A Deceptive Rally

 | Oct 28, 2011 | 9:10 AM EDT  | Comments
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"For everything you have missed, you have gained something else, and for everything you gain, you lose something else." --Ralph Waldo Emerson

The business media tends to operate under the assumption that investors are always nearly fully invested. Thus, it is cause for celebration when the markets go up and a reason for despair when they go down.

Of course, the reality is much more complex than that. More often than not, big days like Thursday cause great frustration, even when most people have some good gains. The bears are unhappy for obvious reasons, but many bulls have a hard time keeping up with such frothy action, and there are plenty of complaints about underperformance, even though they are making money.

This particular run, after hitting an annual low just a few weeks ago, was particularly surprising and lopsided. It seems to have caught a very large number of market players by surprise and yesterday was the cherry on top. None of us should be too surprised to see another V-shaped bounce, since we've had so many, but this one was even more vigorous than most. It isn't logical, and the fact that we have been so focused on European headlines and not on individual stock picking only adds to the challenges.

When market players feel frustrated, the easiest mistake to make is to root for the market to suddenly correct and act more in accordance with their own ambivalence. They want the market to acknowledge that it is acting irrationally and revert to whatever makes more sense.

The irony is that the large number of folks frustrated and unhappy with the action tends to produce conditions that push the market to continue acting the same way. The folks who were underinvested or bearish are determined not to find themselves in the same position and they end up being more aggressive in pursuing buy points.

Despite being bullish lately, my biggest frustration comes from being underinvested because I can't find technical entry points and setups that I like. In retrospect, I should have been far less selective with my buying and simply trusted more in the fact that another V-shaped move would lift all stocks.

Trying to pick individual stocks, rather than embracing the overall market direction, was an easy way to sit on idle cash. It really didn't matter what you were holding during this move since stocks were highly correlated the whole time. All that mattered was staying bullish and riding the indices.

My thesis recently has been that we'd see a shift back to individual stock picking once the European situation was resolved. After the news yesterday, we are probably in good shape for that change to develop. End-of-year seasonality should help as well.

We are obviously overbought and in need of some consolidation, but I remain bullish and will continue to look for individual stocks to buy. It certainly wouldn't hurt to have a little rest, but this market has made it clear that you had better not expect too much of a pause or you'll be chasing runaway moves again.

Look for pullbacks to kick in, but don't be overly negative. This market has plenty of momentum and is likely to be sticky to the upside.

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