It is easy to be a bear right now. Especially after a big run for stocks and the fact that we are still in a nasty recession. Simply read any of the mainstream periodicals and you will find a litany of negative articles saying the market is irrational and is due for a tumble. Perhaps that is the correct position, but history shows that the market doesn't do what the majority expect it to on the whole. So even if you have a bearish disposition, don't let your convictions blind you to what is actually happening in the market now.
Tuesday's action was a great example. The futures indicated a weak opening due to largely in part to North Korea's nuclear test over the weekend. The market opened lower, but then zoomed up after consumer confidence showed a surprise jump. Obviously many investors weren't positioned for this rally, which perhaps made it even stronger than it otherwise would have been. Even though the market fell on Wednesday, I suspect that there are a lot of people are still willing to buy the dips. Add plunging treasury prices, rising yields, a renewed dive in the dollar and increasing oil prices to the already big wall of worries that the bulls are trying to climb right now.
A few weeks ago, I penned a slightly bearish article stating that the market had probably started a correction. Stocks did proceed to fall about 5% the next week, but have been resilient since. If the market makes new intermediate highs on strong volume, I am willing to put some of the cash I raised back to work and not be married to my contention that the market was going to correct by at least 10%. I will let the market's action largely dictate how I position my portfolio. I can always readjust it if I have to, but it would be a disservice to myself to stubbornly stick to a wrong thesis.
There are a lot of institutional money managers out there that had a horrendous 2008 and have badly underperformed to start this year off. These folks are praying for the market to come in so they can put some more money into stocks and catch up to the averages. If the average investor underperforms the market, it isn't that big of a deal. However, money managers are measured against a benchmark like the S&P 500, and their jobs depend upon good performance. The anxiety among them as a whole is palpable right now. This phenomenon is responsible for the resiliency of the stock market in my opinion, and could be a big reason that the market rallies and defies the bears.
I'm surprised at how many professionals not only feel that stocks are heading lower, but that the March lows will be breached. Even in my call for a correction, I felt that the lows had already been set. There is a ton of "bearish" cash out there that will be put back in the market on pullbacks so money managers can catch up performance-wise. This should act as a huge support for stocks. Unless the snarling grizzly bears adjust to the market, they will continue underperforming and get even more bitter.
The main point is that discipline should trump conviction. We all have our opinions of what the market is going to do, but the people that make money over time have the discipline to let the market set the tone and not let ego get in the way. This doesn't mean you shouldn't have a thesis on the market's direction. Do your own due diligence, but be ready to adjust accordingly when it appears you are wrong. Your ego may take a temporary hit, but your portfolio will surely thank you for it.
