The Markets Keep Going Up and You've Missed It!
One of my readers emailed me the following:
I work for a major insurance company and almost all businesses that I deal with are finding it very difficult. I am amazed that the stock market is doing as well as it is. My wife is on my back because I have stayed out of the market and kept my money in bank deposits which pay very little interest. The Elliot Wave Theory has lost a lot of credibility with me. My wife thinks I'm crazy but I think our government is managing our markets to create the illusion that everything is getting better. If you have the time, I would like to know your thoughts on this in a future article.
I imagine there are many who feel or think this way about the economy and the stock market because there's a real disconnect currently between Main Street and Wall Street.
So, you've missed out on one of the biggest one year runs of all time and you're kicking yourself. No one wins all the time and no one captures every opportunity, that's just life. That feeling of missing an opportunity is a highly emotional processes that usually forces someone to break down and buy into a market top or sell into a bottom. Our emotional make up often betrays us with money decisions because it's driven by fear and greed, and why you see so many buy high and sell low. It's very important to understand just how corrosive our emotional make up is before making a money decision. It has to be a risk/reward decision.
So, you're frustrated you haven't made the big mamu of gains on this run. I hope that has nothing to do with your financial thought process as to where we are today and what you're going to do with your money. The past is just the past, and again, it's a risk/reward decision hence forth.
When I discuss the stock market with my folks and their money, it's really a two sided question: First, do you believe the bottom in March 2009 spawned a new bull market for investors, and regardless of down side corrections, you would expect a long term bull run to make all time new highs? Thus, the buy and hold strategy is on again and you should have a buy side strategy for that view.
Or, you view this move higher as a cyclical bull market run in a much greater bear market, and that the buy and hold strategy is useless until we find a more discerning bottom in both price and time. In this view, the market is really for traders and professionals both up and down, and long term investors should seek to protect their wealth and look for a much better entry point than after such a huge run. That's how we look at it from a capital deployment strategy. If you believe this framework than chasing markets up could be unwise. You have to live with the risk you're actually taking not the gain you've missed, or you shouldn't be investing.
Why are the markets moving higher?
Nothing goes straight up or straight down for ever. We came off a huge sell Off. We were over sold and pricing in all the bad news possible into the March 2009 lows. As investors indentified the world was not going to end, especially with the back stop of Uncle Sam, they identified a sizeable trading opportunity. Think of it as a beach ball that was pushed far below the service of the water, and when released it shoots back up.
There was a lot of cash sitting on the sidelines, and institutional investors smelled a great opportunity, and it's really the big investors that drive the markets in a significant manner, and that's really what it's been all about.
Later in the cycle of this up move, net earnings started to rebound after massive cost cuts, and while top line growth has not improved, the bottom line has so for many companies, and the net income growth started to make companies cheap on a P/E basis and further supported the move higher.
So, this brings us full circle with how we view the markets. After such a big run to date, are the markets really leading the economy and main street will catch up and things will improve for all? Or, is it really an oversold cyclical bull bounce and a further eroding main street will bring the markets back down?
To me, this is the frame work that each investor needs to ask themselves. For mom and dad, it's all about risk management, understanding those risks, and the risk at hand for tougher times do not support us moving money into the buy and hold strategy. I do trade for them, as that's what we feel the market is all about. However, that's not a suitable investment strategy for most, and we do it sparingly, again limiting our risk.
I hope that helps those who feel the same as my reader.
As it relates to Elliott Wave analysis and technical analysis, I have my own Rosendahl Theory that I just love.
- Elliott Wave Theory and Technical Analysis are always right, it's the analyst that get's it wrong. And if you're following an analyst that gets it wrong it impacts your view on such techniques. Quite often, analysts get it wrong because they have a certain view, and they back into their analysis to fit their view. Sometimes they clearly don't understand what the dominant time frames are, so they can be very early, or they keep getting bull dozed with the wrong strategy. Or, they fail to incorporate a more complete set of technical tools to draw conclusions. That being said, no one gets it right all the time, and I use Elliott Wave Theory and Technical analysis to increase my chances of being right, and we need to be flexible enough to understand we are going to be wrong and have to deal with it. Remember, it's Mr. Market that dictates the Elliott Wave count not the analyst.
The reader has very important and timely views that I felt needed addressing and I thank the reader for his email. I personally agree with the reader that this up move in the market is based on very little fundamentally to support a long term bull market, and that it's been mostly huge cost cutting and a short term government back stop. But this money decision is for each to make on their own, and that doesn't mean the market can't go higher or sideways for a while from this point in time.
Hope all is well.