The main characteristic of equity markets right now is volatility.
If you take a look at a daily chart of the S&P 500 Index since the beginning of 2009, you can see it immediately. The S&P bottomed in March 2009, then played the bouncing upward game for most of the rest of the year, looking like a Slinky toy going up the stairs rather than down.
After the January 2010 correction, the Index got back on track in February and rallied beautifully through the end of April.
At that point, the bears got a grip on the market and pulled it right back to its February lows.
But the more important thing to see in the S&P chart is that the intraday swings got much, much bigger, indicating a growing disagreement between those who think the market will go up more and those who are betting that it will go down.
Volatility is what you get when you have a devoted group of market optimists fighting it out with an equally committed group of pessimists.
I won’t go through the competing scenarios that each group paints to support their vision of the market’s future. The scenarios for both a major market meltdown and another big rally make perfect sense.
But one of them has to be wrong, at least in the short term.
There are actually three possible ways the market can go from here. They are up, down and sideways, which would mean more of this hacking around without a central tendency.
If you feel yourself drawn to either the bulls or the bears, the optimists or the pessimists, and if you’re moved to put a lot of money behind your bet, here’s my advice. Don’t.
Remember what I keep telling you: The market wants to take your money.
If we get a new rally in the stock market, it’s likely to be a relatively narrow one, with more and more money pouring into the most popular names. And for subscribers to our growth newsletters, Cabot will be happy to tell you what those names are.
We will also be happy to tell you when to get into cash if the market heads for the deep end.
So try to be like a good World Cup goalie. Ignore the head fakes and the temptation to anticipate what’s happening. Be patient and wait until the real move becomes clear. Then react with purpose.