January 2nd, 2013

Shaking Off the Fear

If you’re an individual investor, one of the most important articles of last week besides the focus on the “Fiscal Cliff” debacle was an article in the December 29 Washington Post entitled “Bull market roars past many U.S. investors“.  The gist of the story was that “Americans have missed out on almost $200 billion of stock gains as they drained money from the market in the past four years, haunted by the financial crisis……Individuals are withdrawing money as political leaders struggle to avert budget cuts that threaten to throw the economy into a new slump.”

According to the Post, much of the damage to investors is “self-inflicted” because of fear and anxiety brought on by market volatility and memories of past “crashes”.  However, U.S. growth has improved and earnings tied to the economic are expanding.  Those improvements have been reflected in stock prices.  Of the 500 stocks comprising the S&P 500 Index, 481 are higher now than they were in March 2009 or when they entered the gauge.  Some of the statistics supporting these conclusions are:

  • Investors are lowering the proportion of stocks they own in retirement funds during a bull market for the first time in 20 years.
  • The proportion of stocks in the assets in 401(k) and IRA (excluding money market funds) fell to 72 percent from 72.5 percent in 2009.
  • The percentage of households owning stock mutual funds has dropped every year since 2008 to 46.4 percent in 2011, the second-lowest since 1997. [Of course, this could also result from the wide choice, availability and acceptance of competitive ETFs]
  • New money has gone to the relative safety of fixed-income investments as corporate bonds and Treasuries have received nearly $1 trillion since March 2009.

Housing is making a comeback and housing stocks were among the leaders last year, banks are on the mend and financial stocks were also among the best performers and 2013 auto sales are projected to approach 1.5 million. Is it time then for individual investors to begin fearing declines in the value of their fixed income investments as interest rates reverse (regardless of Bernanke’s protestations to the contrary) and start moving money back into stocks?

Meanwhile, institutional investors (the group I call the “herd”) hasn’t fared that well in the market either.  According to in December 26 Wall Street Journal article entitled “2012 Was Good for Stocks, Bad for Stock Pundits“,

  • At the end of 2011, Mr. Cramer warned investors to avoid bank stocks. Oops. They were one of the best-performing sectors in 2012. He urged investors to avoid real estate, but housing prices are up more than 2% from a year ago…..and the stocks of home builders, as measured by the S&P Homebuilders exchange-traded fund, are up 53.6%.
  • Of the 65 market “gurus” tracked during the last few years by CXO Advisory Group, the median accuracy for market calls is 47%. If that sounds low, or you wonder about the quality of the pundit, consider that the list includes such well-known names as Bill Fleckenstein (37%), Jeremy Grantham (48%), Bill Gross (46%) and Louis Navellier (60%).

So how do I deal with the noise coming from the “talking heads” and the uncertain produced by the market?  I maintain my equanimity in the face of volatility by relying on how market participants have behaved during similar situations in the market’s history.  I rely on my Market Momentum Meter to give me some indication of what market participants believe will happen, on average, in the near-term as reflected in their collective buying and selling decisions.  It’s measure by whether they are pushing prices up or down and the momentum behind those decisions.

The Market Momentum Meter turned a bright Green on January 31, 2012 when the Index was 1312.41, or 10.25% under today’s close of 1462.42.  It wasn’t Green for only 10 trading days during the year (the longest period was 7 days around the November correction low:

Like a parent who never quite trusts riding in a car that his kid is driving, I didn’t fully trust my own creation.  It took me a few months after that Green signal at the end of January to increase the money I had in stocks.  As hard as I tried to totally drown out the noise (news) about Euro debt and currency problems and, more recently, the fiscal cliff debates, I never could bring myself to be fully invested and, like corporate America, always had a significant amount of cash on the sidelines.  And then in after the November elections, as the Market reacted to the realization of a second Obama term and continued Congressional stalemate, it looked for a couple of weeks like we might see a repeat of the 2011 market implosion.  Fortunately, I waited this one out and saw money begin flowing back into stocks as prices quickly recovered.

