Wanting to Get Long For a Trade, But . . .

Markets have been groping for some sort of a bottom (however temporary). The tone has been improving, as selling is starting to exhaust itself. Indeed, over the past few days, US equity futures that start out negative have finished the day in the green. Long-only shops must find this a welcome respite from the inverse that has been occasionally haunting their nightmares — and their trades.

For about 2 weeks, I have wanted to put back some of the higher Beta long positions (Emerging Markets, Small Cap, Technology) that I took off on August 1. I am waiting for some form of confirmation prior to entering the trade.

Note, however, that a Bullish instinct or gut feel or desire is no reason to enter any position. Data-driven objectivity must trump subjective, squishy feelings.

In fact, the bullish feel is the mirror image of the opposite bearish trade. Your emotions and instincts compel you one way, invariably with awful timing. Hence, why the need to wait for some combination of technical, quantitative, sentiment, valuation and/or market internal factors to pull the trigger.

I want to add to long exposure, if for no other reason that I expect an 8-12% rally from oversold levels. Ideally, I’d like to see markets more oversold and sentiment more extreme before putting on the trade, but we rarely get those perfect set ups. Trading (as opposed to investing) is more about laying out probabilities of risk versus reward; Investing is about valuations within the longer secular macro picture.

Our investing risk here is the downside of a significant earnings contraction in a possible recession circa 2012/13. The trading risk is missing the upside move of 8-12%. Indeed, the single factor most strongly opposing any buy is that so many people seem to fear missing the upside move versus fearing a significant loss.

By the way, that is a little known element about Greed & Fear: Greed is actually a variant of Fear — the fear of missing the move higher, fear of leaving profits on the table, fear of losing clients, fear of lower income, fear of losing your job. Hence, when most people say that Fear & Greed drives the market, they are really saying FEAR drives the market in both directions. True Greed doesn’t come into the picture, IMO, until we get to the stupid phase — think DotComs circa 1999 or Housing circa 2005.

Back to the potential Trade: Josh & I have been doing rebalancing portfolios into greater exposure as the markets have pulled back. Nothing huge, just restoring some proper weightings at advantageous prices. (This is simply good portfolio management).

I will be reviewing market volumes, internals and sentiment to see if I can find an objective trigger for the buys. Until then, I am watching and waiting, wanting to get long for a trade, but . . .

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