It seems we are in a period of great uncertainty. Everywhere it seems there are signs of negativity. It seems the housing market is falling, European debt is getting out of control, debt continues to mount in the USA, and so on.
The Death Cross
A Death Cross is a technical indicator that is followed by technical chartists. A Death Cross occurs when the 50-day Moving Average falls beneath the longer term, 200-day Moving Average. This technical indicator is getting a lot of buzz of late, because it is regarded as a relatively reliable indicator of a failing market.
A Death Cross is a very strong indicator of negativity. The only problem is, that technical charting is only one of many indicators amid factors determining how to invest. We strongly follow charts also, but use the indicators in conjunction with so many other factors. The Death Cross is about as infallible as so many other factors – it can be right, and it can be wrong. A false cross occurred in 2010 but reversed within weeks. A true cross occurred in early 2008 and was an outstanding exit cue.
Like so many other indicators, it is often difficult to determine cause and effect. Sometimes an indicator is truly an indication of something about to happen. Other times, the market’s emotion cause an indicator to reflect what the market already believes. Another way to reflect this, is to say that the herd mentality, which is so very negative today, may be the cause of the technical indicator.
The point here, is that following the “herd” and the pundits, means taking quite a risk. Mr. Market often takes great effort to prove the masses WRONG.
The Contrarian View
Remember that when everyone believes something is happening in the market, it is almost a universal truth that the opposite will happen.
Jim Rogers
In support of the contrarian view of the markets, I quote a thought from legendary investor Jim Rogers:
When asked how he made his money, Mr. Rogers answered, “I sell euphoria and buy panic.”
The Stock Market Has it’s Own Unique Life
Throughout modern history, there have been numerous panics, resulting in dramatic drops in the stock markets. It is a truth, that a rising market moves much slower than a falling market. When a market falls, it falls dramatically and quickly. Throughout even the good times, there are always frequent dramatic drops in either the general market or specific sectors.
In fact, as the above quote from Jim Rogers illustrates, there is an entire class of investor that will not buy a security unless there has been a dramatic drop. They “buy” the “dips”. That type of investor just waits for the inevitable dip, buys then, and profits on the inevitable recovery. If a security has good intrinsic value, it will recover, and usually quickly.
The Current Weakness
As we have previously commented, this is the time of year that the market always shows weakness. In fact the worst month of the year historically for stock market weakness, is September each year.
It is possible that the market will continue to show further weakness for a long period of time, but the only sure thing is that nothing can accurately predict the future of the Market.
However, on a historical basis, and given the current world economic situation, the odds are that you will not be wise to sell after the market has shown weakness. We think that patience is a far better strategy at this time.
All said, we believe it is too late to panic. The time to panic, and raise cash, was months ago. Now it is time to selectively redeploy that cash into select equities.
