Long-time readers know that we don’t spend much time trying to predict what the market is going to do next. Our feeling is that it is much more important to stay in tune with what the market is actually doing right now, because quite frankly, Ms. Market doesn’t care what I think. And as Marty Zweig used to say, “Those who use a crystal ball in investing will wind up with an awful lot of crushed glass in their portfolios.”
However, it is also important to understand that sometimes it is very difficult to see the forest for the trees. In other words, there are times when it is hard to stay in tune with the big picture because the environment is so emotionally charged that it is nearly impossible to stay objective.
In short, now would be one of those times. Let’s be honest; if you didn’t take any defensive measures over the past 18 months, you are probably none too pleased about the near -50% decline in your portfolio. So, given the pain that this bear has dished out, are you feeling objective right about now? And are you able to look at the action in the market right now without some doubt creeping in?
For the vast majority of investors out there, the answer is no. This isn’t a criticism; mind you, it’s just the reality of the environment. Losses make people feel bad and when they feel bad, they aren’t as objective as they can be. So, the first point we’d like to make this weekend is if you’ve been beaten down by this bear market, you are most definitely not alone as a report on Friday showed that the net worth of U.S. Households has fallen by -50% over the past year.
The second point is that the brutality of this once-in-a-generation bear market will cause many investors to simply throw up their hands and give up the game – just when the game is about to be fun again!
Proof Can Be Expensive!
While I don’t have the exact statistics handy at the moment, I am fairly confident history will confirm that about one-half of the gains from an average bull market tend to occur during the first one-third of the bull’s run. And unfortunately, THIS is the reason that most American investors aren’t rich.
You see, most investors simply follow the crowd and do what “feels right” – which is okay MOST of the time. Unfortunately though, history also shows that the crowd tends to be right in the middle of big trends and wrong at both ends.
Ask yourself a question: Isn’t it easier to invest in the stock market when everything is going well and everybody you talk to is upbeat and making money? And isn’t it much more enjoyable to go out and buy stocks when there is “proof” that the market is doing well?
The answer to these questions is: undoubtedly yes. But here’s the rub. While this approach is fine during a secular market trend, it isn’t going to help you at major market junctures.
Remember, the stock market is a discounting mechanism that looks ahead six to nine months. So, if you are waiting for things to “feel good” again in the stock market, you are likely going to be “late to the party” during any new market trends. And as such, you are likely to miss a great deal of the gains available during the early phases of the cyclical bull market. So remember, as my dear friend Rick likes to say, “In the stock market, proof can be very expensive.”
What’s That I Hear?
While most investors are currently huddled in their foxholes with their helmets on and their canned goods close at hand, we want those that are still in the game to know that the end of the pain is likely very close at hand. Although this idea may go against the current consensus, we are of the mind that if you listen closely enough, you can hear a bell ringing off in the distance – the very bell that signals the bottom being put in.
Yes, you read it right – we believe that we’ve likely seen the nadir in this crisis. As we’ve written recently, since this mess is all about the banks, we view the combination of the news that the banks are making money AND the likelihood that FASB will make changes in the mark-to-market rules as a deal breaker for the bears.
Our feeling is that if the banks, which are at the center of this quagmire, are actually making money so far this year, it means that there is a very good chance that we’ve FINALLY seen the worst of the credit crisis. Thus, if the root cause of the bear market is improving (albeit slowly), then it shouldn’t take too long for the market to begin to realize that the sun will indeed shine on the economy again sometime in the next 12 months.
Before you start sending me a bunch of nasty emails reminding me about how bad the housing market is, how bad the economy is (and that it is likely to get worse), and all details about all the jobs being lost every month, let me say that we do NOT believe stocks will go straight up from here.
No, we are simply suggesting that we are in the bottoming phase of this bear market. It won’t be short and it won’t be easy, but this IS the first step toward making money again in the stock market. And as such, we believe it is time to begin looking for opportunities.
However, as the playbook reminds us, the low put in last week will likely be retested in the future. And the fact that stocks are overbought in the short-term means that we will likely see some additional volatility to the downside for a while. But, when and if a retest of the recent low occurs without any change in the fundamental picture (such as FASB saying “we like the mark-to-market rules the way they are”) we will need to put away the fear and start adding to positions on the long side.
Wishing you all the best for a profitable week ahead,
David D. Moenning
Founder TopStockPortfolios.com
Positions in Stocks Mentioned: None
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The opinions and forecasts expressed are those of David Moenning, founder of TopStockPortfolios.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
