On October 21st the S&P 500 Index** hit 1,101 and on Friday December 11th the S&P 500** again touched 1,101.  50 days with essentially no gains.

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 seems that Fibonacci’s math was very much in harmony with nature.  Flower petals, leaf arrangements and seed heads, like sunflowers or pine cones, usually grow in Fibonacci sequences.  

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.

As I mentioned earlier there is not much money to be made in a tight trading range like this, so why take much risk?

Successful investors are patient investors.

Right after complimenting me on successfully navigating the treacherous market of the past couple of years, a client asked me what my retirement plans were.  The implication was pretty clear.  I am getting close to retirement age and he did not want to lose me.  I was flattered, but also recognized that I need to address this issue publically.

So for the rest of you who have wondered the same thing, let me tell you about my plans for the future.

For many years I had a vague goal of being “free” after my 19 year old son, Matt, was finished with school and out on his own.

Every morning I have the same routine.  I get my cup of coffee and shuffle into the office at home, wake up the computers and see how the markets are looking.  About 6-8 years ago it dawned on me that whether I had clients or not I would probably start my days the same way, as long as I live.  And if I am going to be doing it anyway, I reasoned, why give up my clients and the many great relationships I have cultivated among all of you?

From that point on, my focus within my business has been to streamline things as much as possible so that my staff can literally do everything for me – except make the investment decisions – allowing me to run the business for a loooong time without ever breaking a sweat.

And that is what I intend to do.  Analyzing the financial markets is the most intellectually stimulating thing I can imagine doing, and a guy has to do something to keep himself out of the saloons, so it might as well be what I really enjoy.

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?

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What’s Going On In Your Portfolio?

As mentioned in the earlier article, the HCM Careful Growth strategy has been very lightly invested with as little as 15% of our money in stocks (Latin American stocks at that) a week ago.  We have also held 30% in high yield bonds which continue to inch up in value for us.  And I have just added telecom stocks and inflation protected bonds to the Careful Growth portfolios.  Careful Growth holds 25% in cash along with 50% in bonds since there are so few places where money is being made right now in stocks.

“No gold?”, some might ask.  Gold had gotten way ahead of itself over the past two months, right as a major cycle low for gold was approaching.  Wanting to lock in our profits I sold our gold mining stock funds after one day of decline in anticipation of a significant “payback” in gold prices.  Since then, prices have dropped another 10% and don’t look like they are finished going down, quite yet.  There may be more gold investments in our future, but not right now.

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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