Take a chill
I just got off a phone interview with www.webfn.com. At the end of the interview, the anchor asked "what is an investor to do if the market is in this trading range?"
That really got me thinking about the whole Wall Street game. We live in a media driven society that rushes to get the news and then act on the news. That sends a dangerous message that every wiggle and jiggle in the markets (and life) should invoke an immediate reaction.
Sure, the market is down three days in a row and may have an up day today. As Toddo so accurately points out in his Journal today, the indicators are far from oversold. God forbid anyone urges investors to stay on the sidelines and wait for the news to become less mixed, the market to show a clearer bias (more than a minute in the same direction) and some level of identifiable resolution to even one of the geo-political uncertainties.
While I have written mainly about the technical backdrop of the market over recent weeks, the fundamental issues also argue for patience. Earnings are indeed growing, but based on historical standards, valuations by any measure are not cheap. Before anyone sends in an email suggesting that I look back at my own past argument that when you take interest rates and inflation into account, valuations could be cheap - please wait. While that is normally true, I can't get out of my mind that interest rates AND earnings have been coming down for the last two plus years, but valuations have contracted. That is not normal and therefore makes me pause before writing an article about how cheap or expensive the market is.
I don't know if a valuation contraction in a declining interest rate environment is good or bad - I just know I shouldn't make an assumption yet. If I am unable to make a fundamental case, then I must turn to the market to guide me as to what investors are saying about the future fundamental backdrop. The problem is the market is saying it doesn't know if the fundamentals and how they are currently valued is good or bad.
That means the best trade I may give to a client is the one not made.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter