Wednesday, August 24, 2011

Don't Ignore Your Hidden Fears

Recently, on CNBC and on Mad Money (Jim Cramer's one-hour show on CNBC), I've seen (as I've seen very often doing market downturns) a strong recommendation to find those "accidental high yielders." And it's not only on CNBC, every station (radio and TV) during their business slots find pundits that recommend this strategy.

We know the strategy...find those stocks of Fortune 500 companies (i.e., solid companies) that normally offer decent yields and, when they are unfairly punished along with the rest of the market, pick them up to take advantage of their "accidental" high yield. Let's call these AHYs.

We can only assume that the reason that these yields are referred to as accidental is because the strong belief is that the price reduction of these AHYs is truly temporary and that their yields will be maintained regardless of economic directions. This seems to me a bit like fortune telling, in that these pundits want you to believe that they can see the future. They can't, as confirmed by the banking industry's near collapse in 2008/2009, so beware of these recommendations.

More importantly and to the subject of this post, don't ignore your hidden fears. Assuming that the pundits are right and these AHYs will maintain their yield and the selloffs in these stocks are temporary, then picking up these AHYs will be a great move as part of your long-term investing strategy.

BUT...most of us have a very innate fear that we don't admit to until it's too late...we hate losing money and we really get scared when things, particularly our portfolios, start falling like there is no bottom. Our long-term investing strategy generally goes out the window in bear markets when selloffs can often seem precipitous. And we often sell what we have held for the least amount of time...i.e., we have a LIFO mentality (Last In, First Out). It takes us time to love the stocks that we acquire so the most recent purchases get sold first.

So those AHYs that seem like a great buy may eventually turn into a great investment...unfortunately, during a bear market, MOST of us will sell the AHY we just purchased in the next leg down and thus take another brutal hit in our already battered portfolio.

Remember two rules in bear markets...nothing is a "great" buy and things generally become far cheaper than one expects before the market bottoms.

Note that the market appears to be inviting us back into the water (with a 60 point rally in the S&P in the last 2 days)...but as I noted in my last post, this selloff is nowhere near from being complete. Be safe, be nimble and don't ignore your hidden fears.

Friday, August 19, 2011

The Recession Line

As it appears that the markets are not at all in the mood to head higher and, in fact, looking at where futures are playing out right now, will likely be headed lower in the near term, I began tracking back to see where we could find some level of support.

When markets have gone through the multi-year rally that we have all lived through over the past 2 1/2 years, it's important to recognize our own biases. We will all be tempted to jump in sooner rather than later on any minor selloff in the equity markets, hoping to continue riding the powerful 100% rally in the S&P 500 that we saw unfold between March 2009 and April 2011 (hope you caught our call for a generational bottom). In fact, it is this tendency that often keeps bull markets running far longer than many expect them to.

Thus longer-term trendlines, if they can provide some historical support as relevant, are critical to monitor and effective deterrents from reacting too quickly and too soon. In a bear market (as we are in now), the speed of the decline will ruthlessly punish overly anxious investors.

To generate a sense of where we might find support, I looked back to the selloff last July (the one that sent Barton Biggs into a tailspin and put him through his now-famous 3-week reversal) and drew a trendline where we found support at that time. The level is at S&P ~1027.

This is not incredibly exciting as it is only one data point of support...what is interesting is what happened when I extended the trendline back 20 years and looked at the S&P on a monthly basis.

Notice that the 1027 line was not only a support level in the July 2010 timeframe, but was tested over 3 months in late 2009 as market participants looked to see if the bounce off the May lows was sustainable.

The 1027 S&P level was also tested in late 2008 shortly after the Lehman collapse and the break below 1027 resulted in the largest 1 month selloff in the S&P over the last 20 years (and probably ever). Even further back, it was in October 2003, when the market broke above this level that industry experts began calling for the end of the recession. It was also a test of this level over 3 months in late 2001 (Sep - Nov) and a subsequent test and failure in June 2002 that sent us into our dotcom recession. Finally, it was this same level that was tested and held in the 25% correction in late 1998 (who remembers this?) that preceded the 60% market run through March 2000. With the amount of historical support for the 1027 S&P level, I would argue that this trendline represents the Recession Line...a break below means we are heading into our 3rd recession in the last 12 years, a real possibility given economic conditions.

Now, not to be too exact, one could also argue that a similar trendline, at S&P 1100, found similar support over the last 20 years and this level may hold again as it did last week (we can only hope...). The only difference is that this will not signal a clear bottom.

It appears that the Relative Strength Index of the S&P (on a monthly basis) approached the 25 level at both the 2002 and 2009 bottoms. With the monthly RSI currently at around 45, I am afraid that the historic Recession Line may not hold this time.

As the old adage goes, only fools (and bullish investors) try to catch a falling knife.

Thursday, August 4, 2011

Temporary Bottom?

We're down 10% at this point from the highs and the S&P just touched what was previous resistance for the S&P back in April and November 2010 prior to the move higher that ensued early this year. I imagine if there is a level for the market to relax and look to recover, this may be it.

I will also point out that volume is screaming higher here...usually a sign of market extremes...

More to come as the day unfolds...