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Buy and Hold is Dead, but 2009 may be a good year

|Includes: SPDR Dow Jones Industrial Average ETF (DIA), QQQ, SPY

 

The market has bounced off extreme lows, investors are becoming giddy because of the aggressive reversal, and for the first time in a long while economic data is starting to show signs of recovery.  In an environment that has left devastation across all sectors and all walks of life, even the glimmer of hope offered in recent days is welcome.  The next question on everyone’s mind is will it last.
 
Although I will offer opinion in this article, and although these opinions will help everyone navigate the playing field that is the market today, this article is not intended to answer that question.  In fact, based on my long-term observations, that question is moot.  It should not matter.  Unfortunately, for those people who are trying to answer that question, and who are dependent on a positive response, life is difficult.  Investors can never reach the Comfort Zone if they continue to depend on the Market to increase, and hope that the market will fare well.  If the market needs to trend higher in order for an investor to feel comfortable, that investor must rethink the doctrine that has gotten him in trouble in the first place.  Many times, that even means advisors.
 
Unfortunately, many people hire professional money managers, and those managers often rely on the market to increase as well.  As a result, when the Market falls so do their portfolios.  Investors empower buy and hold managers by investing in mutual funds, retirement accounts, and professionally managed services.  These money managers are supposed to be some of the brightest people in the world.  They handle billions of dollars, and they make important decisions every day.  Most of them have MBAs from top business schools, and that is encouraging to the naked eye.
 
However, the education they have received may not be the best approach in a real-world environment.  That may be the best way to gather fees, but it is not the best way to protect assets.  In fact, buy and hold traditions are out dated.  In the past year, most people have realized that Buy and Hold is Dead.  Unfortunately, many others have yet to realize the fault with this traditional science.  When the market turns lower, like it did at the end of 2007, even conservative buy and hold strategies collapse.
 
This article is intended to address the current and future economic landscape.  It targets two types of investors, those who have accepted a proactive lifestyle, and those investors who are yet to do so.  With both in mind, the future of the Economy and the Stock Market are brought into light.
 
The recovery from the bottom has already begun.  My analysis tells me that 2009 will be a good year.  But then, so was 1933.  In fact, late last year my analysis told me that the market should have begun to move higher sooner than it did.  The undulations presented by the White House and Capitol Hill caused the market to decline more than it should have.  Fortunately for everyone, Wall Street and the White House now have a relationship, where a month ago they did not.  This is one of the main conditions for the recent recovery, but then it caused the excess decline too.
 
In the months that follow economic data is going to improve.  Specifically, my Return to Parity Analysis for 2009 tells us that demand will return.  This analysis has already been widely distributed through Reuters and to clients a Stock Traders Daily.  In summary, the Return to Parity Analysis suggests that there was an overshoot to the downside.  The Investment Rate, a proprietary measure of longer-term normalized demand ratios in the United States, tells us where normal demand levels should be in the current environment.  Actual demand levels for investments are far lower than they should be.
Reasonably, we can all understand why.  During the housing bubble, when money was cheap, investors who might have waited a few more years to make investment decisions did so prematurely.  They were encouraged by the prospects in both the housing market and the stock market, and they invested money before they otherwise should have.  As a result, in 2008 and in the beginning of 2009, there was a void.  Those investors who would have been making investment decisions during the past year had already done so.  Therefore, no new money is left to invest, until new potential investors have the chance to save again.  From recent economic data, we are seeing this happen now. 
 
This void is what caused the recent economic meltdown.  Sure, there were other catalysts that accentuated the problem, but if new money was still looking for a home, the downturn would have been far less severe.  In addition, the recovery from this void will cause the next handful of months to appear quite prosperous too.  Given the weakness we have seen, even a slight recovery will look good.  Unfortunately for some, this could be the biggest headache of all time. 
Specifically, the Investment Rate tells us that the market and the economy have entered into the third major down period in US history.  The first was the Great Depression, and the second was the stagflation period of the 1970s.  This one is likely to be worse, and it has only just begun.  The declines measured by the downward sloping curve in The Investment Rate, which began in 2007, tell us the weak economic conditions will persist until 2023.  Even though 2008 was severe, and even though a bounce – back could come in 2009, the weakness is not over.
 
Before I continue, and before I address the differences between proactive strategies and buy and hold traditions, I would like to point out that my Return to Parity Analysis and the complete Investment Rate Model are detailed on my corporate website.
 
In the middle of 2007, the direction offered by the Investment Rate was clear.  It told us to sell everything.  That meant real estate, longer-term investments, and private businesses.  The writing was on the wall, and the model was exact.  However, now that the market has declined substantially, the writing may not be as clear.  Reasonably, although the third major down period in US history has begun, advising people to liquidate at the trough may not be the most prudent strategy.
 
This presents a conundrum.  If Buy and Hold is Dead, but the market is likely to recover in line with the Return to Parity Analysis in 2009, what should investors do?  Is it time to buy and hold again?  The answer to that is no.  Buy and hold investment strategies will not work or a handful of years, and people should not newly adopt this ineffective dogma if they have already started to incorporate proactive strategies. 
 
However, for those persons still engaged in these ancient practices, for those persons holding onto losing assets and hoping for the best, there will probably be one more chance.  Reasonably, the chances are expiring, and few opportunities like this will come again.  With the 2009 Return to Parity Analysis in hand, the market is likely to increase aggressively throughout the remainder of the year.  Don’t be fooled, the rally will not last.  More prominently, the economic conditions and market activity that follows the return to parity will likely lead the United States into a Greater Depression. 
Understandably, that takes this conversation a little further than most people are comfortable with initially, so I will explain my position.  This forecast comes from a combination of proven models.  The findings of The Investment Rate, when combined with the escalating debt levels in the United States, tells us that a Greater Depression is a real probability.  I believe it will happen, and I am advising my clients to expect the worst.  If nothing more, they will continue to protect themselves, and that is the name of the game anyway. 
 
