March 17, 2009

Market Turnaround Underway – At least we hope so.

The S&P 500 Index lost another 24.65% of its value from January 1st to March 9th, but I’m grateful that it was not us!  We had losses, but they were generally ¼ to ½ of the market’s loss, depending upon which investment model we discuss.  With the market showing some signs of life, our investment posture is shifting once again.

Over the past two months, once strong sectors again lapsed into decline.  Health care was performing pretty well until they began talking about reforming it back in Washington. Even gold, which had been approaching new highs, slid backward by over 10% in recent weeks.  As these sectors rolled over we moved more and more into cash which really helped to limit our losses. 

However, this past week had four up days in a row, and they were on high volume.  High trading volume lends more validity to a market move, so this is a good sign.

I don’t react to short term moves in the market because they can be news driven.  My mantra is “one day does not make a trend”.  I like to invest with the trend and much of my work is focused on identifying what the real trend is.  Four up days in a row is something we have not seen in a long time, and after the third one I began to dip my toe back into the water. 

At this writing, our growth models* are about 40% invested, primarily in technology.  One surprise is the strength of retail stocks (A sign of the stimulus beginning to work, perhaps?) so we have a little retail, too.  I would expect the market to take a breather after 4 up days, so we still hold a lot of cash to add to our holdings if we get a dip. If the market generally moves up over the next few weeks, I will begin to believe that this is the rebound that is so long overdue.

Our Flexible Income model* is mostly in cash right now as the bond markets look for direction.

This Market Stinks So Bad That It Is Good.

There are a number of polls that reflect the feelings of do-it-yourself investors, newsletter writers and money managers, and as you might suspect, all are registering record low numbers.  We call that “negative sentiment”.  Most investors are very discouraged and rightly so considering that stock markets have performed so poorly for the past 18 months.

But by looking at the psychology behind these readings we can see that balance of buyers and sellers – the ultimate factor in whether a market goes up or down – is shifting significantly in our favor. 

When hands-on investors feel negative about the market they will sell or recommend selling in the case of the newsletter crowd.  It makes no sense for them to wring their hands and do nothing if they really feel the market is in bad shape. 

The key point I want to make is that every time someone sells, they are no longer a potential seller who can drive the market down further, they are now potential buyers who will someday push the market back up again.

So record low sentiment numbers like we have seen recently are a good sign because as soon as the number of buyers is larger than the number of sellers the markets will move upward.  The immutable law of supply and demand is steadily moving toward an upward market.

Granted there are still many concerns and economic stumbling blocks ahead, but the markets usually begin to turn up 6-9 months before the economy visibly improves.  So we can’t wait for good economic news to be trumpeted in the press.  We need to be ready to move back into the markets as soon it shows signs of improvement, in spite of the dismal economic picture.

The great uncertainty seen at major market bottoms can be expected to keep most of the longer-term investors on the sidelines afraid of being sucked in by another false move by the markets. Historically that’s always been the reaction after a large market decline. And that should create a longer lasting rally as that money slowly comes in with each rise in the market.

Have a Group That Needs a Speaker?

Between my three college classes, frequent interviews in national magazines, TV appearances, making presentations at national seminars, talking to investment clubs, and addressing community service groups around town, this has been one of the busiest years of my life.  It seems like everyone is looking for solutions for this squirrely stock market, and just about everyone is suddenly interested in active management.

As a result of all this advance preparation I have talks prepared on many subjects that last from 10 minutes to an hour that I can now give on short notice.

If you have a group that needs speakers, I would be happy to present a program and address questions about the economy or financial markets.

Just call the office at 778-4000 to arrange a date.

College Classes

Heather Hurst, Yavapai College’s head of Community Education, bestowed upon me the “Most Popular Class Award”, an informal, perhaps even tongue-in-cheek designation because my Basic Investing For Retirees class had the highest attendance of any class offered through the CE program.

This class on investment fundamentals is one I have taught at Yavapai since 1990, and is consistently popular.  We always have a good time.  I even have former students and clients bringing friends and making the class a social event.  If you want to brush up on your understanding of the investment world, this is a great place to do so.

Here are the summer class dates:

Basic Investing For Retirees, June 3, 4, 10 and 11 from 1:30-3:30 each day.

Advanced Investment Analysis Using Charts, June 17 & 18 from 1:00-4:00 each day.

Please tell your friends about these popular courses.