5:12 pm Central Time

The market was relatively flat today.  The Dow closed down -44.13 points, off -0.3% while the S&P closed virtually unchanged at 1403.04.  Pockets of strength continue to offset the decliners.  This time, financials and healthcare dragged on advancing energy, materials, and industrials. 

So what caused the disparity?

Banks continue to take a beating.  Just when you think the storm has passed, another round of lightning strikes illuminates the skies.  Bernanke opened his day by talking down financials.  In a speech delivered at a Fed conference on Sea Island, Georgia, he commented the markets are still "far from normal."  He tried reassuring banks by saying, the Fed stood "ready to increase (Fed liquidity) if further warranted by financial developments.  Bloomberg noted Bernanke opposed recent bullish comments made by Treasury Secretary Hank Paulson.  The market thanked Bernanke by selling off Financials -0.91% (XLF). 

Still, there are pockets of strength for those who look.  Energy is on a renewed tear.  Crude Oil futures touched $126.50 before settling at $125.80 a barrel.  Energy stocks jumped alongside the news.  One of those companies, our Mid-April Pick-of-the-Week (CNX), gained a solid +4.16%.  It's up over +15% since we first recommended the growing coal company. 

Another sign of strength came from technology.  Today, rumors began circulating that billionaire Carl Icahn intends to wage a proxy fight for Yahoo.  According to friends, he recently picked up as many as 50,000,000 shares of the beleaguered search company.  Icahn, an industry veteran, may be able to force Yahoo to deal with Microsoft.  This would bode well for Yahoo shareholders who recently saw their hopes dissipate when Microsoft withdrew their generous offer.  For those who picked up our last Pick-of-the-Week, you are not surprised at the latest news.  We expect even more activity in the coming weeks and months from Yahoo.

As we like to say, the market is not monolithic.  Sometimes pockets of strength can be found in a weak market.  Look long enough, and you're sure to find some great areas to invest in.  In the meantime, check out our weekly picks for free by subscribing to Invest With An Edge.  There's a new pick each week and there's no charge for this actionable information.

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2:00PM Central Time

The level of bearishness in our stock market is still high.  Folks have a tendency to extrapolate recent events into some sort of longer-term forecast.  The downward spiral from October through the mid March period caused many investors to capitulate.  Now their pride refuses to allow them the ability to ask themselves if something has changed, are there new facts, and is it possible a new bull market has begun.  The final question then becomes - should I be invested?  It may take many more months and another 10% for them to come back.  Of course, by then, it might be too late. 

When the market makes violent moves one way or the other, I always try to determine the consensus view.  The last place you want to be is along for the ride with the herd, because typically you end up going off a cliff together.  Michael Steinhardt has a tool to help him make sound investment decisions and I think it is good to remind ourselves in times when there is a large and predominantly bearish opinion regarding the economy, stock market, and real estate, as to how position ones net worth.  I have his book right here next to my desk, and I quote:

Chapter 5, Variant Perception -- from his book titled "No Bull, My Life In and Out of the Markets"  - pages 129-130

I defined variant perception as holding a well-founded view that was meaningfully different from market consensus.  I often said the only analytic tool that mattered was an intellectually advantaged disparate view.  This included knowing more and perceiving the situation better than others did.  It was also critical to have a keen understanding of what the market expectations truly were.  This, the process by which a disparate perception, when correct, became consensus would almost inevitably lead to meaningful profit.  Understanding market expectation was at least as important as, and often different from, fundamental knowledge.

The quintessential difference from a contrary view is the degree of conviction.  Reaching a level of understanding that allows one to feel completely informed well ahead of changes in "street" views, even anticipating minor stock price changes, may at times justify making unpopular investments.  They will, however, if proved right, result in a return both from perception change as well as valuation adjustment.  Nirvana.

4:22 pm Central Time

One of our subscribers recently asked our opinion on the market -- where we thought it was heading.  He's been watching stocks for 50 years and commented he'd never seen an environment like this.  I would agree.  If it were that easy, everyone would be making money.

Every market is different.  Though there are similarities between them, each time period carries with it a set of different assumptions, new players, and veterans.  More importantly, major events occur that are completely unforeseen except by esoteric prognosticators on late night talk radio.  It is these sorts of events I want to highlight.  Because this is the stuff of which volatility is made. 

For those unfamiliar with the term, "The Black Swan" occasionally flies onto the scene.  Taken from the book by the same name, Nassim Nicholas Taleb explains that a Black Swan is a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations.  For example, the attacks on September 11, 2001, is considered a Black Swan event.  It had enormous military, cultural, and economic ramifications, yet the event itself was completely unexpected. 

For those interested in the term, real black swans were completely unknown to ancient westerners.  The aphorism "all swans are white" came from this notion.  However, in the 1600s, black swans were discovered in Australia, thus destroying the widespread disbelief in non-white swans.  In the case of black swans, the discovery was a minor inconvenience.  Textbooks were amended and arrogant professors humbled.  But when black swans alight in other disciplines, the results can be catastrophic. 

Black Swans wreak havoc in the markets.  In 1987, the interplay between derivatives and stock prices became toxic.  That, alongside unforeseen problems with computerized trading caused a -22.6% meltdown in one day.  This was a unwelcome Black Swan.  In 2000, once people stopped believing certain DotCom's with 23 year-old CEO's and cobbled-together business plans were worth $25 a share, the Tech Bust commenced.  Yet another Black Swan.

Last summer, subprime mortgage-backed securities problems came to light on Wall Street.  Since October, the broad stock market has dropped over -10%.  Today, we're still dealing with the effects of this issue.  This morning, Citigroup announced plans to unwind $400 billion of assets over the next 3 years.  The net effect: Citi will no longer be the largest bank in the U.S. -- if they stick around at all.  The Subprime Black Swan is enjoying its leisurely float in the markets for now.  One day he'll fly away.  But will it be after another -10% decline in the market?  Who knows?

As for our subscriber's original question: where do we think the market's heading?  We're cautiously optimistic.  Our model strategies are 100% invested in areas of strength in the market, but our Free Market Leadership Strategy is still holding 50% cash.  Barring additional Black Swans flying into the scene, we continue to expect pockets of rallies.  We believe we're well-positioned to profit from this unusual market. 

Have a great weekend.