What makes a down day interesting–even for long-only investors, which is most of us anyway

I’m writing from about 10:30 am to noon, New York time, on Friday October 16th.

Although I have “down day” in the title of this post, I don’t really mean just down days.  I mean counter-trend days.  But, inevitable corrections along the way notwithstanding, I think the major stock market trend is up and will be up for at least the next year.  So I’m satisfied with the title.  You’d follow an analogous procedure for an up day in a down market.

What’s important in a down day

It isn’t so important that the day stays down, or ends down.  What is important is that some ugly counter-trend opinion that you can study and think about gets expressed in prices.

Two useful tasks

There are two useful things you can do on a day like this:

–you can “read” the stock prices to get an insight into what investors in general are thinking by observing what they are actually doing, and

–you can take your own investment temperature to see how emotionally involved you are in your portfolio or your stocks (that’s a bad thing).

“Reading” the prices

On a day like this, you should expect that short-term investors will take profits in sectors and stocks that have gone up a lot over the past few months.   You should expect profit-taking to be especially strong for sectors/stocks that have gone up sharply over the past short while–month-to-date, or even a couple of days.

On the other hand, although they may be dragged down again today with the rest of the market, you should expect stocks that have been poor performers and that people have been selling for an extended period of time to perform better than the averages.  After all, for these stocks, a day like today is nothing special.

Actuality vs. expectations

That’s the picture to expect.  What you should do is look for sectors/stocks that are not performing in line with the past two paragraphs.  Such stocks will probably fall into two categories:

serial clunkers (underperforming stocks that continue to underperform today–usually a very bad sign) and

very strong, continuing winner, stocks (usually a very good sign).

Your intention shouldn’t be to get an absolute, can’t-be-wrong reading on the market, but rather to notice what is happening that doesn’t fit–either with the typical market pattern on a day like this or with your strategy for the market.  You may be able to raise your conviction for some ideas and perhaps get an early warning of changes you need to make.

Turning to today’s market,

One thing that really jumps out to me is that although energy stocks have been the best-performing group in the S&P so far this month, and are up as a group almost 10% since the end of September, they’re down considerably less than the market today. Materials, another economically sensitive group, is doing unusually well also, although not performing as strongly as energy.  I think the important thing about both these groups is that they are bets on global economic recovery, without having to bet specifically on recovery in the US.

Another is Harley Davidson (HOG).  I haven’t owned this stock for years.  As I picture it, the company’s customers are almost all Americans.  They’re either biker outlaws or aging accountants/dentists who have read On the Road or seen Easy Rider too many times and are trying to relive–or just plain-old live–their youth.

The products are expensive and easily postponable purchases.  On the surface, the earnings they reported two days ago were poor.  Yet, after an initial dip, the stock was up strongly yesterday and is (so far) up again today.

I’m not really interested in buying the stock, although I’l admit to be contemplating buying a Harley t-shirt.  As you may know from Keeping Score, I lost my enthusiasm for the consumer discretionary sector at the end of August.  But here’s a consumer discretionary–really discretionary–stock doing well.   I’ve looked a F and scrolled through a series of retail names and all are weak today, except TGT and WMT.  Everything else seems to fit with a weak US consumer.  Still, HOG is a data point I wouldn’t have expected and is therefore worth thinking about.  I’ll have to be alert for any similar data.

Another notable stock is WYNN, which I own. It has been very weak over the past week and is underperforming today, too.  It’s trading in line with other casinos, but that’s cold comfort.  As a group, casinos are now doing worse than hotels.  I’m not going to do anything for now, but I’ve got to watch this stock more closely.

I could go on, but I’m sure you get the idea of what you should be doing.

“Know thyself”

The second thing you can do is examine yourself.  Are you willing to look at prices and perform the kind of check I’ve just been describing about the strategic layout of your equity investments?  Are you able to think about, and perhaps actually make, changes to your portfolio based on data you collect?  If so, everything is probably fine.

If not, if, on the other hand,  you become really emotional–you refuse to look, or are uncomfortable at the thought of  (even temporarily) loss-making investments, then you may have a problem.   It could be as simple as having had too much caffeine this morning.  Or you may have built more risk into your portfolio than you believe you should have, or are temperamentally suited to have.  Or you may have some stocks that, deep down inside, you know you should sell but you can’t seem to pull the trigger.  In any event, you may want to start from the ground up examining your strategy.  You might also want to read my thoughts on constructing a portfolio.

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