Moderating you and the stock market’s expectations $SPY $QQQ

When the market have risen so much and you probably didn’t get invested, it becomes intuitive to debate whether to jump in or not to jump in.

The fear is that when the “missing out” threshold reaches the maximum, that is probably where the herd “missing out” threshold reaches the maximum and where the market will turn.

If you are invested, you may be thinking when to get off the bandwagon, that this isn’t a sustain bull run.

Basing on breadth technical indicators may get you off too early, or it doesn’t give you a good entry point. Overbought situations in bull run will remain overbought. Stocks that breaks 52 week highs are positive and reinforces sustainable trends.

In contrast, oversold stocks may remain oversold for extended periods.

The answer may be somewhere in between. As an investor, you have to understand that prices go up and down. That what you see on the news may not be where the market will go immediately.

1. They say US wasn’t fixed, but the market still rally 100% from the depths of 2009
2. Europe averted a disaster and the market went on a recent rally. Nothing is fixed yet.

This goes to show that basing your investment on political problems may not be the most ideal.

What is more important to an investor is

1. Simplify your strategy. Able to articulate your strategy easily.
2. Knowing your time frame. Whether you invest based on minutes,days, a year or longer than that.
3. Managing your portfolio and your cash warchest using a map and decision tree. What to do when x happen and what to do when y happen. Do shifts in allocation instead of being totally out and totally in.
4. Managing yourself. As a student of discrete mathematics, I always like the concept of disproving. What could kill this current bull run? What are the indicators that will confirm that?
5. Minimizing things that are wrong.

One of my sifu that I found on the net have been Barry Ritholtz of Ritholtz.com and Fusion IQ. He concentrates more on the behavioral psychology of investing and how to prevent himself and us from falling into an area of comfort or pain during the market price meandering. His partner Kevin Lane, supplements him with great technical analysis (though he doesn’t post often and when he does its time to take note)

He was out close to the 2007 collapse, overweight on the 2009 bottom and >80% long equities before this current run. In the middle of it there are much change in directions but what they do have are a clear map and decision tree telling them when what they believe could be wrong.

So since they are heavily invested this is his thought process whether we are overextended or not (I wanted to post the link here, but I realise the article is gone!):

The consolidation in equity markets is continuing. Yesterday, we noted that the US equity markets were in the process of digesting the rapid gains made since the beginning of the year (Look Out Below, Thursday Edition).

Since we are “Miserably Long,” I spend lots of time thinking about what could go wrong. Yesterday, we  discussed how mom and pop are still not buying equity mutual funds. The day before, we trotted out SocGen’s chart showing markets are not cheap, by way of Earnings Yield (Why Using P/E Ratios Can Be Misleading). GMO’s James Montier peak profit comments were widely circulated — he discussed how earnings are more likely to mean revert downwards than keep exploding upwards — and that 9eventually) has to mean lower equity prices (I’ll post his chart later).

Despite all this, the comment that seemed to resonate from yesterday’s morning missive was “And yet curiously, the market cannot even muster a triple digit down day. Odd.”

We had every opportunity to see that major whackage yesterday — bad European economic news, weak German PMI data, more slowing in China, European markets down substantially, sell offs in Copper and Crude.

And? We could not even muster a down 1% day.

Contemporaneous to the rally has been a surge of Bearish commentary. It is intellectually appealing, and I am empathetic to their arguments — but they have been on the wrong side of the trend for a long time. Even this week, those arguments have been money losers. At the same time, the Bull camp seems to be in a mad competition as to who can make the most absurdly foolish statement possible. The winner of the silliest bull commentary so far is Goldman Sachs, but there are many other contenders. And despite the intellectual vapidity of much of the Bull arguments these days, the Market has been on their side — at least so far.

The lesson appears to be Momentum + Fed liquidity trumps intellectual appeal + abstract theory.

As to my own positioning: The hot start to the year and my aforementioned Miserably Long posturehas me looking for an excuse to lighten up, take some risk off the table, cash in some profits. But I need more than a gut instinct or a guess — I need to see some solid deterioration in market internals or in economic data as opposed to a guess or a gut feel.

The bottom line: The strength of this market — or at least, the Fed’s liquidity beneath it — deserves the benefit of the doubt. Until we see proof that something more untoward is a foot, I consider the current softness little more than back and filling, digesting excess gains from the start of the new year. The recent breakout points across major indices remain key levels to watch

Anyway, Kevin Lane have put up his analysis on the markets and you can take a look at it here [Nasdaq /SPX Breakout]

(Click to view larger image)

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