I Hope You Listened

My last two blogs were written on February 13 and February 29. In the former I wrote:

“It is not time to panic. Things are not nearly as dire as they were leading up to the crash in 2008. Outside of the negative consequences of a too-strong dollar, corporate revenues, profits and balance sheets are in very good shape. It is part of the normal and natural part of the stock market cycle that after a prolonged period of gains that we must experience a year or two of negative returns. Then, when the gloom and despair have peaked, it will be time for the next rally to begin.

So stick with your plan. In the world of virtually zero interest rates, owning a diverse basket of blue-chip, dividend-paying stocks, returning an average yield of at least 2%, is your best way to secure your financial future. So buckle up and prepare for a bumpy ride. I’ll try my best to guide you along the way.”

As it turned out, my message was particularly well-timed as the market had hit bottom only two days earlier. Since closing at 15,660.18 on the 11th, the #DJIA has surged 12.4% in only 25 trading days. Over the same period, the #S&P500 has gained a similar 12.0%. Even better, the Dow Jones Transportation Average (#DJTA), which suffered mightily on the way down, has jumped a stellar 17.3%, leading the way for the rest of the market.

On the 29th, I wrote the following two points (out of a much larger blog):

  • I would substantially overweight, or even limit, your investments to blue-chip, dividend paying, U.S.-based equities as most of the rest of the world is a mess and income is at a premium.
  • When times get scary, and you aren’t sure what to do, it’s ok to do nothing. Outside of some family accounts, in which I bought some stocks during the downturn in January (which proved too early), I have made next to no trades in 2016. And that’s just fine. Sometimes the best trades are the ones you don’t make.

Again, I believe these suggestions had, and still have, a lot of merit. I basically have done next to nothing so far this year, other than make a few acquisitions to round up existing positions that had been unfairly beaten down during the correction. More to the point; I sold nothing! Now, virtually every stock that had been down has rallied and recouped most, if not all, of the earlier losses. By doing nothing, buy ignoring the noise from the media and the panic of traders and nervous investors, we experienced no losses and have been made whole again. And the stocks we sat with continued to pay us a steady stream of above-average dividends while we waited.

So where are we today and what’s my current thinking? The #DJIA remains 750 points below the high of 18,312 set almost exactly 10 months ago, so there is still room for growth. The central bankers of the world, including our own Federal Reserve, remain highly accommodative, lowering rates to at, or in some cases even below, zero. These policies basically force investors into equities as investing in government bonds guarantees little or no income whatsoever.

I would continue to overweight your investments in primarily blue-chip, dividend-paying, quality U.S.-based companies. Look for businesses with strong brands, pricing power and competitive advantages and a history of paying dividends through good times and bad.

I believe that market will remain positive for at least the next two months, before we head into the traditional summer selling season, and into the Republican and Democratic conventions. I’ll comment more on the election cycle later. For now, let’s rejoice that Spring has arrived and, at least for now, the market is coming up roses.

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Don’t Succumb To Blind Fear

The past week has been a very turbulent, and nerve-wracking, time for investors. Stock markets around the world have been rocked by massive losses. In just the seven trading sessions, the Dow Jones Industrial Average (#DJIA) has fallen about 850 points, or 5%. By comparison, the S&P 500 has fallen 5.2%, the UK FTSE a slightly better 4.8% while the German DAX has dropped a whopping 6.9%. These are significant losses in only seven trading days.

Today was a microcosm of the past few weeks as the major averages were whipsawed all day long. At one point, the #DJIA was down 2.8%, before finishing down 1%. Similarly, the Dow Jones Transportation Average (#DJTA) was also down 2.8% before actually ending the day 18 points higher. The S&P 500 dropped 3% before winding up down only 0.9%. Investors who panicked today and sold at the bottom will likely regret that when the market inevitably recovers and they find themselves sitting in cash on the sidelines, missing the large gains.

