The market is being pulled in two directions.
Pushing the market higher is what seems to be improving news about the state of the U.S. economy -- namely the positive signs in the housing market. In background, of course, is the monetary activity of the Federal Reserve, which is serving as a backstop to any major market decline. Pushing the market lower, however, is the nervousness about when the Fed will reduce and ultimately eliminate its monetary activities.
So what to do?
If you relish activity, I remember a couple of years reading a report from Goldman Sachs. That report said that throughout the course of the previous rally, anyone who bought on market down days and subsequently sold on market up days would have outperformed the market. If you are an active trader perhaps that approach intrigues you.
To be sure there's an ironic logic to this day trading approach: You are buying low to sell high. I suspect this approach either requires buying an index-linked ETF or other blue chip companies that have a very high correlation with the market. Small-caps would not work for obvious reasons.
For the 99% of folks who either can not successfully trade or don't have the capacity to engage in such a program, the sensible approach is to disregard the zigging and the zagging of the market. Business value doesn't change in that fashion so why should you let the market serve as a proxy for business value in the short run? Don't take it from me, look at some of today's best investors and what they are doing.
Carl Icahn's conviction is names like Dell (DELL) and Chesapeake Energy (CHK) is not being swayed by Mr. Market or even what analysts are saying. He's not looking at these companies as little pieces of paper but as large businesses with tremendous potential under the right conditions. And he's willing to wait. Bruce Berkowitz at Fairholme was all alone a couple years ago which his huge investments in the financial industry; he still remains committed despite what Mr. Market says or does.
Bill Ackman has two opposing bets, a short in Herbalife (HLF) and a long in JCPenny (JCP), which have not been good to him. In Ackman's case, there is a very good argument to make against both of those positions but he's not deterred. He recently commented that his shorting of MBIA (MBI) took years to play out and was painful before it became profitable.
Retailing is a very tough business but I still like micro-cap retailer ALCO (ALCS). I think management is doing all the right things and shares trade for less than one-third of book value. A lot of good things can happen in such a scenario. The market volatility doesn't affect my interest in the company.
Where market volatility should come into place is the effect it puts on price as it relates to whether or not a stock is undervalued or overvalued. And I think it's evident what investors should be doing under those conditions.