Wednesday, October 12, 2011

Do Not Chase the Stock Market Rally

As I noted several weeks ago, stock prices had fallen so sharply that a rebound seemed likely.  Furthermore, sentiment measures indicated widespread pessimism among investors, so the probability favored higher stock prices, at least in the interim.  This was particularly true for a number of high-quality stocks that had attractive valuations and dividend yields.

There indeed has been a sharp rebound.  The S & P 500 has risen 6% in the last five days, and the MSCI Emerging Market Index ETF (EEM) has risen 11%.  Good news from Europe is boosting stock prices today.  

This rally in stock prices provides relief, but I do not recommend chasing stocks now.  As I have emphasized repeatedly, one's starting portfolio allocation is crucial.  After recommending substantial cash reserves earlier this year, I favored moving cash into the stock market several weeks ago.  I would retain cash at this point, as volatility in share prices seems likely to continue.  It is always advisable to have cash on hand to take advantage of unexpected buying opportunities.

Steve Lehman

S & P 500:  1209

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