don’t Know

You see how easy that was?

Why is it that we don’t hear that more often?

There’s this belief out there that as market participants we always need to have an opinion on everything. Is it a buy, sell or hold? Tell me now, right now. Oh ok, you don’t know? How about gun to your head – what do you do? Buy or Sell? Hurry up, there’s a gun to your head!

What’s wrong with I don’t know?

Readers of the blog know how obnoxiously bullish I was last summer (see here and here). And I wasn’t going to apologize for it either. The pessimism was getting to the point where it was actually upsetting me. But now that markets are at all time highs, people forget the list of reasons to run away from stocks. It’s only after the 10% corrections that the headlines become that scary. Check out this hilarious list of stuff that dominated the news last summer.

At the time, things were clear to me as far as US Equities were concerned. Pessimism was high, the right sectors were leading, the right ones were struggling. The right currencies were bottoming and the right ones were topping. Seasonality cycles were in our favor. Metals were acting well, etc etc.

But these days, we’re all over the place. Europe has been getting crushed. China and some other emerging markets slaughtered. US stocks, not so much, but they are showing signs of weakening. Treasuries are wishy-washy. The easy trade is to short them, but price says otherwise. The Dollar is making 5-month highs, but has it gone too far too fast? Tech has been struggling and under-performing all year. Apple, America’s favorite stock continues to disgust. So is it wrong to say I don’t know?

Not to me it isn’t.

It actually feels pretty good. You should try it some time.

And it’s all about time frames. I have my thoughts about the bigger picture. But the market doesn’t care what I think. I need to worry about where to allocate and how to manage my risk now. I can’t afford a 50% draw-down like many “long-term investors” suffered a few years ago. That’s unacceptable to me. I need to manage risk real time. Not wait until thing get hairy to start to worry. Proactive, not reactive right?

So when we’re in these situations, and they’ve come in the past and I promise you will come again, we just get much smaller and look to other less-correlated areas. It’s okay to do that. You don’t always have to be leveraged long or leveraged short stocks no matter what, even if you don’t have a clue what’s going to happen. That’s how you get crushed in this market. By guessing.

According Ted Williams, the first rule for good hitting is to get a good ball to hit. He didn’t say to swing at all of them as hard as you can so eventually you’ll hit one really far. His advice was to wait for your pitch. He said, “A good hitter can hit a pitch in a good spot three times better than a great hitter can hit a ball in a questionable spot.” And it’s true. Common sense even. So why should it be any different in capital markets.

If you don’t love the pitch, don’t swing at it. But if you feel really confident putting on a position because all of the stars are aligned: seasonality, momentum, polarity, interemarket relationships, sentiment….go for it. Crush it. Win or lose, would you make the trade again? If the answer is an easy yes, then you did the right thing.

But to look back at a past trade and have to say to yourself, “damn I shouldn’t have put that one on, I was just bored”, well then you probably shouldn’t have put it on. You should’ve done some push-ups or grabbed a sandwich or something instead. It would have been cheaper and maybe saved yourself a headache.

These markets trade, what, 252 or so days out of the year? Do we always need to have a strong opinion? Do we always have to love the pitch? Do we always need to be leveraged long or leveraged short?

The stars will align again. The fat pitch will come. They always do.

And when it does, you better have your chips stacked high enough to participate to the fullest extent possible.

That’s how I see things at least….