Rational Investing: Serious investors stay aboard stock market roller coaster

The worst of the market’s decline may not be over, but there are many compelling values showing up.

For the serious investor, this is a period upon which you will look back in the next several years and ask, “Why didn’t more folks see these opportunities?” Certainly, patience, as well as discipline, will be required, but that has always been the case.

For the speculator, it’s a different matter. If you’re nimble – and fearless – the current volatility provides both long and short trading possibilities.

But that is not the arena in which solid long-term, after-tax, inflation-adjusted and ultimately, wealth-accumulation returns are garnered.

Some of our indicators of opportunity are based on fundamentals, some on technical behaviors of the time/price/volume measurements employed, and some simply on a combination of anecdotal evidence and intuition based on 40 years of experience in market ups and downs.

Reasons to ride

Let’s take a look at some of the reasons we are becoming increasingly enthusiastic about stock ownership.

We’ll start with what some might call a “gut feeling.”

At the market’s close Feb. 29, the Dow Jones Industrial Average component-pricing screen looked like a Valentine’s Day greeting – all red. Not a green “up” sign among all the 30 stocks in the DJIA. Is that a sign of anything? Is it the indicator of a massive bear market? Could it be a reflection of recession concern?

If it’s recession fear, then does that red screen imply that every one of the 30 components of the DJIA will suffer, whether energy, health care, agriculture or technology?

Or could it be a sign of capitulation, of throwing in the towel? I think it is the latter, a response of “I give up because I can’t figure out the market.” Not necessarily the end of the correction, but perhaps the beginning of the end.

On the technical front, investors may be approaching a moment of truth, the level at which the sages will call it a genuine bear market or the end of a correction. A bear market has traditionally been defined as a 20 percent decline from the high, a number that would place the DJIA at approximately 11424. Should that occur, technical traders would be sitting with buy orders in one hand and sell orders in the other, waiting to see whether that level would hold. Whether one employs charts, a crystal ball or tea leaves, it is anyone’s guess as to what will happen.

From a fundamental view, there is a tremendous amount of cash on corporate balance sheets, huge investor sums parked in money-market funds, and what can only be described as major sources of confident insider buying of their own companies’ stocks.

Still messy

I do not make light of the mess in the credit markets, whether subprime mortgages and predicted foreclosure rates, failed auctions for auction-rate securities, or the difficulty of marking-to-market securities held by many financial companies. Nor am I blind to the costs of energy and food that are pinching the consumer’s wallet. And certainly, I remain concerned about proposed changes in the tax laws and the politically inspired legislative solutions to economic problems.

Next month, I’ll examine the outlook for specific industries. In the meantime, be alert and, as I said, get your “buy list” ready.

Clark Davis is a 37-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company. He can be reached at cdavis@slia.com.[[In-content Ad]]