Being constructive about the market is easier to say than being bullish. Being bullish implies that all the indexes are headed up. Being constructive means that there are opportunities out there but I have no idea where all the averages will be in three months. But, we could be in for a “constructive” couple of months. Lets call it a chicken’s way to be bullish.
The economic news this week (doesn’t it seem like Monday to you?) was terrible. Yet, the market looked through this and pointed up. Year-end bookkeeping and window dressing may account for some of that buying but not all of it. And, while volume was light, the market’s internals were clearly bullish.
Three things get me to this point.
- Hedge fund managers are under huge stress. Even before the Maduff debacle the managers were liquidating to satisfy client withdrawals. Maduff has put them under yet another cloud as clients grow to distrust the managers. And the managers are under personal financial pressure, as well. Few made their bench marks. Almost all hedge funds get 20% of profits so long as they beat their bench mark. With a long-short fund the mark could be the S&P 500. A specialized hedge fund, lets say a health care fund, would have to beat the pharmaceutical index, for example. Few, if any, beat their marks so few received their 20%. So, the funds must survive on a 1% or 2% management fee. Now, if you have $5 billion, or so, one would think survival should not be an issue. But many funds manage much less and probably have high operating expenses, both personal and business. This is a long winded way of saying the funds have to beat their marks this quarter for the managers to keep clients and to pay their bills. The way to do this is to outperform and the path of least resistance is to buy, rather than short.
- The Obama glow. Someone wrote that our President Elect will have a honeymoon of 100 minutes, not the usual 100 days. The third week of this month will have announcements fast and furious. Most should be bullish, if not always fiscally prudent.
- The TED spread indicates banks are loaning again. The spread is down from 4.5 in October to about 1.40 last week. This could be a head fake but its what I’ve got. RiFi’s are being done so money is turning over.
As I have said many times here, buy and hold is dead. But I would like to trade this market on the long side and will use ETFs. Unlike mutual funds ETFs can be sold without penalty by a fund management company.
Here are a few of the ETFs I may use:
- SPY. This is the granddaddy of them. The entire market.
- IWN. The Russell 2000. A mid-cap fund.
- MDY. S&P 400.
- IJR. The S&P 600 small cap.
- VWO. Vanguard Emerging Market
- In addition, I will be opportunistic on individual names for trades.
As a bi-product of this strategy I will be exiting my gold positions, over time.
