Friday, February 18, 2011

Clash of the Technical Titans

One of the dynamics within our investment team is that people have their views, and they will not always be in harmony. This is a good thing, and balances our team, but at times it makes for difficult discussions and decisions. Currently the team is somewhat divided regarding how aggressively to position portfolios at this time. What’s interesting is that we share the same view of higher markets over the next few quarters, but the shorter term timing currently has us divided. The crux of the current disagreement rests on which technical measures matter more right now.

We have one technical camp that thinks we need to be positioned more aggressively here. They reason that massive liquidity, great seasonal tendencies, excellent trends, and solid momentum have created a solid wave that we should ride while the sweet spot exists. I’ll admit that I haven’t been in this camp, and that this camp has been winning the battle this year. I tip my cap to those in the group who have been aligned with this view.

The other side of the technical coin, and the one I have currently embraced despite its short term pain, goes something like this: market sentiment is showing extreme levels of complacency, mild divergences have been forming, markets participation has been narrowing, trends are very overextended, and the more the market ignores this and continues up, the more susceptible it is to a painful reversion to the mean on the next correction when the rubber band ultimately snaps back. On a snap back some froth will clear and weak hands will shake out, and that will be a better time to get more aggressive. That hasn’t worked out thus far, but I’m not ready to abandon this view yet.

I imagine we’ll continue to have interesting and difficult discussions as this Clash of the Technical Titans sorts itself out over the next few months.