LA: Buy-and-hold is alive and well

Look Ahead

MARKET BEHAVIOR

Stocks already marked new multi-year closing highs and are on the verge of eclipsing the intra-day high as well.  On virtually every timeframe stocks are making higher-highs and higher-lows.  The last few weeks to the last few years, everything has upward momentum.

Under normal circumstances a bull market lasts three or four years, suggesting this rally is long in the tooth, but that is only if you think the 2009 bear market was normal.  If a 50% correction is unusual, then the subsequent rally will most often be unusual too, meaning we can throw conventional wisdom out the window when judging the age of this bull market.

MARKET SENTIMENT

What makes this recovery different is the 2008/2009 bear marked rocked buy-and-hold investors to the core.   No one believes in buy-and-hold anymore because of just how badly people were burned by that market collapse.  Under normal conditions investors warm back up to stocks and start bidding them up to unsustainable heights again within a few years.  But the 2008 bear market turned everyone into a cynic and we are still years from the next episode of irrational exuberance.

In fact it is amazing how pessimistic people remain even though the market is up well over 100% since the 2009 lows.  Normally those type of gains would have everyone gossiping around the water-cooler about the next sure thing their neighbor turned them on to, but we are nowhere near that level of enthusiasm and complacency, in fact we are just the opposite.  Everyone is expecting the boogeyman to jump out from behind every corner.  Every story is how this event or that policy will collapse the global economy.  The market is obsessed with fatalistic thoughts of imminent doom and that attitude is keeping this 4 year-old bull market a spring chicken.

Nothing ever goes straight up and there will be pullbacks and bear markets along the way, but we are in a 15-year bull super-cycle.  The best time to buy-and-hold is when everyone says buy-and-hold is dead.    It will take the better part of a decade to get traumatized investors out of bonds.  It won’t happen all at once, but slowly over a period of time.  It is this gradual thawing of investor aversion to equities that will provide a steady stream of new money flowing into the equity markets and will create the foundation of this bull super-cycle.

TRADING OPPORTUNITIES

Expected Outcome:
This post ended up taking a far longer view than I originally intended, but the information is good and people need to hear it so I kept it.  The next decade will be phenomenal for buy-and-hold investing and people should stick to the conventional wisdom of keeping most of their liquid wealth in diversified buy-and-hold equity instruments.  For the adventurous use a smaller portion of your portfolio for chasing the next big thing or trying your hand at market timing.

But back to the present, the market continues holding Fiscal Cliff gains.  Look for new highs this week and just as important holding those gains.  A material break under 1450 could signal the start of a pullback.  Material break is more than just a test and a dip under, it is a strong selloff that doesn’t find a bottom and bounce back above support.  The market often tests support and if your stop-losses are too close to the actual support level, you risk getting shaken out in a routine head fake.

Look for the market to build more support and if we haven’t seen a breakdown by Wednesday, expect the rally to continue.  If you want to get in this market, look to buy a dip that tests of support on Wednesday or later.  The advantage of buying a dip near support is you have clearly defined technical levels to use as stop-losses and can bail out of a bad trade with minimal losses.

Alternate Outcome:
A strong selloff OR rally this week should be sold.  Rallying too strongly is not sustainable and will be the final gasps of this leg as it sucks in the last buyers.  On the other side, many people are wary of a selloff and breaking  key technical levels will trigger an avalanche of selling.  The selling will be short-lived, but it is best not to get in the way and keep cash so you can pickup discounted shares from the carnage.

INDIVIDUAL STOCKS

It looks like AAPL is working on a base.  The stock’s personality has clearly changed from last fall’s selloff.  It’s been two-months since the market found support at $500 and arrested the eight-week selling tsunami.  There are two dramatically different views on the stock.  One side says its best days are already behind it.  The other says this is a money-printing machine that is growing at 30% and has a single-digit P/E when you back out the cash.  Only one side can be right and six-months from now we’ll be kicking ourselves for not making the obvious trade.  But that is the problem with hindsight, you often forget just how ambiguous the trade really was when you are surrounded by all sorts of conflicting information.

 

Stay safe