With so many of the Dow stocks having run during the first two weeks of the quarter, it is strangely difficult to play catch-up and justify chasing stocks at valuations above prudent entry points. However, the task is made only slightly easier by recognizing the enormity of the basket from which to choose and the ever-changing relative opportunity versus the absolute, or objective, rate of return.
Bear or bull?
For example, I am witnessing a shallower rate of descent from the July/August highs, which puts less downward pressure on the market. In fact, some sectors (Energy, Utilities) are registering reflex rebounds from their lows and initiating new intermediate uplegs.
Keep in mind that I believe all market phenomena are cyclical, parabolic in shape, and not linear (straight line). Therefore, I always feel there is sufficient time during which to measure patterns of velocity or performance. If in a bear phase, we can define it, measure it, and gauge any statistical (stochastic) probability of a reversal of the trend. Similarly, bull uplegs are not moments in time, but rather phases of gathering upside momentum, characterized by volume changes, momentum shifts, and price mark-ups.
It is surprising, then, that clients and market observers fail to heed these cyclic opportunities in lieu of characterizing the day-to-day actions as more significant, or worrisome. I, too, certainly worry, and especially abhor losses. But when taken on balance, I more often than not get the allocation of probabilities right.
Last week the market held on to its quarterly upside momentum despite tepid data from the real estate (home building) sector and the employment statistics. Anecdotally, recent job actions at General Motors and Chrysler highlight the disconnect that the average citizen feels from higher salaried CEO’s and hedge fund managers. Not just anecdotally, the numbers are quite disparate and shockingly egregious. This only highlights the potential for emotion and panic to win-out over fundamentals and long term investing.
Squeezing blood from a stone.
In the meantime, rather than simplifying the investment landscape, banks, brokerages and financial planners concoct more difficult to understand schemes and “synthetic” investments with which to bully the public.
What the heck is a reverse mortgage; a derivative; a hedge-fund; a reverse exchangeable; a short-long spread; etc., etc. Do you need these things or are they being foisted upon you as “must-haves”, like new model automobiles or computers. Look, stocks either go up or down, it’s that simple. To prey upon any weakness in economic fundamentals or timing patterns is simply an effort to produce revenue where none previously existed. Like the alchemists of medieval times, it doesn’t always work. Unfortunately, the penalty of losing one’s head (literally) over concocted schemes no longer is applicable. Instead, maybe a reward of the corner office is more appropriate?
I am unequivocal in my belief that markets go up. Likewise, I am cautious that events need time to play out and that any effort to manipulate those cycles is misplaced.
Keep your eye on the trade data and production reports to gauge the domestic profit trends for this quarter, or the probability of a bull versus bear cycle enduring.
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