Friday, March 27, 2009

Don't Be Fooled By A Speculative Market!

The behavior of the stock market is practically omnipresent.  Not just a salient topic of the financial news outlets, but now a hot topic of all news media.  It's wild girations and reports of relative value created and destroyed can be panacea to an otherwise dull day of happenstance for eager news outlets.  And news today is, of course, more entertainment than anything.  We want more drama!!

Be careful of what you "think" the market is telling you.  With the recent rebound of the market (21% rise in the DJIA to 7,924 since March 9), it is easy to think we have hit bottom and the good times could be back again.  Remember, the stock market has multiple "layers" to it.  At the base level, long-term investors invest in low relative value and scalable business models.  Then there is an overlying speculation layer, which is more remeniscient of a casino gaming table.  Speculators make short term trades on news and other events, which are really just psychology and emotions.  I believe the recent upward behavior in the market is just that ... investors trading into stocks on (1) some positive sounding economic news like new home sales and industrial purchases, (2) the illusion of a near-term impact of the various stimulus plans and (3) the following of an uptrend due to hype and enthusiasm.

Our ecomonic problems remain, and companies still cannot get the growth capital they need, and the housing market still shows a high supply/low demand imbalance, and the stimulus plans will take a year or longer to take effect.   Get ready for the speculators to start taking profits, and for the trend followers to turn and ride the other way.  

If you've been betting on black ... it might be time to bet on red.

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