Is anyone still bullish equities?

Or do you think the market is overbought?

Disclosure: I bought stock recently - about a week ago.

I’m starting to feel it’s a little overbought, especially since things seem to be going sideways now. I’m having difficulty finding things I like at current prices.

My portfolio has done very well YTD and I am considering taking some $ off the table to see how the rest of the month goes.

My style increasingly ends up being trend-following, so I remain exposed for now, but I’m not keen to add risk at this point.

In my mind, what’s happening is that stocks got discounted a lot through fear of the European crisis. What happens in those cases is that risk premiums go up. As they go up, stocks lose value (just like a bond, when interest rates go up). However, once the risk premium stops rising, guess what… stocks start giving that higher rate of return…

…unless the fear of Europe turns out to be justified. Then they will crash back down again.

I’m finding more shorts than longs these days, that’s for sure. There are always good longs to buy irrespective of the market’s level, but a lot of valuations seem to have “grossed up” toward full value in recent months, even on the small cap side.

I’m not a technical guy, but I do have this highly unscientific way of look at trends in the market which you might find amusing and can probably do yourselves:

I know a bunch of equity sales traders, these guys are the biggest trend followers I know and collectively as smart as a damp rag. Their whole life is about fitting in and following the trend, and they literally live the markets which makes them like canaries in the coal mine.

I don’t ask them about what they think about the markets. What I do is poll their mood about life in general, not about where they think the markets are going, and also note their behaviorial differences in spending and attitude, I can usually get a good idea of where the market cycle is. I’ve known these guys for 10 years now so have observed this over the big bull market, lehman, and last falls euro debacle.

If they think things are ok then things will likely stay good for awhile. If they think things are awesome and are doing loads of coke and buying sportscars and high class hookers that’s when I start to think about taking risk off and loading up on puts. When things are “terrible” and they are worried about their bonuses, and they buy medium class hookers just for the GFE, that is a strong buy signal.

Last May I was on the Golf course with one of these guys, and I said, “I think Blackberry is obsolete and people will realize it soon.” The sales trader said, “ChickenTikka, you’re an idiot. Blackberry is like Bloomberg, it is never going to leave.” Then two months later I noticed that same sales trader had bought an iphone too. That’s when I moved into my short position on RIMM.

Right now these guys are somewhere between ok and great. One just bought a big expensive sports car and they are doing lots more Charlie than six months ago. They are getting much more self confident and walking around with their chests puffed out. But it hasn’t reached a fever pitch of: bullshit watches, mazzerratis, and meglomania yet.

My prediction is that this up trend goes on at least till the end of spring.

My opinion is that there are a lot of people who missed the recent stock market rally, since they thought that it would not last. Today, these guys feel left out and are jumping on opportunities to buy equity on dips. That’s why lately, all the declines in the market have reversed almost immediately. Also, there’s been a bias for the market to rally into the close, if it was down intraday. S&P 1400, DJI 13000 and Nasdaq 3000 have all passed, so people feel like there is a “support” level that will floor their downside. This makes me believe that, in the absence of some wild card scenario (Italy? Spain?) the rally will continue for a bit more.

True trend followers should do reasonably well (or at least not badly) in down markets too. It’s only when things are topping or bottoming that trend followers should get crushed (at the top, usually everyone gets crushed; at the bottom, value people do well as long as their risk management is ok).

It sounds like these equity sales guys are just long-only permabulls that do well in uptrends but aren’t actually trend following.

The wierd thing about trend following is that one really tries NOT to have an opinion on the market, and you simply watch the price. When I did my CFA studies, I bought a lot of the arguments that said “if trend following worked, arbitrageurs would do it until it didn’t work any more,” but as I go on, I think there’s a lot to it.

I like the idea of fundamental analysis, but ultimately, there are so many interactions between numbers that you have to pull out of thin air (what is the equity risk premium, anyway? what is a reasonable growth rate for revenues and costs and working capital? And if you are off by 10 bps, you can get wildly different valuations). All of that stuff looks so scientific because there’s algebra, but it’s all garbage-in-garbage-out. When you start to look at it this way, price info may ultimately be more “real” than all those fundamental figures with error bars so wide you could send an aircraft carrier through them.

I don’t want to give up on fundamentals entirely, and so I’m starting to head down a line where I think trend figures give you directional information, but fundamentals may still give you useful risk management and position sizing information.

one thing I like to do is to completely ignore the stock market which is not a good idea to some but it has worked for me and it keeps me focused on the things I find important…

I will still buy equities without question…however, its not as easy as 6 months ago…

So you completely ignore the stock market but still buy equities ?

You mean that you’ll do your fundamental analysis and valuation, but won’t look at a chart ?

Maybe he works for a market neutral hedge fund?

i might look at a chart to see where it was trading 2 years ago to see where the valuation was relative to earnings etc…if i never see a 1 year chart, fine by me…its useless information imo…

what the market is doing is by and large irrelevant to me…however, my day job requires that I keep pace…but investing wise, i really can care less where the general market is or going…if i spot a good asset and a good price, its a deal(the calc to determine this is not dependent on the market)…albeit, it is more difficult to locate them in a market that is high but they’re still there…

one thing i learned to remember is that the market is just that, a market…and prices are determined based on investor expectations/emotions…its essentially a big conveyer of opinion…this idea is not original, i ripped it off of Ben Graham and found it very useful…

Bearish all the way. I think the entering now would be a sucker’s play. We shall see how it folds.

Not sure which way the market will go, but correlations are finally coming down, if just a bit. I was hoping 2012 would be the year we could get back to good old bottom-up stock picking. I’m tired of macro events dictating all returns. Plus, it’s bad for business.

correlations will continue to run high…ETFs, investment managers indexing etc…correlation is actually good as it allows movements in stocks that normally wouldn’t occur…

Correlations may very well continue to hang around 1.0, but that has less to do with indexing, ETFs, etc. and more to do with global uncertainty.

As for high correlation being good? Depends on perspective. If you’re in any way affiliated with active management, it’s horrible; all the way from fund managers to financial advisors. No one that professes to be a “stock picker” has had a good time in 2011.

High correlations are both a blessing and a curse. It has caused a couple of the stocks I follow to get both swept unnecessarily down and up because of the Euro troubles allowing me to move in and out to make $$ without taking on a lot of risk because I know that the movements aren’t due to the company’s own underlying business. But then it bites you in the ass when you buy a great stock and it doesn’t return what it you think it should because macro events stand in the way.

Either way, just another thing to learn to try to deal with.

I dont understand how you can be “bullish” or “bearish” on equities. I thought when you invest you invest in specific companies, not arbitrarily throw darts at “equities”. Are you guys like buying and holding IWB?

Although I do wish I knew about what trend following type guys do, like the ones Tikka mentinoed. Perhaps getting a better grasp of market psychology would help.

^^ I think it goes back to correlations, etc. You can be the best stock picker and be totally right, BUT if Europe threatens to implode (again) simply because Germany says or fails to say “something”, or seer Bernanke says nothing, and our portfolios tank 150 bps in one day because of that… the general direction of equities does matter, regardless of the individual choices.

6 months, 1 year, 5 year range, I’m definitely bullish on equities. Partly because they appear “reasonably priced”, but a lot because equities are the least bad looking alternative in the investment universe right now.

Market sentiment definitely helps, not just fundamentals. People are not rational - P/E, equity risk premium, earnings forecasts, and almost all other measures are subjective. Things probably normalize over say, 10 years, but in the short term, people want to buy or people want to sell.

Retail flows are still horrible which is a good sign. A sure way of nailing a market top is when the masses start coming back. Poor guys.