Bottom Feeding II

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MarketWatch featured a story called “Bottom feeding is for catfish.” Let’s listen in:

Every investor wants to say that he or she “bought the bottom” but anyone attempting that feat this year was in for a rude awakening. Bottom picking is a dangerous game and while we have all sorts of indicators to help us get close to that goal they all depend on an orderly market.

When that happens we cannot simply follow the rules of “normal” markets. Most investors with time horizons measured in weeks and months would be better served waiting for the market to return to some form of “normal” before testing the waters and feeding on the fallen.

Before getting into the details, I must first say that I am looking for a short-term rally to follow through on what we saw in the days leading up to the Thanksgiving break. If you are a short-term trader, fell free to play. If you are a long-term investor with multi-year rime frames, I agree with uber-investor Warren Buffett that there are excellent values to be had.

But if you fall in between these extremes then please consider this.

All of our analysis tools, and I am talking about technical, quantitative and fundamental, are based on certain assumptions of the world and many of those assumptions are not true these days. Right now, one of the most important, a healthy credit market, is no longer functioning the way it was. Another is a reasonable expectation that good companies can make money and grow their businesses.

The first limits liquidity and when that is hampered so is investment in stocks. The second has been dwarfed by the psychology of fear, as all the news is bad. It seems that a vast majority of pundits are talking about deflation and depression. Who can blame anyone for wanting to sell his or her stocks, even at current levels?

One of the more widely watched indicators, the Chicago Board Options Exchange volatility index, aka, the VIX, aka, the fear index, moved into the record books in October and has remained at levels that have only been seen right after the crash of 1987. The indicator was not around for the crash of 1929 or the 1974 bear market.

What this means is extreme fear permeates the market and under such conditions we cannot really get a handle on what is going on. Momentum indicators may scream “oversold,” yet the market heads lower. Volume indicators may remain below average to suggest that the sellers are getting exhausted but down go prices anyway.

Certainly sentiment indicators, such as the VIX, are at levels that might have suggested the mother of all buy signals in the past. Yet an extreme VIX got even more extreme. I contend that having the VIX fall back to more normal ranges will be one of several changes we need before we can think it is safe to buy, not just trade, stocks again.
…

The next question anyone should have is why we have to wait until the Dow gains hundreds and hundreds of points before we can acknowledge a market recovery. After all, isn’t the idea to buy low and sell high? That is an awful lot of profit to leave on the table before starting getting back in the market.

In November, traders did indeed buy low and sell high but their trades lasted a few days if that long. As mentioned earlier, active individual investors typically have an investment horizon on the order of weeks or months, not days, so that amount of buying and selling is not palatable to them. Neither is the risk of being even one day early.

When the market finally moves back above all of the turmoil of the past three months we’ll know that the tide has turned for real. I won’t be foolish enough to guarantee a bull market from there but at least we will be on the right side of the trend. Confirm that with a “normal” VIX and any other of a zillion other indicators, such as cumulative volume, momentum and/or moving averages and chances are it will indeed be safe, or at least safer, to buy stocks that still look cheap.

Bottom fishing is a good strategy when the overall market is rising or is at least stable. It is a bad one when a bear market rages and especially bad when things are as far out of whack as they have been this year.

[Emphasis added]

Read the last two paragraphs again because they contain the essence of what I have been writing about. You need to have some return to stability before the odds are in your favor again that a trend reversal is the real thing, and upward momentum can be sustained. The biggest obstacle to waiting for this point in time is an investor’s lack of patience, and the need for ego gratification that he was smart enough to pick a bottom.

The goal, however, should be to be on board when long-term sustainable trends are in place. Those are the ones you need to participate in, because they have the potential to generate above average portfolio returns. After all, isn’t that the main reason why you invest?

No Load Fund/ETF Tracker updated through 12/4/2008

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My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Despite a strong effort by bullish crowd, the major averages closed lower.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -13.31% thereby confirming the current bear market trend.



The international index now remains -25.23% below its own trend line, keeping us on the sidelines.

For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

A Real Estate Parody

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With economic news lacking any kind of positive twist, it’s time to view things with a bit more distance and a sense of humor.

Reader Tom sent me the following video clip, which is very funny even if you don’t speak German. Just watch the plot unfold and follow the English subtitles:

[youtube=http://www.youtube.com/watch?v=bNmcf4Y3lGM]


While a great focus of this current economic malaise has been the effect on Main Street America, wealthy individuals have been suffering as well as the article “When the money goes, so does the toxic wife,” clearly shows:

‘You loser!” screamed Katie, aiming a vase at her husband. “You’ve destroyed my life,” she continued, hurling it. “Just look at my hair, look at my nails! You loser, you jerk, you nobody.”

Katie’s husband, Jack, whose property portfolio disintegrated in the financial crash, had just told his wife that she would have to cut back on her thrice-weekly visits to Nicky Clarke, the nail salon in Harvey Nichols, and the oxygen facials, chemical peels and seaweed wraps at Space NK.

