December 15, 2009
An 800 Year Old Investment Indicator!
For almost 2 months we have had a sideways market, with trading contained within a very narrow range. This is one of the most sideways markets in many years with the past month seeing prices move less than 1½% up or down from that 1,101 level.
It seems like there is a glass ceiling at S&P 1,115. In technical terms this is called “resistance”. No one knows why, but at certain points enough owners of stocks decide to sell at the same time. I maintain that we don’t need to know why, and in fact waiting to figure out why can be very expensive. The smart thing to do is recognize these points for what they are, resistance that needs to be overcome before any gains will be made, and act accordingly.
The market has now closed within a few points of the 1,110 level 7 days during the past month and fallen back each time. Who would have known?
Leonardo Fibonacci, that’s who.
Fibonacci was a mathematician who lived around 1200 A.D. in Pisa, Italy. His work delved into mathematical relationships in nature, and his work tells us that we would encounter this resistance exactly where we did.
Special patterns in numbers called Fibonacci sequences show up frequently in nature. The spiral of a nautilus shell grows in a Fibonacci sequence. Musicians and artists all use Fibonacci relationships in their crafts.
It may be hard to believe, but even the stock markets ebb and flow according to the numerical patterns that Leonardo Fibonacci wrote about 800 years ago, because we humans we are part of nature.
To illustrate this point, let’s look at the two most recent bear markets, 2001-03 and 2007-09, and the recoveries that followed and see what Fibonacci foretold.
I won’t bore you with the math, but the zigs and zags in the stock markets often follow patterns of Fibonacci numbers. His work suggests that the rallies after a decline will be one of three natural magnitudes: 38.2% of the decline, 50% or 61.8%.
In our first example, the market top in September of 2000 came at 1,522 for the S&P 500**. The market’s final bottom in March of 2003 was 788. A bounce from that level equal to 50% of the loss would carry the S&P back to 1,155. The market met resistance on January 26, 2004 at exactly 1,155 (cue the Twilight Zone music) and promptly fell back. Despite trying several times, it took ten months for the market to finally break through the Fibonacci 1,155 level to stay.
OK, let’s see where we are today. The market peaked at 1,565 on October 9th 2007 and bottomed at 666 on March 6, 2009. A 50% retracement of that loss would take us to exactly (music, please) 1,115, which just happens to be the mid-day high on December 2nd before the market dropped and closed at 1,110.
Fibonacci gave us a clue as to where the market would pause or possibly reverse, and this was one of the reasons I have been investing cautiously for the past couple of months. I don’t know when the market will break through this resistance, but until it does, it is time to just be patient.
Successful investors are patient investors.
How long is loooong? I can’t say for sure, but both of my parents made it to 90, and my mother’s side of the family has seen people live to be 107 – and that was 50 years ago when 107 meant something.
So, I think I have enough time left that you don’t need to worry about me retiring out from under you.
In the mean time, I intend to travel more and more now that Matt is pretty self-sufficient. Between our motorhome, a half dozen business trips and a road trip here and there, I spent about 70 days traveling this year. And, I bet you never missed me, did you?
Technology allows me to be just about anywhere and never miss a day of work.
With a little luck, I’ll be able to live like I’m retired while still running the business. Is this a great country or what?
The Riddle of the Week
Q: You use a knife to slice my head and weep beside me when I am dead. What am I?
A: An onion.
What We Were Saying Back Then
October 23, 2007 – One year before the crash of 2008.
” . . . forgive me for discussing recession at the first sign of stock market jitters in a couple of months. I just don’t think we are done yet.”
What’s Going On In Your Portfolio?
Our Flexible Income accounts remain fully invested in high yield corporate bonds, and are just making money slowly. This quarter’s returns, while pretty pokey, compared to the torrid 2nd and 3rd quarter performance, are still annualizing in the 12% range.
Balanced portfolios are invested 50% as Careful Growth and 50% as Flexible Income.
As of December 14th, SRI portfolios are 50% invested in stock funds, 20% in high yield bonds and 30% in cash.
Municipal income portfolios were moved from high yield munis to short term high quality funds last month after the muni market turned down following a strong run up earlier this year.
I’m not sure if this weakness was a reflection of financial pressures on the state and local governments that issue the municipal bonds, but it is something I did not want to take too casually so I went the conservative route for that strategy.
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