As I write to you this evening the S&P 500 is trading 7.5% lower than its early-October peak, having dry-humped its way through several short-term support lines. Almost all leadership sectors and stocks have broken below the 50- and 200-day moving averages – there are more crisscrossing lines on the charts than my sister-in-law’s ass after a three-hour nap in a hammock.
My old desk partner Paul used to keep a marble notebook in his drawer and he’d record all of the most important stock moves that happened around a given event or instance. For example, in the aftermath of the 2005 hurricane season, he had a full page about what a ridiculous winner the Shaw Group was (they repaired roofs among other things!). By chronicling this stuff, we had a playbook for the future and a list of mistakes not to make ever again.
If he were still sitting beside me on the desk, I’d ask him to pull out his book and a sharpie to make the following notation in big, bold letters:
THE “CHASE FOR PERFORMANCE” BULL THESIS IS A LOSER WHEN EARNINGS ARE DETERIORATING.
There were hundreds of Cartoon Pundits who told you to ignore the terrible Q3 earnings reports and subsequent Q4 estimates – because the big money was going to “chase for performance” and come in at higher prices. This kind of bullshit prattle in September and early October lost you big money, double-digit percentage losses in some groups of stocks.
It would be too time-consuming to go back and try to round up all of the people who misled you. The one thing they have in common is that most of them are not actually managing assets, they are typically trading for their own accounts or for friends and family. There’s nothing wrong with that – just consider that they’ve got a different standard of responsibility than those who actually run money for living, breathing clients. They can cut risk on a dime without any consideration. They can stick their hand in the crocodile’s mouth and even lose a finger as they’re snatching it away – no one’s paying attention or counting on them so whatever.
For practitioners it’s a bit different. We’re not able to just add risk with little other reason but the Greater Fool Theory. We have to either like the market or not, and if we do then we’d better have a logical, fundamental underpinning to back that up.
Now there were some voices amidst the cacophany who warned you that the Performance Chase thesis was a dangerous reason to be raising exposure. One of those voices belonged to Dougie Kass, who actually pays attention to earnings and the forces at work that influence them. He’s already seen this movie, where momentum players buy strictly because others seem to be buying against the backdrop of a weakening economy.
And he knows how the movie usually ends. The action of the last few weeks feels like a rerun at this point; people have are now looking at all the high-beta and heavy cyclical shit they bought at the top and dumping it indiscriminately. When the Greater Fools didn’t show up and the General got shot (21 Gun Salute for AAPL), suddenly there was much less ardor to charge the hill.
So get your notebook out or just make a mental memo – if Chase for Performance is the best the bulls can come up, someone’s gonna get their ass handed to them.
Visit Doug’s clarion call from October 23rd to ignore this type of stupidity – he demolishes the meme below once and for all (let’s hope):