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It is all about expectations


Good morning everyone. As many of us know, life is all about expectations. When expectations are low, anything that goes in our favor is a positive surprise. When expectations are high, everything seems to disappoint. The world of investing is no different. Expectations in the beginning of October were so low that any news item (and I mean any) could only be interpreted as a positive surprise in one way or another. Remember, earnings were not great - they were just "not a total disaster," which meant that the market could rally.

Fast forward to roughly two weeks ago. Expectations were way too high. After a move from 13 to 22, analysts were upgrading Intel (INTC) from hold to buy. Was it a change in the fundamentals that drove it? I am sure there could be some data point that could be used in that direction, but at the end of the day, it was ego and expectations. In a time when analysts are going to get paid based upon accuracy of analysis of the stock and not the company, it would be sinful to "miss the move."

It is important in the context of the current market to understand that the rally in stocks has been structurally driven vs. fundamentally driven. Yesterday's column addressed that issue. Therefore, in my view it is essential to not make a fundamental case for making a decision, when the action to date has not been driven by the fundamentals. Pure and simple - two weeks ago, expectations were too high. Now in my view, they are trending toward being too low.

Again psychology comes into play though. While expectations may have become too low, thereby allowing for a rally and potential retest of the recent high, just about everyone that bought "high beta" stocks after the first two weeks of the Q4 rally are now underwater and are likely to sell as they get closer to breakeven. This means that unlike surges that took place so far, any upside is likely to be met with selling by those that bought too late in the run.

I continue to believe that the vast majority of the gains are behind investors, but that there should be a retest of the recent high. Tops are a process and not a price - like bottoms, they take time and generally have retests. This means that each of you must decide how to act and react to a rally if you agree that most of the gains have already taken place. Are you going to buy for last 5-10% or use it as an opportunity reduce some exposure to the financial markets given that valuations remain stretched, the economy and earnings remain suspect and the geopolitical environment that should become even more uncertain.

How you act and react can only come from you (hopefully with the help of a financial advisor) because only you know your financial positions, risk tolerance and expectations.
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