Buy, Sell, or Hold? When 'Foolish' is Brilliant...

"Before the beginning of great brilliance, there must be chaos.  Before a brilliant person begins something great, they must look foolish in the crowd." ~ The I Ching

What a difference one year makes!  This time last year (January 24, 2007), I noted in the post, "Nary Quite Contrary," that there was very little, if any, pessimism to be found among financial market pundits and participants and it was time to slowly and methodically move more conservative.  At the time, moving away from stocks seemed foolish -- but that's the point -- there is a time that looking foolish is actually wise...

Today, fear is certainly replacing greed as the emotion of the time but what would common sense and logic, as seen through the lens of philosophy, say now?  I imagine it will take another 12 to 18 months to answer that question but I will cover the present and past before looking forward:

What Things Look Like Today:

Dr. Brett at TraderFeed takes A Look at Fear and Uncertainty in the Stock Market:

The fear and uncertainty are understandable:  Opening drops of over 3% are quite rare in market history.  I looked at the first-hour changes in the Dow (change from the prior day's close to the end of the first hour of the next day) going back to 1960 and could only find 7 drops of 3% or more...

...in the short run, panicky markets can decline further.  Investors with longer time horizons, however, have generally done well by putting   money to work when panic fills the air. 

Charles Kirk, from The Kirk Report, had this to say:

I've seen panic a few times in my trading career and this isn't it.  Not even close...

We are oversold and VIX has jumped (that's good) and the bulls are going to get what they've been looking for -- i.e. a high-volume selloff at the open and subsequent intraday reversal.

The Rhyme of History:

Here at The Financial Philosopher, instead of pouring over balance sheets, economic indicators, or charts to give us clues, we simply look at history and make common sense decisions accordingly.  As Mark Twain so profoundly stated, "history does not repeat itself, but it does rhyme."  Without the use of fundamental analysis or technical analysis, history does a fine job of leading us, especially when dollar-cost averaging is employed ahead of pure "market timing..."

So what does history say?  The average Bear market (as defined by a drop in stock prices of 20 percent from the most recent high), lasts approximately 18 months.  Bull markets typically have preceded recessionary periods, which have averaged 17 months (as measured by 32 economic cycles from 1854 to 2001).  History will also have us know that a true market "bottom" is marked by pure fear to the point of panic and "throwing in the towel," called capitulation.  I suspect that point is much closer after today but probably not quite here yet... 

Looking Foolish in the Crowd:

Of course, philosophy (the use of wisdom before knowledge) plays a large role in our common sense approach here.  As I eluded to in the first paragraph of this post,  it appeared "foolish" to begin slowly moving away from stocks in early 2007 as the vast majority of market analysts and media pundits were high on stocks and the economy; however, history said the end was months, not years, away... 

Following today's feature quote, and to underscore yesterday's post, Quiet In The Storm, today is shaping up to be a day that is neither a time to "buy" or "sell" but to "hold" until it clearly appears foolish to buy... which is the best time to do so...  At that time, we will do the same as we did one year ago (except in the opposite direction):  We will slowly and methodically move back into the stocks that history has shown will do best in the beginning of the next cycle...

Stay tuned...

TFPAuthor, Kent N. Thune, QPFC, is the President and founder of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Advisory firm located in Mount Pleasant, SC.

Comments

[donna]

Having posted on chaos a few days ago, I recognize that kanji now... ;^)

Helluva day, huh? We knew it would be a good show! ;^)

[rorschack]

Thank you for your blog. I am a regular reader. Please keep up the entries...profound insight!

[The Financial Philosopher]

rorschack:

I appreciate the positive comment! I will certainly continue share thoughts as often as possible.

Cheers...