7 Rules For Investing During the Fourth Quarter 14 comments
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Reviewing the investment successes and failures of 2008 is a necessary exercise every investor should undertake before formulating a plan for the 4th quarter. The volatility that we have lived with over the past 14 months has dramatically altered the investment landscape.
What have we learned? Here are 7 investment strategies that should lead you to a successful quarter. As we have adapted to these rules, our investment newsletter trades at www.lonepeakportfolios.com have yielded a return in excess of 100% over the past two months.
1. BUY THE DIPS AND SELL THE RIPS. The black cloud of negativity that hangs over this market will continue to rear its ugly head every time we have a rally. Buy and hold has been a losing strategy in 2008 and there is nothing to suggest this trend won't continue.
Merrill Lynch's (MER) David Rosenberg has analyzed what happened after the last government RTC bailout in 1989; the stock market dropped for another year, the economy dropped for two years, and the housing market dropped for three years.
While we don't presume this market will act in the exact same manner, we do expect volatility to the upside as well as to the downside throughout the quarter. Stability remains off in the distance.
2. HOME BASE MUST BE CASH. Time for a sports analogy: During a bull market investors should play offense and during a bear market investors need to play defense. A consistently great defender stays home on his man. The only time you leave is to make a big play.
A great cornerback might only intercept six or seven passes during the course of an entire season but if he never gets beat, he's a success. It's not very often that you should leave home base. Investors should take a similar approach, stay in cash unless a big dip in price presents itself.
The most common mistake throughout 2008 has been remaining in your investment vehicle for too long. Once you've made your money, get out and head home.
3. DEAD CATS DON'T BOUNCE. You're investment vehicle of choice needs to be best of breed.
Become familiar with stocks of companies with strong balance sheets and high growth. You must be certain that your stock will always bounce back up. If not, you are at risk of losing everything when you buy on a dip.
There is no need to play with fire when even the good companies have been beaten down.
4. GIVE UP THE FIRST DAY OF GAINS. Anticipating a specific stock turn has been impossible in this market. Once you have identified a catalyst that will propel your stock up or down, wait until the move begins before investing.
Don't let the fear of 'missing out' cause you to unwisely invest in front of big events. Investing in front of such events has killed investors all year long.
5. GO WITH THE CYCLES. For four years, oil (USO) has been going up and the dollar (UUP) has been declining. Not any more.
The US economy might not be that great, but the rest of the world is worse. A proactive Federal Reserve and US Treasury have brought a newfound confidence to the dollar.
This cyclical trend leads us away from emerging markets and away from commodities because of slowing global demand.
6. ONLY GO LONG DURING EARNINGS SEASON. This market needs constant reassurance that earnings are solid. In the absence of such reports, the market assumes worst case scenarios and panic leads to extreme selloffs.
The in-between quarterly earnings performance of the S&P 500 has been dreadful. In March the index was down 5.6%, in June it was down 8.6%, and in September it was down 14.1%.
Don't be long outside of earnings season.
7. THE MARKET CANNOT SUSTAIN A RALLY WITH SICK FINANCIALS. Even with the Congressional bill, Financials (XLF) are not out of the woods. Downside pressure from this sector will continue after we get the next relief rally.
The first shoe to drop was subprime in 2007, the second was equity lines of credit in 2008, and 2009 will bring credit cards. Innovest Strategic Value Advisors is estimating that banks will charge off $18.6 billion in delinquent credit-card accounts in Q1'09, according to MarketWatch.com.
Charge-offs totaled approximately $8.4 billion in Q1'08 and $6.4 billion in Q1'07. The firm sees charge-offs totaling $96 billion in 2009, up from $41.5 billion in 2008 and $26.6 billion in 2007.
It is essential that you take the pulse of Financials on a weekly basis until real estate bottoms. No other sector will be able to win if Financials remain weak. Keep a close eye on them.
Disclosure: None
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This article has 14 comments:
DON;T DON;T DON'T
1. China just reported quarterly GDP which remained close to 10%. Estimates for 2009 are for a GDP of 9%. Hardly a global depression by any means. China's earthquake restorationand urbanization will continue to require enormous quantities of metals, oil, and other hard assets.
2. If this bull is dead it would mark the shortest commodity bull market in history. Again, a very unlikely scenario. Mining supply constraints continue to hamper production of copper, aluminum, nickel, and other base metals.
3. Jim Rogers just started another commodity fund last month. Why would he do so if the commodity bull run is over? Short answer: He would not.
4. Your comment about a market that cannot move higher without Financials is the typical Wall St. party line, which off course is self-serving and off-base. Financials from a technical standpoint (just ask Lousie Yamada or Carter Worth) are in a confirmed downtrend which is not likely to reverse for several years. Unlike Financials, commodity producers actually produce "things" that economies actually use.
I cannot recall another period in the market where the regulators have absolutely failed investors. This SEC is one of the most corrupt and inept ones ever. Buy n hold is dead because it's been killed by mo-mo hedge funds that chase returns and jump in and out of stocks. Sarbox has also killed any domestic companies ability to grow profits.
Thes guys have turned Wall St. into a Vegas-style craps table where it is now virtually impossible to establish an accurate value for stock prices. Thanks guys. Somebody needs to go to jail for this travesty.
The Fed and other powers that be are 90 degrees out of phase with the reality on the ground; the harder they try to be countercyclical, the more positive feedback they induce. The only question that matters is where their misplaced and mistimed flood of money will end up this time. All money is made by buying bubbles on the way up and shorting them as they burst. Investment is dead, its real returns dwarfed by the easy money to be had in speculation and the deep pockets of the manipulators. Don't be a schmuck, thinking that a "solid company" with "consistent earnings" or "a strong balance sheet" will deliver returns. It won't. Find the bubble. Get long. Then get longer. Then get very, very short. All money is made that way. If you want to make money, you have to play that game.
Several years ago I helped a small sandwich shop expand into a larger retail space, tripling the seating capacity for the business. In return I got a small percentage of the company. That investment pays me monthly profit checks which average around 30% annual return on my investment.
Now that money won't double up in a couple months, but 30% annual return ain't so bad, even if not compounded. Plus, it's nice to have a second source of income in case my employer should decide to cut labor costs. It's not enough to pay all my bills, but it's better than nothing.
It's also nice to see that my original investment is helping the community. More people get a chance to eat in a nicer place, more people employed by the bigger store, more profit for the original owner, and a bigger return than a CD or T-bond.
jegan ;-)
www.greenfaucet.com/bl...