What stocks to invest in –
on the wheel or off?
Japanese financial institutions have a reputation as being pretty awful stock market investors. My experience is that this reputation is well-deserved. Still, there’s an old-time Japanese stock market saying that I like a lot.
It’s that trying to trade based on the daily movement of stocks is like being on a wheel that’s spinning rapidly. If you stay on the wheel, you won’t be hurt. If you stay off the wheel, you’re safe, too. It’s only when you try to be on the wheel sometimes and off the wheel at others, jumping back and forth between the two strategies, that you can do big damage to yourself.
Most of us are (I hope) off the wheel with the bulk of our savings. We lay long-term plans that we review periodically and mostly own index-like products. Some of us, though, myself included, like to have a small amount of our assets that we actively managed. Even so, we don’t want to turn into day traders, who are totally consumed with life on the wheel.
studying the spin
Nevertheless, there are some days where price action can be highly revealing because trading is very emotionally charged. Sometimes buying and selling are motivated by greed. More often, fear is the driver. In either case, however, traders show their most deep-seated beliefs. Such days are also typically marked by wide swings in the prices of individual stocks, and often by sharp intraday momentum reversals for the market as a whole.
Yesterday was that kind of day, in my opinion.
I think anyone interested in actively managing part of his own holdings should look carefully at how each active position performed yesterday, both in morning trading, when the S&P fell by 1.5%, and in the afternoon, when the index rebounded to close up slightly for the day.
Of course, company fundamentals and price are the key long-term determinants of investment success. But seeing what the market thinks can’t hurt, either.
what to look for
- The ideal pattern to see in an individual stock would be outperformance during the decline, followed by outperformance during the rebound.
The worst would be underperformance during both phases. I’d begin to think carefully about my rationale for keeping this latter kind of stock.
2. Does a day like this signal a purging of market fears–and therefore the end of near-term downward market pressure? I don’t think so (not enough pain, either in time or in depth of fall). If it were, however, the strongest stocks during the rebound may well become the leaders during the next market up movement.
3. At the very least, though, the stocks that led the afternoon rally are probably the ones the market will continue to feel the most comfortable with when it’s feeling bullish. The ones that fell the least in the morning will likely continue to exhibit a defensive character (I was mildly surprised that Intel was one of these).
4. Follow-through over the next few days can add more evidence to conclusions drawn from yesterday.
– What stocks to invest in