THE ONLY TWO CONCERNS AN INVESTOR SHOULD HAVE CURRENTLY
This article also featured on Forbes
As a normal investor who has colorful fantasies and nightmares regarding the financial markets, there is a better than even chance that following yesterday's route you have a flood of thoughts swirling around your head. The fact that all of the information contained in the entire world, along with the opinions that come in tandem with that information are at your fingerprints may seem like a blessing during times like this. However, it is more often than not a curse. Simplification is the only answer.
There are only two things you need to be concerned with as an investor currently:
1. At what point should I raise more cash?
2. Where will be the point at which I should put that cash to work?
That's it. Your problems have all been condensed into two basic questions that you must now answer.
For reasons that I outlined in an article I wrote over the weekend, I believe that the S&P 500 is headed for 1160 on the downside, as a minimum target. This downside target is gaining increased credibility as I am not seeing the proper levels of panic amongst investors as of yet. The attitude remains one of "at what point can I buy in for a bounce" as opposed to "the thought of being long the stock market makes me want to vomit".
What will get us to that vomit point is a continuing pattern of failures in the market that should take place over the next few weeks and possibly months. Nothing makes traders and investors give up on the long side like a continuing pattern of rallies that fail. That is exactly why you see so much chop around important market bottoms. That chop or volatility is the motion of an ocean of investors not being able to sustain the torment any longer.
The fact that we will be experiencing rallies along the way means that investors will have multiple opportunities to lighten up on their long positions. In the midst of the snap back rally you will see a lot of false hope and optimistic expectations that the worst is behind us. It won't be.
Barring some type of surprise intervention from the Fed, ECB or combination of the two, there is little chance of a sudden "V shaped" bottom taking place. The damage has simply been too great and there will be too many investors maneuvering into the markets during subsequent rallies. This maneuvering will inevitably cause the choppy, violent movement that is typical of bear raids on the stock market. It's a long, drawn out process that will need a month or two of work, at a minimum.
A move above 1250 on the S&P 500 should be used as a point to lighten up on long positions. I would expect to see this take place over the next 5 trading days.
A move below 1160 on the S&P 500 is the point that the cash should be maneuvered back into the markets with an intermediate to long term time horizon. September seems more than appropriate to see the type of panic necessary to put in a sustainable bottom. October at the latest.
During the point in time when this type of frightening decline takes place, Wall Street will make sure to pull out all the photos of past monsters, goblins and vampires to frighten away all but the bravest of investors. It is the equivalent of telling a small child to stay away from a closet where you keep your valuables with stories of a three legged, reptilian creature that wears scary hats.
2008 is sure to come up, as this has been the scariest monster of all. The market will want you to think that the monster of 2008 has come to revisit us in 2011. And as usual, what the market wants you to think will be the least profitable path of thought one can take.
