September 16th, 2008

Focus on the Forest, Not the Trees

Yesterday’s market is a great example of why timing the market (keeping your eye on the forest) is more important than picking the right stocks (not the trees). You could own the stocks of wonderful companies — with great growth trends, consistent dividend payers, leaders in their industries — but markets (macro- and international economics) will always trump stocks. Here’s a recap of the activity across all the markets (click on image to enlarge):

As a result of yesterday’s market decline 9 out of 10 stocks, ETFs (stocks, commodities, bonds, currencies), preferred stocks and other securities traded on all the exchanges were up. The same is true for the actual volume of shares traded. And what are the odds of having a security that advances to new high territory? Forget it, buy a lottery ticket. Here are the stats:

As I write this, word just came in that the Fed is lending AIG $85 billion in exchange for an 80% stake. The S&P futures, after today’s 1.75% retracement of yesterday’s drop, is pointing to a relatively indifferent opening tomorrow morning if I understand the whole futures and fair value relationship, as of 8:10p.m. (the deal hasn’t seemed to have yet triggered a positive market response). Of course, all this could change as the night wears on.

Yesterday we were trying to digest the largest loss since 9/11 and tomorrow we’ll have a relief rally brought on by the government having to go into the insurance business. It sounds sort of like the Putin buying out Russian oil companies (I can just hear the red phone ring in the middle of the night at the White House and, when George picks it up, having Putin sarcastically asking him, “so who’s the bigger Socialist now?”).

But we’re not fixated on a single company, regardless of how important it is to the US and world economic health. Our interest is investor psychology as reflected in stock market momentum. That momentum is still decidedly negative. We’re in the same place as we were on March 12 and 17, both of which were called “the best days in five years” and a “follow-through day”. Tomorrow, we may again hear people calling it a “bottom”.

But that’s why we have an emotion regulator, the MTI (Market Timing Indicator). We need the market to meet certain criteria before we have sufficent confidence to return to the market and that hurdle is an increase to approximately 1335, or 10.0% from today’s close (that’s where the index crosses above the 180-day MA).

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