This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Wednesday, March 24, 2010

Saddling a Bull Market

The market, after a brief correction, has turned up recently and demonstrated notable strength, even after its substantial rally since bottoming in March of 2009. However, lately many well-informed market technicians (e.g.: Corey Rosenbloom) have been sighting frightening similarities between the current rally and the market’s all-time nominal peak in 2007.

Similarities have been noted both in stock market charts, as well as among other indicators like the Volatility Index (VIX). While similar chart formations may or may not be coincidence, the VIX has demonstrated a remarkable amount of complacency in the financial markets.

Considering the pain investors have been subject to over the past couple years, it is incredible that the perceived risk in the market (as evidenced by the VIX) is as low as it is currently.

All of these things tell us that, though it has continued to demonstrate strength as of late, the markets are quite likely poised to head back down.

However, if the markets do head lower, which they undoubtedly will at some point they will, rest assured that it’s not the end of the world. Since the time of Christ people have been saying ‘the end is near.’ So far, they’ve all been wrong.

Unfortunately, people are cursed with short term memories. This works in many ways; complacency develops quickly, fear spreads when things are near their worst, and excitement catches hold when fads are near their peaks.

An example: A few months ago, when gold was near its highs (thus far) many people were screaming that it was going to the moon. You couldn’t turn on a TV or open a newspaper without seeing an ad to buy gold. At that time we warned that there was simply too much hype and the run in gold was probably near its end for the time being.

So far all those celebrities touting gold have been wrong. While they shouted that the dollar was going to zero, the dollar has rebounded lately, and is likely to continue doing so. In fact, what we are now witnessing is most likely the beginning of a long-term trend, which will see a strengthening dollar and resurgence in US manufacturing, as discussed in previous articles.

Periodically it’s good for people to step back and look at the big picture. When the markets change direction, for example, that certainly doesn’t mean that there isn’t money to be made. Investors simply have to smarten up, and dedicate time and energy to outwitting the masses.

Quite often, looking at the big picture is, or should be, a humbling experience (maybe that’s why it’s so rarely done). Keeping with our example of the markets; while many investors think they know how markets should behave, and trade as if trying to bend markets to their will, a change of perspective can prove helpful.

The best analogy that comes to mind, as related to investing, is that of riding a bull. Any perception control is simply your imagination; have no premonitions that you can make that beast submit to your will, they will only end in heartbreak. Instead, just hold on when you can manage, and get off when you’re not sure what you’re doing so you can re-center and saddle back up.

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