Tuesday, April 21, 2009

The Dilemma of Discipline

So, it's been a while since I've posted here and this is simply because time has been difficult to find. I hope to not disappear for this extensive a stretch again. The market's storm higher since the March 9th lows has been dramatic and powerful...six weeks of some impressive individual as well as index gains...establishing a new bull market, albeit only technically.

Many in the analyst community are understandably skeptical after the collapse in both equity markets and the economy that began back in July 2007. Most bear markets stage these powerful rallies that fall apart all too surprisingly for the bulls that jumped in, afraid to miss the party. This run up has been referred to more often than not as simply a bear-market rally, by many of these skeptics.

As I argued back on March 12, my strong opinion is that we have put in a generational bottom. When coming off a generational bottom, almost everyone can make money in the first leg up, as this first move is often powerful and undiscerning...every index, every stock gets a boost. It is the truly disciplined at this time that pick not just the followers, but the leaders in this rally and grab the massive returns. Now, here's where I make an important point - in this blog, I cannot and thus, will not, identify individual stocks, but I will try and guide my readership on general observed market trends and industries where the investment opportunities are high.

The market today staged a strong powerful reversal

  • Many skeptics will point to the high volume selloff today (ignoring the fact that one stock made up the entire increase in volume and then some). These skeptics will say the market has run enough - six weeks is enough for a bear market rally - these are the bullish doubters who expect us to make new lows, so that they can buy as they likely missed out on the first run.

  • Other skeptics will point to the fundamentals and say that there is still lots of bad news to come - these are the lifetime bears who believe that every downturn is simply a stage for a further downturn. They believe that unemployment soaring from 4.7% to 8.5% is just the start, that the collapse of some our most powerful institutions in barely a year is not a sign of a healthy capitalist economy, but an indication that every great company in this country should fail. These are the bears and to allow them to drown out the positives is to give in to the fear.

But, a reversal like this is not a time to run to the exits nor is it a time to load up the truck...it is a time for discipline...and discipline means evaluating the markets without the noise of pundits. It means evaluating all the news without listening to simply today's news. And it means evaluating each holding to determine what to do with each share in your portfolio - some may need to be sold, others may be added to and the remainder may be holds...but each holding in one's portfolio needs to be re-evaluated.

The easy response in any reversal after a powerful rally is to be happy with one's profits and run into the nearest cave. The naive response is to think that every pullback is a buying opportunity. The difficult response is to be disciplined. The dilemma of discipline is that discipline is often hardest to find at times like this ... when the easy or the naive response are the first responses we gravitate to. But without applying discipline at this time, one will either regret selling too early or buying too soon. I think, overall, the trend will follow very close to the 2003 rally that begin March 10, shown here, and that the rally will storm higher, after a maximum of a 3-day pullback. But as I said earlier, the easy money has been made. The rewards now will go only to the most disciplined. Everyone else should just buy index funds.


Murad's Blog said...

Welcome back and an excellent post to come back to :)

Murad's Blog said...

Came back and you've disappeared again :(