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• Teata ebasobivast posititusest

  29.07.2005 15:55

  Mohhammed

  With yesterday's rally, the markets -- especially the Nazz and S&P 500 are once again (still?) overextended. And seriously, folks, what's new? I'm no chartist and I don't use technical analysis, but calling the market overextended is a technical judgment call. What we're really saying when we call something overextended is that the chart has moved up "too far too fast." The "chart" being the key word.

  Regardless of your stance on technical analysis, you can't help but worry when you look at those indices' charts -- near term, at least. And although earlier in the week I called an audible from my handwringing and covered some of my index short hedges rather than adding to them, I find myself coming in today and looking at those charts and feeling those same handwringing emotions creeping back up.

  As others on this site have noted, taking some profits after this run is a good idea. Even as the fundamental outlook remains steady and strong, and even as stocks remain very reasonably valued, things can and do go wrong, and markets do turn. Recall what it felt like back in April when tech stocks continually got pounded, despite the strong and steady fundamentals. We were clearly in a harsh multiple contraction phase, which created a negative feedback loop that fed onto itself. Though I'm not expecting such a market tanking here in the near term, when the market finally does turn down it's possible for such a multiple contracting feedback loop to develop once again.

  On a similar note, economies turn down too. And we all know the litany of potential negative catalysts for this economy: yuan revaluation, real estate collapse and/or rising rates, energy's continued rally, terrorism, the leveraged consumer and all that jazz. If and when things start to deteriorate, we certainly know that it can get ugly in a hurry, as we saw in 2000-2002.

  Even the biggest bull (are there really any pounding-the-table bulls out there right now, anyway?) needs to recognize that when stocks are flying and economies booming, things can turn the other direction. As Rev Shark so often reminds us, we shouldn't necessarily try to time such turns. But we should be prepared for them.

  I've got an early morning meeting. Be back in a just bit.