Fading Away

So glad we've almost made it
So sad they had to fade it
Everybody wants to rule the world
--Tears for Fears

Contrarians love to fade conventional wisdom and trends. Let me offer three market-related situations that currently seem quite crowded. One is the general movement towards a shorter term trading posture. Whether you're looking at increasing volume on the NYSE, steadily rising individual issue turnover, or at the median mindset of the professors at Minyanville, it seems clear that folks are less prone to hold positions for a long time. In a trading mindset, behavior is driven by technical, psychological and event factors.

Secondly, the last few years have been marked by increased risk-taking with no directional bias. Traders are more reactive than ever before. If the market goes up, they get long. If prices are going down, they quickly turn their hats around and go short. Folks have been willing to take risk regardless of direction.

Finally, the world is short cash. Yes, central banks have been 'printing money' over the past few years, but the lion's share has been 'credit money' (i.e., debt). As such, much of the risk taking in financial assets has been driven by leverage. If you want a snapshot of the tiny cash:debt ratios on the average individual's balance sheet, peruse some profiles on networthiq.

How to fade these trends? Elongate time horizon and assume more of an investment posture. Seek opportunities that possess attractive fundamentals and valuations (I believe fundies will reassert their primary influence in the years ahead). Look for payoffs that may take 5 years or more before they are realized. Because this is the road less travelled, opportunities are likely less picked over. Consistent with Mr Practical's advice, reduce risk, pay down debt, and raise cash. Should debt deflate, unlevered cash will buy more in the wake of a general price decline.

These actions position a market participant radically different than the crowd, which, of course, suits a contrarian just fine.