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.
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.