This morning I read this in a note from a trader friend of mine:

“Activity still too mixed to suggest we’re going higher – like walking on ice – you don’t know when it will crack so I would prefer to wait till Sept.”

I sort of like the “walking on ice” description of the current market mood of investors (professional and retail alike), and it inspired me to dig up the following video (I added some appropriate music) to better represent the collective market psychology.

On the one hand, there’s no shortage of bad news, which (if you read my book, or anything by Jim Rogers or David Dreman) is what constitutes a bonafide “buy now and buy often” signal.  The following from a recent report by Sherry Cooper (I’m a fan of hers for a number of reasons), who is of course the Chief Economist at BMO Financial Group, sort of captures the tone I’m referring to nicely:

“Bottom Line: Political dithering is having a significant negative impact on the global economy. Repeated stopgap measures have failed to stamp out concerns in Europe or the United States.  The European debt crisis that began in Greece two years ago is rattling markets everywhere as it spreads to Italy and even triple-A-rated France.  Economic activity in Europe, in consequence, has weakened sharply. In the U.S., incoming data suggest a continued slump in housing and labour markets, particularly troubling as fiscal austerity measures are gaining political acceptance and the Fed is running out of options.”

It’s definitely ‘bad’ enough to warrant moving into the stock market again if you are a contrarian or ‘maverick’ investor.  So why are even these folks still resting on their laurels instead of buying in?  With gold at all time highs, and bond prices at all time highs (despite the downgrades), it’s hard to figure out whether to step out onto the ice (buy cheap stocks) or wait until it’s been tested by others first.  After all, if gold is right (currency is worth nothing) then why the heck are bonds attractive?  Doesn’t everyone know that they’d be repaid in currency worth far less than it is now?….and the return for owning them (interest rates) is virtually NIL?  But if the bond market is right, the next leg of the cycle should be a big recovery in economic and corporate prosperity?  Who would want to own gold in a bull market?

Over my decades in the business, when nothing makes sense we usually are at an inflection point of huge proportions.  Does it make sense to wait before testing the ice?

I would argue that although the ‘thin ice’ example is interesting, it needs another dimension added to it.  What’s just as important:  How deep is the water under the ice?  As I argued vehemently early in 2009 to anyone who would listen (and some did), the ice was shallow and so the risk of falling through mitigated.  For those with the nerve to venture out, things went well until April of this year – optimism and rising valuations had made the water much deeper, and the risk of falling through had grown as too many folks had all of a sudden ventured out on the ice at the same time.  My blog at that time warned about a mini-bubble especially in resources. 

Today, the water under the ice is once again quite shallow in my opinion.  In recent commentaries I highlighted that once again resource stocks and bank stocks (I’ve been buying both) are at levels that would provide a solid foundation worth ‘testing.’  Get out on the ice before the rest of the world and you will have lots of room to skate about and if you do fall through it will only be up to your knees.  Wait long enough and you’ll be joining a mob – you run a higher risk of falling through thin ice into much deeper water.

Invest to Live, Live to Ride