Market Crying Wolf (or Bear)?

As this week passed, many people judged that the market correction is finally over. The STI has recovered to 3205 as at Friday 22 Mar 2007.

I am, of course like many investors, glad that the market has recovered. In this episode, I have hopefully learnt to withstand market volatility better and not to panic when disaster strikes again.

And as I have said before, it is quite fortunate that I returned to the market much faster than I would have thought, after disposing around 50% of my holdings. Yet, I have not fully recovered from the peak before the correction. Last year, it took around four to five months from the May-June correction before my portfolio return to the peak during April 2006. Maybe this year’s recovery may come sooner or it may not come. I don’t know.

When I look at the 2006 and 2007 correction, it may seem like a correction on hindsight. Or metaphorically, it is like the market crying wolf. Yet, as the story goes, sooner or later the wolf appears but when it appears, it is most likely at the most unlikely time. At a time when people think that the market is crying wolf again. And then maybe the wolf appears out of nowhere.

This happened before in the 1999-2000 US market, where after the 1998 recovery, investors believes that any dip is a buying opportunity. Until the bear strikes in Mar 2000 and then it takes quite a bit of time before people realize that the wolf has finally come.

As I review the current market recovery, I realize that I become more prone to believe in buying on dips and therefore, more prone to the market crying wolf trap. That is, failure to recognize the wolf when it appears or before it appears. On second thoughts, perhaps I have a better chance to recognize the wolf as I adopt a bargain value investing style.

Due to my bargain value investing style, it is possible that I may run out of stock positions or stocks to hold when the market is getting very expensive or bubbly. This may enable me to be better prepared when the wolf comes. Yet this hypothesis hinges on the bear striking when the market is at a very expensive stage, Else, I will be equally likely to be unprepared for the wolf.

Well, let the market takes its course. As at now, I am fully invested and it may be time for me to hibernate till May, the release of quarterly results.