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Wait for the downside catalyst

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February 18, 2011 – Comments (11)

I know a lot of you on here hate Cramer, but he said something last night (or two nights ago, I forget) that is spot on.  People keep calling him asking him if CAT has topped out yet.  He keeps responding by telling him this:

Sales keep growing.  Margins keep expanding.  Execution is still spotless.  Profits keep increasing.  If the business keeps growing profits, theres no reason for the stock to top off.

And that goes for the rest of the market.  If businesses keep getting better, why do people keep screaming for a pullback?

11 Comments – Post Your Own

#1) On February 18, 2011 at 1:06 PM, chk999 (99.97) wrote:

Markets don't go up forever. So a pullback is inevitable. The hard questions are does it happen after the market goes up 1% or 15%? And is it a 10% pullback or a 30% pullback?

If you could answer questions like that, wealth is pretty much automatic. 

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#2) On February 18, 2011 at 1:31 PM, Valyooo (99.43) wrote:

Well right, markets don't go up forever.  But my point is, just because a market went up a lot, doesn't make it expensive.  When the market plunged all the way down to march 09 2009, after it rallied significantly over the next few weeks, everybody said the market was way too expensive....it was still dirt cheap.  The market right now is going up because things are going great, not for no reason.  If a company keeps getting better, its earnings are probably going to match the increase in price.

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#3) On February 18, 2011 at 1:48 PM, chk999 (99.97) wrote:

Stuff seems pretty expensive to me right now. I keep looking for bargains and am not finding them. This is reminding me of 2006 a lot, which means buying at these levels isn't the best idea.

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#4) On February 18, 2011 at 4:02 PM, leohaas (32.26) wrote:

You are assuming the market is efficient. That assumption is dangerous. It is only mostly true most of the time.

In addition, there is people who are short. And then there is the gloom-and-doomers. They want the market to go south.

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#5) On February 18, 2011 at 4:55 PM, dragonLZ (99.54) wrote:

And that goes for the rest of the market.  If businesses keep getting better, why do people keep screaming for a pullback?

Because market starts changing direction (up or down) well before the change is detected through earnings, margins, etc.

You are asking a similar question to this:

(It's March 2009): Why people are screaming for bottom when businesses are still losing tons of money (or going bankrupt), still laying off bunch of people, etc.? We are nowhere near the bottom. (And many were this question at that time).

 

I'm not saying market is about to crash (not even close), I'm just saying if you are waiting for the earnings to show you that the party's over, you'll probably be among the last ones to leave.

Same is true for people waiting for earnings to improve to get back in (some are still waiting...).

Good luck.

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#6) On February 18, 2011 at 5:02 PM, awallejr (83.80) wrote:

1-2 years ago you could just throw a dart at a chart and it would pretty much turn out to be a winner.  Now it is becoming a stock picker's market.  So choose wisely and monitor to make sure the thesis for buying the stock hasn't changed.  I am in the buy and accumulate school. Most people simply won't get wealthy trading in and out, because timing is everything.

If you really listen to Cramer he will have you out of winning stocks way too early. Instead just use trailing stop losses, you are protected on the downside and still the sky is the limit on the upside.

As for a pullback, if you are a bull you want them because that makes the longterm bull market healthy.  3%-10% corrections at the most.   If it dropped 30% that's not a correction.

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#7) On February 18, 2011 at 6:33 PM, Valyooo (99.43) wrote:

Eh, I guess I didn't get my full intent across.

Its not that the market is not a leading indicator (it is).  What I mean is that there seems to be two camps of people

1) Doom and gloomers who can just bring the market down 2) bulls who are in it but think its all a bubble and inflated and fake

It doesn't seem that theres any bulls that are bullish because of how good earnings are and the economy picking up and the world producing more.  It seems people are either bearish or only bullish because of bernanke.  So everybody calling for the correction (not everybody, but damn near everybody I have seen) seems to be saying "This market is a bubble, it has to pull back" but they have been saying it since late september...at which point, there was still a crapload of bargains.

I don't listen to Cramer for stock tips.  I just like his analysis of the overall market, its pretty accurate.

I also understand why I want a pullback...I have been wanting one because I have more cash now, but I am perfectly fine with it going up.  anything over 15% is not a correction (or 10% depending on your view).

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#8) On February 18, 2011 at 7:24 PM, awallejr (83.80) wrote:

You are fairly new here so you missed some real rip snorting arguments between bears and bulls last few years.  But I disagree with just 2 camps.  My position is pretty much known.  I've been a bull day one.  After the crash I was in the slow but steady rise camp and I am still in that camp. 

As long as profits continue to rise overall the marekt will continue to rise.  But sometimes the market gets ahead of itself and needs to correct. And sometimes the economy gets nailed with a recession and the market corrects hard.  But in the end it is ALWAYS about profits.

some fun links:

http://caps.fool.com/Blogs/18-reasons-well-pull-back/201013

http://caps.fool.com/Blogs/cit-bankruptnow-the-entire/267736

http://caps.fool.com/Blogs/welcome-to-the-what-the/358320

http://caps.fool.com/Blogs/i-propose-a-radical-friggen/539932

see links in comment 25 on last link.

 

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#9) On February 19, 2011 at 12:52 AM, Valyooo (99.43) wrote:

Yeah, I get the general cycle, I just don't know why people think we are way overextended...I don't think the market is THAT expensive, especially compared to growth rate.  We have double the money we did in 06 in M2 and we still aren 15% off the all time highs for the spy.

Thanks for the links, I will check them out right now.

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#10) On February 19, 2011 at 1:04 AM, Valyooo (99.43) wrote:

Wow, you annihilated Alstry.

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#11) On February 19, 2011 at 1:29 AM, awallejr (83.80) wrote:

Yeah he surrendered in the end and just tries to schill his website now.  I don't think we are overextended.  As long as profits continue to rise the market will.  Once they turn south, the market will. That is why listening to conference calls and forward guidance is important. I generally use a 15 P/E multiple when I consider stocks (though commodity stocks are a different ballgame).

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