I’ve mentioned Ford Equity Research in prior commentaries, as one of many services and tools that allow one to compare what one thinks is going on (biased by news, TV and emotions) to what actually is going on. Years of experience teaches an investor that it is important to constantly engage in some introspection to make sure your decisions aren’t driven by greed or the urge to gamble. Pride and ego can also get in the way; people hate to be wrong and it’s not unusual to ‘go down with the ship’ so to speak instead of bailing. What I’ve pretty much been saying for months is captured in the following summary from the research:
“Investors favored stocks that exhibited growth and momentum attributes as seen in the strong performance of price gain, price momentum, estimated growth rate, and earnings estimate revision factors. Value, large cap and high quality stocks were the least favored during the month. A large number of the industry groups that we cover had positive average price gains during March. Oil-related industry groups performed relatively well. In addition, basic materials industries such as forest products, chemicals, and steel were also among the better performing groups. Notable among the weak performers during the month were metals mining and financials.”
Since most of my postings are still down below, you can assess whether or not what I was saying has actually been happening. If you read what I said differently, then maybe I need to be more blunt.
Another indicator that perhaps the market has become a bit overbought (see last couple of blurbs) very recently is evidenced by this chart, also by Ford Equity. I added the yellow to emphasize the general region (ratio of their estimate of price to ‘fair’ market value of a whole bunch of stocks that make up the stock market) that I would consider the market to be neither undervalued or overvalued.
I devote some time in my new book to identifying the difference between ‘gambling’ and ‘investing’ since it’s often hard to tell the difference. If corporate profitability and economic activity have peaked out or are facing headwinds and the market just keeps going higher than ‘fair’ value, then hanging in there is just gambling (same if it’s an individual stock) in my opinion. Clearly we’re at a potential inflexion point but there are two considerations – are we talking short term or longer term? Longer term, I’d argue we’re early into a global recovery of sorts – having rebonded from extremely low value levels (i.e. when ‘maverick’ investors would’ve been buying in) and that it’s highly probable the stock market will eventually become overvalued over the next year or even three – which is bullish. Short term though, there remain headwinds which are not fully understood or appreciated. Portugal’s woes are just more fallout from the financial crisis house of cards that has yet to fully play out. Japan as mentioned recently in a posting will have some as yet hard to measure impact on global economic logistics – and another earthquake today hints their troubles may not be over just yet. Add it all up and an ‘investment’ perspective would suggest caution (have some cash) – since the probability of some disappointment is non-trivial.
Based on what’s really going on it makes sense to focus on higher growth, low or no yield sectors (the extreme OPPOSITE of what the investing herd is looking for these days) and stocks less sensitive to troubled countries (avoid financials), or sensitive to Japan (electronics?). Having some cash (not bonds) handy will allow you to top up in favoured sectors/stocks in the event of a short term stumble in markets.
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