Strategy Notes

by: Roger Nusbaum

Escalating violence in the Middle East? Fuggedaboutit baby, buy stocks!

Days like yesterday are clearly driven by emotion. In the last couple of weeks, concern was mounting about the near-term prospects for stocks -- maybe even to the point of there being fear.

One reader left a comment related to the 2% rule, asking whether this was shaping up to be a fast decline and not a slow rolling over, which is how bear markets tend to start. Remember, we are about two months from the market's peak and the 2% rule pertains to an average 2% monthly decline for three months in a row.

People always want to hear predictions about what will happen. While a couple of weeks ago I said on CNBC I thought there would be something of a backslide in the market in the immediate term, I don't think the next bear market will start until well into 2013 or maybe 2014.

To the above question about the 2% rule, more important than predictions or guesses, in my opinion, is discipline to whatever it is you do. If you hold on no matter what, then you should hold on no matter what. If you use some sort of trigger point for defensive action, then you should stick to that. The time to change what you do is not on the fly after your trigger point has been breached, as chances are you were less emotionally involved when you mapped out your defensive strategy.

The defensive action we took so far in large accounts amounted to getting rid of names that had not been doing very well, but served to increase our cash position. That allows us the flexibility to take more serious defensive action or, if things go the other way, to get more long the market.