A few weeks ago, we moved from an aggressive cash position (80+%) to about 50% long. We continue to find intriguing set ups and attractive trades, mostly in the small and mid-cap space.
But that doesn’t mean we are sanguine about the likelihood of this rally going on forever. Indeed, there are many factors that are making me uncomfortable with our becoming even more aggressive.
Consider these 10 factors that are making me nervous:
1. Low volume: Friday’s quad-witch volume notwithstanding, volume has been extremely light for weeks now. Historically, light volume is associated with tops (disinterest) while heavy volume tends to accompany bottoms (capitulation).
2. Consensus on political outcome: If one more person announces coming gridlock is good for the market, I may have to scream. Conventional wisdom is unreliable about future unknowns. The widely held belief (assumptions, really) as to how this plays out is too pat, and creates an opportunity for surprise and disappointment.
3. Absence of Volatility: The VIX keeps sliding, as volatility fades. This may be reflecting complacency — never a net positive for stocks.
4. Housing overhang: One of several major macro economic factors weighing on the market. This is going to be an ongoing headwind, as we make our way down towards fair value.
5. Sentiment: Bullish sentiment (expectations that stock prices will rise over the next six months), rose 7% points to 50.9% in the latest AAII Sentiment Survey (historical average is 39%). Sentiment suddenly becomes bullish after each spasm higher sets off my contrary alarm bells.
6. Recession Porn “confusing“: The flip side of the bullish trader sentiment is the obsession with every negative datapoint. From Roubini to Zero Hedge, people seem to be hunting down anything foreboding. (How funny is this tweet: zerohedge once again pissed that asteroid avoided colliding with earth)
7. Overhead resistance:Market are coming up against levels where lots of supply lives. In the past, this is where resistance lay. Watch SPX 1152, NDX 2370, and Dow 10,800.
8. Job creation soft: The 2nd economic headwind. Until this improves, there can be little better than modest improvement in retail, home sales, and deleveraging.
9. Lack of market leadership: Quick, what are the market leaders in this cycle? Its hard to really say — Banks, Energy, Technology? Not really. How about Ag, Consumer Staples, Utilities? Its tough to see much in the way of leadership.
10. Consensus that gridlock is good: I am becoming increasingly wary of the consensus belief that gridlock is such a wonderful thing. If most of the market and economic gains have been driven by Fed/Treasury action, what does gridlock say about future market action?
None of these individual items are fatal to the market rally — but collectively, they are the factors making me nervous . . .