Stephen Weiss: Here's your hedge fund investment setup for the week ahead

Published Fri, Mar 10 20173:14 PM EST

Short Hills Capital Partners

Week in Review : Resilient. Unassailable. Unshakable. Choose the adjective you prefer to describe what you prefer — the markets or the administration because they are inextricably linked as witnessed in this week's action. The tweet and the Russian controversy, abetted by exhaustion from an unstinting market that has run 103 days without a 1 percent decline, catalyzed a slight move into the red as trading began on Monday. It extended through Wednesday — who would have thought three days in a row was even possible? However, after this momentary respite from giddiness, David Tepper arrived and put a floor under the indices, forestalling a more significant sell-off as the pre-market indicators rallied from deep red to a light shade of green, opening +1 handle when trading began. In essence, Tepper's correlation to the markets, owing to a long-term pattern of inordinate accuracy, won out over the market's much more recent predictive technical indicator with a significantly short period of correlation, the Trump tweet. By Thursday, all was good with the world again. I'm actually proud of this market, how it has matured. No longer is a decline in crude prices taken prima facie as a signal of economic weakness, energy having its worst week in quite some time; no longer is a hawkish Fed and rising rates a time to panic. Nope, investors can see clear through to the strengthening economy, comprehending that we are still at historically low real rates and awash in liquidity, both being important ingredients for a continued rally, the bull case further supported by a healthy dose of caution from the majority (by my count) of market commentators. Observations: So here we are, 103 days without that 1 percent hiccup, the 11th longest streak on record for the S & P, last achieved on May 14, 1958. There are multiple pillars supporting this phenomenon, the primary two being an economy that is finally gaining real traction, after a record eight-year period where GDP never touched 3 percent (one presidential term would have been a record), and the fiscal policies put forth by President Trump that are likely to become law with his more staid counterparts, the Republican-controlled congress, executing the administration's vision. But it is not just the U.S. economy, where job growth is exploding, Friday's payroll number and wage growth — yes, wage growth — much stronger than forecast. This is a synchronized global economic recovery. Even the perennially dour Mario Draghi had to raise his economic forecast. The discount mechanism that the markets are doing unquestionably anticipate tax reform being achieved and perhaps some infrastructure spending as well so those deliverables will have to arrive at some point or weakness will ensue. And the outgrowth of those factors, such as wage growth, must not presage high inflation. There is no reason not to be optimistic since promises made have been promises kept. Outlook: However, there is no denying that the market wants to take a breather, maybe consolidate a bit. We see it in the performance underneath the headline indices. While the S & P is down, as of this writing, less than 1 percent on the week, health care and technology are the only sectors in the green. And who would have predicted that energy would be down 8 percent YTD with an improving global economy and a cohesive OPEC? So where to from here? I still think stocks climb and sovereigns sink. A retracement of perhaps 5 percent would be healthy — actually I hate that colloquialism, watching my capital erode, even temporarily, is as health fortifying as gorging on deep-fried broccoli. I'm holding onto my financials, am tempted to add to the airlines, get long Europe — again, short the dollar-denominated commodities – again. No interest in buying energy but liking biotech. Or I can just increase my already intense focus on uncorrelated, longer-duration investments, which, except for direct lending funds, is where I like to be at this point while maintaining not insignificant exposure to the public markets. I will add on the impending respite — nothing goes up in a straight line. As to direct lending, after performing a very nonanalytical survey, I have determined that not only am I one of the very few not invested in one, but maybe the only asset manager who doesn't have one. (Mr. Weiss is the managing partner of Short Hills Capital Partners, a hedge fund advisory firm and asset manager primarily established to invest on behalf of one of the industry's most successful hedge fund managers. He has held senior management positions at SAC Capital, Salomon Brothers, Lehman Brothers and MSW Asset Management. He is the author of two investment books and a novel, is a visiting teaching fellow at UNC's graduate business school, Kenan-Flagler, and a CNBC contributor appearing regularly on "The Halftime Report.")

Laurence Griffiths | Getty Images

Week in Review:

Resilient. Unassailable. Unshakable. Choose the adjective you prefer to describe what you prefer — the markets or the administration because they are inextricably linked as witnessed in this week's action. The tweet and the Russian controversy, abetted by exhaustion from an unstinting market that has run 103 days without a 1 percent decline, catalyzed a slight move into the red as trading began on Monday. It extended through Wednesday — who would have thought three days in a row was even possible? However, after this momentary respite from giddiness, David Tepper arrived and put a floor under the indices, forestalling a more significant sell-off as the pre-market indicators rallied from deep red to a light shade of green, opening +1 handle when trading began. In essence, Tepper's correlation to the markets, owing to a long-term pattern of inordinate accuracy, won out over the market's much more recent predictive technical indicator with a significantly short period of correlation, the Trump tweet. By Thursday, all was good with the world again.

I'm actually proud of this market, how it has matured. No longer is a decline in crude prices taken prima facie as a signal of economic weakness, energy having its worst week in quite some time; no longer is a hawkish Fed and rising rates a time to panic. Nope, investors can see clear through to the strengthening economy, comprehending that we are still at historically low real rates and awash in liquidity, both being important ingredients for a continued rally, the bull case further supported by a healthy dose of caution from the majority (by my count) of market commentators.