In the first two weeks of the year, each major has rallied between 3-5%. Select individual names are up 15-30%. There is no debate: 2023 has been a great start for equities, especially for stock pickers. It is important to keep your greed in check. Bears and bulls may not get along, but they both make money. Pigs get slaughtered every time. 

The Case to Fade

If the 2022 bear market taught us anything, it is that now is the time to take some profit. The S&P 500 is again battling its 200d SMA. Speculative stocks are finding a bid. Meme stocks are making a return. Yields, the U.S. Dollar, and the VIX are at cycle lows. Analysts notes are beginning to sound more bullish: more FOMO (fear of missing out) than FUD (fear, uncertainty, doubt). There were three times in 2022 these variables lined up. Each time, selling paid off. Consequently, if you think the factors that plagued 2022 have yet to abate in 2023, then it would be consistent with your beliefs to fade the rally. However, selling without this belief puts you at risk of contradicting yourself. 

The Case to Chase

Let’s say that you are adding to equities. If you are, you probably believe this rally is different. To be fair, it could be. That being said, if you do, then you must implicitly believe the following:

1. The Fed will pause or pivot in the next 6 months. 
2. Earnings will hold up through the ongoing Fed-mandated slowdown.

The first marks the end of market-wide multiple compression. The second marks the end of market-wide earnings risk. If you believe the following to be true, then it would be consistent with your beliefs to buy or hold the rally. However, adding without this belief puts you at risk of contradicting yourself.

Make Consistent Decisions

I am not indicting or endorsing either viewpoint. I think investment decisions should be consistent with a research-driven, economic thesis. At this moment, broadly adding or selling is highly suggestive of that thesis. Making decisions that contradict your thesis may be the result of emotion as opposed to research. In this case, adding, despite disagreeing with the two points referenced, could be FOMO. Selling, despite believing what plagued 2022 will not plague 2023, could be FUD. Whether it is fear or hope, emotion is not a valid investment strategy and deserves no place in a portfolio.