
The Top 10 Things I (Re)Learned From the October Rally
This commentary originally appeared on Real Money Pro at 8:40 a.m. ET on Monday, Nov. 2. Click here to learn about this dynamic market information service for active traders.
"Disasters have a way of not happening."
-- Byron Wien, Blackstone
The U.S. stock market staged a vigorous rally during the past four weeks that was unexpected by many (including me).
Here's what I (re)learned as a result:
1. Disasters have a way of not happening. The month began on a sour note, with many pundits saying the S&P 500 was in a primary downtrend and had another 5% to 10% of weakness ahead for the month. But I should always remember what Blackstone's Byron Wien has said and written in the past: "Disasters have a way of not happening."
2. Perma-bulls (like perma-bears) are attention getters. The "Chicken Little" crowd got bigger at month's beginning, but the sky didn't fall. Extreme views are attention getters, not money makers -- and dogma is often a four-letter word.
3.Pay attention to investor sentiment when it's at an extreme. I should have paid more attention to the sentiment extreme that existed five weeks ago. The late-September low saw a deep drop in bullish investor sentiment and a move more than four standard deviations below the 50-day moving average.
4.The market remains preoccupied with easier global monetary policy.More "cowbell" (or even just the hope for more cowbell) typically moves markets higher. Despite signs that the marginal impacts of ever-lower rates and more liquidity have been reduced or don't exist at all, rate cuts are still a powerful elixir for stocks.
5. Quants rule the day -- they move markets up and down. Quants base their price-trend strategies, risk-parity portfolios and volatility-managed strategies solely on stocks' past price performance and volatility. They're agnostic about balance sheets and income statements, while fundamental investors like Warren Buffett are anathema to them and the term "intrinsic value" isn't even in their vocabulary.
But they're far more dangerous than portfolio insurance, which put an exclamation point in the 1987 market crash. And they're also influential on the upside.
There's a positive-feedback loop between all of these strategies. Gamma hedging of derivatives caused higher market volatility in late September, which in turn led to selling in risk-parity portfolios. The resulting downward price action invited further CTA or price-trend strategies' shorting. Then, we experienced the feedback loop to the upside during October.
By producing outsized market moves to both the downside and the upside, quants provide both buying and selling opportunities.
6. Greed vs. fear. A combination of hope and low interest rates can often overcome desperation, fear of slow growth and other substantive and logically reasoned headwinds.
7. Tech nearly always leads the market. This almost never changes, and it certainly didn't in October. Tech stocks led to the downside in September and to the upside in October.
8. Perception vs. reality. It's not the news that counts, it's how markets respond to the news that matters.
9. The hardest trade is often the best trade. The hardest trade to make the end of September was to buy stocks. But as it turns out, that would have also been the best trade to make.
10. The Curse of the Billy Goat Lives! The Chicago Cubs are doomed for another 100 years.
And here's one bonus thing that I also (re)learned ...
11. After the fact, few admit they were wrong. This is an all-too-common occurrence on business TV, where many talking heads are "sweepers" (sweeping their mistakes under the rug). That's a constant reminder that we shouldn't to pay attention to those who never admit to being wrong.
Saying "I don't know" or "I was wrong" are far too rare in our mercenary investment world, even though they're the mark of a true professional. But if one lacks the confidence to say these phrases, they're probably b.s. artists. It reminds me, once again, of a play on the words of a famous Albert Camus quote: "There is always a philosophy for lack of honesty."
At the time of publication, Kass and/or his funds held no positions in the stocks mentioned, although holdings can change at any time.
Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.








