Tuesday, January 15, 2013

Last Gasp Rally

2013 will likely be the year that hedge funds officially bury themselves into oblivion.  It is a mystery to me what attracts so many institutions and the wealthy to invest in hedge funds.  It must be the cache of being an exclusive investor, because it sure ain't the returns.  Hedge funds as a whole have lagged the S&P over and over, and now they are pushing out on the risk curve, adding leverage like they haven't in years.

Aside from a handful of elite hedge funds, most are just copycats, swaying to the whims of the latest headlines and exhibiting herd behavior.  It is no wonder that they are now so leveraged at new highs with probably the most unfavorable fundamentals and valuations since the bottom in 2009.

But this topping process will take weeks, perhaps a couple of months, so there is no rush to short.  When there are no more things to worry about (after earnings and debt ceiling), around March, that is the time to strike on the short side.  The funds are not all in yet, but they are getting closer to that point.  Just in time for the effect of the payroll taxes and higher taxes to start weighing on the economy. 

The dips will be shallow since we have options protection this week, after opex, the market will trade more two way.  Right now, bulls still have the edge.

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