The Daily Dose: Learning From Experience

 | Aug 28, 2013 | 9:00 AM EDT
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Here I go again on my own, down the only road I have ever known.

-- Whitesnake

Gosh, do I love the hairdo on the lead singer of Whitesnake! Anyway, there is only one benefit that I have seen to getting older with each passing day: If you're a wise owl, you gain experience that is otherwise not in the mental arsenal.

In recalling periods in my financial services career when geopolitical concerns ran roughshod over equity prices, there was a point during 2004-2005 when I viewed every tick lower in a stock's value as a proverbial buying opportunity. So naive!

Amid the month-long pullback that is now under way, advising investors to buy stocks only causes them financial pain and mental anguish, both of which erode confidence in the entire pursuit of profit via the market.

If you have an infinite time horizon (as in "to death"), then buy stocks of quality companies now at valuations that are cheaper than they were on Aug. 2. However, if you are like most people who are involved with the market nowadays, a.k.a. human beings who pay attention to headlines and have an itchy trigger finger, then the market at this particular moment is not to be gamed. Get the hell out of those loser stocks and profitable positions gained through hours upon hours of research, and wait until the market opens the doors and says: "Hi there, Sexy, come back in."

Pretty darn simple strategy. The market has layered on a new risk in Syria that has caused all sorts of folks to warn of a further short-term dip but a robust end to the year, and straight-up impending doom. In short, sentiment is very chaotic.

Below is a portion of a flash note I released to clients on Monday morning:

"This week will mark three in a row of my more bearish views on the market. In that regard, I am not surprised by the bias being to the downside. The theme in the market is this: renewed geopolitical and U.S. risks (debt ceiling, for example), coupled with a clearly slowing economy and rogue Federal Reserve, is the recipe for the reeling in of overly inflated P/E multiples. Remember, the market has run on forward earnings estimates that in my humble opinion seem wildly optimistic.

"That being said, while you should have a great allocation of cash in the portfolio in this environment, it's important to note that there is no sign of imminent panic in the market. Why is that important to note? First, a lack of panic suggests that wholesale changes to profitable positions enacted to hold for greater than a year should not be made. Second, a true buying opportunity has not yet surfaced. Thus far I am seeing measured de-risking by market participants in a very low-trading-volume week. One sector I am watching is semiconductors, names such as Advanced Micro Devices (AMD), SanDisk (SNDK) and Micron Technology (MU). They are exhibiting relative weakness, and prolonged softness here would imply that renewed global risks are starting to affect the hiring decisions of companies for 2014 (we have begun to see this anyway...)."

Two Things to Keep in Mind

To determine whether the market has reopened those aforementioned doors to fruitful trading sessions, you must look for a couple of basic things. They include:

  • Oil prices recede as the U.S. sends missiles into buildings in Syria, and consumer discretionary stocks rise.
  • The 10-year yield stays below 2.8% as stocks bounce, basically tapering the tapering fears.

In the meantime, you should be grading stocks on your watch list so as to be prepared to strike when the coast is clear. One name I continue to do research on is the auto-parts maker American Axle (AXL). The company has done a fine job at lowering its cost structure and diversifying who it sells parts to. The balance sheet is an ongoing issue, of course. By the way, autos were the lone bright spot in the dreadful durable-goods orders report on Monday. 

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