Market Comment 03 30 10

The market has gone up steadily since early February. The strong sectors have included the industrials and consumer discretionary stocks. I expect these areas to continue to outperform the market. Consumer spending is beginning to come back. The industrials are lean and ready to deliver some real earnings.

While I am optimistic going forward about the prospects of an improving economy, the market is beginning to look a little tired right here. The S&P 500 has been going sideways for the last week and a half. I would not be surprised if the market either pauses here or even declines a little short term. We'll have to wait and see.

Click the Chart below for my analysis of the S&P 500 recent action.

“If It Doesn’t Go Up, Don’t Buy It!”

Al Thomas, author of the book “If It Doesn’t Go Up, Don’t Buy It!” wrote in his weekly syndicated column about the “Attention Deficit Research Disorder.”

Let’s listen in:

"Wall Street has everyone, even the “experts”, believing the myth that research is required to be a successful investor.

Every fact about a company must be known before an investment is made. Find out the P/E ratio, management, cash flow, product quality, market share, etc., etc.


All the figures show the company is a “good” company, but that does not mean the stock will go up. Historical studies show there is little correlation between being “good” and the stock price going up.


After the investor has done his analysis he comes to realize all this information is an agglomeration of stuff that has no wisdom. Suppose you memorized the Encyclopedia Britannica. Would that make you wise? No. You just know lots of “stuff”. The key is you have to know what to do with it, how to apply it.


I make my income from trading. Would it help me to memorize the Morning Star Manual? Not really. It won’t tell me which stocks will go up. If all this “research information” is so valuable why aren’t all brokers rich? As a former brokerage company owner, I will tell you they are not.


Today there is so much information available it is staggering. Then you have to know if what has been found is true. Look at all the false material the financial wizards have been feeding the public.


Furthermore information travels at the speed of light through the Internet to any person who cares to read it. It is very difficult to keep a secret. There are whistle blowers everywhere, not that they are bad people.


Wall Street brokerage companies want you to do nonsense research so you won’t sue them when their “recommendations” turn out to be wrong.


There is only one thing you really need to know and that is the recent direction of the price movement of the stock. Is it going up, down or sideways? Look at a chart of the stock price for the last year or so. On the Internet you will find a chart and it will tell you more in 30 seconds than 30 days of intensive research.


The inundation of facts and figures can have the investor a nervous wreck. There is no need for emotional tribulation when you look at the price movement of the “good” company’s stock. It will be apparent whether it is good, bad or indifferent. If the trend is up, buy it. That is all any investor needs to know.


When it turns down sell it. Find another “good” company whose stock price is appreciating.


Financial research is worthless. If it created wisdom everyone would be rich."

Al's comments definitely fly in the face of conventional wisdom.. Fundamental analysis is a helpful and useful exercise, however, it is not the whole picture; it does not tell us when to invest. Additionally, during the periodic bear market, the market does not care whether a company is good or bad; being a good company will not prevent it's stock from declining.

I believe trend following (technical analysis) and staying on the right side of the market, while employing good stop-loss sell strategies (along with fundamental analysis), is the key to a better and less stressful way of  investing.


Fundamental Analysis


What Does Fundamental Analysis Mean?

A method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and company-specific factors (like financial condition and management).

The end goal of performing fundamental analysis is to produce a value that an investor can compare with the security's current price, with the aim of figuring out what sort of position to take with that security (underpriced = buy, overpriced = sell or short).

This method of security analysis is considered to be the opposite of technical analysis.


Technical Analysis



What Does Technical Analysis Mean?

A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

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How to make a Bear Market Disappear

(Click on chart to enlarge it for easier viewing)

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Treasury 10-Year Yield Advances to Highest Level Since June After Auctions

Treasury bonds declined, pushing the yield on 10-year debt to the highest level since June, after this week’s record-tying $118 billion note auctions drew lower- than-average demand.

Furthermore, Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., said the almost three-decade bond market rally may be drawing to a close.

We have avoided treasuries for some time now.  The floating rate mutual funds we are currently invested in are designed to preserve capital in a rising interest rate environment. I will watch them closely to make sure they continue to perform as expected.  Additionally, our high yield bond funds are more influenced by an improving economy and stock market and less influenced by a rising interest rate environment.

Market Comment 03 23 10

The stock market started on the weak side yesterday, but quickly strengthened, ultimately closing broadly higher. The sell off at the end of last week was modest, but sufficient to relieve the short-term overbought condition. Anyone who was looking for an excuse to sell has probably done so at this time. The risk sentiment-driven sell off has been significantly reduced for now.


Junk bond funds were a little weak yesterday, but they tend to lag the stock market by a day or two. If the stock market holds up well today, we may see some renewed strength in junk bond funds today or tomorrow.

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Great Video on the 2007 Sub-Prime Mortgage Melt-Down

This is a great video on how the sub-prime mortgage debacle came about. It is 15 minutes long. You should have a high speed internet connection to best view it.



