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The Right Question
As the market continues to make new highs the arguments about whether stocks can go higher or the rally will end become more interesting. As usual in any debate about the market, both sides can make a great case. There are a number of factors that I could point to that suggest stocks have room to run but there are also a number of troubling signs on the horizon that could stop the rally in its tracks. Investors almost always get drawn into this debate and most of the people I talk to are pessimistic that this rally can continue.
Professionals and individual investors always seem to want to know what the market is going to do, unfortunately that is the wrong question. There was a great article in the Wall Street Journal this morning that illustrates the folly of trying to predict the market. It quoted Doug Kass, a hedge fund manager who is almost always on CNBC, offering a mea culpa about being completely wrong about the market. In February he said he was as bearish as he has been in years in spite of the rally. Today he said “I rarely have been as mistaken as I have been thus far in 2013.”
The right questions are:
1. How are you invested based on what the market is actually doing? and,
2. How are you going to react to what the market is actually does?
Over the intermediate term the market is in an uptrend and over the short term the market is overbought. So, we are fully invested in our intermediate term models and holding cash in our shorter term models ready to put back to work on any weakness. If the rally continues we will continue to be fully invested in our intermediate term models and continue to buy into weakness and sell into strength in our short term models. If the rally ends then our intermediate term models will move to bonds or cash.