Is the current rally sustainable?

“Someone’s sitting in the shade today because someone planted a tree a long time ago”

“Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes because human behavior never changes”
~ Jesse Livermore

Investors, obviously, are forgiving people. Within a period of 18 months, the S&P 500, Dow Jones and Nasdaq reduced investors' portfolios by over 50% and the KLCI by about 40%. At that point, most investors hated the market.
After showing some good will for a comparatively short six months (March – August 2009), investors are once again falling in love with the stock market. Like a crafty mistress, the market has investors wrapped around her fingers once more. The old emotions are coming back – this time it’s mostly regret - for selling their winning investments too soon (and at a loss); for not staying put in the market or worse, for not investing when it was such an opportunity to do. A wasted crisis, as one would put it.
For sure, the performance numbers of especially emerging markets have been capturing investor's attention. Once again, emerging markets are outperforming the U.S. markets by a margin of 30% (since the March lows). The Emerging Markets ETF is up 43% for the year. Looking for greener pastures abroad, investors have poured nearly $11 billion into Emerging Markets.
Emerging markets four months ago
Previously on December 11th, the ETF Profit Strategy Newsletter uncovered an opportunity in China. At the time, the Shanghai Composite was down 60% for 2008. Observing that the Shanghai composite broke out of an eleven month trading channel, the newsletter recommended buying into China, unfortunately most investors did not do anything, and sat on the sidelines because they were too busy “licking their wounds”.
On March 16th, the ETF Profit Strategy Newsletter commented as follows: 'Similar to the U.S., many markets around the globe are in a bottoming process. While emerging markets should move in the same direction as developed markets, they offer more upside potential.
On hindsight, those were the best times to re-enter into the market. Unfortunately, most investors did not take the signal and continued to believe that the rally was temporary and was not sustainable. It has been six months now and sustainable or not, you decide.
One thing’s for sure, the US recession is ending. The recent Fed's decision to leave the funds rate at zero to 0.25 per is a signal that the economy is leveling out, but that the stance on interest rates will remain in place until growth is on a sustainable basis. It made overseas investors very happy with the announcement that the Fed will phase out the purchases of Treasury securities by the end of October this year.
It tells us the Fed believes the recession is basically over. At the same time, it made clear that the need to be certain of a sustainable recovery means we will not be seeing a rate hike soon. That's nothing but a positive for investors.
Investors’ behavior now
It does seem that investors have again forgotten the fundamentals of investing. Emotional decisions – the ones that have been missing out on the markets’ out performance are regretting and the ones who went against the herd are smiling happily to the bank. The markets never change – what goes down must come up and vice versa. Sadly, neither does human behavior change – fear, greed, regret, and herd mentalities always prevail. At this moment, which emotion is controlling your investment decisions?

What seemed like a dead end investment six months ago now seems to be a winner. And what seemed like the end of the world (or ‘end of humanity’ as one has absurdly put it in the midst of panic last year) has turned out to be an absolute distortion of the market. What works then? Again, it’s having an investment philosophy – a statement of why you invest, the timeframe you are willing to sit through the investment, the strategy you need to have with the prevailing investment climate in mind. Many have wasted opportunities during the 1st quarter of 2009, wanting to ‘feel better’ before divesting their money or averaging down their positions and now the very same people are asking - “Is this too late?” My answer is simple: Their questions will never end and they will never make a fortune from the equity market. All they hope is to have a ‘get rich quick scheme’ which never works. What really works is an investment philosophy and an understanding of how markets move in the longer term. Emotional investing never works. Think about it again.