The market is leaving most scratching their heads in August.Â After a steep run in most sectors bulls are “waiting for a pullback” and bears are saying “the worst is yet to come.”Â Despite the fact that most agree it is counterproductive to “read too much into anything in August” they do anyway.
Volumes are low but mental energy being expended is very high as many investors look towards the end of the year and devise their strategy.Â After a dismal 2008 the desire to put up at least a low double digit return for 2009 is acute.Â Most missed buying the bottom in March but many participated in the second surge from May that tacked on another 15% or so.Â (The QQQQ is up about 52% from the March low.)
There’s almost a paranoia about either a) being caught in a major correction and giving up recent gains and b) being out of the market during a year-end rally that can easily lift it another 10-15%.Â Â Each time the market moves a few percentage points in one direction or the other the crowd leans in that direction.Â Â There are some risk management techniques that can help but investors worry about sacrificing returns to limit their risk.Â (We are using hedges and some options ourselves but to each his or her own.)
Taking a step back from all this helps to take in the big picture and avoid over processing the incoming information.Â The fact is that most of the market participants are simply looking at relative changes in business results.Â That’s why we had the huge bounce in March; things stopped getting worse at an accelerating rate.Â Â Now things are still getting worse but at a slower rate (as our U.S. president likes to say.)Â Â But what about stocks and expectations?
The key to stocks in our view are forward estimates and the YoY comparisons.Â Obviously as we get to the one year anniversary of the huge downtick in business we will have very easy comparisions and higher stock prices as long as expectations remain reasonable.Â But we are not quite there yet.Â The September quarter is a key period we still have to get through and this is what everyone is worried about.
Estimates for the September quarter look pretty conservative and certainly achievable. It doesn’t mean there won’t be a panic as investors fear how quarter closes come in.Â Once through September with inline or slightly better results the comparisons YoY start to get much easier with the December quarter.
The bottom line is that there is probably an upward bias to the market, at least the technology sector which we follow closely, between now and year-end.Â Trying to play a meaningful correction with just four full months to go in the year seems far too tenuous to me.Â It often seems that when everyone wants a pullback we are least likely to actually get one.
Going beyond year-end is beyond the scope of this post but no doubt we will go through at least one serious bout of whether the recover in results is “real” or “artificial” and if it can be sustained with or without government action, etc., etc.
As always it makes good sense to use hedges, limit risk and be fleet of foot in response to any material changes.Â Over thinking this phase of the market is one trap to avoid.
Stay focused on moving capital to the best long opportunities, hedge and limit risk where possible and pay attention to intrinsic value to make buy and sell decisions through year-end and it should be a very good return year indeed.
[At the time of writing Research 2.0 maintains a full portfolio of technology stocks and is using some options and a short position in the QQQQ as a hedge.Â These positions can change anytime and without notice.]