We’re almost there. The S&P 500 briefly hit 929 this week barely 11 points from my target of 940. The moment of truth for investors is rapidly approaching. Will the markets be able to break through this level and rise further or will the averages roll over and re-test the lows? The answer could come this week.
If I were a betting man, I’d say the markets break higher after a short and maybe sharp sell-off. But since I get paid to invest other’s money I will take a more cautious approach. Most of my clients (and readers) have at least some money already invested in this 36% move off the bottom if they have been taking my advice. So there is no real urgency to bet the house on which way the markets go from here. For the most part, we’re in income type mutual funds and some stock and bond funds but we still have a healthy percentage of cash. So we should be in a great position to take advantage of whatever the markets offer us.
Our objective is not to beat the market. Our goal is to preserve principal and make a decent return (although not as much as the market). If the averages decide to drop precipitously, given our strategy, we won’t be hurt nearly as much as those who do swing for the fences. The point I’m trying to make is successful investors need to stay in the game. Hit singles and doubles and once in a while maybe a homerun. If you lose all your profits or take a deep loss in your original investment, your confidence begins to falter and you are out of the game. That happened last year to an enormous number of individual investors.
In hindsight, the mistake most investors made was to take the markets for granted. From 2003 through most of 2007 global stock markets marched higher reaching new highs almost monthly. Investors, young and old, rich and poor, started to believe it would never end. Somehow we talked ourselves into believing we had reached a golden age of mild recessions, worldwide prosperity and of course burgeoning retirement accounts. We probably deserved exactly what we received last year. For most of us, it took a wake-up call of this magnitude to realize that markets can go both ways. Unless you are properly diversified it can cost you a bundle.
The much discussed banking stress test came off as expected. Although ten banks need to find $75 billion in new capital (Bank of America chief among them with $34 billion to raise) none are in danger of failure. I suspect the real objective of this three month exercise was to give a government imprimatur to the viability and health of our 19 largest banks. With that seal of approval in place, the government is hoping the private sector rather than the taxpayer will now be willing to step and buy the mountain of new shares these banks will be offering to the public.
Most of this good news has already been discounted in the markets as has the unemployment number which indicated less people (539,000) lost their jobs last month then economists expected. The unemployment rate now stands at 8.9% but remember that the jobs number is a lagging indicator. It is like looking back to where we’ve come from rather than where we are going. Job losses can continue to mount even after the economy starts to recover. The important thing to watch is the rate of decline and that appears to be slowing.
So if we are going to breach the 940 level on the S&P 500, I suspect the ride will be bumpy with sellers showing up as we approach that level while the bulls battle back as the averages retreat. The good news is you can sit and watch the battle investing more money if it decisively breaks that level to the upside while taking advantage of any downside that might occur.