On June 4, markets bottomed just like they did on October 4. The movement away from the lows was fast and in a significant percentage, therefore meeting the requirements for an acceptable near-to-intermediate term bottom. The mantra has been to “just follow price” and to “not fight the Central Banks (FED)”.
But this time there is no new and big money to throw at the markets. There is some more Treasury buying to keep the government funded through the election and the half trillion raised in April and planning to be used to buy some European Sovereign debt. But no new bazooka.
And this time the markets rallied 100 SPX points like before, as if everything is well. Well, it isn’t well, yet the major market indices are near yearly highs. I frankly find it facsinating that defensive issues are doing so well in holding those major indices at current levels.
I do not think that you can “just follow price” at this juncture. It is clear that there is a large worldwide economic slowdown apace as well as the outright deflation of asset prices due to the inherent falsehood of commodity prices that have not reflected actual supply and demand. We are faced with a classic unwind underway now. But this unwind has been cushioned by the markets levitation. So do you simply buy or sell? It is getting far more complicated that that simple formula.
In this market environment my strategy has and continues to be to find what has been blown up and/or unloved. Then patiently wait for the stock in question to be “cleaned out” and “dry”. Then I begin to accumulate fractional positions.
I know that it is not exciting nor will it provide instant gratification and it is intermediate-term in tactics.
Two recent examples are Astrazeneca PLC (AZN) and Molycorp (MCP). We looked at AZN in the heart of the Euro-meltdown as it is one of the great pharma companies, selling at 6x earnings with a 7% yield and trading near 2008 lows. What is my risk? And Molycorp was all the rage last year at $75 and hated this year near $20.
I am perfectly willing to wait with these types of ideas for months as they develop. I do place mental stops but don’t necessarily place a hard stop. I am willing to ride out most market dislocations with these types of ideas with the intent of buying more. That is why I only buy fractional positions.
So, I do get long regardless of my sarcastic market-hating tweets and comments. There is a method to the madness.
The fact is that based on everything most investors have been historically taught, the DOW should be closer to 10k than to 13k and there remains risk that it may be the eventuality. But it is not there now. I still expect a long sideways slog through the summer so try and cancel the extremes from your thinking and carry on.
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