Tough 3 Weeks
Needless to say, it’s been a tough 3 weeks. Investor psychology continues to dominate the course of the markets these past 3 weeks. Negative sentiments and problems in Europe are continuing to drag down the markets.
However, an interesting thing to note is that it appears much of the reason for the selling isn’t individual investors like you or I dumping stocks — but rather institutional investors moving in and out of different types of investment vehicles. My guess is that one minute, a fund manager might be buying gold or shorting tech stocks … and the next minute, he’s suddenly long Google or Apple. In any case, it seems that most individual investors have continued to stay out of the markets completely and thus, is not dictating the selling.
The frustrating part of all this is that, as individual investors, you really are pretty helpless. Stocks continue to be undervalued and the economy continues to improve. However, stock prices keep going down because of uncertainty over Europe and the irrational fear that somehow, we’re headed towards another Great Depression. Sorry folks, but that’s just not going to happen. All the market data has indicated that we’re in recovery mode and economic indicators are mostly positive.
So what do you do? Let’s say you own a bunch of undervalued stocks trading at low P/E multiples and high book values. The market continues to discount those stocks because of the negative sentiment and downward momentum. Yet, you don’t really have the guts to buy more because you don’t know how low the market will drop. And you don’t want to sell because these companies are fundamentally strong and you’d be taking a loss.
It’s really a tough situation to be in. In the back of your mind, you know that stocks are “cheap” on a fundamental basis but you don’t know how low things can go. So you’re stuck.
My thought is that if you believe, as I do, that the stock market is cheap right now, then you pick a point and start buying again. Like one scenario might be — “Ok, if the Dow hits 9500, I will start buying some SPY”. Well, that’s what I would at least. Of course, watch the economic reports closely and pay attention to new in Europe.
It’s a really tough market to trade in right now but if you stand on the sidelines too long, you might miss out on a nice rally similar to the one that happened in March 2009. A lot of people missed out on the sharp rally that took the Dow from 6000’s back to the 9000’s in 6 months. I don’t think we’ll get anywhere near that kind of a rally today but I do think we’re oversold here and fundamentally, there are some great bargains out there.
So stay focused and don’t let fear (or greed!) overtake your better judgment. Good luck and as always, do your own due diligence!
