In all honesty, sitting down to write this morning left me feeling uneasy.
I tracked down an old post from Howard Lindzon, co-founder of StockTwits, who put a cardinal rule of investing in better words than I could.
Here is what he wrote:
“If you can’t understand the catalyst that will move an investment in your favor, you are the catalyst of someone else’s profit. Even if you understand the catalyst, you will be wrong and must have a plan.
Wall Street is pretty good about cleaning up the ill prepared.”
This was right after a single analyst burned a whole lot of people betting on Plug Power Inc. (NASDAQ: PLUG) to keep up a massive run.
From the start of 2014 to March 7th, the share prices rose a good 400%. All it took was one analyst to slap a 25% loss on people chasing the gains that day.
They took to StockTwits to vent their collective rage, and Mr. Lindzon took them to task.
I don’t want to be the person left fuming at my keyboard, and it would be a whole lot easier to make sure I avoid it if virtually everyone else in the market didn’t seem to be in the same boat.
Compressing the Spring
Judging by past reactions to job reports like we saw on Friday — 257,000 jobs added in January, 0.5% wage gain with upward revisions for November and December — the Dow and S&P 500 should have seen a boost.
It started that way, but both indices dropped by the end of the day.
Shorts were getting squeezed, they were cruising to new highs and analysts were giving statements like this one featured in a New York Times article from Guy Berger, a U.S. economist at RBS, “This is the best employment report we’ve had in a long time. The labor market looks like it’s in really good shape as we head into 2015.”
No other news was weighing in on the market. The so-called “Grexit” news was several days old and stale, plus the indices just went positive for the year.
Perhaps we’re back to the old ‘good news is bad news’ paradigm, but it isn’t like the extremely dovish Fed Board of Governors issued a press release saying rates would definitely rise soon.
Without any macro nudge, it appears market sentiment is now hellbent on creating a coiled market that is loosely trapped between where the market was at the start of the year at the upper line of resistance while the 200-day moving average is catching up to create the bottom:
For it to really coil up and create a strong potential for it to break out, up or down, this band will have to narrow.
If and when it does, it will move faster than most of us can react.
So here we sit. We naturally cannot determine a meaningful catalyst for movement right now when market sentiment is the driving force and it is giving no sign of direction.
Going forward, I can only speculate that the upside potential is greater than the downside based on previous market resilience in spite of all the issues with, and systemic flaws of, the domestic and global economy.
Yet I’m not willing to be the catalyst for someone else’s profit, and our limited capacity to understand and prepare for whatever will happen puts us in a bad position to get caught with our pants down if we place large and broad bets on anything.
The Stock Picker’s Market
Now don’t get me wrong. I don’t think we’re at a loss for something to do. One of the beauties of investing is that you can make it as broad or granular as you want.
In this sense, we still have plenty of options, though we won’t know if we’ll get a boost from a tailwind or struggle with a headwind.
A sideways, uncertain market is a stock picker’s market. When the big picture doesn’t show you a catalyst you can understand, start drilling down.
Depending on how you prefer to invest, or how your portfolio is balanced right now, we’ll all have to find different ways to act.
You can enter trades that capitalize on the effects that long-term trends and mismatched supply and demand will have on key commodities.
You can also move into some of the most resilient stocks in the market and capture income from dividends that haven’t decreased in decades.
There is a wide-range of possibilities here for us, even though the market is in limbo. However we choose to deal with the situation as individuals, we all need to make sure:
- We understand the fundamentals of why an investment will deliver profits, or fail to do so.
- We need to understand the catalyst for the trade to go well, and be prepared to exit if it doesn’t materialize.
- And most of all, we need to stay disciplined and watch our butts.
P.S. Join Nick Hodge for a FREE webinar tomorrow, February 10th, at 3:45pm EST. He’ll be discussing “Three Stocks for a Resource Turnaround.” Click here for free registration.
