24 MAY 2009, Sunday

1. Memorial Day Weekend! Remember.
2. Below is an interesting chart of the Dow Jones Industrial Average from the 1937 peak through the 1942 lows. The situations then and now seem similar...big credit contraction resulting in big economic contraction and the government spending wildly to slow it down. But it takes time to work through that credit contraction...consumers need to repair their balance sheets. Once they do, they will start spending again and the business earnings outlook will be much more solid...enough to have a sustained "buy and hold" type of bull market. Until that time, the chart gives you an idea of the wild ride the next few years may be like (the 1973-1978 stock market had similar erratic swings). To read more on the similarities of the market action...
   
3. Now that I've got your attention...there is money to be made in there but not via buy and hold for life. That doesn't come back until after the SP500 Price to Earnings (P/E) ratio gets below 10 and we're nowhere near that (currently in the 20's). Back to the point, during that 5 year period, there were 7 moves of 20% or better (4 bears and 3 bulls). So, for the mutual fund folks, perhaps you should lean more toward buy and hold for 3-6 months to capture a 15% or so move, eject / run to a money market fund and wait for the next swing. For those able and interested, perhaps even try to catch a down move via Inverse (Bear) ETF's (can be done in IRA's too since it is a stock purchase). So, take some time to think about how you would operate in such an environment and then, if you like, let me know what you're thinking via email or the comments section below.
4. In this environment, it is more important to try to sidestep part of a down move and then get back in for another upmove...that's how your money will be made. In, out, in, out...repeat. Minimizing losses is the most important part of investing because the gains take care of themselves. This topic was discussed in 23 APR 2009 entry with a good chart to demonstrate the principal. So, if you see some 20% move in 3-6 months...you should start thinking...is it possible that it's gone too far too fast? Go back and look at that chart some and you'll see what I mean.
5. OK, so where are we now? First and foremost, I don't see any stable, roaring stock markets for a while. The chart, in my opinion shows a best case scenario for the next few years...believe it or not. Best case meaning that buy and holders will get violently "roller coastered" up and down for a few years but at least they won't go much lower than what they already saw in March when the SP500 set it's low at the all too spooky value of 666. The worst case, logically, would result in another down move well below the March lows...I tilt more toward this scenario as we approach the next 4 Year Cycle Low in 2010.
6. I've been trading this market...trading...and have not been holding anything overnight because it is behaving like a completely insane beast. We've had a huge, fast move up and it's either taking a breather or rolling over. (Like I said 2 weeks ago in the email, in my opinion, no investors should be putting new money to work in stocks until the next solid down move.) What I'm hoping for is the breather and one more short, sharp upward surge to 1020 in the SP500 but of course it may not happen. By the way, on that chart, the breather would put us in the summer 1938 down move. Wish that I may, there is no road map to follow so I, as a trader, will dash back and forth like a scared squirrel in the middle of the road until the market decides which way it wants to go from here. Recently, I've been leaning on the sell side and profiting so while it works, I'll stick with it until it doesn't...but still hoping for one more brief up move once the current corrective action ends.
7. Investors should be considering: 1) whether they want to lighten up, 2) at what price they would lighten up if it went up, 3) at what price they would lighten up if it went down, and 4) if you did lighten up, what would be your price / or conditions to re-enter. Then you just sit back and let the market come to you. It is so much easier with a plan ahead of time instead of being forced to react in an emotional manner.