Make This Schizophrenic Market Work For You

The schizophrenic nature of investors has recently been on bright display, as
90% upside days give way immediately to 90% downside days, and then vice-versa.
Over the past seven weeks, you see that the picture that started off as decline
has since become a bit more blurry: July 22 to Aug. 8: -16.8% over 11 sessions
Aug. 8 to Aug. 15: +7.6% rally over 5 sessions Aug. 15 to Aug. 19: -6.7%
decline over 4 sessions Aug. 19 to Aug. 31: +8.5% rally over 8 sessions Aug.
31 to Sept. 6: -4.4% decline over 3 sessions Now just looking at the stretch
from the Aug. 8 low to now we see an advance of more than 8%. So we have to ask
ourselves: Is this rally the important part of this picture, or is the 17%
decline to Aug. 8 the most important part? The bullish narrative holds that the
most important development in the past month is the series of tests of the Aug.
8 low that has resulted in a set of higher highs and higher lows. On the other
hand, the bearish narrative holds that the past month amounts to nothing more
than a consolidation known as bear flag a pattern that concludes with a move in
the original direction of the market, which is downward. Adding weight to the
bearish point of view is that bulls have failed repeatedly to follow through
significantly on any of their major advances, and even on the strongest days in
terms of points gained, volume has been severely lacking. Also, bulls have
really failed to break out any of their big favorite multinational growth
stocks, as Caterpillar (NYSE: CAT ), United Technologies (NYSE: UTX ) and
Schlumberger (NYSE: SLB ) are locked in weak patterns under their 200-day
averages. Only hotshots like Apple (NASDAQ: AAPL ), Amazon.com (NASDAQ: AMZN )
and Hansen Natural (NASDAQ: HANS ) are consolidating firmly at high levels that
show bulls still care, while the only other strong names are defensive names
like McDonald's (NYSE: MCD ) and Coca-Cola (NYSE: KO ), plus the gold miners.
Both sides have decent arguments, which is why the market cant seem to get out
of its own way. Supporting the bulls going into the rest of the year is the
potential for more deliberate monetary support not just from the Federal
Reserve, starting at its Sept. 20 meeting, but also from other world central
banks in Europe, Latin America and Asia. Moreover, while the economy is
struggling, and may be in recession, it is not falling off a cliff at least not
yet and could actually muddle through at this current modest level of activity
for quite some time. Supporting the bears is the plain fact that any serious
shock a Greek default, a Spanish or Italian debt blowup, a Middle East
conflict, another major natural disaster or massive terror attack would push
the global industrial machine and markets over the edge. Strong economies can
withstand shocks, but weak ones cannot. While the big picture is muddled, the
little picture is fairly clear. If you are invested in high-quality staples
producers (MCD, KO), tech innovators (AAPL, AMZN), and gold and gold miners, and
high quality corporate and sovereign bonds, there is plenty of liquidity to
maintain a positive posture. Most markets offer a differentiated set of choices
to investors. As an example, the 2000-2002 bear market was of no consequence to
people invested in small-cap banks, REITs and energy producers, which did fine
during that whole period. And even in the 1970s, the lost decade of my youth,
was fine for investors who stayed with energy companies. Conditions like 2008,
where everything went down together due to the terrible combination of tight
money and credit implosion, are very rare in market history. There are no
certainties in investing, only probabilities. For now, the high-probability case
is that investors who stick with the stronger sectors and asset classes and
avoid early bottom-fishing in the weaker groups and asset classes will be able
to weather the rest of this year in style.