Stocks: Pleasant Surprise
We were pleasantly surprised by the resilience in the market Wednesday as the broad market surged more than 2% higher. Even the bear market rally in the NASDAQ-100 Index just about matched the gains in the rest of the market. This ability to rally out of a possible topping formation tells us the underlying bullish trend is strengthening, just as it should during the seasonal period of stock market strength. We did say that surprises were likely to be on the upside, in the direction of the underlying trend.If you invested based upon the seasonal Moore Research Center trades, you're in the black after an initial dip. With the close Wednesday at 1132, paper profits now total $3500 per contract on the ``100% probability'' trade, and $3100 per contract on each of the other two trades, for an overall paper profit of $9700 for all three trades. The initial drawdowns, however, were pretty hair-raising: $12,650! Don't do futures unless you really know just how much leverage you're using and how to manage the risk. Most investors should stick to unleveraged investments, such as individual stocks or mutual funds.
If you've been watching the intraday Money Flow chart during the trading day, don't be concerned if it's reading bearish divergence: this week always sees lower volume, so it's almost impossible for the market to confirm any relative new highs on the Money Flow scale.
Since we switched strategies in late summer from primarily an index-based one (via the S&P MidCap) to one emphasizing a diversified portfolio of individual stocks, we have seen that there is always a bull market somewhere, but you have to look for it. You can't just plunk your money into a fund and ride the trend. There just wasn't a trend (except in the NASDAQ, where it was definitely a bear market). You have to pick your stocks, expect a few to go belly-up, prune the deadwood and add fresh new stocks. And, you definitely must diversify. Individual stocks are far more volatile than the indices and they do blow up from time to time. Accept it as a part of the game and move on.
If you're more inclined toward a sector-based strategy, check out the Sector Timeliness Rankings, where we rank the individual stocks within a sector index, then compute a composite rank for the whole sector and compare that figure against other sectors. Recently, the top sectors have been:
- XNG, the Natural Gas Sector
- INSR, Insurance
- UTY, Electric Utilities
You can then click on the sector name, which will take you to the
Stocks Within Sector Page, where you will see each stock within the
sector listed (actually, it's limited to the stocks on the FOLIOfn Window
List which also happen to be in that sector index). Stocks ranked 10 are
good candidates to buy. Clicking on the stock ticker symbol will call up
a chart of the stock which shows its Williams Accumulation-Distribution
Line as the indicator. If you haven't read Larry Williams' book on
``The Secret of Selecting Stocks for Immediate and Substantial Gains'' already,
you should read it. It contains a complete explanation of how the Accumulation-Distribution
Line is constructed.
We suspect the era of outperformance by the broad and blue chip indices has ended and we've entered a new era where individual stock portfolios will solidly trounce the indices. Sector indices will continue to be a great way to gain diversification and exposure to top performance industries, of course, but our preference is for individual stock portfolios of at least a hundred stocks for diversification. Now that this is achievable by individual investors even with modest accounts (via FOLIOfn and similar online brokerages), we see little reason to give up the flexibility of such accounts for the pitfalls (and high expenses) of mutual fund investing. And, given the tax advantages of selling losers for immediate tax writeoffs and letting your winners run and run into future tax years, the folio method of investing beats mutual funds hands down. You get one of the benefits of long term tax-deferred investing in a taxable account which can generate tax writeoffs on the short term.
The market is on a roll now, but a consolidation here would be quite normal and healthy for
the longer term bull trend (except in the NASDAQ, where an oversold bounce or bear market rally
is overdue). Still, we emphasize that surprises on the upside are typical of bull market
trends and we see no reason to take profits now with the trend expected to remain up for much
of 2001.
Bonds /
Interest Rates:
Now that the bonds have put in a significant top in price (low in rates),
guess who the media are interviewing for their great returns this year?
You bet, the one bond fund family we've consistently recommended
for guaranteed gains, American Century. We think the great outperformance of bond funds in 2000,
when we were well invested in them via their Target 2025 fund, may not be repeated next year, and we're pretty sure the next few
months could see bond rates rise before we get another great buying opportunity for substantial gains in bonds.
We note that some long term analysts are projecting 30-year U.S. bond rates to drop down below 3% by 2010. Yes, we do agree, but we still think a minor rise in rates will precede the resumption of that downtrend in rates. That's why were out of bonds for the moment, with 100% of our investable funds allocated to the stock market.
