There is nothing I’d like better than to begin a tirade on some great stocks to that will supercharge your portfolio right now. However, my obligation to tell you the truth supersedes any such urge.

I have been successful trading the markets. However, there is one thing that I wish I had learned when I began: knowing when not to trade can be twice as important as knowing when to trade.

The solid gains I made throughout my early career could easily have transformed into obscene profits had I grasped the concept of resisting the unnecessary trade. This can be difficult for any investor, much less myself in the infancy of my trading days as I stared at Nasdaq level 2 screens for nine hours per day. It can be like sitting at a roulette table in a casino with a pile of chips and trying to refrain from betting.

The coupling of current market events and the probable superstition that will be bred from historical tendencies could make this casino stop flashing so brightly.

Learn to sit on your idle hands.

Do you have a trillion dollars? Me neither. Neither of us would be looking at this screen.

However, that’s about what you would need to move the markets at this point. Since this is not a reality, we must submit to the fact that not every day is the time to buy.

This is common sense, but – particularly in the type of market we find ourselves in – it can be difficult to tranquilize our trading muscles. After all, many investors’ portfolios have seen losses that have wiped out two years of exciting gains.

That being said, there are certain stocks that can still perform if the market tumbles. However, I’m not particularly in love with anything right now that I haven’t already touted in my recent articles.

I have countless investment strategies based on what the market is giving me at any given moment. When I’m thinking long term, I consider myself an aggressive value investor. I like to buy beaten-down stocks when the only thing that has really brought them down is the market itself.

Before you look at the chart below, understand that I don’t want the market to fall. I don’t want the general population to lose money. I want everyone to be happy, hold hands, and thrive in broad-market Candyland. Sigh.

The S&P 500 is not in a bullish trend. No gumdrops, no candy canes, no gingerbread men.

From its closing price today (Wednesday) of 1,274.98, the S&P 500 could gain more than 75 points and still be in a downtrend. Economic news isn’t getting much better. The credit crunch is notably worse than the early 90s, and the unemployment rate is creeping up on 6%.

Sure, oil is off 25% from its highs… but during that time the S&P only rose 6.1%. Choke, cough.

And this is why I want to wait.

The hunt for red in October

October has been home to some of largest stock market declines, with our favorites occurring in ’29 and ’87. One theory is that the anticipation (and superstition) of this is what has made September the worst performing month for the market indices since 1926. In other words, get out before the chips hit the fan.

Obviously a market crash, or for that matter even a decline, does not occur each October. That would be an absurd statement. However, if all actions the market took made logical sense, there would be no mispricing. After all, a diamond is only worth something because the general population thinks they are worth something. Two and a half carats are worth less than a glass of water to someone stranded in the desert.

This superstition, ridiculous or not, certainly cannot help the situation amongst all the other indicators pointing to a market that is very ill indeed.

So there it is. I think the market is going to fall, or at best flutter. I don’t expect the S&P to bottom out at 800, but I’m just not ready to buy the broad market yet. And, as it falls, I will look for more buys in companies such as Home Depot (HD) or Lowe’s (LOW), or maybe even General Electric (GE). Each of these stocks is either breaking or dying to break their recent downtrend. Should the market turn down further, I hope to see these stocks get even cheaper so we can all get a great price on some companies that will probably be around for quite a while.

One last vote for caution

Shall we add some more uncertainty to the mix? As if we needed another reason, a presidential election is looming in November. Because of national issues as well as world events, there could be major implications for companies in many different sectors.

Due to differing policies between the candidates, some stocks I’m staying away from before the elections include companies such as Allied Defense Group (ADG) because of military policies, Exxon Mobil (XOM) for taxation and energy policies, StemCells (STEM) for stem cell research, and possibly a myriad of drug companies because of healthcare policies.

Superstitious or not, I’m keeping my fingers crossed for a turnaround sometime next year.

John K. Whitehall
Analyst, Oxbury Research