Follow your playbook; Be shortie at 8500

One of the most important lessons (I think) I’ve learned as a trader over the years is to set up a rough playbook based on your expectations of the fundamentals of the economy or company. My playbook’s been all about tough, range-bound bear markets ever since I grew ever more bearish about the economy as the Republicans and Democrats in power voted through a new paradigm of overt corporate welfare in the form of TARP, TALF, and the endless bailouts. I don’t know about you, but I don’t get “more confident” when I see welfare being doled out for people rich enough but stupid enough to (supposedly) risk their own money on the future earnings potential of banks like Citigroup (C), Goldman Sachs (GS), Morgan Stanley (MS), and Bank of America (BA), in credit card companies like Capital One (COF) and American Express (AXP), in insurance companies like Prudential (PRU) and Lincoln National (LNC) as well as in auto-related companies like GM (GM) and Chrysler.

I have been alarmed at the concept that our government can pick and choose which shareholders, lenders, suppliers and customers of our nation’s economy deserve taxpayer infusions, loans, investments and other bailouts with the very limited resources and money that could have gone towards providing healthcare for every child under 18 years old in this nation. I was worried that trillions of dollars of capital in this country would become politicized and not-profit-seeking, and since profits are the only thing that create bull markets and prosperity in a society, I became ever more bearish. Been paying attention to the Chrysler and GM proceedings and the finger pointing from regulator to banker (see John Thain, Ken Lewis, et al for example) and feeling better about profit potential for our economy’s deserving, entrepreneurial companies? Yup, welcome to bizzarro world USA 2009.

Even as DJIA pulled back from its highs of 14,000 to 11,000 last fall, I lowered my target for the DJIA from my initial target of 8000-10,000 down to 6000-8500. That range bound “target”, being based on the fundamental earnings potential of companies in the DJIA becomes the aforementioned playbook. When the market crashed in early March and we actually hit 6500 in a straight line down from 10,000, I wrote a column here on these pages reminding everyone not to panic now that we’d finally arrived near the lower end of the playbook’s targeted range for the DJIA.

Frankly, I can’t see how we get back into a bull market for years to come, given how vastly different our financial system, manufacturing system, insurance system, and credit card system are today than they’ve ever been – again, the government, for the first time ever in this country, provides the capital to make our system run. If you don’t think that’s a huge tipping point of change for our country’s economy and markets, then I can only do what I’ve been doing since the Republican/Democrat Regime in charge started taking us down this path, and scream – WAKE UP, PEOPLE AND FIGHT TO SAVE OUR FREEDOM, OUR MARKETS, OUR ECONOMY!

In the meantime though, I don’t think you can expect much more than a temporary, fleeting, multi-month improvement in the fundamentals of the economy, as the trillions of dollars of stimulus and the trillions of dollars for all these overt corporate welfare bailouts (all of which we pay for with printed dollars and/or money we borrow from our children’s future prosperity) flow through the system to the largest, most politically-connected corporations. Listen to conference calls from both big and small companies and you’ll realize it’s no coincidence that the bigger the corporation, the better they feel about the next couple quarter. The market’s already tried to discount some of that fleeting improvement in the economy – that was the bounce from 6500 to 8500.

So if we’re going to listen to that playbook, it’d suggest we get short as we have gotten close to 8500 in the last few weeks. And that’s exactly what I’d suggest.

BTW, look back at that first sentence and it’ll underscore another most important lesson of trading – that you’ve got strive to be humble enough at all times to know that you actually don’t “know” anything for certain. On Monday I’ll look at the importance of being flexible with your playbook – gotta constantly question that fundamental analysis.

PS. I post trading ideas, market commentary and brief stock analyses on my twitter account – you can follow me at http://twitter.com/codywillard.