Less Forgiving Backdrop For Individual Stocks

Right here, right now is the dividing line between emotion and reason.

The market looks like it has been deteriorating in the last couple of weeks, perhaps in conjunction with the earnings season. Aside from the louder declines in Facebook (FB), Netflix (NFLX) and Twitter (TWTR) there seems to be a lot of stocks down 20-30% across many of the sectors.

There are a lot of top down threats these days that you can decide whether they are more noise or news. The headlines related to different stocks have varying degrees of sensationalism to them that again you can decide whether are more noise or news but a lot of stocks are churning and according to Barchart.com the advance/decline ratio has been generally getting weaker, not dramatically but has been trending weaker.

Today was another day where the tech stocks that lead the market higher over the last few months/years lagged behind. There are plenty of other data series and indicators that I believe to be indicating equities are on shaky ground. These sorts of indicators are not part of my process in terms of dictating top down portfolio action but I still believe in paying attention to.

In looking at the portfolio today there are some holdings that had a very bad day like Square (SQ). To the point above about some stocks being down 20-30% there are a couple that fit that bill. There are also some that are up in the short and long term. Client holding Philip Morris (PM) did very poorly for a stretch but is up about 13% from its low a month and a half ago. Pharmaceuticals is another group that did well today which isn't shocking, they tend to do well or relatively well when the market struggles broadly.

Look at your portfolio. Are there things that were up today? With a nod to stock market television in years past, are you diversified? An ongoing tenet here has been that if everything goes up together then there is a good chance everything would go down together which doesn't make for great diversification.

The point of today's post is about not succumbing to the potential emotion triggered when a stock does poorly. If you include individual stocks in your portfolio and have held them a long time and continue to be favorably disposed, look back at the charts. Go back one year at a time and go back for a long time. You'll find some big declines, very big declines.

Look at Amazon (AMZN) which some clients own outright by virtue of another advisor's practice I took over and which other clients own by virtue of its large weighting in the Select SPDR Consumer Discretionary ETF (XLY). It fell 90% in the tech wreck and dropped by 2/3rds in the Financial Crisis. Sure it would have been better to sell before both declines but anyone not selling before those declines and having the fortitude to endure did incredibly well.

What is your worst performing stock this year or this month or whatever? Do you doubt its viability as an ongoing concern? If so sell it now no matter what the price has done. But consider Caterpillar (CAT), it may be the best example for feast or famine trading.

Hall of Fame pitcher Dennis Eckersly calls some Red Sox' games and he has a bunch of very funny sayings, he really is very entertaining. Paraphrasing Eck, CAT will drop 20% just to stay in shape. I was clued into this reality about the stock back in the 1980's. The stock is down 18% since its high on January 22 and that's after moving higher in the last few days. It dropped 68% from peak to trough in the Financial Crisis, before that it fell 39% in the aftermath of the tech wreck.

Despite the occasional carnage, over the last 25 years which might be a relevant time frame for holding long term CAT has almost tripled up on the S&P 500.

If you have top down reasons to sell something, go ahead and sell it and if you really think that ABC or XYZ's decline means that it will go out of business then sell it. But it is crucial to discern when emotion is winning out over reason and discipline. In the course of holding long term, all stocks have periods where they do poorly, it goes with the territory.

When investors look back at some stock and say "oh, I wish I would have bought back then and just held," well for some stocks it is times like right now, like today where that idea unravels due to succumbing to emotion.

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