Sunday, May 31, 2009

Market Pops in Late Friday Trading

Top Line: The stock market staged a 100 point Dow rally in the final minutes of trading on Friday. That move calls into question our position that we expect a drop in the SP500 to around 850 or so, but we are sticking to it for now, not withstanding our general bullish position that sees the SP500 at 1234 on 9-9-09.

[The Update is considering going on a "summer" schedule where we post once or twice a week. We are leaning toward a "Wednesday" Update where we would post on Wednesday evening so you could read it on Thursday morning. We have considered Sunday evening but think it doesn't allow for enough good information; in other words, Monday's can be quite different than one expects on Sunday evening. We are starting this week so our next post should be Wednesday evening.]

Our short term forecast remains that the stock market should work its way to the SP500 850 level in the next couple of weeks maybe three weeks. This would shake out the current late comers to this party. From there, the stock market should start its march to higher levels this fall.

There is an article in our local Sunday paper that caught our attention. The title is, "Take time to map out your money strategy", with a subtitle of, "Feeling lost about which direction to take with your investments? Write it all down." The article asks the standard questions like, "What are your goals for the money?", "What is your Time horizon?", "What are your liquidity needs?", "What is your tax strategy?", and finally, "What is your asset allocation, target percentages for those investments , and re balancing plan?"

We here at the Update, think these questions are a little off the mark but the majority of the world really still believes that one can answer these questions and be right or keep their assets safe. We don't think the reason for saving money should be any basis for investing. We don't even think your time horizon is a good basis for investing. In fact liquidity needs will take care of themselves if you are investing properly. Tax strategy??? Really, you think you should invest based on your particular tax situation??? And, the last question on asset allocation and re-balancing is our particular favorite. How can you make decisions on how to change your current asset allocation and expect That exercise will help your performance?

The market does not care about any of these things. The market is a continuous stream and it is always moving up and down and sideways. It doesn't care how you answer these silly questions, it is just going to do what it is going to do. You can either follow it or try to force it. It doesn't take much to figure out which one of these approaches will fail.

Most people tend to think that market timing is "luck" and not science, so they don't believe it can work. These people are now trying to figure out if they should Exit the market. These people think of themselves as long term investors that just need to tweak their "asset allocation" and everything will be fine but then they sell everything as the market is forming a bottom in March or even last fall in October and November. They aren't long term investors if they scampered away from those lows.

We have not always been right about timing but we have fared pretty well over the past year where the "long term" investor most likely lost a lot of money. This market is not for "long term" investors and will punish such thinking over the course of the next ten years or so. People have "learned" over the past 25 years that the market always goes up and all dips should be purchased. In ten years, all of these people will be out of the market after learning that such a course of action will take most of their assets away from them.

Such is the nature of bear markets generally. They punish the complacent bulls who just "don't have time to spend on their investments". Investors will forget the lessons of the bull market, which were buy and hold, as their holdings go up and down, mostly down. They will learn the bear market rules just in time for another major bull market shows up. As that market goes up, they will say things like, "I'm glad I'm out." Reliance on mutual funds or index funds will be a distant memory just like it was back at the 1982 start of the bull market when the Dow was below 800.

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