Notes From Weekend Reading

I read Bob Prechter's latest Elliott Wave Theorist this weekend. He made many excellent points which I feel are important to keep in mind.

The first is the persistence of collective psychology. Except for a few months in 2009, economists have been net bullish since 2000.

After the last major bear market ended in 1974, they remained net bearish until 1985.

With interest rates at 13% in July of 1984, the Wall Street Journal declared "it would take a miracle for rates to fall" and predicted rates would rise until the first half of 1985.

Interest rates fell for the next 25 years.

Imagine locking in 13% for 30 years and having the face value of your bond go from 43.26 to 142 . . . a 225% kicker. That's why the game is called buy low, sell high.

The WSJ just came out with a six-page special section on the US dollar and foreign currencies. The lead article? "Why The Dollar's Reign Is Near An End."

Time magazine just ran a cover saying "Yes, America is in decline . . ." I take this to be a comment on the dollar as well.

And, in a Bernard Baruch moment this weekend, I was in the local health food store and heard the check-out girl railing about how "they have trashed the dollar!"

She's 100% correct, but I won't be shorting it here.

Consider this: Nomura Securities just reported that short positions against the dollar in the International Monetary Market currency-futures exchange just reached a new record during the first week of March, exceeding the previous record set in November 2007.

Four months later, the dollar hit a low that has yet to be exceeded. Let's see what happens this time. Record short positions are bullish; they are fuel for monster rallies.

According to the Daily Sentiment Index, there are 95% bears, and 5% bulls on the dollar. Rather than lightening up and taking profits, the bears are selling low. That's not a strategy with a high percentage of success over time.

I am bullish on the dollar in yen, Swiss franc, and Canadian dollar terms. I may be off by a month or two, but with a 5-year time horizon, that's a risk I'm willing to take.

Regarding the stock market, consider these stats:

Mutual fund managers and hedge fund managers are the most bullish ever.
Individual investors are the most bullish in six years.
Newsletter advisors are the most bullish in seven years.
Futures traders are the most bullish in four years.

Only one group is not at the party: corporate insiders.

Corporate insiders, the ones who just might seem to know the truth about what's really happening in the economy, are selling at the fastest pace in nearly a decade.

Meanwhile, a Bank of America Merrill Lynch survey of 188 fund managers reveals that institutions have record equity and commodity overweights, and the strongest risk appetite since 2006, the year before the top, while cash levels are at record lows.

The survey also found record optimism in tech, a feat I'd never thought I'd see again after the bubble of 1999-2000.

And lastly, it was noted that hedge fund net exposure is the highest since July 2007.

I remember July 2007 very well. It was when the yen suddenly started to strengthen, suggesting risk aversion, which along with pattern and price gave me an S&P sell signal. I put on the largest short position I'd ever held, on the SPY, and doubled the position in October. People thought I was nuts.

I sold in November of 2008 when the same people wanted to know how to get short.

The game is buy low, sell high. When the crowd is extremely bullish, you must consider the other side.