Enjoy the Rally but Cull the Herd

Resolving the dispute is a relatively simple matter of carefully considering timelines and expectations. Technicians tend to respond to shorter-term market moves (like this week's!), while economists ply their trade over much longer time frames. I find that combining these two dissimilar disciplines allows me to develop a view toward both the immediate and distant futures.

Despite the up-down action this week, the technicals favor an upside bias over the next month or so. There are numerous reasons for that, as I've outlined in Part 3 of my aforementioned Cult of the Bear series.

So despite the negative economic future, with all these positives and the indices near new highs, why have any concerns beyond the near term?

The answer lies between the long and short term. Over the intermediate term, there are numerous technical warning signs. I use these signals to help alert me to a possible change in trend or character of the markets. Investors ignore these signals at their own peril.

That all said, investors want to participate in this current action, especially since they know that the last leg up in a bull market is often the most profitable. Recall that from October 1999 to March 2000, the Nasdaq doubled. But there is good reason to be concerned too.

Short-term bullish, longer-term bearish, intermediate-term confused. What's an investor to do?

Cull the herd.

Get Darwinian on your portfolio.

Dump the weak, the sick, the lame, the infirm as they will only hinder your portfolio's ability to survive any subsequent ice age. Your holdings must evolve, your stock selections must prove their adaptability.

So how does that play out in real life?

Any stock you own which has failed to participate in the recent rallies should be aggressively sold.

This is both a defensive maneuver as much as it is a way to raise cash for the inevitable buying opportunity -- whenever it may emerge. My guess (and it's only a guess) is that the buying opportunity comes in September/October.

---

Barry Ritholtz is the chief market strategist for Ritholtz Research, an independent institutional research firm, specializing in the analysis of macroeconomic trends and the capital markets. The firm's variant perspectives are applied to the fixed income, equity and commodity markets, both domestically and internationally. Other areas of research coverage also include consumer, real estate, geopolitics, technology and digital media. Ritholtz is also president of Ritholtz Capital Partners (RCP), a New York based hedge fund. RCP is driven by the analysis performed by Ritholtz Research. Ritholtz appreciates your feedback; click here to send him an email.