Whereas the market environment of January and February was screaming market bottom as nearly every market pundit was manipulated into thinking we were in a bear market, the market environment of today is much different. There is a general sense of awkward suspicion occupying the hearts and souls of investors that need to create returns, yet are afraid to commit for fear of something nefarious in the offing.
The result of this distrust is a cloud of neutrality that is beginning to become apparent in the price action of both individual issues and major averages. There is very little correspondence between one asset class and another. For example, while financials looks like they might be getting ready to outperform, technology looks like it is getting ready to move into a general malaise.
There isn't much an investor should do in an attempt to cope within such a market environment. Being overactive will result in a grind lower for your equity curve that will create an avalanche of frustration culminating in something much worse down the road. Being underexposed to equities comes with its own set of hazards as this is default position of a majority of investors. The same majority that hated stocks in 2009, loved real estate in 2007 and didn't care what price they paid for Garden.com in 2000. Now they have simply thrown their hands up in disgust, hoarding cash for fear of any asset class that has volatility exceeding that of a certificate of deposit at the local credit union.
The best course of action to take then may be to do as little as possible until a market turned sideways reveals its true intentions. There remain pockets of value all over the place. However, tepid market participants have been slower than usual in making the commitment necessary to allocate any substantial capital into these situations. While that may be cause for some investors to pull the ripcord, it will turn out to be a poor decision.
When markets get pricing of an asset incorrect, they will make the correction in time, as evidence of the error mounts. In smaller, less liquid names, the correction is often made in a matter of days, as opposed to months or years. You literally have an entire year (sometimes multiple years) worth of gains that takes place in a single week. In other words, the smaller you go in terms of market cap, the more private equity like the investment becomes as the mark to market takes place at greater intervals.
While the market may be turning sideways, decisions made by investors should remain constant, realizing that the significant absence of conviction in equities is an opportunity to discover pockets of value that under normal conditions would not exist in the public markets.
