Managing Short-Term Emotion -- Part II

by: Roger Nusbaum

Roger Nusbaum (wish list) submits: My post called Managing Short Term Emotion incited several comments that I will try to address:

Roberto from Nasdaq Trader Blog asked whether I look at charts for individual stocks and whether looking at charts would improve stock picking. I sold half positions on three stocks and sold entirely out of one in an effort to begin getting defensive. Two of the four have struggled due to bad news since being sold and two have done well. As a top down investor I started with the big picture decision that I wanted to reduce domestic exposure.

If things were going to slow down it would make sense to reduce areas that tend to be more cyclical. For now I felt this meant tech, industrial and certain areas of consumer. It could be argued that as the market has gone up it has become riskier. I see problems for 2006 so I'm not in a hurry to re-deploy. Aside from concerns about 2006 this rally has been narrow breadth-wise. I realize there are many positives out there too.

I do look at charts, but like anything else that works sometimes and doesn't work other times. The bigger picture issues have more weight in my process. Please keep in mind I am only trying to be right more often than I am wrong, not get all of them right.

Mike says he does not see anything macro or micro that would make the market crash. Well I'm not worried about crashes. Crashes are bottoms, historically. I spend time looking for slow rolling over action, that is how bear markets start.

An oft stated goal of my approach is to try to miss big chunks of down a lot. I repeat often that down a lot starts with down a little. As George puts it in is comment to this post it is an objective point at which to assess supply and demand for equities. Sometimes this indicator will work and sometimes it won't. That it won't work sometimes is why I don't go 100% cash right away, or likely ever.

As for what concerns me about 2006; I have written about this at least a dozen times. We are at about the historical time limit for cyclical bull markets and economic cycles. Either the ten year treasury yield will be much higher than it is now or the yield curve will invert; neither is good for the consumer in general or the housing market specifically. I don't know when the deficits will matter but they are a problem. I can't see how the dollar doesn't get a lot weaker.

I don't want to try to out-guess these moves. I tend to be a this is how it usually works type of guy and I like to use that as a starting point.

If I'm wrong about this, I'm still quite long and I'm only a couple of trades from much more exposure. I would love the market to rally huge. As I am right now I would lag a 20% rally by a couple of hundred basis points and I'd be thrilled with that!

I will add more value to clients by outperforming in a down a lot market and staying close to up a lot.

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