If They Are Making the Call, I Am Going The Other Way

Carl and I really are chumps in the world of which we speak, which is mostly the stock market.  I heard someone say that the stock market was the bond markets idiot little brother.  I have to agree.  Sometimes the best researched purchases end up being dogs, and dartboard hail marys work out.

Barry Ritholz has a very interesting column today at the Big Picture.  His main thesis is that if someone who has a ton of money (namely Mark Cuban in this example) makes a call that the stock market is going to tank, it is probably for the better that you are on the other side of that trade.  Ritholz freely admits that he is in a large cash position right now, but outright worries about it while wondering aloud wrt the Recency Effect:

I don’t doubt the business acumen of either of these gentlemen; Each is wildly successful in their chosen fields. However, I cannot help but note that neither of their fields involve analyzing the data that goes into determining economic or market collapses. Indeed, it smells more like a case of Recency effect than anything else.

Note that I am not talking my book: We have been mostly cash since May 5th (as much as 100% then, 50% cash in June). We are now over 80% cash, and are looking for a move down towards 950 on the SPX. So what both of these commentators are saying actually matches both our positioning and our perspectives (as well as this AM’s futures).

What I am pointing out is the unusual perspective of two businessmen discussing a crash that is so far outside of their expertise, following a 55% drop from the market top, and a 16% drop from the April highs. Perspectives such as this would be more valuable before, rather than after, a huge crash. (We will revisit this in 6 months).

It reminds me in some small part of the parade of sports figures and celebs on CNBC in late 1999 discussing their equity trades, or the Playboy bunny turned RE Agent in 2005 (also on TV) just as that market peaked. These were all late cycle momentum calls, as opposed to insightful analysis based on new data, fresh perspectives, or creative research.

I doubt this rises to the level of full contrary indicator, but it makes me nervous to be on the same side of the trade of what can be described as “scared” or “dumb” money.

Oddly, I base a lot of my market research on contrarian indicators and it appears Ritholz (who is a baller to be sure, unlike me) does as well.  Most of my contrarian indicators consist of me hearing someone who I think to be a dunce (Paul Kru#man, Mark Cuban, others) and going the opposite way.  Yes, this is simple and is certainly not a recommended way to invest as opposed to thoughtful research, but it works for me.

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2 thoughts on “If They Are Making the Call, I Am Going The Other Way”

  1. Its not the fact the person has a ton of money — its that they have limited ability or expertise in this field, and are more likely repeating the dominant zeitgeist of the moment. These folks are acting more like magazine covers than insightful hedge fund traders.

    The phrase “late cycle momentum calls” really does sum it up . . .

    Like

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