Monday, February 02, 2009

Waiting on the Juice

Top Line: We continue to be bullish...yes, it is getting trying but we are so close to a major rally.

The stock market is exhibiting no signs of a rally and most are waiting for those signs before they will buy any stock. We think that it's the market's job to confuse as many people as possible. You may think we are they say, often wrong but never in doubt.

Last fall when the market collapsed into October and November, the news was bad and the news is still bad. Part of the function of the market is to be a discounting mechanism. In this case, the huge drop in the fall was telling us that the news would be bad for some time to come. The economy is still in trouble and the bailouts continue. That is precisely the reason for the market to go up. There is more money floating around for all kinds of reasons. The main one is that people sold some of their stocks in the fall, of course, they sold after the Fall in prices at ten year lows in prices.

We were buying from them but looking back, we could have done better. That's not stunning news but once in a while you have to take a look at what you were doing and see if there is something better that you could have done.

One of our main problems has to do with trading in 401(k)'s or as some have called them 201(k)'s. We hope your 401(k) didn't take that much of a beating. Our main problem with the 401(k)'s are the limited options in these vehicles. Looking at some of the choices available gives us very little information but one thing is for sure...we don't know what we are really buying.

With an IRA or an after tax account, you can be much more specific about what you buy. You don't have to leave it up to the fund managers of your particular allocations of funds in your account. Not only that, the timing of your purchases is at the end of the day prices. How can you be opportunitistic with that?

So, how do you manage a 401(k)? We don't think it's very easy to do. We have been suggesting that you buy since October and October 10th was a good day to buy some great deals on individual stocks. But, a stock fund in a 401(k) would have included a large portion of financial stocks which continued to get punished into November and even beyond.

That brings us to the other problem with these funds...the other participants in the same fund. While it's something we have tried to change in ourselves and our readers, human nature is tought to change. Normally, people use part of their payroll checks to buy some "diversification" of funds. In fact as the market "goes up", they get more confident and more and more people put more and more money into these the high prices. They normally only sell in times of stress like last fall and probably in 2010 and 2011.

Imagine the fund manager with this flow of funds. The manager is supposed to be "fully" invested at all times even though they know that they should be selling into strength and buying weakness. The flow of funds is completely the opposite, they buy the most at high prices and sell a lot at the lows. Selling by 401(k) participants is usually a complete sell into weakness while buying is more of a continuous event leading to some very serious selloffs and some over extended tops.

We're at a loss to make any good money in a 401(k) in a bear market. What we do know is that we need to be aggressively managing our accounts in a bear market. When prices were generally going up from 1982 to 2000, and possibly even into 2008 if you were in the right place, a buy and hold strategy worked ok. Yes, there were periodic big scares, but the market always came back and went higher. The past ten years have produced no gains for the SP500 and most of the gains that may be left in the 401(k) are probably the sum of contributions made in that period.

So, what can we do? In this market, we have concluded that there will be sharp rallies in this bear market which are the only times we want to be in the market. When the market is going down, we want to be in Treasury securities if we Know For Certain that the bond fund is investing in Treasuries or else be in a stable value fund.

How do we know when the market is going up or down ever??? There never is a view that gives total confidence but there are some clues that can help us. When people are generally bearish we figure they have sold so we want to be buying. We do need to answer the question about whether they are just saying they are bearish or if they really sold. Going back to the theory that human nature forces people to sell into weakness, they have already sold. The last five months have caused human nature to sell stocks. Our other tells are they are buying Treasury bonds and puts.

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