Stock Market Trend Up But Tired

By: Peter_Navarro

[Thanks to all of for buying Always a Winner last Friday. You helped the book make the Top 100 in business and investing books!!!]
I had the great pleasure of meeting one of my CNBC favorites last week at a conference, Bob Pisani. What I love about Bob is his opinion-free market analysis that is based on facts rather than rants.

What struck me in my conversation with Bob was a paradox that has been bothering me. He indicated that while many of the traders he talked to were bearish, most of them had long positions because that’s the direction the market was going.

I’ve been dealing with this same paradox. I look at all of economic fundamentals and I see a general improvement globally and a lift out of the recession. I look at all the technical indicators and virtually everything is pointing up rather than down. Yet something still bothers me.

I think I may have figured out the Pisani Paradox. The problem is that we are in the midst of a recovery being propelled artificially by a massive and unsustainable fiscal and monetary stimulus. Yet, despite the current upward trajectory, even the best projections show very high employments rates through the end of next year.

Worst still, while GDP growth rates are heading into the positive, few countries other than China and maybe India can look forward to growth rates that are at full potential output for any sustained period. That means a slow growth recovery, which can’t possibly be bullish.

On top of this, many countries – including the U.S. and most of the Eurozone – are dramatically increasing their public debt to GDP ratios; this will create enormous pressures on interest rates down the road and constrain both fiscal and monetary policy.

I add all of this up and come to the conclusion that resolution of the Pisani Paradox likely lies in a range-bound market for several years that only the most nimble of traders will generate robust returns from. The question of course is whether we are now reaching the upper end of that range.

I, for one, have begun to take some significant defensive measures. Never one to be greedy, and after the best six months I”ve ever had in the markets, I have now closed all of my positions in cycle-sensitive stocks save my GE 2011 12.50 leaps. However, for now, I have hedged those leaps with a short on GE stock.

In addition, to hedge my other holdings (primarily biotechs), I have put on my favorite market hedge, TWM. This is the UltraShort Russell2000 ProShares exchange-traded fund,

I like using TWM because it has more volatility the instruments one might use to short the Dow or S&P 500. I also like using the UltraShort feature because I can buy fewer shares to achieve my desired hedge.

I have set stop losses on both of my hedges at levels which would indicate a breakout for the market over the resistance levels currently being encountered, e.g., Dow above 10,000.

My bottom line is that the best way to make money in the market is in bursts that leverage the trend. Right now the trend is up but tired and I want to give my capital a well-earned rest and breather from risk. And down the line, we will see if the Pisani Paradox was really a paradox or simply skitterishness on the part of traders who can’t accept a bull market. Either way, I’m hedged for now.

AND thanks again if you bought Always a Winner. If you haven’t yet, please do buy the book this weekend and keep it in Amazon.com’s Top 100 list. I guarantee you will profit from the book.

Navarro on TheStreet.com

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———- Peter Navarro is the author of the best-selling The Coming China Wars, the path-breaking The Well-Timed Strategy, and the investment classic If It's Raining In Brazil, Buy Starbucks. Peter’s latest book is Always a Winner: Managing for Competitive Advantage in an Up and Down Economy. Peter is a regular CNBC contributor and has been featured on 60 Minutes.  His internationally recognized expertise lies in his "big picture" application of a highly sophisticated but easily accessible macroeconomic analysis of the business cycle and stock market cycle for corporate executives and investors. He is a Professor at the Merage School of Business, University of California-Irvine and received his Ph.D. in economics from Harvard University. Professor Navarro’s articles have appeared in a wide range of publications, from Business Week, the Los Angeles Times, New York Times and Wall Street Journal to the Harvard Business Review, the MIT Sloan Management Review, and the Journal of Business. His free weekly newsletter is published at www.PeterNavarro.com.

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