Investing vs. Trading vs. The Bottom

This is getting serious.  Another week, another massacre on Wall Street.  The S&P closed at 683, down 7% for the week.  The S&P is now down 56% from peak, reached in October 2007.  And it has fallen for 8 out of the first 9 weeks of the year–down over 24% this year alone.  If the 2008 meltdown had never occurred, this year’s sell-off would amount to a severe bear market in its own right. 

The fundamental data this week were, unsurprisingly, weak.  Pending home sales, auto sales, and construction spending came in below expectations.  Initial claims remained at the mid-600,000 level first breached several weeks ago.  But the big story of the week was jobs.  Non-farm payrolls declined by 651,000 and the unemployment rate hit 8.1%, the highest level since 1983.   What’s scary is that the momentum of these losses suggests that the worst is yet to come–there is nothing on the horizon that points to a decline in the rate of such job losses.

The technicals seemed to have worked well.  When the 750 support level broke down, the path of least resistance was down, and the market behaved as expected.  In fact, the techicals have been pointing downward for quite some time now, and simply being short the broad market would have paid off handsomely. 

So the inevitable question of “where’s the bottom?” seems to be on everyone’s mind again.  For almost half a year, too many market analysts, money managers, and writers have been calling bottoms, only to be burned–over and over again–as the market continued sliding downhill. 

The problem is that nobody can nail the absolute bottom.  Unless we get lucky, the only way we’ll know we’ve hit bottom is by missing it.   That means the bottom will be called, with the benefit of hindsight, while most prudent investors miss the initial movement up in prices.

Traders who, unlike investors, seek to realize gains over short time horizons (days or weeks) are due for a technical bounce.  The markets, by most technical indicators, have become very oversold.  Traders can jump in, grab 5% to 15% gains, and jump out at the first sign of trouble.

But investors, who seek long term capital appreciation over months and years, must stay out.  Prices have not bottomed, because they are still falling.  We are in a bear market, and buying and holding–today–is likely to disappoint.

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