Don't get carried away by a big one-day gain.
Well, wasn't Wednesday fun? After a rotten August, September kicked off with a 2.7% one-day gain for the FTSE 100.
My online portfolio was a sea of blue, as almost every single stock notched up gains of between 2% and 4%, with Barclays (LSE: BARC) and Diageo (LSE: DGE) leading the pack. It's not often I make a couple of thousand pounds in a day, but I did on Wednesday.
Given the gloom lately, this sharp rebound will have surprised most analysts, with the exception of Motley Fool's very own uber-optimist Bruce Jackson.
I know what you're thinking. It's just one day. Today could be very different. As we've seen over the summer, a sharp lurch in one direction has generally been followed by a sharp lurch in the other.
And you know what? That's what I think too.
Let the sunshine in
On Wednesday, the economic clouds parted and golden rays of share price sunshine came streaming through. After weeks of gloom, it was invigorating. Like a bunch of lizards on a rock, we're bathing in unaccustomed warmth.
Tipsters and analysts have crossed the street to take taking a walk on the upside, and I've been tempted to join them. Enthusiasm is infectious, and I've had to fight the sudden urge to buy shares now, before markets rise another 2.7% in a day.
Toughing it out
Yet buying more stock is exactly what I'm NOT going to do. As part of my newfound investor resolve, I'm going to wait. Sentiment flips on the spin of a coin these days, and who knows whether it will land on heads or tails tomorrow.
After falling back at the start of May, stock markets have been high on volatility, short on direction. We've had several sharp moves to match Wednesday, but every time markets shot up, they almost immediately crashed back down.
Age of extremes
The question now is whether this volatile trend is set to continue, or whether markets are going to settle on a single direction, either up or down. It's a tough call.
I have never seen fund managers and stock analysts so extremely divided as they are now. Whether you are a bull or a bear, you will find plenty of people aggressively taking your corner.
Right now, SocGen Global strategist Albert Edwards is claiming the S&P will crash by more than 50% from 1,084 to 450 while fund manager Richard Watts at OMAM UK Select Mid Cap predicts a 30% upside.
So that's 50% down or 30% up. Choose your sides, ladies and gentlemen.
Time for a nice dip
Both are too extreme for me. Personally, I'm predicting a bit of up and a bit of down. But, I'm seeing some value in the market and I'm investing for the long haul.
If you agree with me, the trick is to buy on the dips, not the peaks, even if your emotions are raging at you to do the exact opposite. Buy when your watchlist is soaked in discouraging red, rather than encouraging blue.
You then have to decide what to buy.
Watching the defectives
As I've written recently, my portfolio is my watchlist. And I'm keeping a close eye on how my stocks perform both when the market falls, and when it rises.
I've noticed several things:
- Barclays, Lloyds Banking Group (LSE: LLOY) and Royal Bank of Scotland (LSE: RBS) are a bellwether for investor sentiment. They fall faster than the market on bad days, but rise faster on good days. They look like a geared play on recovery to me (if you expect a recovery, that is).
- Aviva (LSE: AV) looks increasingly sprightly when markets rise, and resilient when they fall. So does Prudential (LSE: PRU).
- GlaxoSmithKline (LSE: GSK) seems to be on a roll, rising even when markets are falling. And so is Vodafone (LSE: VOD).
- After a quiet year, and now the Gulf oil disaster is out of the headlines, Royal Dutch Shell (LSE: RDSB) looks to be stirring into life.
I'll be tempted to top up any of those, provided they dip enough and I can get a great entry price. I'm still betting they do, whatever happened on Wednesday.
More from Harvey Jones:
> Harvey has an interest in Aviva, Barclays, Diageo, Glaxo, Lloyds, Shell and RBS.
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