Money & Finance - Still Contrarian

"Your best friend and worst enemy are both in this room right now. It’s not your neighbor right or left – and it’s not God or the devil – it’s you." – Edwin Louis Cole

"Just follow the model!" - John Scaramucich, Founding Partner of JSK Partners

We can be our own worst enemies at times. We are not unhappy with our performance. Nor are we regretful of our mid-December purchases and our February and March profit-taking. Our job is to make as much profit as possible in our client accounts with as little volatility as necessary. In other words maximizing profit per unit of risk. We never buy at the bottom and sell at the top but look for the highest probability in-between to accomplish our goals.

This type of market environment though, makes it easy to second guess ones investment thesis.

The other day while listening to a business reporter mock all the professional money managers that have been calling for a correction and have raised cash (in other words, guys like me) I became a little frustrated. This reporter went on to articulate the case for higher markets from here and those that have been scaling out of the market (as we have) are missing the parade.

The simple fact of the matter is that, as a financial reporter, this individual can call for the market rally all he wants. If he is mistaken, he can come back tomorrow and scold those of us that didn’t see this coming correction. Most folks will be none the wiser on his stance. When you are managing peoples hard earned assets, you don’t have the luxury being wrong too often.

Our stance has not changed. We continue to expect a market pullback in the near-term and are raising cash in order to participate in the next trend. That said, for newer accounts that have come in from earlier this year, we increased our long exposure very slightly so these investors have a little skin in the game should the S&P 500 break its 2007 high. 

Disciplined Approach

Our behavioral model attempts to capture human trading emotions mathematically. It combines years of data from various indicators and aggregates it into an easy to understand model that assists in the investment decision making process.

Our indicator will score within one of five basic market cycles. These cycles include “Extreme Euphoria”, “Greed”, Rational Market”, “Fear”, and “Extreme Panic”. Depending on where we are in the market cycle determines how aggressive our portfolio structure.

Typically, the best time to aggressively buy US equities is when we are rising out of Extreme Panic. The best time to be conservative is when we are falling from Extreme Euphoria.

Bottom Line: We are clearly in the high greed/ low euphoric zone that historically signify market weakness on the horizon.

Quarter End Push

We have also heard a tremendous amount of talk about a quarter-end push to new highs and portfolio window dressing. That may be the case and to some extent I am buying into the prospect of a quarter-end push to new highs. But this is purely gut-instinct traders’ intuition than anything backed by mathematics to support such a thesis.

In fact, we went back 33 years and analyzed how the final ten trading days of the first quarter of every year stacked up when compared to the overall first quarter performance of the market.

The results were fairly random but with one interesting caveat. Over this 33 year analysis, we found that the final 10 trading days of the first quarter of each year were strongest during the years with the weakest first quarter results.

The years 1982, 2001, 2008 and 2009 all had the S&P 500 down by over 10% as the final two weeks of the quarter approached. In each case, the market went on to rally an average 2.2% in the final two weeks of the quarter.

When looking at the years in which the S&P 500 had the strongest first quarter (greater that 5%) the average return for the final 10 trading days was -0.2%.

So there you have it. The concept of window dressing works best when coming off a very weak start of the year for the stock market. We are unsure how many of these folks on the financial channels have come to their conclusions but clearly one should not base their investment thesis on gut-instinct.

Bottom Line: Keeping a disciplined approach can be a thankless task at times but in the end it is the proven methodology that will persevere above reactionary trading. 

- Joseph S. Kalinowski, CFA

JSK Partners of New York, LLC
40 Wall Street, 28th Floor
New York, NY 10005

T (212) 537-0462
T (800) 618-1120
F (800) 618-1120

www.jsk-partners.com

 

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