It's Sooo Tempting...

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Good Morning. When the market does something confounding, such as rally for the better part of eight straight weeks in the face of an ongoing crisis, it is soooo tempting to form an opinion of the action and to base your investing strategy on that opinion. For example, one of my colleagues pinged me yesterday with a note saying "This rally is suspect, I don't believe in it." My response was short and straight to the point, "I don't judge market moves, I just try to stay in tune with them."

I know that I've been touching on my particular, opinion-agnostic approach to the markets a lot lately. But I continue to be surprised at the number of investment professionals that I come in contact with who can't just enjoy the ride. Instead, there are soooo many folks who feel the need to take a stand and to "make a call."

I've been at this game a very long time and I know how tempting it is to come out with an opinion, a prognostication, or a downright prediction of what is about to happen next (heck, I've done it a time or two). This is especially true when the market does something that doesn't make sense. And when this happens, folks come out of the woodwork to tell us how wrong the market is.

But as the saying goes, markets are never wrong - people are. So, I ask you - is the market wrong in moving higher at the present time? If valuations were as high as they were in say 1999, perhaps suggesting that the market is wrong for movin' on up might make some sense. And if the economy in the U.S. was either on the brink of a debacle or a recession, then it might be okay to say the market's move was wrong.

The problem here is the need to be "right" in this business and/or the desire to "look smart" to your peers, your boss, and your clients can overtake your decision making process. For example, I know of one former hedge fund manager who insisted that the housing market was going to be a problem and that it was wrong to be in stocks. And although this particular gentleman was eventually proved "right" he was also very early with his "call." As such, he wound up getting fired before anyone found out how "right" he was.

This brings me to the title of a book written by Ned Davis in the mid-1990's: "It's Not About Being Right, It's About Making Money." While the young hedge fund manager's call was eventually proven to be correct, he failed to make hay while the sun was shining. And in this business, that's simply unacceptable.

I believe it is important to recognize that there is no grading scale for a trend in the stock market. You either profit from the move or you don't. So, it makes little sense (to me, anyway) to say, hey, it's okay that I missed a +7% move in the market because it was only a C+ rally on my scale.

The bottom line is your bank account doesn't care about the quality of the move and it doesn't really give a hoot about your opinion of what should have happened. You see, the money made from a "subpar" rally spends just as easily as the money made from a stellar bull move up or a good short in a bear market.

My primary point this morning is simple: do everything you can to avoid falling into the trap of needing to be "right." Take it from me; it is soooo easy to take a stand and to then confuse stubbornness with conviction. In my experience, it is much easier and far more profitable to simply avoid taking a stand in the first place. And it is for this reason that I try to avoid judging a market and instead try my darndest to stay in tune with what is happening.

Does my non-judgmental, model-based approach have flaws? Sure. I wind up on the wrong side on occasion and it is indeed upsetting. But here's the key. While I will be wrong (it's part of the game), my goal is to not be wrong for long. So, while it is indeed tempting to make a call here, I will do my level best to resist the urge and continue to try to stay on the right side of the trend.

Turning to this morning... After watching stocks inch higher each day so far this week, the bears appear to be making a comeback this morning on the back of reports that Eurozone finance ministers have rejected Greece's proposed package of austerity measures and have set new conditions for Athens to receive additional bailout funds.

On the Economic front... The U.S. Trade Deficit expanded to $48.8 billion in December, which was greater than the consensus estimate for a deficit of $48.1 billion. The November reading was revised to $47.06 billion from $47.75 billion.

We will also get a report from the University Of Michigan on Consumer Confidence this morning.

Thought for the day... Best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

• Major Foreign Markets:
  • Australia: -0.79%
    
  • Shanghai: +0.10%
    
  • Hong Kong: -1.08%
    
  • Japan: -0.61%
    
  • France: -1.35%
    
  • Germany: -1.59%
    
  • Italy: -1.40%
    
  • Spain: -1.36%
    
  • London: -0.80%
  
  
• Crude Oil Futures: -$1.73 to $98.11
  
• Gold: -$30.70 to $1710.50
  
• Dollar: higher against the Yen, Pound and Euro
  
• 10-Year Bond Yield: Currently trading at 1.979%
  
• Stock Futures Ahead of Open in U.S. (relative to fair value):
  • S&P 500: -13.10
    
  • Dow Jones Industrial Average: -100
    
  • NASDAQ Composite: -19.93

 

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The opinions and forecasts expressed are those of David Moenning, founder of StateoftheMarkets.com and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security