An Investor's Guide To Springing Forward
We all deal with stress differently.
Some try to forget the recession and down stock market at the golf course, while others relax by working in the yard. For me, nothing drives away the stock-market blues like the crack of the bat.
The weather remains chilly in many parts of the country, but baseballs are flying over walls, infielders are turning double plays, and umpires are blowing calls. Whether we seek solace on the course, in the garden, or at the ballpark, signs of spring are everywhere.
I wish I could tell you that with the spring, a new bull market has bloomed. It’s possible, of course, though we don’t yet know whether the bear market ended on March 9. But if you remember three key facts about spring, perhaps you will feel a little less stress.
1 – It’s not summer yet
After a long winter, people tend to get restless when they see the weather improving. Spring fever is particularly dangerous for investors. Robert Frost understood this phenomenon when he wrote, “The sun was warm but the wind was chill. You know how it is with an April day.”
We like spring. It makes us feel good. And sometimes those good feelings can make us forget the caution we developed over the harsh winter.
If you have an investment strategy with a history of success, stick with it. The economy is showing signs of life, and stocks have rallied. But we continue to hold more than 30% of our buy lists in cash because …
2 – Seasons don’t change gently
The first day of spring is not the same as the first spring day. The Chicago White Sox’s opening home game was called off because the forecast called for snow in April.
Such dichotomies occur often in the stock market. Stocks can become particularly volatile during periods of transition, such as a rally within a bear market or when a bear market is laying the groundwork for a bull-market signal.
In recent weeks, stocks have been choppy en route to an impressive bounce from March lows. Whether this rally precedes another extended downturn or represents the first leg of a pattern of higher highs, more volatility is likely. Respect the trend, but don’t fear it, because …
3 – Temperatures eventually rise
I’ve been listening for months to people calling market bottoms. I heard that that Dow was supposed to bottom at 8,500, 8,000, 7,500, and 7,000. And there are always a few Jeremiahs preaching the gospel of Dow 4,000.
Of course, investors are best served by preparing for the bottom rather than trying to predict it. A Chinese proverb holds that spring is sooner recognized by plants than by men. Stocks will know what’s up before we do. Therein lies the beauty and the power of the Dow Theory. Dow Theorists don’t try to anticipate the market, but instead listen to what the market averages are saying.
The Dow Theory has value not because of its precision, but because of its accuracy. The pattern of higher highs required to sound a bull-market signal will never get investors in at the bottom, but it usually provides an accurate picture of the trend.
Just as May follows April, bull markets follow bear markets. Rest assured, we are paying attention. Just as the smell of fresh flowers tells everybody that spring is here, regardless of the calendar date, the Dow Theory will tell us when to put our cash back into the market.