The market can be paralyzing at times.

If you have been beaten senseless trying to make money on the long side it is only natural to act like Pavlov’s dog and retreat from the electric shock treatment. It’s important to avoid becoming a deer in the headlights. We stare blankly into the lights of the oncoming train or fail to take advantage of a strong investment idea even when the stars align. The battle goes on and it is important to reload and find themes that work in the prevailing environment. I agree it isn’t easy nor should it be. Lately the duration of an investment theme has been along the lines of the lifespan of a butterfly (20-40 days). Don’t bother checking, I already did.

In markets like this we need to trade with different rules. The old saying “A profit is not a profit until you take it” should be on a “post it” note right in the middle of your computer screen. If you’ve made 10-20% in a recent trade you have to take something off the table. These rotations can run full circle and what is in vogue this week could be on next week’s short list. The let your profits run theme simply will not work here.

We all know the market is a forward looking mechanism and discounts what the future holds. Recent strength off the lows implies that six months from now is the trough for the economy and earnings. At least that’s what the market thinks right now. Yesterday’s volatility is a painful reminder as to just how fickle investors are when you don’t have the wind at your back.

However, most of the big names have reported and I suspect investors will have a positive bias for the next few weeks as we are at least a month away from second quarter pre-announcements. As we approach the end of the first quarter it will be as Yogi says “déjà vu all over again”. The market will endure another acid test and the curtain will go up on the second act. 

The best guesstimate (and that is what it is given the crystal ball seems to have some cracks in it) is that despite lowered expectations the second quarter numbers will be a disappointment. The widely rumored test of the January lows will be made. We have seen this many times in the past. The strong V shaped recovery that gets ahead of the fundamentals and then the acid test setting the stage for a more meaningful advance is the usual sequence of events. While the plot is generally the same the cast of characters and the length of the movie is always a surprise.