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Long/short equity, registered investment advisor, portfolio strategy
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Good Morning. One of the great things about being in Europe is the difference in time zones. Given that France and Italy are six hours ahead of New York and eight hours ahead of Denver, there was plenty of time each day to rest up, see some amazing sights, learn about history, and yet still have a moment or two to ponder the big picture of the stock market and the strategies we employ.

Unlike last year's Ireland adventure, where the markets were in turmoil and our trading systems required a great deal of attention, this year, the market gave me a break while my wife and I were exploring Nice, Eze, Cinque Terre, Santa Marghareta, Florence, San Gimignano, Sienna, and Bologna. In short, stocks went up every day but one while I was across the pond, which, again, allowed me some time to think.

While I had several big-picture epiphanies while on busses, planes, and trains (train travel is indeed a must-do experience in Europe), perhaps the biggest was the confirmation of my basic belief system about how best to manage money in the markets.

Take a look at the graph below. This is a monthly closing chart of the S&P 500 for the last 20+ years. In addition to some moving averages that I accidentally left in the chart when I copied it, I've added the approximate returns for each of the five major moves the market has experienced since 1993.


(Click to enlarge)

What struck me is that while we spend SO much time talking about the day-to-day action, the indicators, the news, and what the central bankers of the world may or may not do next, getting the really big, really meaningful moves in the market right is really the key to success in this game.

Since about 1993 (I'm eyeballing the dates and levels here), the S&P 500 is up about 270% (The S&P went from about 450 to 1667). However, the ride has been anything but smooth as we've seen two MASSIVE bear markets since 2000 and two pretty good recovery bulls as well. But what jumps out at me here is that if one could have simply avoided at least a portion of the 47% decline that the "tech bubble bear" produced and the 56% dive associated with the "credit crisis," they would have been in much better shape.

Take a look at each of the major legs (+233%, -47%, +88%, -56%, and +150%) that took place over the last 20 years. Granted, it is IMPOSSIBLE to capture all of the up-moves and then avoid all of the down moves. However, in doing some math, it becomes quite clear that avoiding a decent chunk of the big declines is what the game is all about in the long run.

For example, if one were able to capture 70% of the gains that were available during the bull markets and then avoid 50% of the bear market declines, the returns would far exceed the buy-and-hold approach. If my calculator is correct, it looks like such a strategy would produce a total return of about +360%. And then if one could capture 70% of the upside and avoid 70% of the downside, the return is more like +523%, which is nearly double the 270% that the S&P itself gained during the period.

So, my thought here is simple. The trick to this game over the long haul is to get the big moves right. If you can stay on the right side of the big moves (such as the one that we're seeing right now), then the wiggles and giggles, and the day-to-day "stuff" will likely take care of itself.

On that note, it was enjoyable to come home after dinner each night while we were in Europe and see that our accounts had gained some ground almost every day because our Market Environment Models had told us that we need to be siding with the bulls right now. Like all moves, this one too will end at some point. But for now, we'll continue to enjoy the ride.

Turning to This Morning ...

After Friday's joyride to the upside, it isn't surprising to see some sloppiness in the futures this morning. Asian markets were mostly higher while Europe is mixed and U.S. futures are currently pointing to a slightly lower open.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell ...

Major Foreign Markets:

- Shanghai: +0.75%

- Hong Kong: +1.78%

- Japan: +1.47%

- France: +0.12%

- Germany: +0.36%

- Italy: -0.71%

- Spain: -0.63%

- London: -0.15%

Crude Oil Futures: -$0.55 to $95.47

Gold: -$10.20 to $1345.50

Dollar: higher against the yen, lower vs. euro and pound

10-Year Bond Yield: Currently trading at 1.946%

Stock Futures Ahead of Open in U.S. (relative to fair value):

- S&P 500: -2.82

- Dow Jones Industrial Average: -20

- NASDAQ Composite: -9.31

Thought For The Day ... You can't build a reputation on what you're going to do. -Henry Ford

Positions in stocks mentioned: none

Source: Daily State Of The Markets: Thoughts From The Planes, Trains And Automobiles