One of the biggest investment challenges is keeping focused on the future. We all know that we cannot change the past, but there is a powerful temptation to use current decisions to justify past mistakes.
The most common market sentiment right now is one of denial. Many sophisticated market observers have hated the rally. It is natural to want to seem smart in writing or on TV, so successful investors have been portrayed as "dumb money."
Here at "A Dash" we are focused on the future, not adjudicating who was smart and who was dumb. The only way to do this is to realize that every day is a new one. We really need to look at data -- real data -- and be willing to challenge our views.
Abnormal Returns, in another strong theme drawn from reading and synthesizing hundreds of blog posts, captures the essence of this problem. The article carefully explores the data surprises, the skepticism directed at those bullish on the economy, the "new normal" of expectations, and the resulting problems.
The answer?
So does a new, new normal mean happy times are here again? Not necessarily. Investors should still be on guard for the potential downsides. The economy could still turn tail and go back into some sort of debt-fueled dark age. However the past year is a stark lesson in how we set expectations and how generating some perspective can help investors combat our short-sighted tendencies.
I agree. Readers should check out the entire article and the links. I'll try to offer an additional trick or two in this week's conclusion.
But now -- let us review last week.
The Good
- The Fed decision was good, by which I mean market-friendly. (I'll let the pundits pontificate on the wisdom). There will eventually be an over-reaction as the Fed moves from accommodative to neutral, but that seems to be some time off.
- The GDP report was good. The gains relied less on inventory rebuilding and emphasized consumer and business spending. The bad weather was probably a drag. We all know there will be revisions, but the economic growth seems solidly in place.
- The Chicago PMI was very good at 63.8, beating expectations by a few points.
- Consumer confidence was good -- a concurrent indication of employment.
The Bad
- Weekly jobless claims are still elevated. This is an important part of the job picture. The rate of initial claims seems to have stalled at an unhealthy level.
- Europe. Political maneuvering about Greece and the downgrade of credit ratings (Greece, Portugal, Spain, and ??) had worldwide markets on edge.
- The oil "spill". We do not yet know the extent of the cost, since the spill continues. One cost will be the effect on energy prices as people re-evaluate this energy sources.
The Ugly
- The sideshow. Any time over the last two years that investors have seen Congressional hearings, it has been a market negative. Even the most sophisticated market participants seem lost when something happens in the political arena. They are completely unable to separate policy consequences from political theater.
- Market reactions. The market sentiment seemed to make a major shift. The marginal buyer and seller were reacting more to "headline risk" than to actual data. That is the reality of the moment. We must all deal with it. For traders it is a risk. For investors it is an opportunity.
I expect a rebound on Monday from the annual Buffett meeting (support for financial stocks and cyclicals), a plan for Greece, and a good ISM number. If there is no specific plan for Greece, the negative sentiment will continue.
Once we get past the Monday news, things could be quiet until the employment situation report on Friday. I will do my customary preview, probably on Wednesday.
Our Trading Forecast
Our own indicators remain bullish by a very slender margin, and that was our vote in the weekly Ticker Sense Blogger Sentiment Poll. Here is what we see:
- 87% (93% two weeks ago) of our ETF's have positive ratings. This is very strong.
- The median strength is only +18 (down from +41 two weeks ago).
- 91% (about the same) of the sectors are in the "penalty box," showing a continued high level of uncertainty and risk.
- Our Index Package now has a modest, positive rating, but only the Diamonds are out of the penalty box.
[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly email list. You can also write personally to me with questions or comments, and I'll do my best to answer.]
Investment Implications
There is a real irony in the current rally. Many have been skeptical. For these people the slightest selling is a sign of the "next big one." I talk to many people who wish they had been buyers of many stocks at lower prices, but are now unwilling to step up. When stocks move higher, they think they are too late. When stocks move lower, even by a few percentage points, they become frightened. These people are not really investors, since nothing will convince them to buy.
This inconsistent behavior comes when you have no system -- fundamental or technical. If you are paying attention, you should have a long list of buy candidates. Many stocks were unduly trashed last week -- stocks that were not in the financial sideshow or the energy disaster realm. They are on sale, but few seem to see the opportunity.
For specific stocks, I am happy with my 2010 preview. Some of the themes are already working, and others (health care) can be played at a discount. I would buy any of the names right now. I also warned against energy, but would now be looking again.
As for techniques, you need to clear your mind of biases. One of the best traders I have ever known always had some long-term positions as well. These included many names where he had "fallen in love." Each year when he went on vacation he would sell these positions -- all of them. He needed a clean slate.
So do you.
