Kass: Here’s Why This Market Is a Trading Sardine

The trader in me says the market has a slight upside bias after several recent successful tests. But the fundamentalist in me says the market has a lot of downside risk.

When in such a conflict and conviction is blurry, I tend to trade (and make short-term rentals) rather than invest for the longer term, and avoid positioning too far into the future.

“There is the old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, “You don’t understand. These are not eating sardines, they are trading sardines.”‘

— Seth Klarman

I routinely approach the markets in two ways:

  • By calculating the difference between the S&P 500 Index and its “fair market value.” 
  • By determining what is the direction of market prices and price momentum over the near term, intermediate term, and longer term.

This approach often results in an override when there is a conflict, as quite often the short-term price direction of the market may be materially different than my assessment and calculus of intrinsic value vis a vis current share price values.

When this is the outcome, as it is now — stocks are much higher than “fair market value” at the same time it appears the short-term direction may be somewhat higher — I tend to reduce my market “bet/hedges”, as my confidence is lower, and focus more on trading, particularly in individual equities.

With stocks well above “fair market value” and equities defying bear forecasts and overcoming large down days, and seemingly trending higher, this is the case today.


  1. Volatility is rising
  2. Volume is low
  3. The market without memory from day to day is growing less dependable and less trending despite the appearance of some near-term price relief

Bottom Line

The S&P Index has risen massively over the last 14 months, from under 2200 in March 2020 to about 4160 on Friday.

There have been several attempts at a market breakdown that have been resisted over the last few days.

To me, equities remain overvalued — I have numerous fundamental, sentiment, policy and economic concerns — in a market without memory from day to day.

However, equities seem to be in reasonably good short-term shape and many individual equities have had sizable corrections. Some, such as Disney (DIS) , Coinbase (COIN) and Twitter (TWTR) , I have been buying.

Many have fixed market views that tend not to vacillate regardless of price action or changing fundamentals/sentiment.

However, in this period of uncertainty and conflict in my views, I lack conviction and my confidence is not high.

With regards to many stocks and, even with the Indices, it is time to trade sardines and not eat sardines.

I hope this helps to explain my flexibility in managing money — how I could be positioned net long (individual stocks) while being bearish in view over the intermediate term.

(Disney is a holding in Jim Cramer’s Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells DIS? Learn more now.)

(This commentary originally appeared on Real Money Pro on May 21. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass’s Daily Diary and columns from Paul Price, Bret Jensen and others.)

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2021-05-22 16:30:00

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