Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Five Reasons for Investors to Head for the Sidelines

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Instability in Europe, protests in the streets of US cities and the implosion of a big Wall Street trading firm—it all adds up to be a good time for some investors to hang on the sidelines until the storms pass.

Such volatility is often thought as good for traders. When others are panicking, straight thinkers can slip in and make profits off the carelessness of others.

But even some of the most battle-hardened are finding it tough to stay in the game now.

“All of these things are intertwined,” Dennis Gartman, the hedge fund manager and author of The Gartman Letter, wrote this morning. “Tear gas on the streets of Athens; students being arrested in the streets of NY… these are symptoms of economic sickness and the markets collectively came to that conclusion yesterday and voted, in virtual tandem one with the other, that the sidelines are a better place to be than involved.”

That mentality has taken over the markets lately, with trading volumes depressed as October’s near-record rally has given way to a cold wake-up call in November.

For Gartman, there are four things making the market too gut-wrenching for many investors: 1) Rioting in Greece against forced austerity measures; 2) worries that the Occupy Wall Street movement could swell into a larger market protest; 3) the collapse of MF Global, which went bankrupt after bets on European debt went sour; and 4) revelations that the European debt contagion could be moving to the steadier economies of France, Belgium and elsewhere.

Of particular concern is the OWS movement, which continues to garner widespread media coverage even as its members are getting evicted from their encampments in New York and elsewhere and the numbers appear to be dropping.

“The concerns about the banking system; the concerns about the supposed “unfairness” of the tax system; concerns about Wall Street’s power have all coalesced in this motley, ill-tempered, un-sophisticated movement,” Gartman wrote, “that at the moment has very little in the way of concrete philosophy to guide it but which nonetheless seems to have engendered wider support than we had ever thought possible.”

Is Europe Threatening US Market?

Stocks have fallen more than 4 percent in November, even in the face of gradually but consistently improving economic data in jobs, housing and manufacturing.

Bob Janjua, Nomura Securities’ co-head of cross-allocation strategy, said the reason the October rally didn’t carry over is because investors are convinced the eurozone debt crisis is spreading, and that the improved economic signs merely reflect a short-term bump from Japan’s recovery from the earthquake and tsunami that struck in March.

While acknowledging the possibility of a rally into the end of the year, he said a stock market bounce would cause him only to consider “reloading my short risk positions.”

In this climate, Janjua advised, he will “tighten my stops” amid the market unpredictability.

“This bounce has now peaked, in our view, and moderation has resumed or is about to,” Janjua said in a note.

Another noted bear, David Rosenberg, the senior economist and strategist at Gluskin Sheff in Toronto, noted the Thursday slide in stocks, commodities, oil and gold, as well as a rise in Treasurys, had “a certain eerie 2008 feel to it.”

And Rosenberg adds a fifth reason why investors may want to take cover: the congressional supercommittee negotiations over debt reduction. Should no agreement be reached on the bipartisan panel, he notes, that will trigger at least $1.2 trillion of automatic spending cuts.

“For a market that is trading more on headlines and technicals than on fundamentals,” Rosenberg said in his morning note, “these events have to be monitored.”

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