A Reflection On The Rally

Since the recent lows in early March, the stock market is up about 20%.  A very typical bear market rally.  Sharp and fierce.  But, is it just a bear market rally or the beginning of something bigger?  The short answer is I don’t know.  It’s way too early to tell.  We were oversold, we covered our shorts, bought a few things, and we’re enjoying the rally.  But, is it over? As I mentioned in yesterday’s post, it paused in the general area where it should have technically.  

Here’s what we know so far.  The participation of stocks in the rally has been great.  A lot of sectors have participated.  A lot of different size companies have participated. Heck, the financials even participated.  So, the breadth has been just fine.  How about the volume?  That’s been pretty good as well.  Not explosive but much better than the December rally.  During that entire rally of December, volume was getting weaker and weaker.  A big red flag.  That hasn’t happened this time.  So, that’s encouraging. We’re also seeing some real demand for stocks unlike the November & December rally measured several different ways.  So, why am I not advocating running out there and loading the boat?  For a couple of reasons.  First, this rally has been quicker than the previous bear market rallies and that means it has moved too far too fast.  We need it to consolidate or pullback a little before resuming.  Secondly, even though a lot of stocks have gone up during this rally, not that many have advanced tremendously.  In other words, the points or percentage gains for all the stocks isn’t that impressive.  There have certainly been some big rallies in several stocks, but as a group they’ve lagged somewhat. Therefore, the rally hasn’t been perfect.  But, it’s definitely been the best one we’ve had since October.  And that’s something we have to watch.

Next week I’m looking for more of a pullback.  Nothing severe and in fact one that we can buy.  Buying the dips?  Has a nice ring to it. But, that may be where we’re headed over the next several weeks and maybe even months.  Again, too early to tell.  But, today’s selloff is exactly what the doctor ordered.  The volume was low and the selling was mediocre but we had pullbacks in the big winners on the week. That’s profit taking.  Right on time.  A few more days of this (perhaps 2-3%), and I’d get more aggressive on the long side.  I stressed patience earlier this week and I still feel that way.  We’ve had two down days in a row since that post and patience is paying off.  In this dangerous environment, any selling can snowball and become quite aggressive.  So, we can’t assume it’s just a small pullback.  That’s why we have to be patient. 

Buy Before The Economy Turns?

I hear a lot of people on television saying you need to buy stocks now before the economy gets better.  But, if you buy stocks now, you’re assuming the economy will be better six months from now.  We have no evidence of that and neither do those guys and gals on television. Could it be stabilizing?  Yes.  But, at very low levels.  This economy is still contracting and will for some time.  That will hurt growth and profits.  Without those two things, stock prices may be contained.  We’ll certainly get rallies and the economy will eventually improve.  I just think it’s going to take a little longer than the stock market is pricing in at these levels.  Even though I think it’ll take some time, I sure wish people would stop using the word depression.  We’re not in a depression and won’t be.  We’re in a very severe recession which may take a few years to get out of.  But, depression?  No.  But, let’s be realistic about what we are in currently.  A really bad recession that and there’s no evidence whatsoever suggesting an improving economy yet.  So, it’s too early to buy stocks for investments.  But, for trades?  Sure.  

Be Aggressive

We often hear the word aggressive used in the financial world.  It usually means you need to buy a bunch of stuff that vibrates a lot.  I think this is a time you need to be aggressive in your trading.  I don’t mean adding risk when I use the word aggressive.  I mean you need to control your portfolio instead of letting the market whip you around.  Get active.  Take advantage of extremes.  Take advantage of income. Sell when things are overbought.  Buy when they’re oversold.  Focus on making money and remove the emotions.  I know that’s easier said than done.  But, it’s true.  You hate this stock and love that stock.  Forget about it.  It’s all paper.  I don’t care if you have a 20% gain or a 20% loss, sell when you should and buy when you should.  If you attack your portfolio instead of letting the market attack you, you’ll have much better results.  It takes some work and much more attention than we’re all used to.  Unfortunately, that’s today’s market.

Have a nice weekend.

This post published at www.karleggerss.com

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4 Responses to “A Reflection On The Rally”

  1. 1 Jessica March 23, 2009 at 1:42 pm

    What do you think about MBB – iShares Lehman MBS Fixed-Rate Bond Fund?

    The MBS bond itself requires a minimum $25,000 investment, too rich for my blood especially since I’m just starting to learn about bonds and want to start small.

  2. 3 Jessica March 24, 2009 at 1:51 pm

    At Schwab and Ameritrade, to purchase a mortgage back security bond or agency bond, the minimum purchase was $25,000.

    I don’t want to invest that much. That is why I want your opinion of the ETF MBB which I can buy as little as 1 share if I want. What do you think?

    • 4 keggerss March 24, 2009 at 3:05 pm

      I think it’s ok. If this is the only option, I’d rather you buy a managed fund perhaps so a manager knows when to buy and sell. With an ETF, it’s strictly going off of an index. Don’t see a whole bunch of upside in this.

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