Author Topic: sage advice from Highland Capital Management  (Read 1138 times)

Offline Reginald Hudlin

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sage advice from Highland Capital Management
« on: February 25, 2011, 01:44:15 pm »
February 25, 2011

 

Market Lessons from Charlie Brown

 

If you have ever been sick and your mother ever made you stay indoors while all the other kids in the neighborhood played outside, you know the feeling of being an investor, sitting on the sidelines today, while all the other investors seem to be having fun making money.

 

Your mother may have been prudent by keeping you indoors but her prudence did noting to take away your urge to bolt outside and join in the fun. To your mother’s credit, her prudence was smartly playing the odds.

Sitting on the sidelines, in the current market environment, is the same – playing the odds to limit the potential for pain.

Tuesday and Wednesday, this week, the markets sold off with big increases in volume - a cautionary sign that institutional investors are unloading shares.

Thursday (yesterday), the market indexes clawed their way back from morning sell-offs, and the NASDAQ managed to see a nice gain for the day, but the volume was lighter.

Today, the markets are rising nicely, but once again, the volume is suspiciously light.

I’m told that serious poker players look for the opposing players’ “tell”; a changed facial expression, maybe fidgeting, or blinking. Some reaction, the other player unconsciously displays, when he has a certain good (or bad) hand.

I don’t know much about poker, but I like to believe that I know something about the markets. What we know from studying history is that volume is the “tell” of the markets.

The two heavy-volume days this week were the ones that realized big losses while the two positive days came on lower volume. This has the signature of institutional selling on the down days and retail buying on the up days. At a minimum, this type of price/volume action suggests a lack of buying conviction, while the worst case is, the light we see in the tunnel is a train coming toward us. Either way, exercising caution seems like to prudent path.

Age-wise, I am in that sweet spot where I am old enough to have seen a lot of history, but not so old that I have forgotten it. Yesterday, the stock market took off, and gold plummeted, when a news story was released that the Saudi’s would graciously increase oil production to offset any supply disruptions caused by the events unfolding in Libya. I can remember many times when similar promises were made by the Saudi’s but I can’t remember the Saudi’s ever following through and making good on one of their promises to “help-out” by opening up the spigot.

The Saudi’s are Lucy and we are Charlie Brown. Every time Lucy promises to hold the football, for Charlie Brown to kick, he falls for the gag and falls flat on his back. When the Saudi’s use Bob Marley’s words from Three Little Birds, and tell us “Everything is gonna be all right”, we fall for it, because (just like Charlie Brown) we, so desperately, want it to be true.

So where does the market go from here? In a word, idunno. But I do know that until the situation in the Middle East becomes clearer, we are unlikely to see the large institutional buyers demonstrate confidence by putting new money into the markets. Markets don’t like uncertainty. Without the big-institutional money to drive the market, it is unlikely to move higher and could quite possibly drop lower.

The markets have an uncanny ability and proven track record of consistently humiliating the greatest possible number of people. To me, a low volume snap-back rally like we have seen yesterday and today, feels like Lucy telling us, “It will be fine … go ahead … kick the ball … you can trust me this time.”

 If this modest, low volume, two day recovery turns out to be a sucker’s rally, we can be thankful that our mothers taught us to stay indoors at times. If it turns out to be the beginning of a much larger rally, we will have plenty of time to go outside and play with the cool kids later.