WHAT THE MARKET WANTS: A Clarification
Several comments to this week’s article on SeekingAlpha (“What the Market Wants: A Week of Murk and Fog”) have prompted me to make a few points of clarification.
First, regarding the controversy over my comment about “cash on the sidelines,” Sabrient uses a proprietary formula to track this very thing, with a combination of mutual fund cash, money market cash (cash that is frequently in the market instead of in money market funds), cash available from pension and endowment funds, short interest in the aggregate, and estimates of foreign funds available for domestic markets. We use this information internally, but not in any significant way since we normally are agnostic to short-term (less than one year) market direction. It is my personal opinion that there is a larger than normal amount of such cash on the sidelines at this point in time, and in my article was commenting that such cash was probably responsible for inexplicable bullish reactions to bearish news days.
Now, as to my being a “talking bullish head,” we got a big kick out of that here at Sabrient, because we are known for our dollar-neutral, long/short strategies. For example, I was invited to participate as a “bear” in Forbes’ annual Love Only One contest in 2007 and 2008. In 2007, my short pick was RAIL, which closed at $43.20 on Oct 31, 2007, the official entry date for the contest. RAIL reached a low of $17.69 on Oct 17, 2008 and then closed the 12-month contest four days later on October 31 at $26.11, earning me an invitation to the 2008 contest.
LAMR, my 2008 pick, closed at $15.17 on October 31, 2008, the entry date for that contest (although it was about $25.00 when I selected earlier in October). The stock reached a low of $5.38 on March 9, 2009, some four months later – actually, a long time to hold a short, forget about a year – but for reasons that I still cannot fathom, LAMR recovered and ended the contest period on October 30, 2009 at $24.30.
These two examples, plus the regularly strong performance of short positions of Sabrient’s long/short models, have given Sabrient a reputation as a provider of short positions to the “nasty short sellers”.
Sabrient, as you may know, is a quant firm that calculates weekly calls on more than 5000 stocks using more than 200 scores to arrive at ratings of Strong Buy, Buy, Hold, Sell, or Strong Sell. We’ve built various strategies with our system that are used by hedge funds and large asset managers, and our ratings reports are used by many broker/dealers for their clients. But our performance on the short side continues to identify us more than we would like.
To counter that, I began publishing the “What the Market Wants” as a free newsletter service to our institutional and retail customers. In this weekly letter, I report various market stats for the past week – cap/style performance, sector and industry performance, and our forward looking sector rankings for the next 30 days. Then, to demonstrate that we are equally adept at selecting longs as well as shorts, I offer three or four stocks that are attractive to our system in the current market. The results for the 4 stocks selected each week for the past 12 months for What the Market Wants have averaged 16.8%, with a maximum 3-month hold for each stock (i.e., more than a 70% return compounded annually).
Anyone who has consistently read What the Market Wants knows that, except for the period January ’09 through early May ’09, I have been far from bullish. I firmly believe that one can never be certain of the short-term direction for the market, so it is much easier to find 50 great stocks for long positions and 50 terrible stocks for shorting, than to decide which way the market will go. Based on this conviction, Sabrient publishes a subscription service called Investors (H)Edge, which offers 13 long positions and 13 short positions, with each position usually held for a minimum of 13 weeks. One long and one short are rebalanced each week, which has the added benefit of fitting the time constraints of the typical individual investor. All you need to do is check in on the portfolio once a week. As of yesterday (January 21), the long side of the Investor’s (H)Edge portfolio is up almost 88% since its inception on January 30, 2009. The overall portfolio is up more than 28%, if short positions were actually shorted, or about 45%, if puts were used instead for the shorts.
The bottom line is that I am not a “bullish talking head,” and I believe my commentary in What the Market Wants and other publications is consistent.
David Brown
Chief Market Strategist
Sabrient Systems, LLC
Leaders in Investment Research
http://www.sabrient.com
and http://Twitter.com/ScottMartindale
Full disclosure: The author does not hold any of the stocks mentioned in this blog.