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Still about psychology


The focus in the market has clearly shifted from the negative to the positive with very little change. I know that I keep harping on the twilight zone analogy, where the perception often changes the near-term psychology with very little actually changing. It is a time when there is very little conviction on either side of the isle (bull vs. bear), which results in bandwagon trading. That of course means jumping on the market because it looks good and jumping off the market because it looks bad. Over the past six weeks, there have been important breakouts and breakdowns, with very little changing.

Today brings the White House proposal on economic stimulus. The headliner of the package is the elimination of some if not all taxation on dividends. This was used as the reason for yesterday's jump in the market, but was it? What actually changed? The bottom line from my perspective was very little. Everyone already expected that proposal and the market got it. There is no question in my mind that the proposal is good for the economy and/or the market. The word I do want you to focus on in the prior sentence is "proposal." The White House stimulus plan has not even been debated yet, much less passed. So be careful about buying stocks for near-term gains solely on that basis. There is sure to be some political give and take and how the market trades should continue to depend on the prevailing psychology at the time.

It seems a bit premature to just buy stocks because the taxation on dividends may change. If one is looking to do that it may make more sense to wrap some other reasons around that. For example, I advised my troops this morning to look for stocks that;

· Are in the S&P 500
· Yield more than the market (as measured by S&P 500)
· Have better earnings growth than the market
· Have a lower price-to-earnings multiple than the market
· Have less % debt to Capitalization than the market

Right now, in my view, the psychology has turned to quickly to the positive side of the equation. The major equity indices are now up roughly 5% this year and to expect too much seems a little early. The problem with how quickly the sentiment can change quickly the sentiment can change. Remember that very little is significantly different with the geo-political, economic and valuation environment over the past week so some level of moderation should weigh in here.
No positions in stocks mentioned.
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