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Dow 13,000: Don’t Overthink the 2012 Rally

Breakout

Four words could be used to summarize the reaction of Wall Street professionals to the news that the Dow Jones Industrial Average briefly topped 13,000 today: "The market is stupid!" Stocks "shouldn't" be here with Europe collapsing, earnings dropping, and every other thing you can think of apparently working against us.

According to Lee Munson, chief investment officer at Portfolio LLC, this contempt illustrates one of a few traps pros and everyday investors fall into that costs them money.

Everyone wants to be smart but sometimes ignorance isn't just bliss -- it's lucrative. The reality is nothing was solved over the weekend in Europe, earnings have come in somewhat tepid, and the best case scenario for the economy over the next six months seems to be somewhere between flatline and infinitesimal growth. All of which may or may not be true but won't determine the next 5% move in stocks.

"Instead of actually engaging the market, looking at valuations, and trying to be somewhat reasonable," Munson says, traders are too often focused on demonstrating their wisdom. In the big picture we're all going to die, but if you've obsessed over mortality for the past three years, you've missed a pretty enormous rally.

This hubris leads to the harmful practice of trying to call exact tops and bottoms. Munson says he fell victim to this thinking himself back during the Internet bubble when he wanted to be the guy who shorted Priceline (PCLN) or Enron (RIP).

The value of being able to say "I shorted that and made money" is viewed as more dear than money itself. In other words, it's not at all uncommon for traders to prefer to make nickels fighting the herd than to make dollars running with it. It's a concept so absurd as to seem impossible; that is until you spend some time talking to professionals about the world's most popular stock.

"Everybody wants to short Apple (AAPL)" notes Munson. "Why? So you can make 10 bucks?"

Apple bears -- and no one among the Wall Street "smarts" seem to want to cop to being an Apple bull -- have been gunning against the stock for the past 100 points, most recently and vocally as the stock hit $500 a share. Suffice it to say there's been more money to be made on the other side of the trade.

The bottom line is those obsessed with having a contrarian view end up disappointed more often than rich. Munson can feel the contrary thinking build as mutual fund flows finally go positive early in 2012 after being stuck in negative territory since March of last year.

The idea of a stock market mania rebuilding is insane, from Munson's perch on the other side of the country.

"I don't see anyone on Main Street too excited about stocks," he says.

That may come as news to many on Wall Street but, at least according to the author of "Rigged Money: Beating Wall Street at its Own Game," a little ignorance can go a long way towards outperforming the broader stock market.

In other words, don't think, just trade.

Perhaps ironically, we want to know what you think. Let us know via the comment section below or on Twitter @Jeffmacke.

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