Although ecstasy reigned supreme last Tuesday as the Dow crossed into record territory, not everyone felt as if they shared in the bounty. It’s at times like these that we must be mindful of the distinction between economic recovery and market recovery. Two phenomena which fly in tandem, on parallel tracks, are not always inextricably linked, and in this case the parallel disconnect is wide and obvious.
Those who don’t have the good
fortune to have owned stocks or mutual funds certainly don’t care about, or are
aware of, a Dow Jones new high.
Similarly, those who merely recovered the net loss they incurred since
2008 don’t feel euphoric, they feel relieved.
Financial anxiety also
heightens around seminal high points in the averages. Statistics tell us that, despite the thrill
of uncharted territory, there is nowhere else to go in the short-run but down. Of course, the prevailing uptrend
might still be up, but cycles need fuel, and the capital and energy expended to
get to the top needs to be replenished.
However fantastic the
achievement, there remains a panoply of fundamental excuses why the rally
cannot be sustained. The origins of the
debt crisis may have been ameliorated, but the globe is awash in financial
indebtedness and leverage. Those who
forget the greed and excessiveness of a rush to spend money are likely to
repeat the mistake.
Misplaced analytics.
There is solace to be had that
bull and bear cycles evolve over time, and that we are in a pretty good bull
recovery at the moment. But bear in mind
that the advance is taking place against the backdrop of a steep bear decline
that just last week was breached for the first time only. The safest place to be today is sitting with
profits in your pocket.
I am also waiting, not only
for more segments of the population to be included in the market/economic
recovery, but also for more market sectors and geographies to participate, as
well. The acceleration in common stock
is mostly benefiting “household names,” Western nations, and the already-rich.
Conversely, my portfolio
strategy is to try to find pockets of undeveloped capital gains probabilities
in order to maximize the sustainability of portfolio appreciation. It is not when all stocks are rising
that the best gains are made, but when undiscovered opportunities can be
uncovered.
For portfolio safety, the
bottom line is not to see the new high as an entry point, but to wait for a
more appropriate inflection point with better relative strength probabilities.
Deploy the drogue chute.
As a mostly long-only investor
I am not looking to dissuade investors from believing in the upside rally, but
to make the context in which it happened more understandable. The glass is, indeed, half-full but still
early relative to its possibilities.
Q: What would you have if everyone bought into
the “it’s time” theory of investing?
A: The same stampede philosophy and methodology
that engenders downside terror and panic when “it’s time” becomes “it’s
time to get out!!”
We are in a changing economic
landscape, punctuated by cyclical opportunities and inflection points. The vast assortment of financial securities are
ripe for capital gains. I simply choose
not to push too hard on the accelerator as we run into, and past, certain
benchmarks of inordinate complexity.
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