HAUKE: Research, not gut, should drive market decisions

Every one of us has used our instincts at some time or another. We can all remember having that feeling of being watched and, as it turned out, someone was there. Sometimes you do things without consciously thinking about them, only to discover later that you did the right thing.

I know a few traders who rely on instincts to make a living, but only a few. Most stock market professionals (including me) use some form of data before making decisions. Fundamental investors look at items such as balance sheets and valuation metrics. Quantitative and technical analysts use historical data (either financial or price-based) to guide them through the markets.

Using information instead of gut instinct is a huge advantage, especially in the modern markets, which are enormous and extremely complicated. The greatest investors I know all use time-tested principles and apply them rigorously in their activities. I have always believed there are several methods you can use to find success on Wall Street. The trick is having the right amount of patience to really make them work.

Since the stock market saw its last high April 23, the global financial situation has experienced a wild ride. Europe looked as if it were going to evaporate. Experts were telling us that U.S. debt burdens were going to bury our country, immediately.

Global stocks were selling off, hard. The picture was bleak. Any logical person would be excused for looking at the data and concluding that it was time to sell everything and head for the bunker. Any emotional person using their instincts would be excused for taking the same action. If you ask me, it sure didn’t feel right.

One thing we know from human history, however, is that feelings and emotions are one of the strongest impediments to successful decision making. Emotion can take someone to great heights and passion can keep us going onward through adversity. However, when it comes to making a decision to go either right or left, cold, hard analysis is usually the right thing to do.

I relied on some cold, hard facts to get me through the spring of 2010. I used historical indicators going back to 1932 to help me understand what to do. Anyone reading this column already knows my decisions. I believed that selling at the lows in May and June would prove to be a mistake over coming months. I thought that, at the very least, the market would rebound enough to provide a much better selling opportunity for those who think April was the beginning of a major bear market. This was not a gut-based move. The data clearly demonstrated an incredibly high probability that April was not a major top. I went with the data, and it proved correct.

Now that the markets have rallied (the Dow Jones industrial average has climbed more than 1,100 points in the last five weeks), the number of people who still don’t believe we are in a bull market is incredible. Business owners, employees, academics and many stock market experts are passionate about how negative things are now. They just don’t see how the market can go higher. People are so afraid of risk today that they refuse to take any. The fraidy-cat side of the boat is really crowded right now—much too crowded for me.

We’ve seen a strong rally over the past five weeks and maybe it is time for a pause or even a short-term correction. Listen to the facts, though. The facts continue to point to higher equity prices over the intermediate term. I’ll even throw in a gut call here. These markets might explode higher over the next few years. That’s nothing to invest on, but you should think about it.•

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Hauke is the CEO of Samex Capital Advisors, a locally based money manager. His column appears every other week. Views expressed here are the writer’s. Hauke can be reached at 203-3365 or at keenan@samexcapital.com.