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Posted 10/24/2005
Contrarian Chronicles
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Market's confusing, but the big trend is down
The market's reactions to earnings news so far have been random -- a treacherous environment for any investor. But I still see stocks headed lower in the long run.
By Bill Fleckenstein
Lately, I have been unusually focused on the market's short-term gyrations. This is because I have felt that this fall would see the resumption of the bear market and the beginning of the "next time down." Meaning that this would be an attractive opportunity for profits for me and my fund, which operates on the short side.
However, the key to success as a short-seller lies not just in identifying the correct targets, but in how you manage your positions and, more importantly, in how you add to your positions.
If you are running a short portfolio and the trend goes your way, your exposure and potential for future gains tends to shrink. Thats not the case on the long side. Sometimes that may be fine, but, at other times, you may like to keep your exposure up. So, you have to continue "pressing" (adding exposure). Of course, pressing at the wrong time is a recipe for losses.
Mindfulness of minefields
As the market has rolled over, I have been trying to sort out in my mind where rallies might come from. I have felt as though the tape has been particularly treacherous in the last month or so because the response to news has been a fair bit more random than it's been in the recent past.
For example, tech land has seen bad news punish stocks like International Rectifier (IRF, news, msgs), Xilinx (XLNX, news, msgs) and Novellus (NVLS, news, msgs) -- but not impact Apple (AAPL, news, msgs) and Research in Motion (RIMM, news, msgs). Tepid news has not hurt IBM (IBM, news, msgs) though good news has punished Advanced Micro Devices (AMD, news, msgs). (As an AMD aside, I can't remember the last time that a chip company won so handily at beat-the-number, and yet the dead-fish community fell all over itself, saying why this was the end of the line. Usually, they get the ruler out and extrapolate as far as the eye can see.)
Turning to the housing ATM, stocks all along that chain have responded negatively to nearly all company news. On the other hand, Citigroup's (C, news, msgs) earnings win failed to light a fire under that stock, even as the shares of JP Morgan Chase (JPM, news, msgs) were lifted by its good news. Then there is Fannie Mae (FNM, news, msgs), which has bounced from the initial pain inflicted by a negative Dow Jones story.
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Meanwhile, other crosscurrents abound. Two weeks ago, as the financials and housing stocks were getting pounded, tech stocks were firming up. In the past, that has always signaled that a rally was coming. Last week, however, tech stocks as a group traded rather poorly, even though we finally saw a bounce in financial, housing and oil-service stocks. So to me, the action continues to be quite confusing.
Curveballs 'n bulls
Coming into Wednesday morning, for instance, I'd thought that with Intel's (INTC, news, msgs) results being less than spectacular, coupled with the prior poor action of the tape, we might be ready to see some acceleration on the downside. But, in fact, we saw just the opposite, as the tape reversed.
The reason that mattered: If the market couldn't mount a bounce, that might mean that downside acceleration was at hand. On the other hand, if we did start to get a bounce after seeing a somewhat scary tape, it might indicate that a bit of a "better" bounce might be in the cards, which could perhaps last a week or two.
The fact that so many people are bullish -- particularly so in the print media and especially with the more vocal talking heads on TV -- means that if a rally gets started, it ought be able to get legs. Of course, if it can't, that's an even stronger signal of just how weak the market is.
Along the serpentine stock highway
The bottom line: I expect the tape to fall apart at some juncture. I'm groping with when that might be, because it's important to me to capitalize on it. I recognize that for some folks who read the column, this attention to the near-term minutiae may be just a distraction. But for others who are more active participants on a day-to-day basis, the thought process might be useful.
In any case, it's never easy to divine the direction of this mass of humanity called the stock market, but sometimes you can make sense of it. I have no choice but to continue trying to ferret it out. Meanwhile, the long-term outcome for stocks is quite clear to me: Much lower prices.
In praise of inaction
Speaking of lower prices -- this time, in the commodity arena -- I'd like to end with a lesson that may be helpful to readers. By way of background, in my Sept. 26 daily column, I'd admitted to being "very tempted to buy some (gasoline), as it seems to me that gasoline is headed higher in the short run. Upon reflection, however, I reminded myself that I knew next to nothing about gasoline futures, so I didn't."
With the price of gasoline futures now down about 15% from where it was when Hurricane Rita struck, I am thankful that recognizing my lack of understanding of gasoline overruled my impetuous desire to buy it. That decision would have cost me a good deal of money. The takeaway here: If you don't know what your edge is in doing something, perhaps it's best left undone.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of MSN Money. At the time of publication, Fleckenstein was long AMD. He was also short Intel, Fannie Mae, Research in Motion and IBM and held puts in those same stocks.
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