Beat the mind games

For a moment there it looked like the worst was over. Some saw the big stock market rally on Thursday, April 5 as a catalyst that might finally turn things around. After all, it was the second biggest one-day rise in the history of the Dow. And Nasdaq did even better in percentage terms, jumping almost 9% on the day.

Alas, it appears to have been a one-day wonder. By the next day, the markets had returned to their old ways. The Dow dropped 127 points to end the week in net loss territory despite the big Thursday move. Nasdaq gave back 44% of its bounce.

It was a similar story in Toronto. A nice gain on Thursday turned into a 97 point loss on Friday to bring the TSE’s week to a close with a loss of 1.75%.

By now, this kind of volatility is old news. We’ve seen triple-digit swings so often in the past couple of years that we’ve come to think of them as normal.

They’re not normal — far from it. They’re an indication of a very sick market that hasn’t the vaguest idea in which direction it should be moving. Picture a drunk leaving a bar and staggering down the street. He doesn’t know whether his next move will be to turn left, turn right, or fall over. Anneither do we as we watch his uncoordinated movements.

Mixed signals continue
The signals continue to be mixed. The Canadian unemployment report for March is surprisingly strong. Meanwhile, the U.S. reports that layoffs are running at their highest rate since the recession of 1990-91. Fed chairman Alan Greenspan continues to predict no recession but some detractors say he has lost his magic touch. Some analysts are calling for a rally in the second half of the year. Others forecast that the slowdown will continue into 2002. The U.S. Senate is obviously worried enough about the situation to pass a bill that, while trimming President Bush’s overall tax cut proposal, would put more money back into the hands of Americans this year, thereby stimulating consumer spending.

My own sense of the situation is that things are not as bad as the newspaper headlines suggest. But they could get that way if the public becomes convinced that hard times are indeed coming. Psychology remains the x-factor in this whole equation. There are a lot of mind games going on. If the administrations in the U.S., Canada and elsewhere can manage to keep public opinion reasonably up-beat, we have a good chance of toughing this out. Otherwise, the slide may continue for a long time.

Exercise restraint
We have moved into a market condition where there are many apparent bargains to be found. But investors should exercise restraint in snapping them up. A good strategy in times like these is to decide what you want your portfolio to look like when the turnaround comes. Identify the specific securities you want to be holding at that time. Then gradually start accumulating them, a little at a time. That way, if the markets go lower, you can take positions at even cheaper prices.

No one can predict the exact timing of a market bottom, just as no one can predict when a market will top. If you are an active trader, your goal should be to buy within 25% of the bottom on either side (going down or coming back) and to sell within 25% of the top. Anyone who can successfully master that strategy is assured of doing well over the long haul.

This article originally appeared in the Internet Wealth Builder, a weekly financial newsletter edited and published by Gordon Pape. For membership information: