Avoid the News, Find an Investment Strategy

The long-running Dalbar Financial Services study shows that funds routinely deliver bigger returns than investors actually get, because individuals only buy after a rise or sell after a decline. (MarketWatch)

What would also make an interesting study is to see how these decisions are correlated with the financial press headlines. True financial journalism is rare with most mainstream news happy to pump the market up and wish for better times when it dives. There is rarely any real analysis, especially on TV - you have to look online to find that.

All of this is in the context of the current market rally. Is this time to get back in? The simple answer is that, if you haven't done so already, then don't do it now! The S&P 500 is now sandwiched between its 200-day and 50-day moving averages. As the two indicators move towards each other there will come a crunch point. Is this a sucker's rally or the real thing? That will be the time to tell. Don't add to Dalbar's statistics. This is perhaps a good time to sit down and think of a real investment strategy. There are many strategies that work, you just have to find the one that's right for you, your level of assets and your time commitments. The worst strategy is to follow the news!

Ruff Rides the Rally with Caution

Ruff Times, edited by veteran Howard Ruff, is up 20.4% over the year to date through March, according to the Hulbert Financial Digest's count, compared to a negative 10.56% for the dividend-reinvested Dow Jones Wilshire 5000.

Ruff wrote recently: "The stock market has made a dead-cat bounce, even though the returns are spectacular for short-term investors, which I am not. The long-term problem with the stock market is two-fold: 1) its earnings will decline as business sags deeper and deeper into this recession which will depress stock-market prices; and 2) the price/earnings ratio (PE) is still way above the typical PE at the bottom of bear markets. The stock market will have its ups and downs and literally suck Wall Street investors into short-term rallies as they try to pick 'the bottom.'" (MarketWatch)

Ruff's conclusion: "Sell into these rallies. The stock market is toxic and will be for several years."

Well there's confidence for you! And this from a guy who's made 20% during the last year.

Analysts Clutching at Volatility Index

The CBOE Volatility Index, or VIX - which typically moves in the opposite direction of the S&P 500 - on Tuesday deviated from its norm and tilted mildly lower in a move one analyst attributes to a potential shift in the stock market's course, reports MarketWatch.

"Typically, if the S&P moves 3%, VIX will move 10% in the opposite direction And, when the VIX is stubborn, and doesn't move as much you'd expect, it is often forecasting a change in direction," said Randy Frederick, director of trading and derivatives, Schwab Center for Financial Research.

The VIX, a measure of the market's expectations of volatility over the next 30-day period, is often referred to as the fear gauge, but Frederick rejects the description.

"I don't like to use the term 'fear gauge' because then you're saying fear and uncertainty are synonymous. You can have uncertainty without having a lot of fear," he said.

Exactly, the VIX measures uncertainty rather than fear. It is still stuck in the 40s, which is moderately high and what traders would like is to see it back firmly in the low 30s or even 20s. Ultimately, earnings will determine a successful recovery, and on this front there has been some little-publicised activity as stock indices shed their most pathetic performers for new, and hopefully better, companies.

Keep a watch on companies about to enter the S&P 500 as the mere fact of being in the index means their share price increases as funds tracking the index have to buy the stock to balance their portfolio.

Nikkei marks lowest close in at least 24 years

Japanese shares gave up early gains to end lower Monday, with the benchmark Nikkei 225 Average marking its lowest closing level in at least 24 years as investors sold down financials and pharmaceutical shares amid a weak economic outlook.

The Nikkei ended 1.2% lower at 7,086.03, the lowest finish in a data series dating back to 1985, according to FactSet. At its latest close, the Nikkei is less than a fifth of its all-time high of 38,915.87, which it touched nearly two decades ago. The broader Topix index slipped 1.5% to 710.53.

MarketWatch.

Like I said, all that froth about the US markets hitting a 12-year low was just filling space.

Look at what the bankers are saying: we are going through a process of de-leveraging. If companies were de-leveraging profits that wouldn't be so bad, but they are winding down losses - leveraged losses - which means many more companies are still hiding the fact that they are bankrupt.

A Trading Strategy for a Flat Market

The possibility exists that the stock market in March will go neither up nor down, needless to say.
It's also possible that it will go nowhere, trading in a narrow range and ending the month at more or less the same level at which it began.

Well, duh. Of course. So what?

But it is surprising how few of us devise our trading strategies with that possibility in mind. Ask a group of investment gurus to offer a trading strategy for March, for example, and almost all will base their recommendations on a bold forecast of a big up or down move for the month.

Whether it's human nature or not to overlook sideways markets, they are a fact of life. And, at least according to some analysts, we may very well be entering into such a period now --late in a bear market but not yet ready to begin a brand new bull market.

Perhaps the most spectacular example of sideways action in U.S. stock market history came between 1966 and 1982. The Dow Jones Industrial Average first rose above the 1,000 mark in January 1966, and yet still traded at that same level in the latter part of 1982 -- more than 16 years later.

In, and out, like a lamb?

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This goes back to the article that there are 20-year cycles that are quite noticeable when looking at stockmarkets from, say, 1900. There are 20 years of growth followed by 20 years of going nowhere. From a long-range perspective those lean years just look dull and flat. But living within one of those periods, as we are probably doing now, those bear market lows look very painful and depressing.

All the talk of bottoms becomes even more meaningless as any real bottom could well be followed by a few years of sideways movements. Having a good strategy for sideways markets is the best advice at the moment. The same strategy will also catch the next bull market - when it happens - but is not wholly dependent upon it.

This is why a buy-and-hold strategy only makes sense if your time horizon is at least 20 years, otherwise it is an easy but costly way to invest.