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Market Update 11/16 - "All In" Or "All Out"

The markets continued to grind higher this past week as new highs could be found everywhere.. The elusive correction continues to wreak havoc with investment managers looking to put new money to work and the hedge fund guys & gals that are once again behind the 'eight ball" as their funds trail the major averages YTD. Now the 64,000 question is whether these same managers will provide a 'bid" to the market into year end , or will we see some resistance here at S & P 1800.

During the course of the last 3 months or so , I have suggested harvesting gains along the way, by trimming extended positions. Increasing income by the use of a covered call strategy in an effort to slowly raise cash along the way.. A simple strategy that has served me well over the years.

In keeping with my bullish long term view of the equity market , I continue to maintain my core dividend growth holdings. Many have e-mailed recently questioning whether its now time to cash in the chips after this 25% + gain in the S & P YTD . I simply reply going "all in" and going 'all out" is a recipe for failure if one has an eye to the longer term.

It rarely pays over a considerable time period to be 100% in or 100% out when you manage money for others the way I do. The same applies to those that manage their own retirement funds. There are a few simple reasons for this:

1. You're not god, you're not a clairvoyant, if you're caught all-out and the S&P has a plus-6% week, you better hope you've caught at least some of that, it could be the entire year's gain!

2. When you go to 100% cash, something changes in your mind. You get to this place where mentally you won't be satisfied unless you pick the perfect entry point. It's harder to do some buying at 100% cash than it is at 75% cash or 50% cash - at least then you're "adding to positions" rather than taking a stand from scratch. Price will drive you crazy without an existing position or average cost to anchor you, whether it's higher or lower than the current quote.

3. There are high yields being paid plenty of stocks , yields in excess of what the bond market is offering. When you buy a building in the commercial real estate market, you are buying it in large part for the rental income it will produce. Sure you'd like to sell it at a higher price one day but there are no quotes online for what it's worth on a day to day basis. You except the fact that on any given week or month the building may be worth less than the week or month before. But the rents are rolling in and you don't have to pay attention to the swings in value on a daily basis. Can you do that with stocks? You should certainly try to in some cases. If you own a non-cyclical stock with a 4% yield and you've bought it at a reasonable PE ratio, what do you care if it's up or down a few bucks in a volatile tape? You're still getting paid and there's no reason to react to the headline volatility of the market today or tomorrow. Think like a landlord, not like a tenant.

4. There's a tendency to pay closer attention to things when you've got money on the line, and a tendency to be lackadaisical about things when they aren't making or costing you money. If you're 100% out of the stock market, you're also 100% excused from having to pay attention to it - and you probably won't. -Its Human Nature.

5. In real estate, they say Location Location Location. In the stock market it's Timing Timing Timing. Everything is timing, it's what makes the guy who bought Apple @ 700 a loser and the guy who bought in this year @390 , a winner - same stock, very different result.. The average investor should be striving for maximum upside capture with minimum drawdowns and volatility. Easier said than done, but for most people that's the game..

There are funds that run a very specific momentum style and for them it might make sense to go 100% to cash when the market acts "unhealthy". For those running stock mutual funds, in many cases it's their job to be 100% exposed to the market at all times, by the terms of their charter they can't be anything but All-In.

But as individual investors we don't have those restrictions, it's actually an advantage , we can be 30% in, 50% in, 65% out, 28% long and 44% short etc. We can change our exposure as we go, assuring that we'll never be fully exposed to a nasty fall or completely on the sidelines during a rip-your-face-off rally.

This isn't just market sense, it's common sense.

Looking ahead , one group that I believe will produce good returns in '14 are the Financials. Banks still have some of the best bottom line earnings growth in the S&P 500…

The Financials have lagged since the start of the 4th quarter, taking a breather from their big moves since the start of '13. According to Bespoke Group in a very overbought stock market, the Financials are the least overbought of the 10 SP 500 sectors. I added JPM, & GS recently. C , BAC are two more that can be bought here. - Don't Chase !

I've mentioned this before, but its worth commenting on again as we move forward to a more normalized interest rate environment. An environment that initially may send shock waves to the market. The worst investments will be those linked to interest rates - bonds, utility stocks, are prime examples. That's not a call to sell all of your core utility holdings, its a suggestion to possibly lighten up if you are overweight the sector and a call to not add to positions in that group.

The best investments will be those with low current PE ratios and sensitive to the economy. With stronger economic growth as the fed slows down its asset purchases the environment will be bullish for technology, cyclical stocks, discretionary consumer stocks, and financials.

JP Morgan's excellent quarterly analysis report supports my point about rising interest rates and P/E multiples. Rising rates have historically been positive for stocks, as long as the ten-year is below 4.5%. So if the market gives us that knee jerk sell off as rates do begin to normalize , it will be a buying opportunity.

This week I'll start to look ahead to '14 and share some thoughts for what we might see on the equity front as we turn the page and close out '13 ..

A quote from a financial blog I follow :

"Most of your favorite crash-fetishists have track records that you wouldn't' wish on your worst enemy. It is one thing to be aware of the potential for terrible things to happen, it is quite another to give up on life and opportunity altogether."