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1/29/2013 6:48 AM
Rally Not Ready to Withdraw Into Solitude
But for investors 2013 has been a party, Mardi Gras in January.
Even with the notion of sequestration becoming a reality the stock market didn't crumble although yesterday's pause seems to signal the need for a slight push.
To refresh your memory, part of the debt ceiling deal of 2011 called for what many figured would be a nuclear option that included $1.2 trillion in spending cuts over a ten year period. Half those cuts come from defense which is why many felt Republicans would reach to renegotiate and in the process give up even more of their power or some would say soul. But now Republicans say the cuts have to go through. Say what??? The White House has been caught off guard but there really doesn't seem to be any way around the cuts beginning on March 1st.
The market which would have recoiled at the notion of spending cuts of this magnitude kicking in around the corner seemed to take it in stride. The cuts would probably lop off 0.7 percentage points from this year's GDP which means it will certainly be beneath 3.0%. Maybe the market is too busy partying to notice right now, so even as most Americans have already been hit with tax hikes, their holiday bills and divorce filings (yes the days after January 16th typically see highest number of divorce filings of the year) stocks seem focused on powering through nonetheless.
On that note, however, I wonder how many ho hum days the rally can handle before testing the real resolve of investors, especially those that reluctantly jumped in with little conviction.
Fear and Greed
In the past one of the most reliable anecdotal indicators I’ve used to know when to get out of the market is when investors quibbled over taking profits. For a while many hijacked Wall Street’s ‘disdain for day trading as a reason for not ringing the register unwittingly buying into a ploy always designed to take power and independence from those very same individual investors. We aren’t at that point yet but a couple of subscribers noted we are getting out of some ideas fast- and to a degree they’re correct.
But, we are getting out with healthy returns. Below is the letter I wrote to subscribers and posted in our daily Portfolio Approach model portfolio update. I want to share with everyone as the market seems listless for the first time this year. I think this could be a huge year for stocks but that doesn’t mean it will be devoid of wild swings and serious hurdles.
I'm not sure how long you have been in the market, but the risks of not taking profits is still too high for us to ignore substantial gains (for me substantial gains are 15% in less than six months or 20% in less than a year). There was a time when one could let the winners run, but what's happened over the last decade or so is that winners often become the first place investors go when other things aren't working. This is actually what busted Bernard Madoff - people couldn't take the losses on their other holdings and needed to cash out with the crook.
I mention this as we are letting a lot of winners ride, but I still think the biggest shame is to let these winners become losers.
For those that base their selling on the tax man, you are making a giant mistake. While we would love to avoid capital gains taxes it's still better to pay (higher) taxes on profits than lick our wounds on a loser that was once a winner. When I started the company, the Hotline was designed to buy and hold for six months to a year. For the most part that worked until 2001- since then holding profits even as fundamentals continued to improve led to more lost gains that certainly mitigated any would-be tax savings.
It's true this month we have asked subscribers to close out positions with an average hold of 2.8 months, but virtually all are home runs outperforming on an amortized basis (closed CRUS today for precautionary reasons). If the stock is higher the next day some subscribers see it as money left on the table, but that mentality crushed more investors than any other kind of thinking out there. It's the same kind of thinking that makes casinos rich.
If you ever get a chance drive by the bus depot in Atlantic City to see all those "losers" and ask if they were ever up at any point -90% will say yes. But they got greedy. For the record my technique is to win two or three grand and buy my wife something, that way I leave broke but buy peace at home.
I would love to hold them forever, and there are stocks like IBM that fit the bill, but my job right now is to deal with the emotions of investors that turn harsh and fearful on dips. The same people that wonder why we are selling "too early" would be on the ledge if the ideas all tanked along with a hiccup in the market. Let's focus on making a lot of money. I'm taking short-term home runs. I'll let a few ride knowing stocks don't go up in a straight line, but we are being realistic about history, our clients and the notion of sleeping at night. CP
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