September 23rd, 2008

Has Risk Been Reduced?

This market isn’t being driven by trend, momentum or market fundamentals. It’s not even being driven by greed. It’s being driven by fear and anxiety. Charts become unreliable and few technical indicators work either. Is it a trader’s market? Only if you have nerves of steel. Are there safe industry groups? I’m not sure I know of any to recommend. Are there specific stocks to buy? Don’t know of any I could hold with confidence that I won’t be the victim of a downdraft.

About the only think that seems to work for average individual investors is the safety off the field and sitting in the bleachers (although money market funds almost lost their footing last week until FDIC insurance was expanded to cover them as well).

Hoping to predict when the market will turn — or claiming that it has touched the absolute bottom — is also a playing a loosing hand. How many times over the past few months have you heard someone say that if you’re out of the market you run the risk of missing days with the biggest percentage moves. In response, I point to the 4 up days of over 3.50% and the market is still down 17.79%. So is it important to always be in the market? I think not. And is it important to buy in at the bottom? I think it’s more important to not suffer more losses.

Here’s a sobering statistic from my study of the market since 1963 in the process of developing the Market Timing Indicator:

Since 1963, there have been 53 instances when the market’s trend has been unequivocally down as reflected in 1) all market moving averages are in a reverse order (300-, 180-, 90- and 60-day at the bottom) and 2) the trend continuing (Index below all its moving averages).

With what consequence?

In 78% of the cases, 1) the market sustained a loss while those conditions were in place 2) the longer the conditions remain in place the larger the loss and 3) the maximum loss was 22.96% in 1974 when the trend continued for 84 trading days. Three of the 54 occurrences of these bearish conditions took place his year.

There should be no fear of missing out on a turnaround and rush to buy stocks until the conditions significantly improve as measured by the alignment of the moving averages and the position of the Index itself relative to the averages. A more positive alignment represents a change in investor sentiment and psychology and this would come, albeit slowly, from attitudes towards the financial system, the and world economic health.

Rather than watching and reading the news, the best strategy for the individual investor who lack the resources, training and experience to dissect, analyze and interpret the information is to move directly to the effect of professional opinion by looking at their market actions directly. Here’s the position as of last night:

We’re a long way from getting a green light (unless something very dramatic and earth shaking is unvielded). Again, let someone else spot the next high-flier, the hot stock, the great value, the safe dividend stock. Right now, it’s still just too risky.

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