Rinse, Lather, and Repeat

Needless to say, this past week and a half have been tough for a stock market guy. So far so good, this is where active management can make or break. By this I mean that in times of market volatility (either rapid price movement up or down) is the best opportunity for people to make bad decisions. Fear and greed drive the markets to their extremes. At these two extremes are where people to make the wrong decision. One of my main themes is that people act about the same on average. Unfortunately, we all make up the average and that means that when markets are reaching extremes we tend to make the wrong decisions. Whether, selling at the bottom or buying at the top, people tend to all feel the same emotion and act about the same at the same time. This creates the common problem of selling just before the stock turn around. If on average everyone, sells at the same time because they can't take the pain of the loss anymore, there will be no more sellers and only buyers left and the stock will rise. The opposite is also true. As the euphoria of greed kicks in and we chase a stock that is rising higher everyone is feeling the same emotion and is buying at the same time. When this surge of buying dies out the stock will reverse and the sellers take the stock lower because there is a lack of buying to support the higher valuation. Rinse, lather, and repeat over and over again. We see this time and time again.

The question currently in the stock market is where are we going from here? Has all the bad news been priced in or is more blood likely to run? I believe, and have believed for quite sometime that we will test some lower levels. For months the experts have called for a bottom in housing, a bottom in financial, etc. just before more bad news comes out and the sectors take another dive. Despite my opinion, up until recently I found my self extremely long the market and was correct in doing so. The landscape is changing now and I will be reevaluating over the next few weeks. Reevaluating means taking small probing positions and various levels of support, either long or short. I identify the highest reward to risk ratio and enter a position at an area of support the stock is not likely to break. If it does I take a very small loss. Rinse, lather and repeat until a sustainable direction is present.