Should you go with the mo'?

You know, the momentum. The tendency of stocks that have been going up to keep going up (until they don't, of course). The successful investment strategy built on the observation that stocks are the only things that people want to buy more of as they get more expensive.

From the Oct. 3 low through Oct. 26, the Standard & Poor's 500 Index ($INX) was up 13%. That's enough to put thoughts of 2009 in anyone's head. From the March low that year the S&P 500 rocketed ahead 13% in just about two weeks -- and from there it had almost an additional 1,000 points to go before it topped out in April 28, 2011.

On the other hand, going with the mo' is one thing, but nobody wants to be Curly or Shemp. The rally from the Aug. 19 bottom to the Aug. 30 high took the S&P 500 up 10% -- but it wasn't followed by two years of roaring rally. Instead, stocks reversed, and by Oct. 3 they had tumbled to a level below where they were on Aug. 19.

If you'd bought on Aug. 30 after that 10% move up, you would have been left looking at a 9% loss by Oct. 3.

So should you go with the mo'? Should you hold positions that have rallied 13% or more in a little more than three weeks because momentum will take them higher? Should you buy in now if you've been sitting on the sidelines? Should you be taking profits and trimming positions to protect your gains from a potential downturn?

Let's try to figure all that out.

Image: Jim Jubak

Jim Jubak

If only we knew

I'd love to be able to offer you some magic formula -- "The inverse Mondavi function says this rally is going to 1,364.3 on Nov. 8" -- or an astounding piece of fundamental wisdom -- "Comparing the multiples of the current market to all markets stretching back to 1843 shows that stocks will climb an additional 17%."

But I think the current market is best described as poised. The news flow can break either way, depending on the debt-deal details that come out of Europe in the next two weeks. Fundamentals can go either way; with growth in Europe certain to slow but growth in the U.S. and Chinese economies set to come in either above or below the expectations built into stock prices right now.

Technically, the charts show a market testing some tough ceiling levels, with it uncertain whether the trend will push through that resistance or fall back from those levels.

So what's an investor to do? My advice boils down to this: Wait

I know you probably feel like you should be doing something right now -- gobbling up momentum plays or selling everything in sight or, well, something.

Right now I think this market is so poised between alternatives that the return on waiting is very high. A few days -- maybe two weeks at the outside -- should turn some of these points of indecision into actual trends that might run for a few weeks. Waiting may cost you a few of the bucks that you might have made if you guessed right on which way the market is about to break. But it will also save you the money you would have lost if you guessed wrong.

Most importantly, though, waiting will diminish the amount of guessing that you have to do.

Making sense of the mo'

Let me sketch out for you how I'm making sense of the market's risks and rewards right now, and why I think waiting is a good investment. It will be up to you to figure out how my risk/reward calculus fits your own portfolio. But I'll throw in specific suggestions for what you might buy or sell so that you can actually act on these calculations.

Poised on news flow. News flow these days means the eurozone. The more closely you've been following events, the more likely that your head is spinning. For example, on Wednesday at 1 p.m. I was reading an online headline that said "Impasse on Greek Debt Relief Threatens EU Crisis Summit Deal." By 3 p.m. the headlines were about rumors that China would invest in a European debt special investment vehicle. At 5 p.m. the headline was "U.S. Stocks Advance on EU Bank Agreement." By 6:30 the headline was back to "Euro Weakens Against Dollar After Banks Say No EU Deal Yet on Debt Losses." And by the next morning, the story was headlined "EU Sets 50% Greek Writedown, $1.4 trillion in Rescue Fund."

Well, maybe. The deal, which is still evolving, is a bit light on details. Yes, the banks' negotiators have agreed to a "voluntary" 50% write-down, but no one knows what will be offered to individual banks to get them to accept that deal. Yes, the leaders of the eurozone have agreed to increase the firepower of the European Financial Stability Facility, but the details of how that leverage will be created are still to come. It almost certainly involves some combination of an insurance guarantee and a special-purpose vehicle to entice investors from outside Europe, but in what combination is still being negotiated. And until we see the details, no one can be certain how shaky this house of cards might be.

You may think you understand what this all means. I may think I understand what it all means. But I also know I could be totally wrong.

What I am sure of, however, is that the next few days will bring more details and some relative closure to these discussions -- if not to the crisis itself. We will get, probably, a deeply flawed, frustratingly vague agreement that will put off most of the tough decisions until later -- again.

And, as important as having the agreement itself, we'll know what the market reaction will be. That's all worth waiting for.

How long to wait? The meeting of the Group of 20 leaders is set to start Nov. 3; European leaders will have to flesh out their deal -- as much as they can -- by then.

Continued on the next page. Stocks mentioned: Banco Bilbao Vizcaya Argentaria (BBVA, news), Banco Santander (STD, news), LVMH Moët Hennessy Louis Vuitton (LVMUY, news), Itaú Unibanco (ITUB, news) and Gerdau (GGB, news)