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I am a freelance writer and an independent trader with an interest in sleepers, dark horses and obvious secular trends. In my spare time, I also enjoy bottom fishing, buying 52-week highs and betting against the contrarian crowd. Image by Michal Marcol (
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  • Salesmen, Marketable Market Facts, and Investing Truths

    At some time in their investing lives, most people will hear that 80% of the gains in the market are made in 2% to 7% of the trading days in a calendar year.  While few veteran investors will argue with the veracity of this statement, some object to the contexts in which it is made and to the motives of those who make it. Asset gatherers, for example, have an obvious interest in keeping clients invested at all times, and the 80% rule certainly helps them to make the case that average investors should stay in the market no matter what.  Trailing commissions that increase in proportion to the time that clients remain invested in a fund further encourage dealers and financial advisors to overemphasize the 80% adage.

    Another issue with the 80% rule is its misleading presentation as an isolated fact.  When viewed without a context, it doesn't tell the whole truth about rebounds, bear markets, and how traders trade.  As a result, it begs the questions of when 80% of the losses occur and why investors shouldn't avoid the market to avoid losses on those days (the corollary argument to staying invested for gains on 2% to 7% of the trading days).  Furthermore, should investors remain exposed for the sake of those ten winning days in a year even in a year when the market falls by 35% and drags every portfolio down with it?

    Another reason that traders object to the 80%-of-the-gains adage is that it sounds like an argument against short-term investing even when it's used to make an unrelated point.  Contrary to popular belief, successful traders don't make big bets based on one or two market timing decisions.  Therefore, the odds of a trader being out for the ten best days in a year are much lower than many investors and advocates of buy-and-hold imagine in their wildest day-trading dreams.

    Ultimately, marketable market gems like 80%-of-the-gains, sell-in-May, and don't-try-to-catch-a-falling-knife should be subjected to as much scrutiny as anything else that pundits or salesmen advance as 'investing truths.'  With experience, most investors return to the old-fashioned fundies, and as a result, sometimes find themselves lightening up during an uptrend.  Adages don't deter them from keeping a little powder dry or buying common stock in June. 

    And some successful investors even live long enough to catch a falling knife in their bare hands.  

    Jun 24 10:57 AM | Link | Comment!
  • Scared of a Healthcare Tear?

    A strong start to the year is traditionally viewed as a good omen, but since March, domestic indices have established a sideways pattern with a few fake-outs to keep investors guessing. Trendless trends, however (when they persist for long enough),  sometimes look to make a leadership appointment. Which group has emerged as the leader of the directionless charge? Consumer staples? Well, yes. They're holding up pretty well. Also utilities with reliable dividends. But the shocker of the year has to be the rise of the healthcare stocks - a group that's resisted every rally and disappointed investors since Buffy the Vampire Slayer first contended with the forces of darkness.

    Despite generally stagnant earnings and forecasts for more of the same, the likes of Bristol-Myers Squibb (NYSE:BMY), Eli Lilly (NYSE:LLY) and Pfizer (NYSE:PFE) are leaving high-growth issues in the dust. PFE is up over 20%, while LLY has gained 10% for the year. Even BMY's gain of 8% year-to-date outpaces that of the S&P 500.

    So what can we say about a market led by pharmacy stocks, where the financials have hardly raised their heads? Has the aging demographic finally aged long enough to bring an ailing sector back to life?

    It's hard to love a market led by the healthcare group, where the stellar quarters of beta names are ignored. It's equally difficult to ignore the rise of big pharma shares after a decade of sub-par performance. Most remarkable of all, the pharmacy stocks seem set to subvert the busted myth of the 'defensive play'. As every investor soon learns, defense stocks don't so much defend as lose less and gain less as the market moves. Eli Lilly, however, along with Pfizer and Squibb, is actually doing what defense stocks are supposed to do. It's moved convincingly against the market since the downturn in February and appears poised to take out its 52-week high. And with an undemanding multiple of 8.9, LLY may have more upside than anyone expects.

    The recent commodities rout and threat of a slowdown in China have left many investors looking for a place to hide. Whether we see a return or not to the risk-on trade, the market appears to have made its choice for risk-off. Now as always, traders will note when a stock moves against its index - even or especially if the market is stuck in a range or showing a general aversion to risk.

    May 17 7:51 PM | Link | Comment!
  • No Love for Fertilizer Stocks

    With crop prices holding near record highs and farmers reportedly flush with cash, most investors would expect the agriculture space to be on fire. Year to date, however, fertilizer stocks - previously the darlings of the recovery - have lagged the major indices and stubbornly failed to respond to positive earnings numbers for first quarter 2011.

    As a case in point, Canada's Agrium Inc. (NYSE:AGU), a potash and crop nutrient producer, fell last week after beating analysts' expectations on both the top and bottom lines. Agrium supporters call the sell-off an overreaction to modestly lowered guidance for the first half. Weakness across the board in the commodity-weighted TSX, which appears on course to return to 2010 levels, likely also contributed to AGU's decline. Agrium shares are down 18% for the year, and rival fertilizer makers haven't fared much better. Among the majors, Mosaic (NYSE:MOS) and CF Industries (NYSE:CF) have significantly underperformed the S&P 500. Only Potash Corp. (NYSE:POT) held its own against the lacklustre TSX Composite after the company that taught Wall Street how to find Saskatchewan on a map raised its EPS forecast for the year.

    Seasonal patterns related to the spring planting season may account for first half weakness in the fertilizer stocks - and this regardless of quarter-over-quarter comparisons. But charts have little respect for chartists' observations when investor sentiment turns against a group. In addition, even pure plays like POT won't always adhere to historical patterns.

    Despite investors' lack of love for the fertilizer giants, analysts remain committed to the crop input story - at least in the near and very long term. According to Yahoo Finance, five out of seven analysts rate Potash Corp. a buy, and three out of nine give Agrium Inc. a strong buy recommendation. Forward multiples, however, appear to tell another tale as professionals project more modest valuations for agricultural stocks in 2012.

    Few money managers will argue against the agriculture story when asked for a five- or ten-year outlook. A global food shock and increased production to meet increased demand are regarded as near inevitabilities. Developing nations will continue to turn to nutrient makers to bring yields to levels routinely achieved by North American factory farms. And patient investors should live to see crop nutrient producers back on the 52-week high list again.


    May 12 2:29 PM | Link | Comment!
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