April 3rd, 2009

Designing a Bull Market Discipline

The Snowbird has landed.” My wife, dog and I made it back to the ole’ homestead last night after a couple of days on the road. What made the time driving almost bearable was Sirius satellite radio and being able to listen to the market’s continuing to improve on an audio feed from CNBC. [I have to confess, but CNBC as bad as a radio show doesn’t sound half as bad as it does as a TV broadcast … I guess we’re conditioned to having radio as a background and regularly tuning it out while doing something else like driving 70 on I-95.]

Listening to audio CNBC for 24 hours (don’t get me wrong. We spread a fair share of time to NPR, CBC, CNN, FoxNews and a big dollops to a variety of music) gives you time to think. The question that kept swirling in my mind was “What’s the best discipline to follow when it actually does becomes time to go ‘all-in’?” That time is getting close. I don’t want to sound like a broken record (remember those?) and the market’s going to have to take a breather soon. Last week, I wrote:

“It’s just about here, at what would have been an extension of the upper boundary of that symmetrical triangle, that moves tend to stall out (850-920). Buyers and sellers might maintain an equilibrium constraining prices within a narrow range. Short sellers (few long-term holders remain and are looking to unload at this point) may overwhelm the new money coming in from the sidelines and make a last attempt to push prices and the index lower.

But my guess is that, seeing the underlying strength of many individual issues (take a look at the breakouts posted by many of the stocks included in the spreadsheet in referenced on March 19), it will be a short and steep. When it runs its course, I’m guessing around mid-June, that more positive signs will be seen and a clear “all-in” signal will be issued.”

I’m going to stick by that even in the face of today’s strong market. But after the profit-taking ends, the market begins its march towards the 180-day Moving Average, crosses above and clearly signaling that the Bear Market has ended, the accumulation phase has nearly ended and the a new mark-up life cycle phase has begun – when it is all-clear what strategy or discipline should we follow? The obvious answer is to get fully invested by selecting and buying the “best” stocks. But all that driving time allowed me asking whether the obvious answer is the only answer. Here’s the process I went through:

  1. What’s the reward? I think it’s to make money but I also get a lot of psychic rewards from buying stocks with great charts that perform exactly as I had hoped and predicted. When I’m truly honest with myself, these psychic rewards are often more important than monetary rewards. I know this because these “winner” stocks with great charts may turn out not be be the best performers in terms of percentage moves.
  2. What’s the goal? Long-term, I want to average 5-10% better than the S&P 500. It’s easy in a Bear Market when you’re pretty much in cash; hence the expression “Learning to love Bear Markets”. As a matter of fact, if you were in cash last year, you could have beaten the S&P 500 by approximately 50% since the market declined 38.49% while cash lost nothing.
  3. What’s the easiest way to beat the market when it’s going up? Beating the market when it’s going up isn’t as easy. You can’t get into or hold on to losers and your winners must outperform the index. When the market does correct, you should take your profits. Tracking and managing a portfolio of 5, 10, 20 or more stocks isn’t easy. The easy way out is to buy the Ultra(Long) S&P, SSO. You automatically get a move that’s 50% greater than the S&P 500 and, when you believe a correction is coming, you can easily reduce your position and increase cash.

You’re not going to hear any talking heads mention this strategy on CNBC for a couple of reasons:

  • How would CNBC and their guests fill 18 broadcast hours if all the conversation was about timing the market and none about individual stocks?
  • If everyone owned the index, who would own the 500 individual stocks and how would their prices actually be set (Would they be all written down to $0 because there were no buyers by M2M rules?).

But as an individual investor, I make up an infinitesimal share of the overall market. I’m mostly interested only in moving up. I won’t have to worry about being “un-American” by only an Index ETF rather than the underlying individual shares when I get to be as big as a hedge fund.

[Actually, I’m only going to carve out about 25% of my portfolio in which to follow this strategy and have it race against the remaining 75% consisting of psychic-reward stocks from outstanding chart reading. Which do you bet will win? Rest assured, though, I’ll continue to write about those outstanding stocks. In fact, most of the stocks in the last spreadsheet I shared with you are performing beautifully.]

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