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!

29 January 2011

Market branchings manifest decision points

Just now finished my review of the equity markets, an analysis I do each weekend when the lack of market activity provides me a clear mind and perspective. And while yesterday's decline was no surprise (with more decline to occur), I also expect typical seasonal strength to re-appear later in February that provides one last upside oomph into March/April. (The technical analyst's bane and lament: "One more rally!") Except...

Almost without exception, individual charts betray worsening technicals: most stocks begin to droop, many wilt, and a few have withered while still on the vine. Even Apple/AAPL, the portfolio darling for many investors, me included, likely has made its high trade for 2011 at $357. (After hours trade, post earnings report.) Perhaps the market rallies one final time into March/April, perhaps not. My unease comes from what might occur next for the markets.

Subscribers and regular readers know I have been raising cash for the past few weeks via liquidating my weakest holdings -- selling the comparatively illiquid stocks (bull market phenomena), the under-performing, those purchased as trades -- while maintaining my holdings in long term investments. But what does an investor do, what do I do, when the budding decline looks worse than I expected... worse than I prepared for. (30% cash at this moment.)

Please understand: I am no trader, but a long term investor. To quantify that difference, imagine a stock chart with price bars: you analyze intra-day price bars, if a day trader; you analyze daily price bars, if a swing trader. But as an investor with a time frame of 1 year and more, you analyze monthly price bars. Get the picture? Fewer bars = fewer signals. How much weight does an investor grant a given signal, irrespective of time frame? Combine that with my expectation that the high for 2011 would occur as an exclamation mark to the rally since the March 2009 low... and prefatory to a sizable decline, and you are up to speed with my dilemma: Buy, sell, or hold?

Well, okay, that dilemma is every investor's, not solely mine. And it prevails at all market inflection points. So I would like to clarify two more items:
1) While I often increase cash as a percent of my portfolio, I rarely increase it to 100%.
2) I raise cash as a method to swap over-valued for under-valued, risk for opportunity, not as a matter of attempting to time the market's oscillations. (Price = risk.)

But is this moment (the coming days and weeks) one of those moments? You know, like the summer of 2007 that led into the Crash of 2008? I look around and wonder, "What could go wrong (this time)...?"
● Perhaps another liquidity crisis?
● Another crisis of confidence (ala 2008) that rattled systemic confidence?
● The spreading unrest in the Middle East that demands systemic change? (The explanation provided by several market commentators for yesterday's market decline.)
● Renewed food riots, as commodity prices soar ever higher?
(Remember that, in a free market system, prices reflect the abundance or scarcity of an item; in this instance, a scarcity of food for the world's billions of people. And when do rising prices equal the canary in the coal mine?)
● Extreme weather conditions?
● Mass die-offs? (Already plaguing animals around the world.)
● You name the ill

My effort is not to hang the fabric of my concerns for the equity markets on the hook of geo-political problems (if this input, then that outcome); gosh, I am wrong too often (read: always) to claim any special insight. But I do wonder whether the coming decline (over the course of 2011) will be just another intermediate term correction, a speed bump on the road to higher highs... or of long(er) term proportions.

Which returns me to where I began. What portfolio decisions to make now? Especially for a person who transacts few buy decisions, and even fewer sells. I watch markets closely, trigger-finger ready to sell if markets and the world deteriorate and devolve anew. Which brings up one final question... What value is cash in a world gone haywire?

Your remarks welcomed.

Full Disclosure: Long Apple/AAPL
-- David M Gordon / The Deipnosophist


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