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Tuesday, January 6, 2015

How Equities Recover from Sell-Offs

Yesterday was considered the first real trading day of the year.  We couldn't really count last week's low volume days.  There was plenty of volume on Monday.  Sellers, spooked by crude oil's continuing fall, with the price of a barrel breaking $50, hit the panic button and took gains.  Concerns about the Eurozone were on investors' minds as well.  The end result, a 330+ point drop in the DOW and 37+ point drop in the S & P.

Energy


I keep hearing that there is still a bottom to be had in energy.  I'm not waiving off this possibility.  Of course, it is quite probable that energy continues to fall.  Great investors are contrarian by nature.  They don't follow the crowd.  Waiting for a bottom is committing to the world view of the masses, not your own.


There are bargains to be had in energy.  The drop has been great for new buyers.  Indeed, check out the  XLE, the Energy Select Sector SPDR ETF.  Today XLE is selling for $75 a share.  This is only 3 points from its 52 week range low.  I also saw countless articles yesterday announcing the drop in individual stocks associated with this industry:



www.thestreet.com/story/13000049/1/conocophillips-cop-stock-falls-today-as-oil-drops-below-50-a-barrel.html?puc=yahoo&cm_ven=YAHOO

The Street had similar articles for Valero (VLO) and BP (BP).  Are these buying opportunities in the making?




Keep Your Eye on the Price

We can get really crazy as investors, trying to keep tabs and a handle on all of our domestic economic woes.  Add to this making sure you are abreast of the economics of the world, of our trading partners, and their political problems, and now you have an insane asylum of a market with participants in need of anxiety meds to stick around.

The market is made up of individuals and their peculiar stable or unstable psychology.  In times like this you have to become more robotic, machine-like, and just keep an eye on the price.  Know what is happening, but do not let it deter you from the winning formula for long term investing: If the price of an asset falls drastically, skillfully catch all of that downside for optimal returns while others sit on the fence.  Investors, as opposed to traders, are in it for the long haul.  We are patient and can wait for prices to swing back up.  We recognize the only pattern that truly exists is cyclical.




Will Equities Recover from Monday's Sell-Off?

Yes!  It may not be today.  It may not be tomorrow, but equities will recover from Monday's sell-off.  However, I am not predicting a bull case for 2015.  70% of the U.S. economy is made up of the consumer.  That's you and me, going out and shopping.  Falling gasoline prices has been like manna from heaven.  Many of us, the little folk, have had the chance to pay down our bills, credit cards, and debts, with the money we've saved at the pump.  Some of us have even started saving for emergencies and investments!  U.S. businesses should fare well.  Our Gross Domestic Product, GDP, should continue chug along at 3-4%.  I'm not seeing inflation spiking any time soon, in fact, we have the opposite, deflationary inflation and this may delay The Fed's short-term interest rate hike schedule.  Investors globally keep parking their capital in the U.S.  The 10-year US Treasury bond yield is 1.9%!  Are you kiddding me?  What's the safe-haven alternative...oh yeah, it's getting even less yield in Germany.  Their 10-Yr Bund Yield is less than 1%!




Bill-gross-says-good-times-are-over"When the year is done, there will be minus signs in front of returns for many asset classes." --Bill Gross.  "Gross said investors should hold high-quality assets with stable cash flows, such as Treasuries, high-quality corporate bonds, and stocks of companies with little debt and attractive dividends."


The Bond King

2015-stock-market--10--higher-but-plenty-of-volatility“There are so many data points that are going to drive volatility and disrupt the positive and almost complacent tone that we saw in the first half of 2014.”--Peter Kenny, Chief Market Strategist at Clearpool Group.

None of this and all of this matters.  None of it matters because if investors will it, a correction will happen.  If investors become rational or irrational, a bear market will develop.  The United States being the best country in the world for buying assets will not make one lick of sense if enough people decide to sell.  Psychology happens!



All of the above matters because traders/investors are like some of my colleagues at school, reactionary in nature.  Little Jose flips them off in class, and instead of attempting to figure out why little Jose has done this from an objective standpoint, they'll escalate the event by yelling angrily, calling school security, and getting rid of the problem immediately.  Sound familiar?  Not saying there is never a time to sell.  Just don't succumb to the kitchen's heat.

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