Conscience Makes Cowards Of Us All—-And So Does Fear.
Date: 10/2/2009
Dow: 9462.46
The current market conundrum, as I see it:
The market has climbed 50% from it's lows in March and is up 17% year to date through September 30th. It is obviously due for a correction and I wouldn't be surprised if we were shaken out of our complacency to see a scary 10-20% decline. And why not? Since when, can we expect a rally of such magnitude to continue without taking a breather? Think of the March to September rebound as a tightly coiled spring uncoiled after a full year of downward pressure.
Now that this spring has uncoiled we are back to a sort of normality. I hate to say "normality" because we all wonder what is "normal" these days. Bill Gross from PIMCO, calls this era, the "new normal" characterized by slow growth, the unwinding of leverage, low inflation and low interest rates—all of which he expects to continue for a while.
But I digress. The real question today is whether last week's decline signaled a new downward path for the stock market or a simple and much needed correction. Only time will tell, but we do have a few clues we can use.
The Technical Point of View
I have been saying, based on technical research I use that, while we were due for a correction, the intermediate term picture continues to look good. This scenario has not yet changed as of this writing, but there is no question we are at a crossroads with regard to the near term direction of the market.
The bottom line is that upward market momentum, while still positive is weakening. We should have a better view this week and I will report this on my Twitter Page.
The Fundamental Point of View
Looking at the economy and the world political situation, things seem pretty negative. Tensions heating up over Iran and Afghanistan, the health bill in disarray and a surprisingly downbeat unemployment report have added to the worry among many things. Not all is bad, however. With low inflation and low interest rates, (low mortgage rates if you can get one), most economists are saying the GDP should grow 3-5% this quarter and 1-3% going forward. We also may be at the trough of high unemployment which currently stands at 9.8%. Perhaps things will get better from here, not worse.
As usual, we never know what is going to happen next. If the market declines, we don't know if it just is a correction or the beginning of a significant downward market move. The psychology goes as follows:
Market moves down 5-10%,
The psychological dilemmas:
1. You are afraid stocks will continue lower so you sell now only to find out you that this was a temporary correction and you should have added to your investments.
OR
2. You have been waiting to buy in because buying the dips has worked for the last 6 months, so you hold your nose and take the plunge and buy more, only to find this was the beginning of a nes downward leg of the stock market.
This is an age-old dilemma and there is no "best" answer. My answer is to take an incremental approach to investing taking the emotion out of it as best you can. Thinking long- term, stocks are more likely to have a higher percentage return from these levels than they did at when the Dow was at 14,000.
But time is the key. The stock market is still the best mechanism for investing in the growing dynamism of capitalism worldwide. It is a MUST HAVE investment for your portfolio because, like the mighty oak, it needs time to mature to its full potential.
