The Trend is Your Firiend...Or is it?
The market started the year a whole lot stronger than anyone expected. It got out of the gates like a raging bull…..The breath of the market was excellent, volume was good, and the new HI list expanded dramatically, which is the exact action you would like to see in a healthy market. Seasonal strength typically runs through April bringing huge amounts of extra money flowing into the market from mutual fund distributions, year-end bonuses, pension plan contributions, income-tax refunds, and many other forms.
The market dropped over 200 points on Friday but if you take a peak at the underlying action, the broad market had over 500 stocks making new HI’s and less than 50 making new Low’s. The market looked a lot uglier on the surface than it really was.
The big drop in the averages last week serves as a reminder that this is NO time to throw caution to the wind. We stated in our year end commentary that the market was up against several negatives that should not be overlooked. We expected these negatives to really begin to hamper the market’s progress during the first half of the year.
We expected earnings to begin to slow and we are seeing signs that the slowdown is really beginning to affect the market over the last week with YHOO, INTL, AAPL, GE, C, and several others either missing or warning about earnings slowdowns. Rising interest rates (with an inverted yield curve) and higher oil prices (we will write more about this subject next week) have always been bad for the market and we have stated that this time should be no different. Gold and most other commodities are showing us that inflation is a problem. Sugar just hit a 21 year high. The labor market is tight and is showing signs of higher wage inflation to come.
The housing/real estate market is slowing down and so is the appreciation of prices. This means that the game of consumers borrowing equity to live off of is coming to a halt. Remember that the housing boom made up 30% of our economy’s growth during this recovery and consumer spending has accounted for 70%. The consumer has more debt than ever and with no more equity appreciation to borrow to live off of and interest rates increasing, the negative implications for the economy will be significant.
The Presidential cycle (one of the most reliable cycles in the market) more often than not portends a major market correction and markert bottom in year two of the cycle. We are currently in year two of this cycle.
How do we make money in this type of market?
You have to be selective on the stocks you are investing in. Buy only the strongest sectors such as medical (DVA, NVS, CMED, BNT, and STJ) and energy related companies (SWN, EOG CHK, TMR).
DO NOT CHASE STOCKS. Buy only when a stock pulls back to its 50 day moving average and begins to turn higher or a stock breaking out to fresh new highs after a proper consolidation.
KEEP STOP LOSSES IN AT ALL TIMES. In a bull market that is living on borrowed time you don’t want to be out of the market but you do want to manage the positions you have very carefully. Never risk more than 10% when making a new purchase and remember to move your trailing stops higher as your stock moves higher.
Following these simple common sense rules will force your portfolio back into cash once the market goes into a full fledged correction. This allows you to lock in your profits and build your cash during a correction so that you have plenty of capital to invest once the market finishes the correction and begins a new bull phase.
We believe that the market has a little more to go on the upside over the next 6 to 8 weeks. The quality of the next rally higher will tell us how much power is left in this old bull. That being said....we still believe that 2006 will bring a major correction of more than 10% with a good bottom being made late in the year and maybe even the start of a brand new bull market.
HAVE A PROFITABLE WEEK
Marc S. Barhonovich
Publisher
www.thecommonsenseinvestor.com
www.mainscale.com
The market dropped over 200 points on Friday but if you take a peak at the underlying action, the broad market had over 500 stocks making new HI’s and less than 50 making new Low’s. The market looked a lot uglier on the surface than it really was.
The big drop in the averages last week serves as a reminder that this is NO time to throw caution to the wind. We stated in our year end commentary that the market was up against several negatives that should not be overlooked. We expected these negatives to really begin to hamper the market’s progress during the first half of the year.
We expected earnings to begin to slow and we are seeing signs that the slowdown is really beginning to affect the market over the last week with YHOO, INTL, AAPL, GE, C, and several others either missing or warning about earnings slowdowns. Rising interest rates (with an inverted yield curve) and higher oil prices (we will write more about this subject next week) have always been bad for the market and we have stated that this time should be no different. Gold and most other commodities are showing us that inflation is a problem. Sugar just hit a 21 year high. The labor market is tight and is showing signs of higher wage inflation to come.
The housing/real estate market is slowing down and so is the appreciation of prices. This means that the game of consumers borrowing equity to live off of is coming to a halt. Remember that the housing boom made up 30% of our economy’s growth during this recovery and consumer spending has accounted for 70%. The consumer has more debt than ever and with no more equity appreciation to borrow to live off of and interest rates increasing, the negative implications for the economy will be significant.
The Presidential cycle (one of the most reliable cycles in the market) more often than not portends a major market correction and markert bottom in year two of the cycle. We are currently in year two of this cycle.
How do we make money in this type of market?
You have to be selective on the stocks you are investing in. Buy only the strongest sectors such as medical (DVA, NVS, CMED, BNT, and STJ) and energy related companies (SWN, EOG CHK, TMR).
DO NOT CHASE STOCKS. Buy only when a stock pulls back to its 50 day moving average and begins to turn higher or a stock breaking out to fresh new highs after a proper consolidation.
KEEP STOP LOSSES IN AT ALL TIMES. In a bull market that is living on borrowed time you don’t want to be out of the market but you do want to manage the positions you have very carefully. Never risk more than 10% when making a new purchase and remember to move your trailing stops higher as your stock moves higher.
Following these simple common sense rules will force your portfolio back into cash once the market goes into a full fledged correction. This allows you to lock in your profits and build your cash during a correction so that you have plenty of capital to invest once the market finishes the correction and begins a new bull phase.
We believe that the market has a little more to go on the upside over the next 6 to 8 weeks. The quality of the next rally higher will tell us how much power is left in this old bull. That being said....we still believe that 2006 will bring a major correction of more than 10% with a good bottom being made late in the year and maybe even the start of a brand new bull market.
HAVE A PROFITABLE WEEK
Marc S. Barhonovich
Publisher
www.thecommonsenseinvestor.com
www.mainscale.com
posted by Marc Barhonovich | 5:56 AM
0 Comments:
Post a Comment
<< Home