At the risk of repeating myself, I'm bullish. Unambiguously, unequivocally, and, yes, sometimes even unrepentantly bullish.
In addition to my frequent talks and interviews here, at least once a week, I'm live on FOX Business Network making the case to investors, that they absolutely must be in this market - because it's going up.
The ingredients for a continued bull run are all there in ample supply - a decreasing number of shares, a rising tide of cheap money, and a big, new contingent of mobile app-based investors, to name just a few.
My prediction is for a 10%, maybe even 15%, run on the big benchmarks in 2021, as more and more people get vaccinated and as the U.S. and global economy starts to get rockin' once again.
But let's be clear: "Bullish" should never, ever mean "foolhardy." There is a market mechanic at work right now that could, potentially, turn a simple dip into something much uglier.
The good news is, once you know it's a possibility, it's dead simple to protect yourself and get into position to cash in...
"As Long as the Music Is Playing, You've Got to Get Up and Dance"
That quote is courtesy of Chuck Prince, former CEO of Citigroup Inc. (NYSE: C). Way back in the summer of 2007, he said, "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance."
Prince was talking about the leverage in the subprime mortgage market and liquidity in all markets ancillary to mortgage-backed securities (MBSs).
That was July 2007. Of course, 15 months later, the music stopped with a record scratch heard from New York to London.
I remember it well: October 2008 was beyond frightening - beyond surreal, even. As we lived through it, it was like it wasn't happening, like it was a movie, because how could it be real? How could the U.S. financial system, and a lot of the world's financial systems, be on the verge of collapsing to the point where we'd have to resort to a barter system to live?
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That's no exaggeration, really - we were that close to the unthinkable. The crisis was that unbelievable.
Back then, in the subprime market and a few other places, you could see how illiquid markets were becoming if you knew, as I did, where to look.
Now, I'm not here to tell you we're "there" again, because we're not. The trouble is, liquidity is still a problem, and potentially a big one. Again, we're not there, as far as anyone can see, but that's a problem in and of itself, too.
Today, the liquidity issue no one's talking about is the nature of the activity in the markets. The equity and bond markets aren't ruled by investors anymore; they're ruled by traders.
Traders, generally, are highly leveraged and at the mercy of liquidity constraints when markets unexpectedly turn upside-down.
Again, I'm not saying we're turning; I'm saying if we do, liquidity will be an issue. Everyone sees this, or is able to, anyway, but they don't all understand it.
The Risk Is in the Market Mechanics
The way buy and sell orders are "spread out," and directed to different venues for execution, and the way dark pools of liquidity operate are mechanical issues.
The way order flow is monitored and front-run, and the way retail investors have become the tail wagging the dog are mechanical issues, too. They're mechanical issues that underlie liquidity concerns.
Mechanically, markets move up and down with a degree of "quirkiness," meaning they can sometimes move a few hundred points (in Dow terms) in a matter of seconds. A 1,000-point move can unfold in a matter of minutes. That's what I mean by "quirky."
Things generally smooth out fairly quickly after sudden moves... but they don't always. And, because we've been in a raging bull market, those increasingly worrisome liquidity issues are flying under almost everyone's radar.
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Everyone is expecting a year-end rally and continuation of the bull market - and we're getting it, so far.
But coming as we are into the end of the year, there are a few mechanical "pressure valves," like dollar liquidity, and Treasury bond liquidity (in a constrained Treasury market, no less) that could blow if there's any sudden selling that knocks markets down... at the exact instant everyone's expecting them to rally.
Protection Is Easy and Cheap Here
Let me be clear: I am not betting against the bull market, and neither should you. But this possible liquidity problem is an issue every single investor needs to be aware of.
Until we're comfortably into the middle of the first quarter of 2021, I'll be "listening" to these pressure valves very carefully. If I sense any bubbling, rattling, or worse - whistling - you'll be among the first to know. I'm sure Citi's Chuck Prince would agree with me that that isn't a tune anyone could or should dance to.
Here's what to do in the meantime...
First and foremost, stay bullish. Continue to view dips as buying opportunities, particularly for the quality stocks I talk about right here. Keep your stops in place, though, and tighten them up if you hear from me. This is a good time to take up relatively inexpensive hedges by buying puts on the big index ETFs, like the SPDR S&P 500 Trust EFT (NYSEArca: SPY), the SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA), and the Invesco QQQ Trust Series 1 (NASDAQ: QQQ) ETF that tracks the NASDAQ. Think of it as paying for insurance; you hope you never need it, and you may never need it, but you'll be glad you have it in the event.
All in all, I think 2021 could be at the start of a generational buying opportunity, and I want to show you which stocks to grab right away and which to avoid or sell ASAP, so that you can know how to be in the strongest possible position to potentially make a killing next year.
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