Saturday, May 8, 2010

Buy the Dips Or Sell the Rallies

[These thoughts were provoked by Gray's comment on my last post, the one about The Mood of New York.]

Now that everyone's mind is focused on the state of the world economy, and our own stock market, I want to add a few comments to what I said yesterday. There I quoted famed market strategist David Rosenberg, to the effect that the cyclical bull market is over, thus that we are entering the next phase of the secular bear market. He believes that the rally from the March 2009 lows was an upward correction in a larger bear move. For a summary of Rosenberg's views, via South African analyst Prieur du Plessis, see here. For a summary of Richard Russell's views, see Prieur's post here. (Between us I have a very high opinion of Richard Russell.)

Anyway, if we are entering the next leg of a secular (i.e. long term) bear market, then you want to sell the rallies. If you believe Richard Russell you want to be out of stocks, with the only exception being gold mining stocks. Russell would look seriously askance at the strategists who think that they are preparing for the bear market by dropping their asset allocation from 75% long to 50% long.

Of course, if you believe that this is just a correction in an ongoing bull market-- perhaps even a secular bull market-- then you want to buy the dips.

Not that it makes that much of a difference, but on this one I side with Rosenberg and Russell.

As for market psychology, my guess is this. Many people missed the rally from the March 2009 lows. They have been waiting anxiously for a pullback, a minor correction, to get back into the market. Thus, if this is a downward leg in a secular bear market, it will be accompanied by lots of commentators saying that it is just a correction, that the fundamentals are sound, and that you should buy the dips. In my view, you should not.

Bear markets, as Russell says, are in the business of luring you into their lairs, the better to separate you from your money. Beware the bear.

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