January 27th, 2006

The Stock Market Perspective -2

After last Friday’s big decline, I posted “Putting the Stock Market Decline in Perspective“. It’s nearly impossible to become euphoric about the excellent gains of the last couple of days when viewed against the negative background most fundamentalists are painting. But objectivity and cynicism is important so that when the market does turn negative, as it surely will sometime in the near future, we aren’t caught too much off guard.

Along those lines, I encourage everyone to sign up for a free subscription to Stocks, Futures and Options Magazine; for those who register is available online in addition to its being mailed. The current issue includes a sobering article entitled “Don’t be afraid of the bear…just prepare” by John C. Brooks, senior VP and senior analyst for Lowry’s Reports, Inc. Some of the article’s sobering highlights follow:

  • The biggest danger an investor/trader faces by dismissing a bear phase is not having enough capital at the start of a new bull to make an impact on a portfolio.
  • There are very few constants in our business, but one facet does come close to being constant is the four-year-cycle. It is an interesting fact that the Dow Jones Industrial Average managed to make a low in 1950, 1954, 1958 and in 1962….there are bottoms in 1966, 1970, 1974, 1978, 1982 and 1987….the market reached bottoms in 1990, 1994, 1998 and again in 2002….It appears that [the market] wants to make a bottom every four to four-and-a-half years no matter what we think shold happen….It is not an absolute given that the market will decline in 2006, but why would anyone want to bet against a record like this one?
  • …market tops will be found when the average investor feels like putting a lamp shade on his head and buying that fabulous summer home that’s been on his mind. Many, if not most, of the economic indicators are at or near
    highs
    , and the temptation to burst out in song of “Happy Days Are Here Again” is very high. But the action of the market seems to suggest something quite different.
  • Relative strength probably is the most used and widely accepted indicator in the world of technicians….Stocks that fail to relatively perform should be culled from our list and stronger stocks accumulated…..
  • ETF’s offer a way to move in and out of markets and sectors as easily as buying and sellng a common stock. They also give us the opportunity to invest in foreign markets. It is not a hard project to compare all the international markets available to us against the major US indexes [see my December 30 post, “US vs. Foreign Stocks“]. In today’s world we can just as easily buy into stronger markets as not.
  • After advancing for more than three years, the stock markets are beginning to show signs of aging. The indicators are suggesting that the momentum and power on the tape is slowing, giving us signs of a possible reversal on the horizon. The small- and mid-cap issues that have been the backbone of this
    advance basically have doubled over the life of this bull market, and we now are seeing the money flow into larger capitalization issues-all normal action for the ending of the advance.

There’s much to ponder in this article (as there is in many others, all of which are available online, including archived back issues) but it was obviously written at the end of December, prior to the current up-leg that started at the beginning of January. While the timing may be off a little, its worth sticking into the back of our minds as we ponder daily position and trades.

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