The Cusp of Doom

Not counting today's action, the DOW has moved about 850 points in 5 weeks. Earlier this week Matt Nesto on CNBC reported that 88% of S&P 500 stocks were trading above their 50 day moving average so we can infer that investors are too far out on the risk curve chasing performance, but the market can still go higher. I'm not going to give you another hard-luck story, but I am getting hammered mercilessly in my short positions. The Ithaca Experiment Portfolio is on autopilot right now and will remain so for the foreseeable future despite the disappointing performance. Saying I am unfazed would be misleading, but the market tends to revert to its mean and there are plenty of problems looming on the horizon that could diffuse the bomb. Most financial planners will tell you it is best to check your portfolio on a monthly or quarterly basis and reallocate your positions once a year. This July will be the end of my fiscal year and a lot can happen by then.

Today is quadruple witching day when options expire and you should expect the market to rally, plus pick up some volume. Anybody who tells you you can't make or lose much money in a low volume market is out of their minds. This rally that started over a year ago has been very low volume. It just keeps slowly grinding skyward. According to the Stock Trader's Almanac 2010, the last week and a half of March tends to be historically weak, so maybe I'll catch a break by the end of the month. Sovereign debt default in Europe, the health care bill here domestically or some sort of terrorist attack could send this full throttle market to a screeching halt, but I doubt it. Both Meredith Whitney and Nouriel Roubini came out with statements on Tuesday saying they still see trouble for the markets in the second half of the year, especially when the Fed takes away the punch bowl and the markets kept moving higher. I'm not sure what impact Roubini has on moving the market anymore, but the prevailing theory on Whitney is that she called the sub-prime crisis and still sees another double dip in housing prices.

The majority of our GDP in the USA is comprised of consumer spending and a lot of consumer spending is dependent on housing prices. If housing prices decline, then our GDP will sink like a rock and if history is correct, so will stock prices. But this is a simplistic scenario here. It is a multi-faceted problem with many factors contributing to the market's decline like employment figures and credit card limits, both of which have been shrinking. Without money or credit, people just can't buy things. In the April issue of Kiplinger's Personal Finance, Jeremy Siegel wrote his monthly column about how stock returns were better than bonds and he may be right, but where I disagree with him is his projection of a 14.2 P/E ratio for the S&P 500 for 2010. Right now the current P/E ratio of the S&P 500 is roughly 20-21 without splitting hairs. For the P/E ratio to reach 14.2, we would have to grow profits by about 30% for 2010 and I just don't see that. I believe it is going to take many years before our economy is back up to speed. That doesn't mean the market can't rally. It has and it will, but eventually it has to prove that the fundamentals are sustainable and I don't see that happening for quite some time.

Déjà Vu

Yesterday the S&P 500 closed at 1150 which matched the January 19th year-to-date high. This is also the high for the rally that has been forging ahead since March of 2009. If I were a trader, I'd be long the market, but I'm not a trader so I will remain in my short positions even though I could be suffering considerable pain for the foreseeable future. I'm not rattled yet although the paper losses I've experienced make me second guess myself on a daily basis. It takes a leap of faith to remain leveraged and short during a 12 month run to the upside. Now, you might think I've been taken to the cleaners, but that doesn't happen until I sell for a loss. The odds are in my favor that we will see a significant correction in the months ahead, especially since the market is overvalued and we really haven't backed and filled for a significant amount since a year ago. The bulls do tell a compelling story, but I'm just not buying it. I thought bad financial news would redefine the current investing landscape and we'd be in for a white knuckle ride to the downside, but I've been proven wrong again. This market is off the charts.

People I respect tell me if a stock or your portfolio is down 50%, it takes a 100% increase to get back to even. I am well aware of this and still am not gun shy and consider myself battle tested. As I've stated before, leveraged portfolios tend to rise and fall at lights out speed. You just have to get used to the volatility. Let's see how bold I am when the S&P 500 reaches 1200. I may have to snap out of it and crawl away with my tail between my legs, but I don't think so. I felt this gnawing in my stomach two months ago when the market reached its high the last time and it turned around and headed south. With a dearth of economic news being released the next few weeks and earnings season almost a month away, we very well could drift higher now. I am prepared for that and will counter punch by doing nothing. A rope-a-dope situation, if you will.

Running on Empty

Last week the Ithaca Experiment portfolio got crushed. Most of the damage was in the the Direxion Small Cap Bear 3X Shares (TZA) because of the major move in the Russell 2000, but the ProShares Ultra Short S&P 500 (SDS) also went down significantly. Remember these are leveraged and short positions, so if the market goes up, my holdings go down - big time. This week is the one year anniversary of the market hitting it's March, 2009 low and because it's climbed a wall of worry for 12 months, I took some time to reflect on my investments this weekend and have decided to stay the course even though I've considerable paper losses on a percentage basis. I still firmly believe we are due for a major correction. If I had a magic wand or a genie in a lamp, I'd start the correction immediately because this market is trading on inertia, but I'll just have to be patient for the time being. As I've stated before and I'll say again, I'm taking big risks here, so following my portfolio advice is not recommended for most retail accounts.

Because David Walker's Comeback America was praised by Paul Volker, I took a flier on it last week and have decided not to review it even though it is an economics book. Mr. Walker is the former comptroller general of the United States and although he has written a good book, there isn't very much investing information in it. He seems to keep repeating the same themes over and over and as he states: "By now you recognize my mantra. The expansion of the government over time, excessive spending, and the continuing cry for tax relief have been driving us towards bankruptcy.". This is quite evident to most Americans except for those on the far left and to go into detail about Mr. Walker's views would be sidestepping the main focus of this blog which is to track the Ithaca Experiment portfolio and to discuss my reasons for being short the market (for the time being). Because of that, this will be a very small installment this time. However, on the docket is The Quants by Scott Patterson and from the first few chapters I can already tell there will be plenty of fodder for my next posting.