Rev Shark:
The Bottom Will Come, but Don't Try to Call It
1/24/05 8:35 AM ET
"My success just evolved from working hard at the business at hand each day."
-- Johnny Carson
Trading the stock market for a living is a bit different than most other jobs, because success isn't always a function of working hard and staying busy. In the stock market it is extremely important not to be active at certain times. When the market is not favoring your particular style of trading, staying busy and working hard at making trades is counter-productive.
For ambitious, hard-driving investors who enjoyed a solid year in 2004, it can be tremendously frustrating to sit idly by as they wait for more favorable conditions. Many are intent on trying to catch the very moment that the market turns. They react swiftly to the first sign of improvement in the market action, and over and over again they end up being too early and are stopped out for another loss.
The psychology of the stock market encourages us to be impatient in seeking out a bottom in the market. Most of us prefer to be active rather than sitting around doing nothing while we wait. The bias toward staying busy pushes us to act prematurely. "Boredom" trades are often a costly way to spend our time in a poor market environment.
There are other factors at work that push investors to overanticipate market bottoms. First, traditional Wall Street has a strong bias toward keeping us fully invested. Folks who are holding cash are more inclined to withdraw it, and that is not something that mutual funds and brokerages want to see.
Second, being a "master of market timing" is another reason many market participants err on the side of being too early. If you are going to nail the exact bottom of the market you have to be anticipatory. You can't be the "master of market timing" if you wait until there is a clear bottom in place and things have begun to turn back up.
It is very tough for most of us to stay patient and resist this temptation. Serial "bottom-calling" becomes a plague in a market like this and can cost you a lot. It is extremely important to focus on protecting capital right now. If you are going to play the bottom-calling game then make sure you are very aggressive at cutting losses quickly.
Sooner or later the market will turn back up and produce a sustained rally. When that happens there generally is plenty of time to get on board. More often than not the cost of being a little late to the party is far less than trying to catch the exact moment that it starts. Stay patient. This market is not healthy.
Once again we have a very tentative start to the day. Oil is trading up as winter storms slam the Northeastern U.S. Overseas markets are showing little life. We have a lot of earnings reports due this week but many of the heavy hitters have already reported. There aren't a lot of news catalysts right now so that will keep market participants cautious.
Gary B. Smith:
