‘the worst is over’, and that the recent stock market rally was something to believe in, investors were handed major losses today by a heartless market. It’s not surprising that people are desperately searching for a bottom and recovery to the woes, but as I’ve been saying for some time now, do not expect the stock market or the housing markets to recover anytime soon. What we’re seeing is a bear market rally, and it’s quite possible that we see the markets test previous lows again before this is over. Visibility continues to be the major problem, and I expect we’re going to see some more ugly news come out from the financials over the next few weeks. Turbulent markets give you the opportunity to make a lot of money, but you absolutely MUST know what you are doing. This is NOT the time to be speculating. It’s incredible to me that people believe somehow that there’s less risk to be investing right now because the markets are down so much off their highs from last year. Just because a market or a stock is down 50% doesn’t mean it CAN’T go down another 50% again! Also remember that in order for a stock that’s down 50% to recover back to where it was, it needs to gain 100% — just to get back to the starting point. Most investors don’t think about this and underestimate how much they need to see in order to really recover from losses. Don’t fool yourself into thinking that it’s a good time to be buying because ‘prices are low’. That may be true, but they could go a LOT lower than they already are. I believe we’re in for several more months of massive turbulence.. periods of hope and optimism where the markets rise, followed by sudden shifts in confidence and you see a sudden drop in a matter of hours or a few days. As they say, bull markets tend to come up the stairs, and bear markets go out the window. The past 6 weeks has presented a great example of this — the slow, consistent movement that took place over several weeks was psychologically wiped out by the harsh moves of a single day. I expect tomorrow we’ll see a bit of a recovery simply because people still want to believe, but don’t expect that this reversal is going to be unique in the context of the market. Volatility and turbulence are alive and well, and they’ll be regular visitors to the markets over the next several months. Until we start to see real signs that a recovery is coming, this is the new way of life for investors.]]>
4 Responses
“Bull markets are born on skepticism, mature on optimism and die on euphoria.” – Sir John Templeton
“These words from the good Sir are among the wisest ever spoken on the stock market. In one statement he has summarized why most people fail when trying to outperform the overall market. I would only add that bear markets are born on denial, mature on pessimism and die on fear. Human beings are programmed to respond to the market in a way that hurts their ability to make money from it because most buy on euphoria and sell on fear. It is time you stopped being like most people and started to understand these six important phases in a stock’s life.”
These are not my words, but rather the thoughts of a very bright stock trader by the name of Tyler Bolhorn. I hope he doesn’t mind me posting his thoughts here.
Always remember that stock price is nothing more than the price that an investor is willing to pay for the future earnings potential of a company. It is quite similar to cap rate in that regard. How much are some of these companies going to earn over the next months or years with their present business models in this environment?
The trading ranges currently presented provide good profit potential but should be regarded as no more than that. My thoughts are that we should enjoy the spring thaw but be very wary when the true traders go on vacation this summer. I believe that we could not only test the February lows but bust right through and see the Dow settling around the 5000 range over the next 6-12 months.
The main question remains, whether this is the start of a bull market or a dead cat bounce, how do you protect yourself and profit?
My thoughts for today
Harold
Hi Greg,
While I generally agree with your points that you made in this posting, I am bothered by your what I view (just my opinion) as a dogmatic, all-knowing view of the stock market. I’ve been a professional money manager for 20+ years, so while I don’t know everything, I’ve had my share of ‘learning experiences’. 🙂 🙂 🙂
I also write a financially-oriented blog, which is distributed to friends and clients. if you’re interested, see http://www.lylelatvala.com/Deliberations/ for some of my recent comments.
I believe giving advice like — “Don’t fool yourself into thinking that it’s a good time to be buying because ‘prices are low’. That may be true, but they could go a LOT lower than they already are.” — is dangerous because an investor’s decision making process is a function of their current financial situation, their need for funds at some time in the future, their time frame, and their risk tolerance, amongst other things.
While the market may go lower in the next weeks-to-months NOBODY knows that for sure……not even the Federal Reserve nor the ‘market wizards’ at Goldman Sachs. The less-than-completely-knowledgeable investor may take your advice as gospel and may make some decisions now (or in the future) based upon your advice that are not appropriate to their personal situation.
As I like to say to my clients, “Don’t believe a thing that I say. Use your own head to make your own decisions. I’m just offering my thoughts, and of course, I could be wrong.”
I’m enjoying your expanding topics of coverage. Thank you very much. I especially enjoy your replies to comments.
LYLE LATVALA
Hi Lyle:
I wasn’t delivering dogma, nor vague assertions. I was saying, the stock market continues to be overvalued in my opinion, and it’s going to fall further than it has.
You’re right – no one can truly predict the stock market. My point is, be careful about confusing false hope and desperation with market fundamentals.
And yes, I think an investor’s decision to buy or not right now is affected by many things, as you’ve said.
However, if you knew the stock market was going to drop 20% in the next 60 days, do you still think it would be prudent for some investors to go back into it because they have ‘investment goals’ they’re trying to hit?
I certainly don’t, and that’s why I think that my comments about prices being low are still very valid.
The truth is, if I keep a few amateur investors from making decisions based on false assumptions (ie: “I’m going to buy some stock because it’s down 50% and obviously a good deal”) then I’m fulfilling my goal here.
As you outline, it IS critical both (1) question your assumptions, including those given to you by people you trust and respect, and (2) develop an investment plan based on your profile, principles, and goals.
But I will say without qualification, I think the stock market is going to fall further than where it has this week. So unless someone is executing more advanced strategies than the typical individual investor (ie: shorting, etc.) then I think it’s a dangerous time to step back into market .. at least until we see some stability in earnings, in the market, and the economy.
Regards,
Greg
Greg,
Thanks for your further thoughts.
You said, “…if you knew the stock market was going to drop 20% in the next 60 days, do you still think it would be prudent for some investors to go back into it because they have ‘investment goals’ they’re trying to hit?” I agree, that trying to hit “investment goals” can be hazardous to you dollar capital AND your mental capital. Since no one KNOWS for sure what the market will do, for someone with a very long-term time frame (e.g., 30+ years), it probably does make sense to start dollar-cost-averaging at these levels, regardless of what volatility the market has AS LONG AS your time frame is long enough. Shorter-term? – It’s April, go out and enjoy Spring and ignore the markets! This is an impossible market to forecast.
Given that we had a 25 year (1982-2007) bull market, it is reasonable to expect this bear market to take more than 18 months to correct the excesses. The probability of your forecast (i.e., going to lower levels) is pretty high.
That being said, you ARE fulfilling your goal of keeping ALL investors from “…making decisions based on false assumptions…”
We’re in the same camp. Thanks, LYLE