So what are the reasons for the big declines and the crazy volatility? They include (just to name a few): a growing economic malaise in Europe, concerns about a continued economic slowdown in China, fears on an expanding Ebola outbreak, continued trouble in the Middle East thanks to ISIS and other terrorists, plunging oil prices thanks to the dollar surging in value against most other currencies and horrible policy decisions within OPEC. You could probably add concerns over social unrest in Hong Kong. Don’t forget natural disasters like cyclones, hurricanes and typhoons that are growing in frequency and magnitude. And that doesn’t even count worries about economic slowdown in this country, anticipation about future rate increases by the Federal Reserve and uncertainty about the upcoming mid-term elections. Phew, did I miss anything?

Given all the ills that I enumerated above, we should all dump everything, build a bomb shelter and stick all of our money under our mattress, right? WRONG!! Succumbing to fear, acquiescing to panic and abandoning your financial plan is exactly the opposite of what you should be doing.

First of all, in my opinion, you shouldn’t be investing any money that needs to be spent in the next two years. So if we take that as a given, and if we assume (yes, I know what happens when we assume, but that’s the only way I can continue this narrative) that the money you have invested is for some future purpose (of at least five years), than weekly volatility is really irrelevant. In fact, it is normal and present opportunities.

Let’s put things in perspective. On October 9, 2007, almost exactly seven years ago, the #DJIA was 14,164.53. From there it proceeded to go down for the next year and a half, finally hitting bottom on March 9, 2009 at 6,547.05, for a loss of 53.8%. From that low, the market hurtled forward for the next five and a half years, erasing all of those losses before peaking on September 19 at 17,279.74, a gain of 163.9%! Today the #DJIA closed at 16,141.74, which means we’ve fallen 6.6% from the high. Is that really so bad? In the grand scheme of things is that likely to derail your future plans?

The truth about the stock market is that it goes up and it goes down. And after a prolonged period of going up, with only a few very short down periods, we were due for a correction of sorts. Now, I don’t know either the depth or duration of this correction, but I’m confident it won’t be nearly as bad as 2008/2009. Global economic conditions are MUCH better today, even with all of our problems, than they were back then. So relax, have a nice glass of wine (or whatever your drinking pleasure is), take stock of your portfolio and look at your “wish list” of stocks that you’d like to buy. Perhaps now is the tie to use some discretionary cash to pick up one or two of them on the cheap. Then sit back, wait for the rebound and congratulate yourself for remaining calm and sticking with your plan.

Full disclosure: I purchased one new position last week, and another one this afternoon, totaling about $600,000. So I’m putting my money where my mouth is. I’m very confident those will be very opportunistic and profitable purchases, creating solid profits for me and my clients for years to come.

 

The Market Continues To Climb A Wall Of Worry

As I write this 10 minutes before the market opens after the Memorial Day weekend, the Dow Jones Industrial Average stands at 16,606, down a mere 110 points from the record high established on May 13. On the other hand, the Dow Jones Transportation Average registered a new high of 7,986 on Friday, the same day the S&P 500 closed over 1,900 for the first time. So as you can see, things are remarkably good. Yet if you listen to the news or watch the TV, the mood does not match the reality. It appears to me that the majority of market observers are negative on the market. The commentary continues along the themes of fear and caution with many “experts” suggesting that the market is primed for a collapse. In the face of all this general pessimism, the market continues to gain ground, or “climb a wall of worry”. If sentiment remains this gloomy while the market remains at such lofty levels, I believe the market will continue to rally to ever higher levels.

Indeed, I believe that the market should end the year higher than it began, perhaps by as much as 10%. With that overarching belief in mind, I remain fully invested in my own accounts and on behalf of my clients. I don’t attempt to trade the short-term movements; rather, I look to buy the securities I want when opportunities present themselves. And I only buy things I believe will out perform the broad market for at least the next three- to five years. If I don’t have that confidence, I don’t buy it.

I also think that the battering endured by the biotech and high growth technology sectors may be over, suggesting that it could be time to nibble at some stocks in those sectors. Many prior high-flyers dropped between 25% and 50%, or more in a very short period of time. It also may be time to look at some downtrodden housing stocks as the housing numbers are expected to perk up over the next few months. Finally, as a core holding, the value sector, as represented by dividend-paying, blue chip stocks continues to be a smart place to put your money for excellent long-term returns. Indeed, that’s where the bulk of my own money is invested.

