Regarding compleat anglers and compleat pragmaticians it is well to remember that 15% of the fishermen catch 85% of the fish.
While our colleagues are cutting bait we have the hook in the water, knowing that patience is rewarded and bait cutting is not rewarded until the fish is in the pan. Specifically, is the S&P priced at 13 times this year’s earnings (earnings, who’s got earnings? Enron? Who tells the truth about earnings?) or 19 times last year’s earnings (which will probably be restated). Frankly, like Clark Gable we could give less of a damn. When the heavy money decides to do something about earnings they will do it in the market and we will be watching like paranoids watching a friendly cobra.
As we said in Zen Simple Beat the Market with a Ruler It seems innately absurd to us to hold a finger up to the wind (or the statistics chart) and say this stock is worth 95.50 when the stock is lying on the floor of the exchange saying 95.25, 95.125, 95….
But enough of advanced logical positivism– Contemplate instead the extremely pragmatic question of when to add on. Adding to winning positions is an article of faith with us. (Not pyramiding — that’s another kettle of fish.) There are certain times when the book (ours) says you should add on: when corrections have played themselves out, when there is a breakaway, when there is a new high… Often the market responds to these sincere and good faith efforts by sticking prices in your ear and giving you the Bronx jeer. Nonetheless, like everything in stock trading you have to take the trade when offered, because otherwise you wind up like so many of our confreres –with a wad of cash while the market is making new all time highs.
So we added on, gingerly last week, as we noted. These add-ons can be gingerly — i.e. scaled in as tranches. But even a small add-on builds your confidence and power. And you can always put a tighter stop on add-ons. We only recommend this when the add-on doubles risk, or some such. We will be doing some adding on next week, depending on conditions, and will report.
Meanwhile a market in new high ground has no resistance overhead, as we said. Maybe it has resistance at 30 times earnings. The same people who wouldn’t buy at 20 times earnings won’t be buying at 30 times earnings. Meanwhile they are earning 2% in Tbills.