From the age of 8 years old through high school I played club soccer and during that time I learned many lessons. One lesson I learned early on after receiving plenty of tongue lashings from coaches was to play the whistle, not the ball. I knew the rules of the game and what SHOULD happen under various situations but there is a clear distinction between having rules, interpreting them, and who ultimately makes the judgment call—in this case the referee.
In my early years when an opponent would dribble the ball out of bounds I would quit pursuing them expecting the referee to blow his whistle and my team to receive the ball. Several times the referee completely missed it and the other team member would come back on the field and run right past me and score; from whence the tongue lashing from my coach would commence. "PLAY THE WHISTLE, NOT THE BALL!", I was told. Unless the referee blows his whistle the game is still in play regardless if the ball is out of bounds or in bounds.
Too often investors play the ball and not the whistle. They have an idea of what SHOULD happen but fail to see what IS happening and do not listen to the ultimate referee for investing—the market. If you believe we are heading into a bear market and/or recession and yet the market continues to hit new 52-week highs and the ISM Manufacturing Index remains north of 50 in expansionary territory, how long will you wait before the whistle blows?
If you believe gold should be rallying strongly under all the QE’s of the world and yet it continues to make new lows, is it helping you get closer to your financial goals? You can say the referee is manipulating the game by failing to play by the rules, but does it make sense to yell at the one who determines the outcome of the game, or in investing terms, determines your fortunes? You have to ask yourself a very simple question, “Do you want to be right or do you want to make money?”
Echoing countless money managers and seasoned investors on this point, Barry Ritholtz wrote back in 2010:
My inbox is deluged with rants and demands from people who are insisting that this rally must end now!
A composite of their emails would read something like this: “How can you sit there so blithely while the Fed debases the world’s reserve currency? Why haven’t you commented on POMO?!? The entire game is rigged, and your just another @%$# salesman for Wall Street!”
Ahem.
My day job is working in an asset management firm. From that perch, I look at the world as a series of risks and opportunities. I am not a political analyst, nor a professional Fed critic. If through my research and analysis I come to a conclusion about a given issue — Bailouts, Fin Reform, Foreclosures, Stimulus — I am happy to share them.
But make sure you understand this much: I consider many other factors beyond the macro. This includes sentiment data, liquidity, market breadth, trend, volume, and valuation. And while liquidity can mean many things, this cycle its been pretty much all Fed all the time. That was what hedge fund manager David Tepper was referring to when he noted the Fed was pouring fuel on the fire. When the Fed sends their minions out to discuss the Bernanke Put, they add even more gasoline to the conflagration.
Some people rush for the fire hoses, but my job requires me to grab some marshmallows and sticks and head over to the boy scout jamboree campfire.
If you are constantly fighting the tape, if you missed the run up and are now whining about it, let me steer you to esteemed technician Ned Davis of NDR. In his 1991 book Being Right or Making Money, Davis tells the story of missing trades, investments and rallies because they did not fit some expectations of his regarding the economy or valuations or other factors. The title of his book and of this post comes from a more senior trader, who simply asked him: “Do You Wanna Be Right, or Do You Wanna Make Money?”
When surveying the markets we currently have an economy that is expanding and a stock market that is still rising. Checking in on the fundamentals shows we are a long ways away from a recession when viewing the Philly Fed State Leading Index
Source: Bloomberg
Looking at the market’s technical summary shows a well-represented market in which more than two thirds of the 500 members within the S&P 500 remain on weekly and monthly MACD buy signals, indicating the market’s intermediate and long-term momentum remains bullish and a bear market does not appear to be on the horizon.
When summarizing the fundamental and technical picture for the economy and stock market we can clearly see that the referee has not blown his whistle as the game is still in play. As long as breadth remains strong and as long as the markets react favorably to Bernanke’s QE programs, the trend remains up and fighting it will likely prove to be a frustrating task. Bears will eventually be proven right just as a broken clock is right twice a day. The key is not just about being right, but being right in a timely manner.
