This market is delusional!  I’ve heard it several times, but I am still unsure exactly what this means.  Given what I’ve seen and heard on this trading desk over the past several weeks I can begin to hypothesize about the true nature of this ubiquitous exclamation.  First, strength and weakness in the market has not necessarily translate to strength and weakness in individual names.  Dean’s portfolio has been the best barometer of this divergence.  His long cash book has felt the slings and arrows of a declining market while under performing on up days; the perfect shitstorm.  Strong balance sheets and superior management have failed to translate into upward price action.  On the other side of the coin, Moskowitz’s technical strategy has also struggled in the face of this “delusional” market.  Daily levels of support and resistance, moving averages, and pivot points have been broken, traversed, and forsaken.  Familiar setups have failed to produce familiar results.  Finally, after reviewing the charts of Schwartz’s portfolio, we came to the conclusion that the tenets of relative strength and relative weakness have been all but abandoned.  Names have shown massive intraday reversals that suck away P&L without warning.

Given the “delusional” nature of the market, there is only one strategy that guarantees success; get small.  The fact that strategies have lacked their usual effectiveness does not imply they are obsolete; however, given the unusual action we have witnessed lately, it is advisable to limit one’s exposure to the bizarre action.  Eventually the market will begin to look like its old self and when that time comes, the heavens will open and the money gods will reappear.  In the meantime, remember the old axiom: “The market can remain delusional longer than you can remain solvent.”