Be Long Term but Watch the Ticks

As the year began, little did I know the horrors that awaited me in 2011. But first there was some good money to be made.


January 3, 2011

This time of year there is always the ridiculous obsession over forecasts of where markets will be a year from now. Mr. Market is smart and sadistic, and he couldn’t care less about our calendar. In other words, I have no idea. My sense is, however, that equities are going to work higher in the next couple of months.

As I go into 2011, I’m suffering from a mild case of acrophobia. I’ve been riding this rally since last summer with a very high net long, and markets have had a pleasant, gradual melt-up that has surprised a lot of people. In the U.S., big caps have risen 20% and the smalls are up 30%. Europe and the emerging markets have had roughly similar moves. The question now is whether I should reduce my net long substantially, say to 50 or 60%, and lie in the reeds for a while. As I circulate around, I find that the so-called “smart money” is uneasy and is currently taking off or has already taken off a substantial amount of risk. The prime broker summaries show that, particularly in the last two or three weeks, there has been substantial hedge fund selling of longs and shorts.

A Volatile First Half

Data source: Bloomberg

“Stocks are clearly overbought,” my co-conspirators say. “Bulls make money. Bears make ...

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