Like many other market participants, I need additional “guarantees”.  Even though the Meter says that these sorts of market conditions in the past have lead to higher prices and that it’s all clear to be fully invested with relatively low risk, I still want to see the Index continue its assault on the all-time highs by first crossing above where it stalled out last September.  When that happens (which could be next week), I’ll feel more comfortable putting rest of cash to work.

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March 2nd, 2012

Stock Picking Now Feels Like Shooting Fish in a Barrel – Chapter 2

We hear a lot today about the individual investor being frightened away from the stock market.  We hear that the young, those who face the challenge of having to replace social security for their retirement have no interest in owning stocks.  Many today believe that owning stocks is risky, difficult and is nothing more than gambling.

However, the performance of the market and of individual stocks since the beginning of the year should have been an excellent testament to exactly the opposite.  Over the past several of months, I often feel as I did on July 23, 2009 when I wrote Stock Picking Now Feels Like Shooting Fish in a Barrel.  You should click on the link and read the piece but, for you who are too lazy, here are some choice quotations from it:

“This is a great time to be a stock picker! You don’t hear many say this these days but it’s exactly the way I feel. The market and economy felt like they were going you know where in a hand basket on March 9. But now that seems so long ago and with the vantage of the slow, 10-month market turnaround ….. picking stocks feels almost as easy as shooting fish in a barrel …… It’s not often that you can start with a clean slate (i.e., essentially a 100% cash position) …. we have little garbage to clean out and now have the pleasant task of finding new seeds to plant ….. Many stocks have charts that closely reflect the market’s bottom reversal pattern….”

The technique I described there was the “Stocks on the Move” scan; these days I run daily and it always delivers a long list of excellent candidates.  As I wrote in 2009, the scan parameters

“Sounds complex but the results filtered out with 135 amazing stocks.  I don’t mind saying I have a hard time deciding which of these 135 I’m going to add to my portfolio but I would feel comfortable and sleep well with nearly any of them (with the caveat that the market remains constructive by crossing above the neckline by Labor Day, as I expect it will). “

I present charts of the following stocks as examples in that July 22, 2009 post.  Note that by that year-end, the four stocks were up an average of 35% (the market had risen 16.88% of the period) and up over 100% by the following year-end (market up 31.82%):

As members to Instant Alerts know, I’ve bought I’ve bought 60 stocks for my portfolio since October 24, 2011 and today 75% of them show gains (four of over 20%) while I’m confident the remaining 25% will soon also show profits.

I don’t intend to boast; I mention this only to prove the point about how easy it is to find great stock to buy in at times like these.  If you buy stocks at the beginning of a bull run and are patient enough to ride them to the end of that wave then it should be relatively easy to generate some huge gains.  On the other hand,  it almost doesn’t matter what stock you buy or how good it’s chart appears to be, you’re facing significant risks and the probability of only small rewards when the trade is near the end of a market life cycle,.

In 2009, the Market Momentum Meter had turned Bull/Green on June 24, 2009, three weeks prior to the above post and the tool I use to time the market (the relative positions of four moving averages plus the Index itself as described in Market Momentum Meter) turned Bull/Green came on November 18, 2009.  We might again be at a similar inflection point, the beginning of a new market life cycle, because  Momentum Meter turned Bull/Green on January 31, 2012 and the moving averages are only 45-60 days away from a perfect bullish alignment.

Finding stocks to buy again feels like a bounty or riches, like shooting fish in a barrel.   The “Stocks on the Move” scan is again spitting out up to 200 stocks worthy of purchase (most of my 60 trades came from that scan).  As was true in 2009, many of those stocks presented classical bullish chart patterns or potential break out situations (click on image to enlarge) including:

  • ISRG on 11/3/11
  • SCSS on 1/27/12
  • EQIX on 2/2/12

At time like these, the challenge isn’t in separating the winners from losers, it’s in putting money to work quickly enough to take advantage of the market momentum move.

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