The Rally Is Coming! The Rally Is Coming!
by Steve Selengut
Always buy too soon--- because no one will tell you
either when the rally will start or, more importantly,
how long it will last. Of course those are the two
things you want to know, but all you really have
to go on is the experience of the past. This is not
going to be a technical analysis of a series of numbers
or chart formations that have predictive capabilities.
Instead, it is intended to be a mild sedative to
calm your collective fears and to allow for a relaxed
analysis of the corrections of the past. You have
to prepare yourself for the rally that is surely
coming, and it may just arrive sooner than you think---
today, even.
Yesterday's classic e-mail question wondered: "Is
this ever going to end?" The reference was to the
eleven-month correction playing out concurrently
in both the investment grade value stock (IGVS) and
the income securities markets--- the anxiety was
cloaking the monitor screen in doom and gloom. Most
of you would be surprised at how frequently the current
scenario has repeated itself during the last 80 years.
Quite typically, a new set of abuses has been identified
as the cause of the problem, and it is likely that
a new set of regulations will be enacted for monitoring
by new legions of enforcers.
There is more in those six little words (Is this
ever going to end?) than meets the eye, and too many
investors share the misconceptions that lie beneath
the surface: The market has never and will never
be a one way ticket to ride (smile Beatles fans).
None of the important aspects of the voyage (advances,
declines, speed, beginning, or end) are predictable,
by anyone, no matter how overpaid or well credentialed.
It has become clear to me over thirty-five plus years
muddling through the investment exercise, that most
of the mistakes are made by people who over complicate
the process. This is not at all rocket science. In
fact, the only science(s) that are at all helpful
are economics and management--- mostly management,
since the market and economic cycle realities are
fairly clear.
Good investment portfolio management, for example,
would have you looking for quality additions to your
portfolio inventory for later sale at a reasonable
profit. Management includes the discipline, rules
and procedures that are necessary to create, implement,
and control an investment plan. It requires an understanding
of what is going on, in and around the portfolio,
so that you can react rationally rather than emotionally.
If you have been taking losses over the past several
months in investment grade securities, and/or if
you have been buying the currently more popular,
but historically more speculative, fear products
of the moment, you are on the wrong track. The rally
is coming on this one!
In the simplest of terms, stock market corrections
are caused when there are more sellers in the markets
than buyers. Corrections in the income securities
markets are normally caused by changes in interest
rate movement expectations. The duration of
stock market corrections will vary with the nature
of the events that cause the correction in the first
place. There are six types of selling, but only two
types of buying. What? People buy stocks either to
hold them for profit taking, donating, or bequeathing
in the distant future, or to trade them in a more
businesslike manner for profit taking ASAP. Securities
are not purchased with the hope (or knowledge) that
the market values will diminish--- except in the
case of portfolio window dressing, where the institutional
money managers really don't care one way or the other.
Selling, on the other hand, is a much more complicated
decision, with six separate and distinct motivations
and an expectation of financial loss: (1) Loss
taking on securities that have fallen in market value
because of the irrational fear that they will never
be able to recoup the losses quickly enough, if at
all. Why speed is important puzzles me, but analysis
of a few charts of IGVS would quell such fears. With
regard to income securities, this fear of market
value erosion is somehow equated with loss of income---
a relationship that just doesn't exist. Fear selling
is generally more prevalent in inexperienced investors.
(2) Window Dressing is normally a quarter or year-end
phenomena where money managers cull unpopular issues
from portfolios to appear wiser to their clients.
But with most investors addicted to personal on-line
portfolio access, many individual managers have succumbed
to client pressures and have begun to look a lot
like their institutional brethren. Wrap Account managers
are likely to use these strategies on a monthly basis
as well. (3) Greed driven switching from a weak stock
or bond market to a hot new speculation is another
form of selling that peaks toward the end of corrections,
as investor patience wears thin. These sellers push
whatever vehicle has had the best recent performance
even higher, helping to create the next bubble.
(4) Pure profit taking is my favorite reason for
selling, but a surprising number of professional
money managers hold on to their winners far too long,
and little of this type of selling takes place so
deep into a correction. (5) Stop loss profit taking
in Mutual Funds and in individual securities produces
a significant number of sell transactions, and much
of the liquidity produced falls into the managers'
wait-and-see, or market-timing, cash allocation.
(6) Finally, and most importantly, there is the financial
adventure of Short Selling, in which speculators
expect to make money from a continued decline in
a stock's market value. It is disturbing that the
elimination of the up-tick rule has allowed large-scale
traders to sell securities they don't even own in
large enough quantities to wage war on target companies.
This strategy involves selling borrowed securities
at the current price and then "covering" the position
with stock purchased at a lower price and pocketing
the difference.
So, the various categories of sellers, regardless
of their motivation, create large pools of money,
while the buyers accumulate larger and larger stock
holdings. Now the buyers, you'll recall, have no
interest in selling their positions at a loss. Sooner
or later, some gutsy financial gurus will declare
the stock market oversold and full of bargains; some
of the brighter ones have already been talking about
how cheap municipal bond based securities have become.
A few days of positive market numbers will create
some itchy-trigger-finger, short covering that will
spiral the equity markets into its next feeding frenzy,
gobbling up even the memory of this correction.
But the markets cycle onward to newer highs, and
to higher lows, with no right or wrong, no good or
bad--- just some simple truths, that experienced
decision-makers learn and thrive upon. No person
ever became richer by selling at a loss during a
correction or by waiting for the market to achieve
new high ground to get new positions started. Always,
yes always, buy too soon during corrections.
Steve Selengut
http://www.sancoservices.com
http://www.valuestockindex.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor:
The Book that Wall Street Does Not Want YOU to Read",
and "A Millionaire's Secret Investment Strategy"
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