However, I might be wrong, and it might not happen.  With that possibility, some investors may start to think the wrong way.  Some may think, just maybe, buy and hold may not be completely out of the question.  This is almost surely going through many minds right now.  In addition, after my 2009 Return to Parity begins in earnest, many people will forget about this article completely.  They will instead give way to the passive indisciplines that allowed their portfolios to decline in the first place.  Some investors will be well on their way to recovery later in the year, and they will be reluctant to liquidate those positions.
 
That will be the biggest head fake in history.
 
Obviously, my point of view is strong, but we always must consider both sides of the probability spectrum.  Planning for the worst is a good concept, but what if I am wrong, and what if the Investment Rate, which has led the market through major economic cycles since 1900, is wrong for the first time in history too.  My purpose is to both protect wealth and provide a means for making money in any market environment, so I cannot set limitations on opportunity.  I don’t want to leave anyone out in the cold, and if the Market increases, I want my clients to participate.  At the same time, if the Market declines I want them to make money too.  Clearly, I expect to be able to prosper no matter what.  Even in the face of a Greater Depression, I expect my clients to make money.  So, how do we do that?  That is where proactive trading strategies come in.
 
Proactive trading strategies allow us to make money regardless of market direction.  They automatically transition with the Market, when the Market turns higher or lower as well.  This unique feature not only keeps us on the right side of the curve, but if I am wrong, if the Investment Rate is wrong, and if the Market surges higher and makes new highs, our proactive strategies will allow us to ride the wave higher as long as it lasts.  This is the new era of investing.  Buy and Hold is Dead, and investors must remain nimble. 
 
For everyone already engaged in proactive trading strategies, don’t change a thing.  Proactive Trading Strategies are the channel leading to the Comfort Zone.  This is a place where economic conditions and market direction no longer matters to us.  It is a place where we are always in control, and moving ahead.  We can all get there, but it requires a conscious understanding of the pitfalls of traditional investment techniques. 
 
However, for those persons still holding on to brackish buy and hold investments like managed accounts and mutual funds, consider adopting proactive trading strategies now.  You may want to sit on your positions until the Return to Parity fulfills itself, but prepare for the transition that you will need to make when the market stalls again.  Learn how to do it now, when emotions are not running high, and then transition seamlessly.  This is a process, and this is a plan.  When the 2009 return to parity comes full circle, you need to be ready to transition.
 
Reasonably, proactive trading strategies have not been something most people are comfortable with.  I recognized this from day one, when I first started Stock Traders Daily.  In fact, most people fail to remain disciplined.  Even with a strict set of rules, many of my past clients failed because they did not adhere to the rules in real trading environments.  Over the past decade, I have been developing a way around this.  I have been looking for a way to help prevent investors from making the mistakes that have caused so many people to fail.  What I came up with has revolutionized the process forever. 
 
I have developed an automated trading strategy that pre-incorporates structure and discipline so investors have no choice but to always follow the rules.  Best of all, it also operates automatically.  Investors no longer need to hit the ‘trade button’ to execute trades.  However, they still remain in complete control.  
 
That control factors makes this tool an excellent resource for active traders who appreciate market timing, but the automated features avail this tool to a much broader audience.  For the first time in history, normal people, with normal jobs can incorporate proactive trading strategies without sacrificing time or lifestyle.  Now everyone can use the risk controls that proactive trading strategies offer, and transition with the Market no matter where the Market goes.  This is our vehicle, and it is taking us to the Comfort Zone.  There is nothing else like it. 
 
With this automated tool, economic conditions no longer matter, the risk of a Greater Depression is a non-issue, questioning the latest economic data will never happen again, and we will all be free to live life the way it was meant to be lived.  Free from Market related worries or concerns, we can start to focus on the things that matter to us again.
Most of my clients are using this already.  Although some of them still prefer to operate manually, the interest in the completely automated version is catching on fast.  Because we are proactive, we can walk down the street and smile every day.  Today, coincidentally, we walk hand-in-hand with our neighbors because the market is moving higher from its lows and brackish investors like that.  However, a month ago we were the only people smiling.  That’s the difference.  It is a lifestyle change, and all it takes is a subtle realization.  Buy and Hold is dead.  Once that happens, this automated system is the logical alternative.
 
If you are a traditional buy an old investor, and if you are holding on to assets that are severely underwater, I will not tell you to go to cash today.  Instead, recognize and respect my Return to Parity Analysis for 2009.  While doing so, learn how to use my proactive instruments too.  They will make the difference in the end.  With all seriousness, this may be the last chance you have the move to cash before the severity of the third major down period in US history hits.  If you are already a proactive investor, don’t let yourself be enticed by the prospects that my lie immediately ahead.  We have already positioned ourselves in a couple pre-diversified instruments near the bottom, but we will not take that much further. 
 
The focus now is on discipline.  We must all have a plan.  For some, the plan may be to consider the risks, and prepare to make decisions that are obvious.  For others, it is to avoid temptation, and stay the course.  In our world, Everyday is a Tuesday.  Our lifestyle can only be impeded if we allow temptation to seep into our world.  Don’t do it.  The path to the Comfort Zone is clear.  As always, we will remain in control of our risk at all times, and we will position to take advantage of opportunities every step of the way.

I have recommended URE and UYG to my clients as short term position trades.  These were made the day after the Market bottomed, and I do not recoommend chasing these positions.