The Blog of Evermore

A Time for Caution

May 21st, 2010

Despite today’s rally, I think a little caution is in order for investors. I took a look at a chart of the DOW Jones industrial average during the depression era and one thing stood out. After the initial big drop, what would prove to be a sucker’s rally ensued that brought the average back up to around the point we recently reached (proportionally) in the recent bull market rally. The subsequent several years after this rally saw the DJIA fall two steps down for every one step up on it’s way to what must have been an excruciating fall to levels that no one could have imagined in 1929.

To be clear, I am a firm believer that no one can predict where the stock market is going to go next, but I also do not subscribe to the theory that you should not try to “time” the market. I have been sitting with about 2/3 of my money in cash since prior to the 2008 implosion. Although I increased my holdings beginning in December, I did so only marginally and largely by selling some securities and then buying slightly more of others. I guess you could say I believe in always having a foot in the market so that you can participate in any and all rallys, and to buy dips and sell rallys along the way, all the while keeping some ammunition on the sidelines for those golden opportunities.

Perhaps more importantly are the trades I haven’t made lately. I recently bought both Google and Goldman Sachs thinking they had been beaten down and represented a good long term buy (which they probably still do). But I unwound both of them at small profits only to see them fall further over the last week. I’ve also been eyeing EMC, AFAM and CLDX, but have thus far been rewarded in eyeing and nothing else. I think I mentioned in a prior post that I also let some of my Applied Materials go at $14.32 after they announced their most recent earnings. At the moment, that’s turned out to be a good move.

Today I decided to let go of 80% of my Dover Motorsports (DVD) at a loss. As described earlier, this was an asset play where the only value is their two NASCAR sprint cup races and their primary facility. However, with NASCAR losing popularity (as measured by attendance at events) and the poor attendance at Dover’s May 16th race, the value of those assets appears to be on the wane. Too much so for me to hold on for what may be a very bumpy era in world finances. The the only thing that will save the is a buyout and I’m not sure if that will come in this environment.

I don’t think anyone should ever be completely out of stocks, but I’ve decided to set some very aggressive limit orders on the downside in the event that we witness more meltdowns like we saw during the flash-crash. Besides that, I’m willing to miss out on some upside in order to protect capital. There will likely be much better bargains to come. Patience is crucial, albeit painful at times.

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