A SIDEWAYS RANGE MASKED AS THE NEXT GREAT, GREAT DEPRESSION
This article also featured on TheStreet and Fidelity
For all the fury that this week had in terms of headlines that focused on doubt and fear, we remain in nothing more than a prolonged sideways range that has been with us since the first quarter of this year. If there is anything that investors should be focusing on that is it.
You shouldn't be focusing on the headlines about this being the worst week in a many months. You shouldn't be focusing on the nonsense about how we're on the verge of a great, great depression. You shouldn't be focusing on the pessimism that has afflicted the middle-class to the point where a majority never expect the American economy to recover.
Instead focus on what the market is telling you at this very moment. If you look at what the market is saying and what the news headlines are saying, they are painting two very different pictures.
Let's use the alien abduction model to demonstrate this in action. Let's say that in January of this year you were abducted by space aliens and were just dropped off back at your house today. Curious about what has been going on over the past 5 months you look at the weeks headlines. Given the painful picture that is being painted by the financial media, you would automatically think that the Dow is surely down more than 10% this year. You would assume that we have resumed the bear market and stocks are the last place anyone would want to be.
Unfortunately, most investors are acting as if they were just dropped off back to Earth and are only focused on these negative headlines, without looking at the rest of the picture. The truth of the matter, as told by the most reliable source of all (read: financial markets) is that the market is simply digesting the enormous gains of the past couple years. The Dow is, in fact, up on the year. The S&P is essentially unchanged for 2011.
Yes, if you were overallocated to volatile, high-beta names then this week sucked for you. If this week did indeed suck for you and you failed to take the precautionary measure of making it less sucky as we enter a new week, then that is a YOU problem. It has nothing to do with the markets. It has everything to do with incorrect management of capital and improper allocation. I said it numerous times this week: If you underperformed the markets during the most volatile days, it doesn't matter if Ben Bernanke pulled you aside at your kids little league game and told you he was going to do a surprise injection of $1 trillion into the markets. You should be reducing your exposure.
This game that we play on a daily basis can be so much easier if you take your ego and opinions out of it and simply listen to what the market is telling you on any given day. Don't listen to what you are telling you. Instead, put your ear to the market and respect what it is saying.
Risk management can really be that simple.
