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The Costanza Trade: Why the Market Is Irrational & What You Can Do About It


Stocks are higher by more than 10% in 2012 yet are widely reviled and distrusted by the masses. Hedge funds are up less than 3%, equity mutual fund outflows are a way of life and trading volumes are negligible. Scott Bleier of CreateCapital.com has a decent explanation for how stock indices can rally while individuals get nothing but angry.

"We are on a hamster wheel," says Bleier in the attached video. Individuals are running furiously to keep up with global news, financial scandals, and a crumbling economy. The most bullish forces are those of the Federal Reserve's invention, so the worse it gets, the more likely the Fed saves us. As a result bad news can be good and vice versa.

Experience only gets you in trouble. "It's not logical. You have to throw away everything you've ever learned about markets and stocks in order to put your money in," says Bleier. He and others have come to call this strategy the Costanza Trade after the Seinfeld episode when George achieves great success by doing exactly the opposite of what his instinct tells him.

This Opposite Day strategy is actually fairly widespread in trading communities. It's also the bedrock of quasi-theories like the Maximum Pain Trade betting the market will do whatever hurts the largest mass of investors and an outstanding assortment of movies from the '70s and '80s in which parents and kids magically change places.

Bleier says the negative fundamentals are about to combine with improving sentiment to create a brutal, painful reversal in the relatively near term. Fund flows and hatred be damned, he says everybody is getting long stocks if only because they don't want to miss the party. When the momentum buying dies so does the rally.

"We're going to make a 3-year high sometime in the next few weeks," he says after making a cogent argument for why we shouldn't. "Then be careful because I think the market drops easily 1,000 points quickly."

It's not a matter of avoiding markets entirely but a warning about knowing what you're getting into when you buy. "Understand what you're dealing with," he warns. "You're dealing with artificial markets that you can make money in. It's a dichotomy."

Whatever it is proceed with caution.