In his recent MSN article, Jon Markman makes some good observations regarding historical data on the S&P 500 and what we can expect in the next several months for returns (hint: not much):
"Statistically speaking, since 1950, whenever the Standard & Poor's 500 Index ($INX) has moved more than 10% over its 10-month average for more than seven months (as it did through mid-January) it has next slipped sideways for at least the next 10 to 18 months within a range of flat to down 10% as its average catches up."
"But during the 2003-07 bull market, the S&P index typically stayed 4.6% above its 10-month average, which was unusually buoyant. Until Tuesday of last week, the benchmark index was ahead of its trailing 10-month average by more than twice that amount, at 11.9%. Even after the recent slip, it was still ahead by 8.9%, or more than three times normal."
"Now let's roll back the calendar two and a half decades for another view of this concept. The only previous time in the past half-century that the index maintained a double-digit percentage lead above its 10-month average -- October 1982 to June 1983 -- the move lasted two months longer than our most recent span, at nine months. The S&P 500 closed the final month of that stretch at 167 and did not return to that level for 18 months. The index never crashed -- the worst slip was 10% from that peak -- but just slipped sideways with a downward tilt as valuations caught up with expectations.
This can happen again and probably will. Not because anything is wrong with the economy or companies but because mean reversion is just what markets do. You need to be prepared mentally for this to happen."
How can an ordinary investor play this 'do-nothing' market? One simple technique would be to hedge long positions with a short position. The simplest way would be to purchase a 1x inverse ETF such as SH, the Proshares Short S&P 500 ETF which currently has a trend score of +60 and is in a very weak uptrend according to MarketClub.
Another technique would be to focus on high quality individual stocks that you anticipate will outperform the market over the next 12-18 months. This is easier said than done, but if the market is relatively flat there will still be some companies which outperform. I will be adding some additional free screens on the blog in the coming weeks to help identify potential candidates.
Finally, don't be afraid to take profits and use stop losses. Protect your capital through the use of stop losses and take profits on winners or use trailing stop losses on winners to lock in gains.
Disclosure: No Position in SH