Market Achieves Record Levels

About an hour into trading today, the S&P 500 and the Dow Jones Industrial Average have both surpassed previous all time highs and achieved significant milestones. As I write this around 10:30am, the DJIA is at 15,003, marking the first time in history the venerable index has reached that level. Similarly, the S&P 500 is at 1,616, the first time that index has ever been over 1,600. And the Dow Jones Transportation Average is only 7 points below its high. Should the DJTA move to record levels concurrent with the DJIA then we’ll have a bullish confirmation according to Dow Theory. This is all great news.

Yet surprisingly, given these lofty levels, the overall enthusiasm seems relatively muted. There are no fireworks, no parties on the floor of the stock exchange and relatively muted commentary on CNBC. I think that’s a good thing. It suggests that this in not a period of “irrational exuberance”, like 1999. Corporate balance sheets and earnings are in much better shape than in 1999 or 2008 and the global economy continues to be propped up by central bankers. So as long as the money continues to flow unabated, the good times should continue.

That being said, it appears to me that market sentiment remains relatively bearish, or at best very overly cautious, despite the record levels. I think too many individual investors have remained on the sidelines since the crash in ’08, missing out on this stupendous rally. Also, the plethora of contradictory economic news, both in the US and around the world, has left market participants confused and scared. It seems as though every day one economic statistic reveals a slowing economy while another suggests that everything is more robust than expected. Earlier this week the PMI data indicated that the manufacturing sector was slowing. Comments by the Federal Reserve seemed to confirm that thesis. Yet today it’s all wine and roses after the BLS released a stronger than expected employment report. More jobs were added than expected in April, and February and March were revised higher. Additionally the unemployment rate dropped to 7.5%, the lowest level since the crisis began.

It’s possible that since the DJIA and S&P have now breached important psychological barriers that the rally will really take hold as cash begins to move from the sidelines and investors and money managers who have under-performed the market rush to add equity positions. If that is the case, the broad market could move markedly higher from here, dispelling the old adage to “sell in May and go away”.

Conversely, these lofty levels could spur some investors to take some profits and wait for the inevitable correction. We’ve already had a great year after only four months. I certainly would have signed up for a 12% return for the year. If this momentum continues, we could be looking at 20%+ returns for the year. Only time will tell as there is still a long way to go before the story of the market for the year is fully written. Personally, my clients and  I remain almost fully invested, but we’re selling weaker holdings into the rally to raise some cash for the next buying opportunity.

The Bull Is Running: So Says Dow Theory

Three and a half weeks into 2013 the Bull is solidly in control of the market. The Dow Jones Industrial Average and S&P 500 are both closing in on the all time highs set back in 2007. The Nasdaq has surpassed the 2007 levels but remains well below the all time high from 2000. Interestingly, the Dow Jones Transportation Average has just blown past its previous record to achieve a new all time high. All of this has occurred in the face of continued economic uncertainty, record high federal debt levels and an upcoming legislative battle over the debt ceiling and the deficit.

In addition to writing this blog, I also pen a free monthly newsletter called “News and Views”. (Simply drop me a note and I’ll add you to the distribution list). Part of my monthly content includes analyzing a bunch of charts for clues on the direction of the market. This very basic technical analysis includes a discussion of Dow Theory, first proposed by Robert Rhea and George Schaeffer, based on the work of Charles Dow. At its core, the theory describes big, medium and small trends in the market. In order for the trends to be validated, the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) must be setting concurrent highs or lows.

So, according to Dow Theory, where are we right now? The easy answer is that the market is decidedly bullish. The DJIA and DJTA are both at multi-year, or all-time highs right now, having moved higher every day this week. This suggests that, in the near term at least, there should be further gains ahead. The bullish trend will remain in force until both averages move lower and fall through support to interim lows.

There are other indicators, like NYSE Bullish Percent Index and the Volatility Index (VIX), that suggest that the market may be a little ahead of itself and in danger of a correction. Even if that happens, it wouldn’t necessarily mean the end of the bullish trend. Dow Theory says that the primary trend of the market remains in force until it isn’t. So we’ll just have to keep watching for clues as to the health market. For now, the bull is running.