Not only that, but they no longer had the money to pay for an army of bullied Eastern Europeans to wait on her hand and foot.

Worse was to come – the brow-lift would have to be cancelled; her black Amex card would have to be snipped in half; and there was no way, he told her, that he could carry on spending £28,000 a year on Henry’s school fees at Eton.

Chloe, too, would have to leave the marginally cheaper (only £25,000 pa) Wycombe Abbey immediately.

Such was the aggression and verbal and physical abuse that followed that Jack was left with cut lips and blood streaming from a broken nose.

Their eight-year-old child, not yet at boarding school, sat cowering in a corner and dialling 999. When they arrived, they had to restrain Katie forcibly from attacking her husband.

An extreme and isolated example of the global economic meltdown hitting the £1 million home? Sadly no. When the super-rich feel the pinch, inevitably, the Toxic Wife heads off.

The Toxic Wife, first identified in these pages almost two years ago, is a particular and terrifying species.

Not to be confused with the stay-at-home mother who selflessly devotes herself to the upbringing of her children, with all the housework and domestic chores that entails, the Toxic Wife is the woman who gives up work as soon as she marries, ostensibly to create a stable home environment for any offspring that might come along, but who then employs large numbers of staff to do all the domestic work she promised to undertake, leaving her with little to do all day except shop, lunch and luxuriate.

Having married her wealthy husband with his considerable salary uppermost in her mind, the Toxic Wife simply does not do “for richer, for poorer”. Little Dorrit, she ain’t.

Indeed, lawyers and financial advisers have reported a 50 per cent increase in the number of divorce inquiries since the financial markets collapsed in September.

While I think this is funny and sad at the same time, this issue is probably not limited to only British men, and may very well spread across the Atlantic, if it hasn’t already.

When Actions Speak Louder Than Words

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The CEOs of the Big 3 automakers apparently got the hint and traveled to Washington by hybrid vehicles for another round of pleading for monetary assistance.

November auto sales were absolutely dismal, and new restructuring plans were submitted that included plant closings, layoffs as well as shrinking dealer networks. This made me think of a video clip I recently saw that focused on a different type of CEO with a total different mindset. Take a look:

http://www.flixxy.com/japan-airlines-ceo-work-ethics.htm

I bet you would never see this in the U.S. no matter how difficult the financial times for a company might be.

Hitting A Brick Wall

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Last week’s feel-good rally came to an abrupt end yesterday when the major indexes ran into a brick wall in form of further weak economic news.

I’m sure that profit taking had some effect on the sell-off and, as I mentioned before, hopefully, many investors used that opportunity to get out of their long positions.

Contributing to the market’s malaise was a report by the National Bureau of Economic Research announcing the U.S. economy fell into a recession in December 07. Just in case you did not know it, it has now become official. Another report on manufacturing came in worse than expected, as was news on construction spending.

This week will be loaded with market moving news with the service sector index being on the menu on Wednesday followed by Friday’s jobs report, which is expected to show that the economy lost 300,000 jobs last month.

While bad news is already factored in the market, anything worse than expected can send the major indexes heading further south. Watching this carnage safely from the sidelines is the best course of action, unless you like living on the edge watching your portfolio bounce around like a super ball in a trampoline factory.

Should I Ease Back In?

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Reader Rich is considering moving back in the market by allocating a small portion of his 401k. Here’s what he said:

Last March I sold all mutual funds in my retirement accounts at work and moved them into money market funds, currently allocating 100% of new monies into those money market funds.

My question is: In your opinion, should I begin allocating a percentage of new money back into the market in my 401K & 403B? I am satisfied to stay in cash but would hate to miss a 30%-40% increase even if I only have small monthly allocations of say, 2-10% going back in to the market.

I have heard several opinions lately advising people to get back in. One guy on CNBC said the only thing worse than experiencing a 40% decrease when the market declines, is missing a 40% increase when the market turns around. Well, I missed the decrease when I moved into cash.

Yes, there are many opinions floating around, especially on CNBC, as to what the best course of action might be. I have four reasons for you as to why you should stay put:

First, you are far better off than most investors by having avoided the sharp market drop. Congratulations!

Second, you have put yourself in the enviable position of not having to make up losses. So there is no reason for you to have to make panic decisions in trying to be afraid of missing a 40% rebound. Besides, chances are pretty low of the market first dropping 40% and then rallying 40%. That’s wishful thinking given the current economic circumstances.

Third, your plan is to allocate 2-10%. While that is a small amount to risk, it also will not make much of a difference on your overall portfolio performance even if the market decides that a Santa Claus rally of another 10% or so is warranted.

Fourth, as I have repeated mentioned, in my opinion it is questionable whether the real market bottom has been set in November. I think there is more downside risk, and you’re better off waiting for an actual trend reversal before committing your serious money.

However, if you consider a small portion of your portfolio “play money,” then by all means go ahead and take a chance. Just be sure that you never confuse your pile of serious money with your pile of play money, so that your investment priorities will always be in order.