Fertile Ground for Short-Term Trading - 09/13/10

• A trendless but volatile stock market presents a challenge to a buy-and-hold strategy and delivering excess returns.
• But it will likely provide fertile opportunities for a shorter-term, catalyst-driven trading strategy.
   

I am holding to several strong opinions concerning the capital markets and the world's economic future:

• Stocks are cheap relative to bonds, but that does not mean that equities are inexpensive in an absolute sense.
• Bonds are overpriced. I remain short the fixed-income market via the ProShares UltraShort 20+ Year Treasury (TBT).
• The U.S. stock market appears fairly priced, and stocks are likely to be range-bound over the balance of the year.
• There will be no double-dip. Nevertheless, the domestic economy will experience a (consensus) shallow and inconsistent recovery contained over the short term by political (regulatory and tax) uncertainties and over the intermediate term by numerous non-traditional headwinds.
• After a strong cyclical surge in 2010, corporate profits should expand further (albeit modestly) in 2011.
• The risks to forward corporate profit and U.S. and worldwide economic growth rates as well the overall stock market's progress are all to the downside but not meaningfully so.

If I am correct in these views, the above conditions will likely result in a relatively trendless but volatile U.S. stock market into early 2011, presenting a clear challenge to:

1.  a buy-and-hold strategy; and
2.   delivering excess returns.

 
This near-term backdrop will not be a permanent condition, but, for the time being, it will likely provide fertile opportunities for a shorter-term, catalyst-driven trading strategy.
Position: Long TBT