More Of The Same?

The last couple of weeks had some signs that we were likely to begin a sustainable rally and possibly things were changin.  We were technically oversold, the Fed was throwing money at the economy, the financials were rallying, commodities were selling off, and equities were moving higher.  But, not so fast.

I’ve mentioned that some of the fastest and biggest rallies come in bear markets.  This is what bear markets do.  They suck you in.  They’ve mildly sucked me in the last few days.  I bought a little tech and covered some shorts.  Fortunately, I’m still not 100% correlated with the market and way ahead of all the averages for the year.

Review 

After studying all the data I can possibly review, here’s what I know:

  • The economy based on some leading indicators has stabilized.  Unfortunately, it’s probably stabilized in recessionary territory.  Not necessarily a deep recession, but a recession nevertheless. 
  • The Fed is doing everything in their power (perhaps too late) to grease the wheels and this will help eventually.
  • There is still way too much supply meaning everytime the market goes up, there are plenty of sellers ready to dump stocks causing prices to go down.
  • Some of the long-term oversold indicators that show the market is completely washed out and the selling is exhausted is not present.
  • The rally that started a couple of weeks ago with promise lost its steam this week.
  • There are some great stocks out there that are really cheap and worth buying right now.
  • Whipsaw risk is still high along with volatility.

It’s amazing to me how this market can toy with all of our emotions.  Unless you’re practically day trading, you’re penalized for moving too fast.  If you buy after 3 days of rallies, you get burned.  If you short after a few down days, you get burned.  I’ve been stressing flexibility and nimbleness.  This is definitely no time to let pride get in the way.  If you bought something you shouldn’t have and it’s down but you know deep down you shouldn’t own it, you have to take your losses and move on.  The shorts I covered early in the week I wish I had back. 

When the market is in a tough spot like it is now, you have to say to yourself, “am I going to be caught in or out?”  I choose out everytime.  That means unless something changes, I’ll be adding back on a few shorts next week with my cash to reduce my overall exposure to stocks.  Not how I would have drawn it up but that’s what separates good traders from bad.  Good traders admit their mistakes, cut their losses, and move on.  They live to fight another day.  Bad traders hang on saying to themselves, “I’ll sell it when I get even”.  That’s calling paying to be right.  We get information and we trade based on that.  Then, the data changes, and you have to adapt.  The data changed quickly this week.  

Income

I want to reiterate the need for income in times like these.  I have 40% of my money in income producing securities yielding 8-10%.  That’s stable and it’s there every month.  But, the 60% that I don’t have in income producing securities is allocated towards capital gains.  That means buying something and then trying to sell it to the next guy for more.  Right now, that’s hard to do.  So, make sure you own some income producing securities.  Not treasuries yielding 3.5%.  There are various energy trusts that are attractive now and various types of bonds that can yield high single and low double digit income. 

Since January 17th, the market is practically flat even thought it’s been real volatile.  So, if you’re a buy and hold investor, you haven’t made any money but you’ve been terrified.  If you have income investments, at least you have 2 months worth of income which can help your total return. 

Trading vs. Investing

I fundamentally believe this market is in a bottoming process which can take several months.  Weak economies are followed by strong economies.  It just takes time.  The problem right now is the fact that there is simply no appetite for stocks, no demand.  Until that changes, you can trade but not invest.  As the weeks go on, the weak market is giving us all time to make our “investments”.  Buying extreme fear and selling optimism is still working as it always does for short-term “trading”.

Position yourself

So, the week ended with more disappointment as there was no follow through.  For the next couple of weeks, either the fear will start building again and we’ll once again get oversold, meaning too many bearish people  or some good news will come out and buoy stocks higher.  The market is still responding better on good news and holding its own on bad news.  That’s something different we haven’t seen in a few months.  That’s definitely encouraging.  Bottom line, pay attention.  If you’re holding a diversified portfolio of mutual funds, you’re in a dangerous position.  On the other hand, if you’re 100% cash, it may feel good, but you’re going to miss some big up days.  My choice, continue to own the rails, agriculture, natural gas, technology, and some healthcare.  The stuff that’s working.  Add to the plenty of cash and shorts on the weak areas and and you’ll sleep better at night. 

Have a great weekend.

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