You may be itching to get in, but tread carefully. Events over the next couple of weeks, including the apparent debt deal in Europe, will offer clues about the market’s direction.
Should you go with the mo’?
You know, the momentum. The tendency of stocks that have been going up to keep going up (until they don’t, of course). The successful investment strategy built on the observation that stocks are the only things that people want to buy more of as they get more expensive.
From the October 3 low through October 26, the S&P 500 was up 13%. That’s enough to put thoughts of 2009 in anyone’s head. From the March low that year, the S&P 500 rocketed ahead 13% in just about two weeks—and from there it had almost an additional 1,000 points to go before it topped out on April 28, 2011.
On the other hand, going with the mo’ is one thing, but nobody wants to be Curly or Shemp. The rally from the August 19 bottom to the August 30 high took the S&P 500 up 10%—but it wasn’t followed by two years of roaring rally.
Instead, stocks reversed, and by October 3 they had tumbled to a level below where they were on August 19. If you’d bought on August 30 after that 10% move up, you would have been left looking at a 9% loss by October 3.
So should you go with the mo’? Should you hold positions that have rallied 13% or more in a little more than three weeks, because momentum will take them higher?
Should you buy in now if you’ve been sitting on the sidelines? Should you be taking profits and trimming positions to protect your gains from a potential downturn?
Let’s try to figure all that out.
If Only We Knew
I’d love to be able to offer you some magic formula: “The inverse Mondavi function says this rally is going to 1,364.3 on November 8." Or an astounding piece of fundamental wisdom: “Comparing the multiples of the current market to all markets stretching back to 1843 shows that stocks will climb an additional 17%.”
But I think the current market is best described as poised. The news flow can break either way, depending on what debt-deal details come out of Europe in the next two weeks. Fundamentals can go either way, with growth in Europe certain to slow, but growth in the US and Chinese economies set to come in either above or below the expectations built into stock prices right now.
Technically, the charts show a market testing some tough ceiling levels, and it’s uncertain whether the trend will push through that resistance or fall back from those levels.
So what’s an investor to do? My advice boils down to wait.
I know you probably feel like you should be doing something right now. Either gobbling up momentum plays or selling everything in sight or, well, something. But sometimes waiting is your best investment choice.
Right now I think this market is so poised between alternatives that the return on waiting is very high. A few days—maybe two weeks at the outside—should turn some of these points of indecision into actual trends that might run for a few weeks.
Waiting may cost you a few of the bucks that you might have made if you guessed right on which way the market is about to break. But it will also save you the money you would have lost if you guessed wrong.
Most importantly, though, waiting will diminish the amount of guessing that you have to do.
NEXT: Making Sense of the Mo’