In celebration of attaining positive returns of 15.6% for the first six months of 2008, my wife and I had supper at one of the local fine dining establishments last night. As I was merrily consuming my 2 1/2″ buffalo ribeye steak, lo and behold, Mr. Obvious sat down at the table next to us. Mr. Obvious is considered a very astute investor on the Street, and followed by many, many investors. In accordance with the principle of “carpe diem”, I seized the opportunity to pick his brain.
What follows is an after dinner conversation that transpired over cigars and a goblet of Grand Marnier:
AD: Mr. Obvious, what are you seeing in the market right now?
Obvious: Well, Alphadawgg, what I have determined through careful analysis is that we are in a bear market. Through yesterday’s action, the Dow is down 20% since it’s peak in early October of last year. The S&P 500 is a tad below 20% down, and the Nasdaq is down 21.25% since its high on 10/31/07. My measuring stick is 20% down from the peak. So it’s official. We are in a bear market.
AD: Isn’t that somewhat of an arbitrary measure? Bear markets are characterized by markets that trade back and forth and go nowhere, even down. Hasn’t that been rather obvious? No pun intended, of course.
Obvious: Well, not exactly. Prior to being down 20%, the market was just exhibiting volatility. You see at my brokerage firm of Obvious Lee Klewliss & Howe, we prefer to be optimistic about the markets. We are buy and hold investors. You have to look at things over the long term and ignore market “noise”. It is always a good time to buy. That’s our motto, and we’re sticking to it. Besides, bear markets, which we prefer to call “pauses”, only last a few months. Actually, we are still in a long term bull market. These corrections are simply pauses, as we say. It’s analogous to a bull in the pasture, happily consuming vast quantities of grass, then lying down for a brief knap (chuckle).
AD: Interesting concept (rolls eyes). But, don’t you think that by looking at the charts, examining trends and market sentiment, you can clearly see that we have been in a bear market now since late last year? As a matter of fact, since late March of 2000, the Nasdaq is down 54%, the S&P down 17% and the Dow has been flat. Doesn’t that qualify as a secular bear market? Isn’t eight years an awful long time?
Obvious: Maybe. Again you have to look at things from a long term perspective. To me, charts and technical analysis are fictions made up by people who think they can time the market (chortle). It can’t be done. College professors have proved this to be a fact.
As far as market sentiment, I try not to get sentimental about the market. It’s too emotional and I run the risk of getting verklempt. Really, if you look at the market going back to 1926, it has given us an average return of 10%. Where can you get 10% these days?
AD: But that’s over 80 years. People don’t invest for that long. Additonally, returns are never always 10%. That’s simply the average. We can experience quite a variation in any given year. Also consider that by the time many investors reach age 47 1/2, they start pulling money out of stocks and going into bonds for part of their portfolio. They’re advised to start being conservative.
Obvious: Yes, that’s true. We even tell them to do that.
AD: Well, then they probably won’t be able to make 10% , will they?
Obvious: (Scratching his head). Hmmm, I didn’t think of that.
AD: Moving on, what should people be doing now?
Obvious: Well, since we are now officially in a bear market, which I prefer to call a “pause”, people could consider moving into cash. They should also buy bank stocks. They are cheap and pay a hefty dividend.
AD: But Mr. Obvious, going to cash and buying banks, isn’t that contradictory? Aren’t you worried about a further meltdown with financials?
Obvious: No. Haven’t you heard of the C-O-N-T-R-A-R-I-A-N strategy? Go into cash and buy the banks, now!…Before it’s too late!
AD: Mr. Obvious, with all due respect, you don’t know WTF you’re doing, do you?
Obvious: How dare you speak to me that way? I am the Chief Investment Strategist and CEO at my firm!
AD: Obviously, we are in a bear market, Mr. Obvious. Nice call.
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And obviously, this is a fictional account of what a typical conversation most retail investors may be having with their brokers right now.
The NYSE Bullish Percent is now at 30%. The percentage of NYSE stocks trading above their 10-week MA is at 28%. We are approaching oversold territory, but we’re not completely at that stage—– yet.
The public is starting to get worried about their bullshit accounts. Capitulation, here we come.
It’s also interesting to note that some of the most highly regarded hedge fund managers on the Street are down for the year. They are in the process of raising cash to try to take advantage of oversold conditions and a bounce.
We saw some of that yesterday, obviously.
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