Is now the time to get bullish?

Jul.23, 2008 in Market Outlook

By Todd Harrison

Last Update: 7/23/2008 12:01:00 AM

NEW YORK (MarketWatch) — Where you stand is a function of where you sit. In
today’s marketplace, where you sit is a function of time.

As crosscurrents commingle on Wall Street, 2008 is shaping up to be one of the
toughest tapes in recent memory. With massive amounts of information and
razor-thin margins of error, the financial field is thinning before our eyes.

Jeff Saut, chief market strategist at Raymond James, once told me that it’s
impossible to do more than one thing at any given time. That seemingly conflicts
with the daily routine of market players but it’s possible to compartmentalize
the process.

There are four lenses with which to watch the freaky fray — nuances, trends,
phases and cycles — and each requires a unique stylistic approach. The task at
hand, regardless of which way you play, is to synch the risk profile of your
portfolio with an appropriate time horizon.

It’s easier said than done. In the spirit of sharing my missteps so you avoid
them altogether, I’ll offer that this juxtaposition has been the single biggest
pitfall throughout my career.

With humility and stability as a mindset and goal, let’s take a quick peek where
we stand:

Nuances

The short-term volatility is vicious. Not only do we have thousands of hedge
funds standing in a circle shooting at each other, we’ve also got remnants of an
expiration hangover and the implementation of the short-sale rule pushing prices
under the surface. Read related Minyanville column
Click for Detail

The upside action offers excellent opportunities to capture profits with minimal
overnight risk. It’s not for everyone — and there aren’t opportunities every
session — but for those proactive and patient, there is money to be made.

My daily tells include the financials, market breadth (when skewed 2:1), reaction
to the overnight news and the high beta complex (Apple Inc. (AAPL)), Google Inc.
(GOOG), Baidu.com Inc. (BIDU), Research in Motion (RIMM)), particularly when they
don’t participate in opening gaps (either way).

Trend

Last week, I offered that the big-picture blues we’ve long eyed in Minyanville
finally arrived. On cue, Federal Reserve Chairman Ben Bernanke acknowledged them,
paving the way for the biggest financial rally in history. Read column
Click for Detail

After Thursday’s mean-reverting melt-up, I punted my long exposure and with the
exception of a small Google short (which I’ve since unwound), entered Friday’s
ride with a relatively flat book. It was a tenuous time to be a bull but with the
benefit of hindsight, that was the easy trade given the massively oversold
condition. Read related Minyanville item
Click for Detail

The reaction to news is always more important than the news itself. Given this
week’s earnings from American Express (AXP), Apple and Wachovia Corp. (WB) the
bovine need to stand tall — right here, right now — if the squeeze is to morph
into something more.

Trading bottoms are traditionally littered with bad news and the fundamental data
points this week qualify as such. If S&P (SPX) 1260 can hold underneath, the
upside should continue in the context of a bear market bounce.

Phase

The debt unwind will take years to manifest as deleveraging unfolds in phases.

The first domino was housing.

The second domino was the banks.

The third domino was financials in drag such as General Electric (GE), General
Motors Corp. (GM) and Ford (F) that derive a large chunk of their revenues from
finance-based operations.

The “easy trade” in those sectors has passed. While risk remains and dead men
walk through their ranks, the baton has been passed to other vulnerable groups.

One of our 10 themes for 2008 was the other side of zero-percent financing, or
the financial crisis morphing into an economic, consumer-centric one. Read
related MarketWatch column.
Click for Detail

We’ve talked about tech being vulnerable, both on the consumer and enterprise
level. The action in Microsoft Corp. (MSFT) last week — and Apple this week –
spoke to this.

Retail is flagged given its reliance on the consumer.

Ditto the credit card companies, perceived safe-havens given their processing
revenue.

The final group to fall will be energy and commodities as a function of slowing
global growth.

It could take years for this to fully play out but it’s a road map for what’s to
come

Cycle

Just as the debt bubble took many years to build, it will take time to unwind.

It is, in many ways, the mother of all bubbles, the definition of cumulative
imbalances, seeds that were sown during the Asian contagion and tilled anew after
the tech bubble.

Time and price are the ultimate arbiters of our financial fate and the only
legitimate hope for the integrity of our structural machination.

The bad news is that widespread denial persists and through the lens of denial,
migration and panic — the three phases of any trading move — we have a
prolonged and painful period of socioeconomic malaise ahead.

The good news — and yes, there is good news — is that those properly prepared
will be in a fantastic position after the immediate gratification,
buy-now-and-pay-later fat drips from the bone.

Once debt is destroyed and the Great American Financial Experiment ends, we’ll
finally have fertile soil in which to plant the seeds of a sustainable economic
expansion. Read column
Click for Detail

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