Why The Bull Market Should Return

I'm not buying at the moment. I have been selling to protect long-term gains as well as principal. And the process has been grueling... to say the least.

The reward? Stock markets here and abroad are getting hit harder than the portfolios that I manage. (Some reward, huh?!)

Yet it's still painful for my clients as well as the investing public at large. After all, how can stocks work their way to record heights over 7 1/2 months, only to end up in the red in less than 4 weeks!

An optimist would call the recent sell-off a "correction." A correction refers to stock assets that give up 10% or more from the top. (The S&P 500 SPDR Trust (SPY) hit 155.53 at its July peak and has dropped 9.32% to 141.04 here in mid-August.)

Indeed, I believe that this activity to be representative of a correction. I recognize the perils that exist in subprime/credit/interest rates/oil/the economy. Still, I believe that we are looking at a restorative correction rather than the big, bad, ugly "bear." (Note: Bear markets send stocks reeling for 20% losses or greater.)

Here's why the bull market should return with vigor:

1. It's a "housing bubble," not a stock bubble. What the country faces today is the continuing effects of a housing bubble... now a housing slump. Although the Fed has been resistant to recognizing the economic threat of the current housing slump so far, it will ultimately decide to lower interest rates in an orderly manner. When it does, stocks should respond favorably. (Stocks are actually cheaper on a price-to-earnings base than they were in 1995!)

2. After anxiety comes fear. After fear comes panic. After panic... the big O. Opportunity always follows panic sellers. And we've very nearly reached the point of panicky pandemonium. We're able to see this on what is called the put-call ratio, where the level of "puts" is indicative of excessive pessimism. In fact, the levels are so high, those who do not follow the herd are searching the bargain bin as I type.

So one might ask, why then am I not buying? As a manager of other people's money, families ask me to protect their assets as well as help them grow. And that means, one has to have a high level of cash during market storms. The same holds true for my personal money... cash is needed to ride out volatility.

Will my clients and I miss some of the upside opportunity? Probably. Yet emotional well-being and financial well-being go hand-in-hand.

It follows that I will continue to use stop-losses to sell riskier assets, raising cash for investor portfolios. At the same time, I will use a variety of concepts for reacquiring exchange-traded stock funds with the greatest potential.

Here are several items to look for: (1) A S&P 500 SPDR Trust SPY that climbs above and stays above its 200-day average and (2) A reading on the Purchasing Managers' Index [PMI] Composite that increases the likelihood of the Federal Reserve lowering interest rates.

Comments

[irondoor91:]

The absolute surest way to mediocre returns and outsmarting yourself? Trying to protect "open trade profits" and the confusion of volatility with risk.

2007 Aug 17 01:05 AM

[Carl leason:]

Gary,..you got a lot to learn...Housing affects almost every industry from appliances, to carpeting, to Heating and A/C, to roofing, to landscapping, to the salespeople , etc....etc ! When people aren't making money they are not buying cars, taking trips, they are just trying like crazy to wait it out ! Even gasoline sales are down, refining capacity isn't that important anymore, all the impulse buying stops,...Just take a look at Home Depot STOCK ! Or LOWES STOCK ! BK HOMES STOCK ! LENNAR STOCK !
The only independent companies who are not affected that much by slow home sales are to some extent,..companies like Boeing, but check out Caterpillar........
So run that by again,..that it's a "Housing Bubble",...Not a stock bubble ??? LC

2007 Aug 17 01:34 PM

[alfredchew1:]

Technically Speaking, this is just a rebound. Need to wait and see! Going up is usually slower than coming down.

2007 Aug 18 05:40 AM

[Carl leason:]

Alfred, the "going up" was very fast when it comes to housing prices, and now people are digging in their heels and waiting, ..if at all possible. Prices have come down a lot from the peak a year ago, but
,..if you do the math,...housing prices are still too high for the Florida economy especially, as this is a very low wage, retirement state. other states with a higher wage rate will recover faster than FL as
wages are higher in Northern states. Housing is very much a state by state thing where pricing is concerned. ...One can still buy a small ( 1300 sq. ft.) home NEW in Ga, S.Car, Tn, even places like Branson, MO for a cost of $130,000. while one cannot buy the same new home in FL for less than $200,000. and perhaps $300,000. in a place like Chicago.
When it comes to buying as an investment, using the home as a rental, the low wage states rent condos for $750. per mo. whereas high wage states would rent the same home for $1100. $1200. That greatly influences what a home is worth ,...right ?? The recovery is , in my opinion, going to be different in every state, depending on rents, wages, etc. In a place like FL with so many retirees, they can't wait for their Soc. Sec. benefits to go up !!! That would take forever ! LC

2007 Aug 18 11:54 AM

[alfredchew1:]

Dear LC,
What I meant on the going up is related to the stocks and the market sentiment.
Thanks for explaning

2007 Aug 19 08:51 AM