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Get Darwinian on Your Portfolio!

Of all the many battles on Wall Street, the one that strikes us as peculiarly absurd is the recent sniping between Economists and Technicians. Each of these specialties digests different data, and operates over widely diverse time frames. Dismissing each other’s work as if neither discipline has any value strikes us as exceptionally foolish.

Resolving the dispute is a relatively simple matter of carefully considering timelines and expectations. Technicians tend to respond to shorter term market moves (like today’s!), while Economists ply their trade over much longer time frames. By combining these two dissimilar disciplines, we can develop a view towards both the immediate and distant futures.

Despite the Red on today’s screens, the Technicals favor an upside bias over the next month. We are in the seasonally best period for equities, Indices are near new highs, and despite recent sector rotation, Momentum remains strong. However, the Macro-analysis suggests an eventual slowing of the economy is more than likely. Housing Sales are softening, the Yield Curve is Inverted, and the Consumer is slowly tiring. Inflation, at both the retail and wholesale level -- core and non-core alike, -- is still rearing its ugly head.

In between these two time periods, we see numerous technical warning signs: Low volume on Up days versus heavier volume when the market is down; An increasingly narrow advance, with less issues participating in the gains, and a small number of 52 week high list – despite the indices being at or near multi year highs – all suggest that a high degree of caution is warranted for equity investors.

What's an investor to do?

Darwin’s answer is to Cull the Herd. Now is the time to get Darwinian on your portfolio. The weak, the sick, the lame, the infirm – they will only hinder your portfolio's ability to survive. Your holdings must evolve, your stock selections must prove their adaptability. Its a case of relative strength – which is essentially the Technician's version of Survival of the Fittest.

Any stock you own which has failed to participate in the recent rallies should be aggressively sold. This is both a defensive maneuver, as much as it is a way to raise cash for the inevitable buying opportunity – whenever it may show. My guess (and its only a guess) is September/October.

As this "long in the tooth" cyclical Bull market continues to age gracelessly, your best bet is aggressively shoot those cattle who cannot keep up with the herd. The market is a cattle drive, and for the good of the herd, you must get rid of those who fail to keep up.

Adapt. Evolve. Cull.

If you have a philosophical problem with a Darwinian approach, then consider this a dose of Intelligent Design for your portfolio.

Tuesday, February 28, 2006 | 11:52 AM | Permalink | Comments (20) | TrackBack (1)
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Comments

Interesting, even as a short term option trader I notice call options on the Nas are not worth buying. With these short erratic moves it makes for an uncomfortable trading environment. I'm on the sidelines for now, and have been for awhile.

Posted by: TonytheTiger | Feb 28, 2006 12:45:13 PM