The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

13 September 2009

Of meltdowns, meltups, and portfolio success

Despite the recent upsurge in prices, the market remains in its seasonal (summer) doldrums; that is, the market continues to oscillate within its base.

Yes, base. I realize most market commentators call repeatedly for a resumption of the bear market -- a plunge back to the lows, if not a sustained breakdown beneath those lows. But the bears have been wrong for 10 months now, as the market increasingly betrays its true direction, its winning hand.

Understand: Much of the selling that occurred during 2008, especially late-September through early-November, happened for many reasons, but its net result was a
portfolio blowout: a forced liquidation in the frenzied quest to raise cash during a liquidity crisis. That melt-down, amid the twin crises of liquidity and (lack of) confidence, is followed today by a melt-up as a sense of normalcy returns; stocks oscillate on individual fundamentals, valuation, and/or technicals. And, of course, the swings of the general market.

Can you
feel or sense it? The decline of Fall 2008 (Ha!) had become so emotional that our skin would horripilate at the mere thought of the markets -- and another disastrous down day. The market's resolute advance since then is one the bears repeatedly decry and declaim, as though the current up trend is, in and of itself, sufficient reason for the market to resume its decline, if not plummet. Perhaps, yes, typically -- price is risk -- but the markets traded atypically during the decline of 2008. And so one extreme begets another.

In essence, the market bounced off the lower boundary of its
high level consolidation; moreover, I believe the market climbs its clichéd Wall of Worry. Bad economic and fundamental news no longer propagates a resumption of the selling pressure, and individual groups and sectors begin to rise to the fore as they rise to all time highs. In the process, these groups and sectors become the market's leaders. Can you see them (rise)?

[Click on chart to enlarge]

So this is how it works:
1) Recognize that markets and individual stocks oscillate always;
2) Recognize those oscillations occur within trends -- up, down, or sideways;
3) The market averages and indices remain in their 12 years long high level consolidations

4) The market has traded sideways for many weeks, ~8-10 weeks, as it builds power for another upward thrust;
5) Individual sectors begin to out-perform on the upside;
6) Individual groups begin to lead higher;
7) Individual stocks within those groups and sectors bifurcate into those that trade higher, or base;
8) Many of those stocks in bases within leading groups within leading sectors should break out (up) soon, and lead higher the general market.

All trends die eventually, but until this one does, I want to own the leading sectors, groups, stocks; the market's leaders. You do as well. Especially because the market provides every hint that its up trend is nowhere near complete.

-- David M Gordon / The Deipnosophist

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