Watch CBS News Videos Online

Market Comment 03 18 10

The market continues to drift higher on very light volume. Light volume generally reflects a lack of enthusiasm among investors. Moreover, the market is short-term overbought. I don't believe it is prudent to chase a market that is up so much in a very short time. Since we are clearly in an intermediate term uptrend, I will look to add equity positions only on meaningful pull-backs.


While the low-volatility funds in which we are primarily invested will underperform the major stock market indexes as long as the market remains overbought, we can take comfort in the fact that our high yield/income funds continue to earn very high dividends and interest with a very low level of risk and volatility.

Overbought
What does overbought mean?

1. A situation in which the demand for a certain asset unjustifiably pushes the price of an underlying asset to levels that do not support the fundamentals.

Market Comment 03 12 10

The S&P 500 has now recovered to its mid-January highs. We are at critical resistance of 1150. The market is overbought at this level so a pull-back would not come as a surprise. Since the intermediate trend remains to the upside, I would want to buy a dip.

Anniversary of March 9, 2009 Market Bottom - Keep it in Perspective

Even with the incredible rise of the market since March 9, 2009, the market is still off its Oct. 9, 2007 highs by more than 25%. As the media reports on just how well the market has performed since the bottom, keep it in perspective. The real question remains, has your account gone up or down in value since Oct. 2007.

The following chart on sector performance since the market high in Oct. 07 tells the whole story.

There is no risk at looking backwards; risk resides at the right edge of the chart (the unknown).

(Click on chart to enlarge it for easier viewing)

Gerritz Wealth Management clients largely avoided the bear market, so it was not necessary to take on large amounts of risk to try catch up.

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Buffett Turns Bullish on Homebuilders

In his annual letter, Buffett said “that within a year or so residential housing problems should largely be behind us”.

It’s no secret the housing boom drove the economy up. And it’s not a secret the housing bust drove the economy into the ground. It happened because of an imbalance in the housing market. Supply and demand got out of whack.

During the boom, builders were supplying about 2 million new homes a year. But new households were only demanding about 1.2 million a year.

It’s easy to see how after a few years we have a huge glut of homes. Now, the problem never would have gotten as bad as it did without a few enablers along the way.

Those enablers were the speculators and the banks. Combining loose lending, low interest rates, no down payments, and people who can’t pay the money back is a bad idea. It created artificial demand, especially in areas like Arizona, California, Florida, and Nevada.

It was like a game of musical chairs… without any chairs. The music played for so long nobody thought it would ever stop. But when the music finally stopped, it wasn’t just one person getting hung out to dry. Everyone went down.

How do you correct the problem of excess homes? New housing starts must fall below the rate of household formations.

The builders have done their part and cut supply. In 2009, new housing starts hit their lowest pace in the 50 years it’s been tracked. Only 554,000 new housing starts were registered in 2009.

The problem is, as the economy tanked and jobs disappeared, new household creation disappeared too. New household creation dropped from an annual rate of 1.2 million to under 500,000 per year over the last three years.

It’s not as if these people just disappeared. They’re just acting rationally. If you can’t get a job, you’re not going to buy a house or rent an apartment for yourself. No, you’re going to bunk with family or friends until things improve. And that’s exactly what people are doing.

But what happens when the economy starts to pick up and jobs are available? Those same people bunking with family and friends are going to want a place of their own.

A tidal wave of pent up demand will start hitting the housing market. We could even see some areas swing to a housing shortage. And if the economic recovery keeps up its current pace, it will happen before the year is out.

Market Comment 03 05 10

The market responded positively to a better than expected jobs report on Friday.  The report stated that 36,000 jobs were lost as opposed to the 50 to 70k job losses that were expected. This was enough impetus to drive the S&P 500 through the 1125 resistance level, ultimately closing at 1138.70. The intermediate down trend has now been decisively reversed.

Bull and Bear Tug of War

Below is a chart of the S&P 500 at noon on March 4th. We have currently retraced better than half of the decline from the January high. I have included support and resistance lines on the chart. Resistance is set at 1125 and support at 1044. A close above 1125 resistance would be a clear signal that the trend to the upside would resume, in which case I would add to long positions. On the other hand, a close below support 1044 would indicate that an intermediate downtrend would then be re-established and a more cautious approach should be taken.

(Click on chart to enlarge it for easier viewing)

What is Support and Resistance ?


Support


A support level is a price level where the price tends to find support as it is going down. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely to continue dropping until it finds another support level.

Resistance

A resistance level is the opposite of a support level. It is where the price tends to find resistance as it is going up. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely that it will continue rising until it finds another resistance level.

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The Gerritz Letter

The March 01, 2010 issue of The Gerritz Letter has been published. It should be in your email inbox now. If you do not see it check your junk or spam mail folder and mark it as not junk mail.