Perm-bulls have had quite a party the past few months. You can always tell the bulls that lost a ton in the bear market to March as they are the people most bragging about “gains” they have now “made” year to date. The fact that most are still suffering heavy negative return numbers over the past 1, 3, 5 and in some cases even 10 years is not a point most care to acknowledge. And now we have October. Hopefully something will crack one way or another this month: either through a bullish pick up in buying volume (at last), or by a bearish pick up in sellers. Prices and valuations are high here; very tough to defend on rational arguments unless we are going to see a strong rebound in consumption and earnings over the next six months.
October doesn't have to be a negative month of course. Momentum driven markets, even on low volume and wide-eyed hope, can go on longer than logical. We know that so far 2009 has been the steepest rebound on the lowest volume ever since 1930. This is quite an achievement. But it doesn't exactly give capital-careful investors a warm content feeling about the price risk at present levels.
We can see from market history that October has been a particularly volatile month in secular bear periods and particularly so when the previous months have seen a strong summer rally as we did this year.
If I got to chose, I would have October be the last downside test to the 2007-2009 cyclical bear market. We had suspected from the outset that this bear market might last a couple of years; this month would be the 2nd anniversary.
The best plan for thinking investors is never confident predictions or one-sided plans but rather a plan A, B and C:
A. What if the market rolls over 10-20% here?
B. What if it moves lower than that?
C. What if it doesn't pull-back but continues to climb?
Failing to plan for different outcomes is no plan at all.
Define your rule set now, so that you will know what to do no matter what way this goes.
Cory’s Chart Corner
“An explosive critique about the investment industry: provocative and well worth reading.”
“Juggling Dynamite, #1 pick for best new books about money and markets.”
“Park manages to not only explain finances well for the average person, she also manages to entertain and educate, while cutting through the clutter of information she knows every investor faces.”