Familiar Crossroads

We are at a very familiar crossroads we've faced most of the past half year... I look over the earnings reports, earnings upgrades, product price increases in stocks I own for the portfolio the past few months, and I continue to love their fundamentals. They are executing. In fact many are getting "cheaper" as their fundamentals only get better. I pat myself on the back for solid stock picking. Each time the market gives us any peace and after it runs up the obligatory "early cycle plays" that the herd buys without thinking, these stocks who actually have good stories ramp up and reflect their superior underlying fundamentals (as opposed to buying Fannie Mae because the government will bail it out)....

.... but, 90% of the time the past 6 months individual stock market fundamentals are completely trumped by the market direction. I look back on my history with the fund and in the times the markets rewarded individual company fundamentals the portfolio has exploded higher. The rest of the time when "all stocks stink" or "all stocks are great" or "early cycle stocks are the way to go because thats what the playbook says" we lag. This has been the major problem with this environment - to do well 90% of the time, you have to guess the market direction; it has nothing to do with individual stock selection. And this is what makes this market the most difficult I can remember, even 2001-2002 when you knew everything would be sold off 80% of the time - at least it was consistent - almost everything stunk. And it would go in the same direction (down) month after month after month. Nowadays, we have 180 degree changes in direction literally every 3rd day. So the indexes actually hold up relatively well, while individual stocks get battered, and if you are not in a stock down 30% in the past 2 weeks (i.e. any financial, retailer) and pick the bottom perfectly, you miss out on the 25% gain that comes in the following 4 days. If you are a day early or late you miss out on half the move. So it is indiscriminate action and it works against stock picking.

So this is not a market that rewards my type of fundamental analysis or picking large macro themes. It rewards those with timeframes of hours (daytraders) who close out their positions every night. Or people with bipolar personalities and a magic crystal ball who can predict when the market will change 180 degrees based on a Ben Bernanke remark, a Federal Reserve bailout, a surprise intervention here, or a massive writeoff there.

That said, the last few days have been different and seeing many names in the portfolio finally get rewarded based on fundamentals is nice to see. But that sort of action has not lasted for more than 2 weeks since October 2007. So it continues to be tough sledding, but I continue to believe in all the concepts and themes I've been presenting. Even if the market refuses to stay with any concept for more than a week. When stocks react more to their underlying story rather than if the market is + or - 300 points each day, I believe the fund will return to a more consistent pattern of outdoing the markets by a significant degree. Like I said before that does not even require the market to go up (or down)... sideways or a gently sloping trend down is fine. But the 1200 points in 2 weeks moves up, followed by 1500 points in 2 weeks down, followed by +400 point 1 day move up, followed by -300 points 1 day move down, followed by sell all commodity stocks on Monday, followed by buy all commodity stocks on Thursday.... is not an environment that rewards any thought or analysis. It is just random swings from pure panic to greed.

So we are at another crossroad now... many charts of my favorites look very good and poised for a sustained move *IF* the market does not implode. And the problem is, some news from out of the blue could cause implosion at any moment. Or the move from denial of the economic problems to recognition. And suddenly all your nice charts with great companies with extremely promising fundamentals, mean as much as a hill of beans. So do you sell here, lock in all those recent gains or let it ride? Who knows. Which is why this market continues to be extremely difficult.

For now, I'll continue to remain bullish as long as we hold S&P 500 level 1350. If we break down below that, unfortunately we probably simply return to the random action we've experienced for months on end, when having a Magic 8 Ball is more important than stock research.