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Six months ago the three
legs of a bull market I talk about were all strongly in bullish territory. Monetary conditions
were liquid.
Bond yields, were quite low and the S&P 500 earnings
were rising. That combination made stocks a good value.
After the huge rally from March of 2003, the psychological leg had
weakened and I expected a few months of consolidation in early 2004
before the rally would continue. I had also expected that to end
sometime in May or June at the latest. Instead the market
continued to consolidate through July and into early August. The
good news was that the psychology leg was able to get firmly back into
bullish territory again. The bad news I was already completely
invested in the stock funds and my account was punished for getting
onboard too early.
I kept anticipating this explosive rally because of the strength of
those indicators.
It was tough for me to tell everyone to jump
into stocks while the market at the time, was doing so poorly.
In these
longer term comments written last summer I was saying "all
of this is still equating to a
possible 20% gain in stocks by the end of this year."
I'm sure that was looked at with much skepticism. In the end, it
worked out as I had hoped. While the S&P 500 managed a 10.8% gain,
we saw the S and I funds up 18% and 20% respectively. Pretty
impressive. I definitely could have played things better as my
return was a modest 10.5%. A couple of poorly timed moves in July
cost me a big year but we did finish strongly. The key for those
of you who normally sit in the G fund, was that we were able to take
what the markets were giving us in the second half of the year, rather
than passively accept a 4% gain.
So where does this put us for the first half of 2005? The market
seems to be in a very similar position from a technical standpoint as it
was in early 2004. That is, coming off a strong rally, the
indicators are telling us the market is getting overbought. This
has me thinking there will be a resting period sooner or later. I
believe the S&P 500 (currently 1211.92) has a shot at going up to 1250
or 1300 (another 3% to 7% gain) before the resting period so it is the
"when" that us short term traders will try to figure out.
It could be tomorrow. It could be next month. But
these are the longer term comments. They are geared more toward
investors who are not going to play the small wiggles in the market.
So yes, we should see some selling commence sometime between January and
April, but these will bring buying opportunities for those raising cash.
How low will we go? The S&P 500 valuation is still very good so I
don't expect too much carnage when we see a pullback. It is just a
calculated guess but I would say a 10% to 15% correction from the top
(wherever that will end up being) may be possible in 2005. You
will see on the the chart of possible longer term allocations below that
I have suggested raising a little more cash by lowering the allocated
amounts in stock funds. I will look for those dips to put that
cash back to work later in the year.
You will also notice that I am getting less aggressive by moving more of
the stock allocations from the S and I funds into the C fund. As
we have seen, small cap stocks do very well early in an economic
recovery cycle. As we move further away from that recovery and the
market moves into the later stages of the bull market, large cap have
tended to be the leaders. Rising interest rates may be the
catalyst for this switch.
Since interest rates are still on the rise, I continue to avoid the F
fund as a safe haven and prefer to use the G fund instead.
So to sum it up, the market may not be ready roll over and die just yet.
But if you are looking for an allocation for the new year and you do not
make many transfers during the year, you may want to move something out of stocks
now, or with each rally over the next several weeks. That is, as the
market goes up, throw a little bit more into the G fund until you have
raised your G fund allocation to 15% or 30%. You can then
wait for the market to take a break before putting that money back to
work in the stock funds.
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