The S&P 500 Index hit 1,900 this week. The Dow Jones Industrial and Transportation averages also reached new historical highs but the euphoria lasted about a minute and a half. That’s about as long as it took for traders to sell into the move. Not good.
The market gave the bulls all the excuses in the world to man-up and push the markets higher, as they backed and filled for two days, then the bears took over. Thursday was a blood bath and sellers added to the damage again on Friday. Not good.
Last year, if you recall, all I recommended readers to do is “buy the dips” whenever the stock market declined. Obviously, from this headline, I am recommending just the opposite today, especially in the so-called momentum stocks. Momentum, small-cap and mid-cap stocks continue to lead the markets lower. As it should be, since they have led the market up over the first three months of the year. Don’t think that they have bottomed. In fact, sell any bounces in these names.
“I can’t sell them now, they are down too much,” retorted Chris, a friend and client, as we walked our dogs by the lake this morning.
It is an understandable attitude. The hardest thing to do is sell when you are underwater pricewise and down 40-50% from the highs. That little devil on your shoulder is whispering that if you just hold on you will recoup all your losses and then some. That may happen but in my experience too often the opposite occurs. Instead, you will end up watching those stocks drop another 30% before you finally sell in a fit of emotional disgust.
Another thing to remember is that many of these momentum names that hit astronomical prices had no business reaching that price in the first place. Expecting them to regain their former luster anytime soon is about on par with hitting the lottery next week. To me, it is far better to take losses now, sit on the sidelines in cash and wait until there truly signs of a bottom before buying back in.
If, on the other hand, you managed to avoid getting entangled in these high flyers, sit tight. You have raised the recommended cash. Sure, you will take some paper losses on the rest of your portfolio, but that will be a temporary condition. By the end of the year you should recoup those losses.
It is too hard to tell whether this week was the start of my forecasted 10-15% correction. However, we are entering the third week in May (sell in May and go away) so whatever you do–don’t buy the dip. If the markets follow the behavioral pattern of the last several weeks, expect the market to bounce for a few days next week.
We have now hit my target of 1,900 on the S&P 500 Index. I actually expected a little further upside (20-30 points or so) once we hit that level but I’ll settle for what I can get. And who knows, traders might try once again to break that 1,900 ceiling level and propel markets and emotions to higher highs. I don’t care.
It feels to me like the markets are rolling over here. If that process has begun, I wish it would be a short, sharp and therefore less painful ordeal than a drawn-out affair that lasts through the summer. However, markets, as I have often said, will do what is most inconvenient for the greatest number of people. Plan accordingly.