Stock market trend: Sideways
Market Pulse
Here I am, back from a three-week hiatus. You may recall from my last newsletter prior to that hiatus I urged all my long term investors to stay in cash while possibly allocating some portion of their portfolio to biotechs.
So far, this seems to have been pretty good advice. The stock market had one of its worst months of August ever. Of course, over the past week or so, the market has been rallying so many of the talking heads are all a twitter about the arrival of a new bull market.
This continues to seem pretty much like a sucker's game to me. To understand why, try this little exercise. Go to Yahoo finance and pull up the three-month chart for SPY -- the exchange traded fund the Standard & Poor's 500 index. If you got suckered into buying the bottom hit on June 6, you would've had a very healthy gain by June 17. However, by July 6, you would've been deep in the red.
By the same token, if you bought the bottom on July 2, you would have been in great shape right up till August 9 – and then been gutted like a pig.
Okay, so let's say you were smart enough to buy the dip on September 3 at $105 a share. Now you're up already five bucks and you think you're a genius. But what makes you think that after another run-up, the market is just going to run right back down?
Please keep in mind, I'm usually not this cynical about the market trend. Usually, it's pretty damn clear whether the economy is, as Bob Dylan might say, "busy being born" or "busy dying." But there is so much uncertainty right now in the economy, that the only really sensible thing for the market to do is to trade in the sideways pattern until things resolve themselves.
I myself am not particularly in the double dip recession camp. When I see is what we've had over much of the last decade – slow GDP growth well below our potential output. That will in turn mean persistent high employment and stagnant wage growth. How you get a bull market out of that – and the Dow at 20,000 – I really don't know.
I wish I had better news, but we have to trade or invest the hand that we are dealt – or sit patiently on the sidelines in cash.
For traders, I myself am growing increasingly disenchanted with a long short strategy unless you have great skills at risk management and rapid trading.
What happens in a sideways market with a hedge portfolio is that your shorts get stopped out when the market runs up, and your longs get stopped out when the market runs down. All you wind up with is modest losses over a lot of stocks that add up to a big loss – plus a lot of transactions costs.
So if you didn't make any money over the last couple months in your short-term trading strategy, I'd strongly advise you to hang your cleats and mouse up for a while until this market is easier to make money on.
As for the long-term investor, I continue to recommend cash for now. I also continue to hold about 20 to 25% my own portfolio and small-cap biotechs. And by the way, I will send you a Special Report on my biotech picks this coming Wednesday based on a conversation I had one of the top biotech analyst in the world – Andrew Vaino of Roth capital. (I did a segment last Friday on CNBC that talked about a few of the stocks Andrew is following, but a lot of the best stocks I could really talk about on TV because their small caps.)
