Missing Rallies or Catching A Falling Knife?

The recent stock market activities has stimulated the urge for some to consider today’s rally as a possible turning point -that some of us may harbor the feeling of “missing the train”.

First, we do not have the power of clairvoyance as to really know when the market bottoms or peaks out. We do not also know where the short term market path will go, simply because we can’t read the emotional impulses of every market participants.

Even if my first lessons in the stock market had been in technical or chart reading, I eventually discovered that these are not foolproof, entirely depends on past performance (pattern and signal reading), and is a tool mainly utilized by brokers who are itching for trading churns and not measured risk reward output.

The chart above shows that during this bearmarket cycle, rallies have been significant (see ellipses) or V-shaped but they tend to give them away as the tide reverses.

New York Times’ Floyd Norris: For Stocks, It’s the Wild West, East ...

Can today mark the bottom? Maybe or maybe not. My impression is that for as long as the world markets continue to track the developments in the US and forced liquidations represent a significant driving force weighing down on global markets (see volatility chart from NYT's Floyd Norris), then a major bullish run on our markets or to any stock markets elsewhere will likely remain suspect.

Second, the important lesson I learned about the market is to understand the interplay of different cycles and try to project on how these are likely to impact prices of assets or securities and thus allocate portfolio according to our risk profile.

Yet looking at the how regional and other contemporary markets have performed none of which has yet revealed signs of conspicuous decoupling. All of them, World Index, Emerging Markets and Asia ex-Japan continue to manifest downside action and bias.

So regarding risk, a downside bias could still be the dominant driver, although global monetary conditions and idiosyncratic fundamentals may support or cushion the decline of individual markets.

My point is: to hinge on the idea of missing a train ride is tantamount to catching a falling knife.

We simply shouldn’t believe in “missing rallies” today simply because different cycles seem to converge and point towards greater downside risks than a precipitate recovery. Remember, bearmarkets draws in hopes of investors until they capitulate.

If a decision has been made to enter the market today, then the expectation should be geared towards the longer horizon since the risks is likely tilted towards more potential downside actions or the risks of a portfolio going underwater. For me, trying to bottom fish or picking market tops is a game of vanity.

We should get aggressive when the trend suggests of a complete reversal. This is like paying for an insurance premium, by buying high because they are likely to go higher and importantly because the risks are likely to be reduced.

Thus, conservative portfolio exposure and allocation is best recommended.