January 3rd, 2010

Scorecard and The Head-And-Shoulder That Might Be

On the first Sunday of the year, I usually sit down and tally the past year’s results. On that score, last year was outstanding at the same time as it was disappointing. On the one hand, the year produced the second results of the past seven (since I first began actively managing my portfolio full-time). On the other hand, I was unable to surpass the benchmark S&P 500 Index:

The major reason for the under performance was that I was overly cautious and refused to head the various all-clear signals during the year (e.g., the Index’s “Golden Cross”, the Index crossing above the 200-dma) and stubbornly (or, if I want to be generous, “cautiously”) holding on the too much cash for too long. My second mistake was not following my instincts about the overly extended gold and the miners and not taking some profits from their nice run.

While I can learn from these mistakes but I can’t complain. Over the past seven years, my portfolio has increased over 85% while the market, as measured by the S&P 500 Index is only oh so close to breaking even.

It would be so nice if this year produces another 14-15% appreciation bringing the cumulative total to a doubling over 8 years, slightly less than an average 10%/year compounded annual return (contrasted with the market’s measly 1-2% compounded annual return). I can say with some pride (since next to my wife, I am my harshest critic), I will have earned my salary as the asset manager of our portfolio.

As I wrote last year:

“The stock market is like a huge voting machine. Those who believe the market will be headed higher vote as buyers and those who believe the market is headed lower vote as sellers. And every minute of ever trading day we can tally the vote count to see which way the voting is going.

Rather than digesting and analyzing reams of statistics ourselves, we chartists look at the on-going tally to see which way the majority of investors are voting. Like the public opinion pollsters (at least those who are independent, impartial and honest), we attempt to measure trends and forecast expectations based on statistics and previous patterns.

…..I love ‘stock picking’ but that’s a waste of energy if the market is moving in the opposite direction”

We find ourselves since around Labor Day in a long tug of war between the bulls and the bears. Some of the pro’s say that the First Half will be strong with the market turning soft in the Second Half as the Fed is forced to start raising interest rates and the benefits of the stimulus begin to wear off. Other pro’s say the exact opposite; they say that a 10-20% correction will finally arrive in the First Half but the bull market will resume in the Second Half with the market closing above 1300 by year-end for the first time since mid-2008, or another 16-18% increase.

I’m in the latter camp. I see many similarities between the current situation and the Tech Bubble Crash Recovery in 2003-04. In 2004, the market continued the huge recovery move into March, its one-year anniversary before it went into a agonizing, slow, 7-month correction, 8%, wedge-shaped correction. The year ended by tacking on 10% in the last two months.

That correction began at 1163 on the S&P 500 Index; the high for 2009 was 1130 on December 28. Will the market zoom past 1163? I might hope it does but think it won’t.

It’s interesting that in May-June, everyone saw the market carving out a head-and-shoulder top (and I was focused on a long-term inverted head-and-shoulder bottom; see “Market Future is in Eyes of the Beholder“). In fact, the market surprised them and continued its mad dash higher. Today, several potential head-and-shoulder tops are emerging that we hear very little about:

The pattern is far from being formed and it’s prospect could easily be broken, quickly, soon. But it is something to be aware of and to watch.

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  • Anonymous

    Guru…thanks for the coaching…
    nothing stopping this market
    spx 1250 here we come.
    Might pick up a little EDZ as a
    hedge.