Why Investing Is So Difficult

Today’s one of those days that makes you realize why investing is not a science.  It’s more of an art.  If it was a science, computers would make all the decisions and we could go play golf instead of look at tons of screens with flashing numbers and lines going all over the place.

The stock market has been humming along and it’s been pretty easy and methodical.  There have been some warning signs as of late as we wrote in our weekly newsletter such as fewer and fewer stocks participating in the last couple of weeks, the reversal on Thursday, and of course that dreaded weak volume.  But, as I’ve stated before, most of the things we’re currently worried about (like volume) are the same things we were worried about several weeks ago.  However, we still can’t assume everything’s great and we’ll just keep moving up forever.  So…we trade.  We protect ourselves.  Today, the market was down from the opening bell all the way to the close and almost all the volume on the NYSE was downside volume.  The reason a day like today is so hard is because in just a moment, you have to abandon what’s been working lately and protect yourself.  I sold a lot of positions today that as late as Friday I didn’t think I’d be selling.  But, if you’re going to buy something, you better know when to sell. 

During this entire rally, I’ve never called it a bull market.  I think it’s been a longer term bear market rally based on improving fundamentals.  I think ultimately that continues.  But, I’m not going to watch positions fall and keep telling myself they’ll come back.  Don’t take anything for granted.  If we get a 10% correction, which we could easily get from these levels, many of the stocks you own will be down 15-20%.  That’s painful.  Remember that you’re not a pension fund, a mutual fund, or anybody else that has restrictions.  You can buy, sell, change your mind, and buy again.  Flexibility is the best tool you have. 

There are two ways to approach this market.  For those that are longer-term investors, averaging into this market is still the best strategy.  For the money I oversee that does have some restrictions or has limited options such as 401-Ks, those portfolios are still in a heavier cash position and I’ve been averaging in over the past few months.  For the portfolios that have all the options available to them such as a traditional brokerage account, those portfolios have more cash today than they did on Friday.  I had several positions get stopped out today.  Some were to protect profits and some were to cut losses.  The bottom line is that stop losses can protect you.  I don’t always use them, but when I do, I typically use conditional stop losses.  They aren’t always exact price levels.  But after analyzing the market this weekend, it became obvious that there has been some mild deterioration lately so we decided to put some tight stops on various positions.  You start with what the market’s telling you and then you work down from there.

I still believe the economy will continue to improve, surprise investors, and that will lead to higher prices.  But, my beliefs come in second place to market technicals and the mood of investors.  If the technicals begin to break down and investors start running for the exits, we have to react.  As far as those technicals, we’re still above the 20-day moving average and the 200-day moving average.  The 50-day moving average looks to be a natural support area.  That would be around 880-890 level on the S&P 500.  If we don’t hold that, then we could be setting up for a much bigger correction.

This post published at www.karleggerss.com

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June 2009
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