A Year of Surprises Lies Ahead
"Engage people with what they expect; it is what they are able to discern and confirms their projections. It settles them into predictable patterns of response, occupying their minds while you wait for the extraordinary moment -- that which they cannot anticipate." -- Sun Tzu, The Art of War
I followed my game plan Monday of embracing volatility (long and short) and moved rather dramatically from a large net-long position to a net-short one.
I continue to believe that 2016 will be a year of surprises and drama -- politically, economically and market-wise:
Politics. This year began with one of the most "probable improbables" -- controversial, outspoken Republican Donald Trump leading the pack of GOP presidential contenders. (Sarah Palin even reappeared to endorse him.) And last night, we saw a shocking development in the Democratic presidential contest as non-Democrat Bernie Sanders wound up in a dead heat at the Iowa caucuses with leading contender Hillary Clinton. On the Republican side, one-time GOP heir apparent Jeb Bush spent $4,000 for each vote he got in Iowa. You can't make this stuff up.
Economics. The inability of zero interest rates, $30-a-barrel oil and injections of liquidity to catalyze global economic growth has led to negative interest rates in some regions and countries. After the Bank of Japan cut its benchmark rate below zero last week, yields on more than $7.1 trillion of government debt have turned negative. Meanwhile, yields on U.S. investment-grade and junk bonds are rising to their highest levels in four years. (I think U.S. credit is attractive and underpriced.)
Markets. Short-term moves are often exaggerated in our current backdrop of machine-dominated markets. They're full of sound and fury, but provide an uncertain setting for the buy-and-hold crowd and arguably diminish some of charting's value. But they provide a wonderful opening for opportunistic traders willing to buy or short the market's extremes. Importantly, the "contrary" -- an up move in the last 10 days within the context of a down market -- recently prevailed as the market put what the benefit of hindsight shows was probably a capitulation low.
"A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty." -- Winston Churchill
I made an about-face 10 days ago and turned near-term bullish while maintaining a bearish intermediate-term view. I based that on the extreme swings I was seeing in many sentiment indicators. (My RealMoneyPro colleague James "RevShark" DePorre writes intelligently in his opening missiveTuesday about the role -- both pro and con -- of contra-trend trading.)
Just when some of the bulls became more cautious as the market broke down hard in mid-January, the S&P 500 rallied by 7% between Jan. 20's "noon swoon" and last Friday's close.
There were numerous technical and sentiment indicators that served as a signpost of opportunity 10 days ago. But unfortunately, as I noted in yesterday's column Get It While You Can ... As We Need It Now, the 7% rally might be about all we can expect. We seem to be resuming a downtrend of lower stock prices and deteriorating fundamental and technical conditions. (Helene "The Divine Ms. M" Meisler argues this morning how quickly we've moved from an oversold condition to a developing overbought one.)
Speaking of technicals, I've been having a spirited debate recently with Real Money Pro colleagues RevShark, Tim Collins and others on the merits of technical vs. fundamental analysis.
This reminds me of a great joke told I heard last night at a small dinner party at Ira Harris' house. Home Depot founder Ken Langone, Omega's Lee Cooperman and Sanford C. Bernstein founder Roger Hertog and others were there to celebrate 82-year-old Byron Wien.
Here's the joke:
A technical analyst and a fundamental analyst are chatting about the markets in the kitchen.
One of them accidentally knocks a kitchen knife off of the table, and it lands right in the fundamental analyst's foot.
The fundamental analyst yells at the technician, asking him why he didn't catch the knife.
"You know technicians don't catch falling knives!" the technician responded.
He, in turn, asks the fundamental analyst why he didn't move his foot out of the way.
The fundamental analyst responds: 'I didn't think it could go that low!"
Baby, It's (About to Be) Cold Outside
"I got to get home (But baby, you'd freeze out there) Say, lend me a coat. (It's up to your knees out there) You've really been grand (I thrill when you touch my hand) But don't you see? (How can you do this thing to me?)"
-- Frank Loesser, Baby It's Cold Outside
I've consistently expressed my intermediate-term bearishness over the last 15 months on technical and fundamental grounds, while in the process parodying:
Dr. Seuss (in The Bull in the Hat and Green Eggs and Stocks: Neither Rocks)
Janis Joplin and Hillary Scott (of Lady Antebellum)
Cheech and Chong
Frank Loesser
The movie Trading Places
But regardless of what investment methodologies we use (or what parodies I offer up), 2016 promises to be a year filled with surprises.
I outlined my 15 Surprises for 2016. Possible surprises that I see range from socialist Bernie Sanders becoming the Democratic presidential nominee to a deepening bear market caused by a garden-variety recession. (I even think Pete Rose might end up in the Baseball Hall of Fame!)
We'd all like to see the market's future with clarity. But we're living in extraordinary, abnormal times (i.e. negative real interest rates) where the only certainty around is the lack of certainty.
Enjoy, endure, capitalize upon and survive each surprise as it comes to you (if it does). It's said that surprises are the greatest gift that life can grant us. Prepare to be shocked and embrace surprises -- and the opportunities that they present.
The Bottom Line
"Remember, the storm is a good opportunity for the pine and the cypress to show their strength and their stability." -- Ho Chi Minh
Whether you're a fundamental or technical practitioner, buckle up and err on the side of conservatism in what's expected to be a volatile and surprising 2016 (with potentially stormy conditions).
After all, baby it's about to get cold outside -- figuratively and literally!


















