This market reminds me a lot of last year. I spent much of early 2004 in the G fund anticipating a consolidation. We did get just that but for several weeks I looked silly as the market rallied without me. But like last year, if you are patient enough there will be a better opportunity to get invested.
The jobs report Friday had the market doing cartwheels. I am not going to say the market is ready to crash but do you remember the stat I wrote about on Friday?
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If the market did cartwheels for the jobs report and closed higher by 0.5% or more, there was only a 33% chance that is was still higher 30 days later.
Humbly, I'll let the
bulls have their day. Some say the employment report was a bunch
of smoke and mirrors as the unemployment rate actually went up slightly.
I suspect
we could see some continued momentum as the market was waiting for a
catalyst and it was just thrown a bone.
I know if I wasn't
already out of stocks I would be using this strength to lighten up.
If you've been smart enough or brave enough to ride this rally up, you
have some gains to play with. Since I have missed this last rally
completely, I can't afford to try to jump in now. I have to stay
in protection mode.
I know some bears want to compare this market to the 1987 crash or to
the 2000 bear market, but I doubt it is that serious. I would
compare it to the 1994 market. Take a look at this chart.
Looks similar to 2004/2005 but it's 1993 and early 1994.
Chart provided courtesy of
www.decisionpoint.com
Looks pretty good. The breakout was impressive. Would you be
a buyer or would you get conservative? Here's what happened in the
weeks ahead...
Chart provided courtesy of
www.decisionpoint.com
I don't expect it to happen exactly like this but I wanted to show you
what can happen when the three legs of the bull market start getting
weaker. Of the three legs I watch, psychology, valuation and
monetary conditions, we recently lost the psychology leg which is
leaning to the bearish side now. The monetary conditions are not
bad but have weakened to about neutral. S&P 500 valuation is still
strong compared to bond yields. So we have a strong leg, a
slightly weak leg and a neutral leg. Because of this I am not
bullish nor bearish. I am neutral and will try to buy the dips and
sell the rallies until the indicators look better. As we know,
that is easier said than done.
I missed the last pullback and that is the risk of playing it this way.
The benefit of a buy and hold strategy is that you never miss a rally.
But buy and hold makes your account very vulnerable to sell offs.
Preserving your capital in uncertain market conditions is the key to
market timing in my opinion. I would rather risk my money during
better circumstances. Because of this I can miss gains but my
account is protected.
I don't want you to get the impression that I am bearish and expecting a
crash. I know some of you that follow my lead may be getting
impatient. I have to look at this from a risk/reward ratio
perspective. The market could continue to rally but I do expect to
see a better opportunity to get in. In hindsight, going to 100% G
as I have done may have been too conservative. In times like this
I like to take a step back and put things in perspective. My
returns for 2003 and 2004 were 39% and 10.5% respectively. These
are big years and missing another 1 or 2% rally is small change compared
to taking a chance to lose that hard earned money, and those of you with
me last year know that 10.5% in 2004 was hard earned money.
If you do play stocks, the I fund continues
to perform well and the dollar seems determined to test the lows it made
several weeks ago.
That's all for today. Currently 100% G fund. See you
tomorrow.