How To Invest During A Sideways Market
It's too soon to know if the recent market action will lead to a full-blown correction. A herd mentality could set in, and investors could rush to sell, simply because they fear that their peers will do so as well. Indeed a fresh survey of investor sentiment showed more bears than bulls for the first time in nearly six years.
It's too soon to know if the recent market action will lead to a full-blown correction. A herd mentality could set in, and investors could rush to sell, simply because they fear that their peers will do so as well. Indeed a fresh survey of investor sentiment showed more bears than bulls for the first time in nearly six years.
If you see the percentage of bulls drop to just 25% in the American Association of Individual Investors' weekly survey, that will be a clear sign that it's time to buy stocks.
Investors Are Feeling Less Bullish Lately
Source: American Association of Individual Investors
Source: American Association of Individual Investors
Even as the market posts some scary dips in recent weeks, investors have become conditioned to use the pullbacks as buying opportunities. A "buy on the dips" strategy can prove quite fruitful, but as we saw this past week, a post-plunge rally on Thursday was followed by a fresh sell-off on Friday. If dip buyers get repeatedly get burned, they'll stop doing so. And that's when the market pullback could build steam.
Still, for investors who have the resources to track a wide variety of stocks they consider to be appealing, the market gyrations provide clear openings.
As the SP 500 was falling 5% from Jan. 22 through Jan. 29, a number of small and mid-cap stocks fell at twice or even three times that rate. In a market that has provided few entry points in the past few years, these pullbacks will be increasingly embraced as the indices fall farther from the 52-week high. The economy is simply too healthy to justify any major sustained market pullback.
Of course most small cap stocks have yet to deliver fourth-quarter results and issue 2014 guidance, so there's risk in pursuing any stocks that have yet to report. Instead, this is a great time to focus on stocks that have pulled back from recent highs and set up a calendar of their reporting dates. A solid outlook, paired with a still-constrained stock price, could lead to a chance for quick profits, before the market truly stabilizes and returns to these sold-off names.
So what's the short-term plan? Watch and wait. It's a good time to nibble at bargains, but there's no need to rush. If markets don't stabilize, then a steady grind lower could trigger forced selling as the levels of margin debt remain at alarming levels. As this recent Seeking Alpha article noted, margin debt rose nearly $70 billion in the last six months of 2013, to a record $444 billion.
Source: INO.COM Traders Blog
