Insights & Advice

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The Same Old Song

“These markets are making me dizzy,” exclaimed one retired investor who, against my advice, insists on watching CNBC all day.

“Go out and play golf or kayak on the Hudson River,” I said, “you’ll live longer; besides, you’re hedged no matter what happens in the markets.”

“The truth is I’m waiting for that big sell-off and I don’t want to miss it.”

I tried to warn him that it could be months before that occurred and when it did happen, it would most assuredly be more than a one day event.

In the meantime, there are so many cross currents in the markets that investors have no idea whether the markets are coming or going. For example, a slightly weaker second quarter GDP number on Friday dropped the Dow by more than 100 points in minutes. An hour later, slightly stronger data points in last month’s consumer confidence Index and the Chicago Purchasing Managers’ Index erased those losses almost as quickly. In this week’s FOMC (Federal Open Market Committee) minutes, the Fed reported some regions growing while others either slipping back or at best stable. The markets didn’t like that news.

Some Fed members also worry about inflation; others are more concerned about deflation. Oil and other commodities swing up and down while gold and silver prices make even the gyrations of the stock market look tame. Precious metals ads continue to bombard our daily television shows, constantly stoking fear of the next Armageddon.

Readers are aware that I am looking for an interim low in the S&P of 950 or so. I don’t know when that will occur. It could be next week or three months from now. In the meantime, sure, the markets could move higher (or lower) in a wide trading range as they have done now for almost four months. Once we do correct to that 950 level, I expect all the market indexes to have a healthy bounce. That bounce does not signal an all clear to investors, however.

Quite the contrary, investors, in my opinion, should accept that, for the next several years, markets will continue to be volatile. If I had to compare the markets in the first 16 years of this 21st Century, the period 1966 through 1982 would most closely approximate the markets today and the years immediately ahead.

Looking at a chart of the Dow during that period, I was struck by the extreme volatility of the markets. Clearly, a buy and hold strategy would have generated at best, no gains, and at worse, extremely heavy losses. If I’m right, investors will need to actively manage their portfolios or find someone who can buy and sell successfully over several years.

Overall, I believe the underlying reason explaining this volatility is that we are presently in a cyclical bull market (short-term) within a cyclical bear market (long-term) driven by enormous and wrenching changes within the global economy. As a result, somewhere up ahead, within the next few years, we will experience lower lows than we did in 2009.

John Roque, technical strategist at WJB Capital Group, Inc., whose opinion I respect, does not believe the markets are at a major low either. He points out that historical market bottoms have occurred when the S&P traded at a single digit multiple.”

”Secondly, when the S&P trades to a single-digit multiple, the S&P 500 stays cheap for a long time,” Roque explains.

At our lowest level in recent years (666 on the S&P 500 in 2009), the Price/Earnings Ratio of the market was 13.8. Today, it stands at around 15 times earnings, down from 22Xs in April. When we finally reach my target 950 level, we still won’t be close to a single digit P/E on the market. That unfortunately awaits us sometime in the future. Knowing its coming is half the battle, taking action before it comes is what this column is all about. Keep reading.

Posted in A Few Dollars More, At the Market