Equities: From "Bear and Long" to "Bull and Short"

I’ve had lately a tendency to mix up my personal views on the markets and the side I take on my trades.The last year, I started the year pretty bearish on the stock markets and ended making money on the long side. Another example is when at the end of the past year, I was pretty bullish on the EURUSD and ended making money being short. Well, I can’t complain and the situation could be worse: I could be right in my views and lose money… And today, in the very same way, while I’m bullish on the equities market, I’m finding myself short equities…

The rationale for my trading in divergence with my views is firstly that I fully understand that “the market can be irrational longer than you can stay solvent” as Keynes put it. Don’t fight the market Nic, if it wants to go up or down, it’s going there whatever the economic reality is, whatever the news, bad or good, are and more importantly whatever you or me can think. And in such a framework, technical and chart analysis could give some clue of where the market wants to go and I lately tend to rely on them more than usually. Secondly, it looks like the way the things have unfolded for one year or so has showed a few instances of this divergence between market and economic reality: last year the markets enjoyed the strongest rally in years while the economic news remained bad, the unemployment in the US doubled, it doesn’t look like the massive money pumped in the Economy did flow to the consumers and the fundamental causes that threw us in the Recession haven’t been fixed. Notably we still don’t have any clue regarding the final outcome of the delinquencies and defaults on US residential mortgages and their impact on the toxic assets they back.

It’s never easy to identify precisely what moves markets, but the main reasons given by the analysts for the correction seen in January is the tightening of China policies and the threat of further measures, Obama’s plan to curb speculation in the banks and finally pressure on the European PIIGS (Portugal Italy Ireland Greece and Spain). To a large extent, the first two reasons show some confidence from who I called previously the “Sheriffs”, governments and central bankers world-wide, that the recovery could sustain with less support. I believe that Chinese move is part of a sane process and initiatives to limit the overheating of an Economy couldn’t be that bad. As I wrote in my previous post, I don’t think Obama’s proposal will change anything to the risks taken by the banks. But to me, the tensions in Europe could weight more on the Bearish side of the market balance. The weakness of the PIIGS and the discrepancies between the members are not really new, but we could see soon the very first test of the single currency and more than the sovereign risk that, I believe, remains limited, I think the potential role of the EUR as an alternative currency to the dollar has lately taken a hit. The name of the game has not changed: Long the best, short the worst. I switched most of my stock holdings lately to Asia and as I felt some pressure on the markets end of January, I’ve partially hedged for the time being these holdings with a short Eurostoxx 50 (SX5E).

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