Help! I missed the recent stock rally — what should I do?

By: Philip MacKellar

January 10, 2024

After a lousy October, markets went into dovish overdrive following the Federal Reserve’s 2024 interest rate guidance. This holiday-season run capped an excellent year for North American benchmarks that saw most indexes up double digits and the NASDAQ notching its best annual gain since 2003.

People who missed out may be wondering: What should I do now? Hopefully, investors in this situation will have managed to find some undervalued securities to buy and have sold some holdings to take advantage of the momentum. When missing out inevitably does occur, it is important to step back, take a breath and avoid chasing a stock.

It is easy for investors to get sucked into pursuing, because the fear of missing out can be overwhelming, and cloud even normally pragmatic judgments. Even worse than the dreaded FOMO is the feeling you get after missing a rally and snapping up a bunch of positions anyway at top dollar, only to watch stocks fall. Not only will your feelings suffer, but your returns and confidence will erode as well.

o avoid this mistake, I wait for a pullback – say, 5 to 10 per cent in many instances. Sometimes this comes quickly, but other times, investors may have to practise patience and wait. If patience is not your strong suit, do not worry, as you are not alone and you can improve.

A few tricks that can help you weather through include taking a break from the screen, working on something else, or digging back through your watch list to see if there are some potentially neglected gems there that may not have participated in the run-up.

You could also enter purchase orders with a strict bid limit and an expiry date well into the future. That way, if the stock does fall, you will have your orders set to snap it up. In the meantime, consider stashing the cash away in a high-interest trading account or other cash-equivalent security where it can generate a bit of interest.

A good partner or sounding board can help, too. Warren Buffett said Charlie Munger was his “abominable no-man” and regularly told him to wait or consider something else. For me, Benj Gallander, Ben Stadelmann and a handful of other trusted peers and mentors have served this function for many years, and they regularly echo Charlie’s advice.

Investors may find the waiting game easier by remembering that stock markets are cyclical. When shares jump or crash it is easy to get sucked into the belief that it will never change, and that it can only continue rising or falling. Nothing could be further from the truth: Equities have always had a bumpy road, and my bet is they always will. If you have missed an opportunity, try to remember the security (or market) may come back, and even if it does not, another investment opportunity will appear.

But what if the stock market cycle has just started?

It is hard to know where we are in the cycle, but there are a handful of factors I look at when trying to hazard a guess. These elements include valuations, momentum, bond yields, investor sentiment, insider activity and historic cycles (e.g., the presidential cycle).

This time last year, bulls and bears could each highlight multiple features to justify their positions. Bears could say valuations were high, momentum was poor, and the yield curve was inverted, which often signals an impending recession. Bulls could say exchanges rarely have two down years in a row, especially double-digit down years. They could also point to low investor sentiment and strong insider buying.

This year, bears can outline more factors to justify their position than bulls. Valuations look worse; the yield curve remains inverted across many countries, including the United States and Canada; insiders are significant net sellers; and investor sentiment is strong (which is a contrary indicator). Bulls can counter that momentum is excellent; it is not unusual to have back-to-back up years; and it is the fourth year in the presidential cycle – which is often good.

To me, this suggests the cycle is well under way, that bears have a slight edge, and that the arguments to practise prudence, patience and wait for a pullback are alive and well. While I wait, I will search for contrary companies with low valuations, strong financials and high alignment between insiders and other investors. Once I find unloved companies, I will seek to understand them and add some of them to my shopping list – with those all-important price targets – and wait patiently for a pullback.