THE BEST INDICATION that the market hasn’t yet reached a bottom is that a vast number of analysts and pundits are still trying to call one.
Markets are a combination of fear and greed — and bottom fishing is, by definition, the product of greed. After all, those who are intent on buying the absolute bottom aren’t satisfied to profit from a portion of a stock’s upward climb…they want to capture the whole shebang.
But like the watched pot that never boils, the bottom — a long-term, sustainable bottom — will come only when people stop looking for it. It’s kind of like the family car trip. As long as the children keep asking “Are we there yet?” the destination will never be reached.
Let’s assume, for a minute, that we’ve reached bottom and a new bull market has begun. Terrific! As we’ve discussed before, the big money is made on the big moves. You want to buy a stock because it’s going to go up 100%, not 10%. The reason to get back into the market, then, isn’t because the Nasdaq is going to 5000, but because it’s going to 15000…or higher.
But knowing that a real bull market will eventually challenge the old peaks, people shouldn’t feel a huge sense of urgency to buy back into the not-yet-forgotten favorites. From the crashes of 1929 and 1987 to the long bear market of the 1970s, there was never an instance when investors needed to jump in with both feet at the perfect time or risk missing out on the substantial upside that followed. Real bull markets take time to develop.
As we pointed out a few weeks back, it’s possible that any number of individual issues will make dramatic advances from here. But for anything more than a short-term counter-trend trade, I’ve found that the reward of picking a bottom isn’t worth the risk it entails. Stocks that are trading at their 52-week lows are, by definition, weak stocks. “Buy low, sell high” aside, my philosophy has always been that weak stocks are weak for a reason. Let them be.
What most pundits and investors don’t realize is that, in a bull market — a real bull market — there’s plenty of time to get onboard. In order to spot, and ultimately profit from, a real bull market, you don’t need split-second trades or complex arbitrage strategies. In the simplest terms, all successful bulls need is an awareness of the trend and the courage to stray from the herd. Let’s take another look at each.
The only reason to be bullish is because the market is bullish. Whether you’re trading orange juice or Oracle (ORCL), the best indication of the market is the market itself. So as tempting as it is to buy depressed issues making multiyear lows, there’s no reason to buy a security whose trend is clearly down.
When it comes to putting serious dollars to work, I’m generally interested only in securities that have performed well recently. While brokers and financial planners are quick to remind us that past performance is no guarantee of future results, the truth is that recent performance tends to be an excellent indictor of future performance. XYZ can’t be a winner over the long haul before first becoming a winner over the short haul.
Positive price action is one indication a bull market is beginning. Crowd psychology is another. In the early stages of a real bull market, there’s never a huge urgency to buy. The prevailing attitude isn’t greed or even fear…but doubt. Gains are viewed with suspicion; price advances are chalked up to short covering, program trading, seasonal factors…just about anything but the start of a legitimate bull-market advance.
At the start of a bull market, there’s very little interest among either individual or professional investors — even when prices go up. It’s only in the later stages that the public becomes interested. Remember, the S&P 500 gained 37% in 1995, 22% in 1996, 33% in 1997, 28% in 1997 and 21% in 1999…but it wasn’t until the first few months of 2000 that massive amounts of money started pouring into aggressive-growth mutual funds at record levels.
So when evaluating a stock or sector, I look for a combination of both positive price action and doubtful crowd psychology. Hopeful investors are those who’ve already put down their bets, but doubtful investors still have money on the sidelines. That’s where the opportunity lies.
One good indicator is the message boards. If the rise in a stock isn’t accompanied by a high quantity of equally bullish chatter, it’s a sign that there’s still plenty of upside to come. Two sectors worthy of consideration are real-estate investment trusts, or REITS, and gold. Their recent stellar performances have been given a ho-hum reception by investors still preoccupied with Priceline.com (PCLN).
Although REITS are up double digits over the past year and many are breaking out to new highs, most pros doubt the future will be as kind as the recent past. “Real-estate prices lag the economy” the naysayers quip. “It’s only a matter of time before REITS fall.” Of course, they’ve been saying that for 18 months.
Despite the landmark decision to add REITS to the S&P 500, the Yahoo message board for industry bellwether Equity Office Properties (EOP) has logged only 30 posts in the last two weeks, compared with Cisco Systems’ (CSCO) more than 15,000. And Manufactured Home Communities (MHC), which I recently recommended on Fox Television’s Cashin’ In, is up more than 20% year-to-date, yet has received just 98 posts on Yahoo since the board was created…in 1997.
Gold’s recent rise is being attributed to the World Trade Center attacks. But as we’ve pointed out before, the sector was on a tear long before Sept. 11. Homestake Mining (HM), which has a tantalizingly large short position, is up more than 100% year-to-date. Despite that performance, the stock has received a mere 12,000 Yahoo posts since Jan. 1. For comparison’s sake, Oracle (ORCL), a crowd favorite which is down more than 50% year-to-date, has received the same number of posts in the last eight weeks alone.
– Originally on Oct 16, 2001 by Jonathan Hoenig
