Finding a "balance", when the big boys play....
Disclosure: If I knew anything I would I be here? Stocks go up, stocks go down. I may or may not be holding any stocks in this blog and I may or may not decide to buy any.
I blogged this past Thursday that it appeared instituitonal investors were rebalancing, possibly end of quarter cleanup, or possibly taking a more conservative stance after a nice run on the markets. I commented that Biopharms were being hit particularly hard. jiltin pointed out that some techs had also been hit. (Facebook, Netflix, etc). Yes, the "event" rebalancing, redistribution, moving more conservative, hit internet based stocks, and other stocks that had been on the momentum "favorites" list and were starting to have high metrics that needed strong earnings to support. Of particular, however, the smaller cap Russell 2000 index dropped about 3% harder than the S&P.
This could be signalling a correction, but I also cautioned that those who stay in cash and fear a correction often miss out on more than they would lose. I am certainly, however guilty of this, preferring to hold my gains, limiting future gains, than see them disappear. It's tough to find a balance if you've invested in some of the down periods over the last 20 years, such as the tech bubble in 1999/2000 and the 2008-2009 dump.
Biopharm investor zzlangherhans pointed out in his pitch for Alexion Pharmaceuticals, Inc (Nasdaq: ALXN) that in a possible bubble investors should focus on stocks with revenue and potential. After a 20% decline some of these stocks would be safer positions once the concerns of Congress questioning Gilead's pricing fades as earnings are announced. I highly recommend his pitch, (even if you are not a biopharm investor). The part about bubbliciousness, has broader applicationss.
Unfortunately, the market is tossing the good with the bad currently. Maybe this will stop end of quarter. Some of the biopharms, however have tested lows, bounced, and retraced again. While not a mid-cap filling ZZ's example, Tekmira Pharmaceuticals Corp, (TKMR : NasdaqCM) dropped 20% on March 24th, when I mistakenly downthumbed it by accident, thinking I had caught a bottom. It rallied back up about 12%, leaving me deep in the red on my mistaken call and getting me some mirth from my Foolish Friends, only to drop another 17% on Friday. Oscillations with lower highs and lower lows are not a good sign for investors.
So what to do if this continues?
jiltin added to my last blog: "I have seen two recessions/corrections when rates are increased. we (individuals) must have proper strategy to protect the money/values. It can be beginning or next year or middle of next year. I am still confused what is the best strategy."
Again, I would add that predicting a bubble, as bbmaven, our "Top Fool" keeps in front of us is usually detrimental to making a profit.
I'm not sure what to do either, I spend more time trading, and less investing. Usually trading in a rising market can also reduce potential..... :) In an erratic, market, however, traders with some luck, skill, time, can do better than longer term investors.
I would suggest however, for those with conerns or shorter duration timeframes:
1. Don't try to catch a falling knife: Often stated, but more apt when lots of knives are falling at once. If I had attempted to catch TKMR in real life, I would have been disappointed. If I wanted to go long and average in, then perhaps the attempt would have been better made. The best approach, however, is to give a falling knife a few days to settle. One of two things will happen, it will bounce and those who thought it was a bargain would join the rally OR it will bounce and those who watched it drop the first time, but were still holding, will run and dump a few percent higher, and the stock price will drop further to the next resistance level. So you can wait, or you can buy and then set a limit under your buy price, losing a few percent if it trips, and trying again later. Buying an equity that has corrected hard once, gives some measure of safety.
2. Look for the strong in the sector. As ZZ noted. Look for the cream, watch earnings, metrics, and fundamentals. In a correction, these "should drop less". Averaging in can help.
3. If you're not sector preferenced, determine where the smart money is heading. I don't expect a large correction, barring a catalyst, because there is lots of money going into the markets. Interest rates will remain low, gold and silver are out of favor, money HAS to go somewhere. From this rotation, it appears, there might be a focus on utilities and energy. (Although I personally feel oil and natural gas are on the high end of their trading range).
4. Emerging markets also appear to be bouncing, but are higher risk for most investors. China got a rather hard hit the last few weeks. I closed my YINN and YANG positive on a bounce back up, but missed a chance to play Latin America. I took a look at Turkey, but this appears to be an "election rally" with questionable legs. (seem my pitch on Turkey Index: TKR). On the plus side, Russia/Ukraine tick for tact sanction nonsense on governement officials who could care less and turn the sanctions into bragging rights may be improving. I'm hopeful this will help all markets, especially emerging. See my blog on the Crimea Affair, where I foolishly play with 3X RUSL. Monday should show a trend back up, especially if Russia agrees to pull back troops from the Ukraine border, but investors need to stay carful as many believe Putin has additional "ideas" to help areas return to the Motherland.
That the Russell 2000 is dropping hard is a concern to me regarding longer term prospects. This cycle and move to safer utilities and energy is similar to moves in the past that precede corrections.
The BIOPHARM adjustments should be clearer going into this coming week. Resistance levels, lows, bounces should be easier to track for those technial traders. Personally I dabble in "blending fundamentals with technicals" There are certainly purists in both areas. I find that for technicalists that a trend/pattern is a trend/pattern until it's not. For Fundamentalists, things can change rapidly. The belief of some that a stock that had a high of so $20 a few months ago that is now $10 has a potential to double back up. It may be down 50%, but it was up 50% higher. This is a very dangerous way to attempt to place value on a stock. Past performance is ZERO recommendation for future performance. Find what changed before diving in.
The sky is not Falling Today, but there were quite a few tornados around recently as spring returns.....