Bad News Can’t Hold Market Down

Another volatile week for stocks that did not lack an abundance of news. But when the closing bell rang on Friday afternoon the Dow (^DJI) and S&P 500 (^GSPC) were little changed as the NASDAQ (^IXIC) gained 2.1% for the week. On the day the Dow rallied back from triple-digit losses to close up 64 points or 0.75%. The S&P 500 added 6 points or 0.7% on the day and the NASDAQ had the best of the big three, gaining 32 points or 2.2%. Crude closed down $1.70 on the day at $46.28/barrel after trading as low as $43.32; for the week oil was up 13.4%. Gold lost $6.10 to close at $820.50/ounce and closed the week up 9%.

After word of the auto bailout not making it out of the Senate last night began making rounds it was clear investors were going to sell first and ask questions later. Early this morning the Dow futures were down as much as 300 points before opening down triple digits and bouncing all over the board in the early moments. As news regarding the auto bailout and the possibility of the Treasury stepping in hit the wires the markets gyrated. In the end the bailout or lack thereof will likely be a short-term catalyst for stocks before being quickly forgotten. It is clear a bailout would send the market higher in the near-term, but once we realize there is no clear plan for how to turnaround the automakers, the market could take some lumps.

ROUGH YEAR? YOU ARE NOT ALONE

As I was watching the market move today and the minute to minute swings in the leveraged ETFs it dawned on me how difficult this market is for both long-term investors and short-term traders.

With less than 3 weeks left in 2008 the major indices remain down about 40% and most mutual funds are doing even worse. A news story highlighted the Harvard endowment fund, which has historically performed very well, was down 22% in the last four months since the start of its latest fiscal year. Bill Miller, the famed mutual fund manager for Legg Mason, has his Value Trust Fund assets down to $4.3 billion from $16.5 billion according to the Wall Street Journal. If you are not familiar with Miller, he had a streak of 14 consecutive years of beating the market that ended in 2005. His fund is now one of the worst performers in its category over the last 1, 3, 5, and 10-year periods. His bets on beleaguered financials did not pay off and the fund has been hurt in the process.

The untouchable Berkshire Hathaway run by Warren Buffet is down 30% this year. This has not been easy for anyone that considers themselves long-term investors if they have remained 100% invested in stocks. Unfortunately there has been nowhere to hide if you are long equities, the best you could have done in 2008 is minimize losses. The situation has turned a handful of long-term investors into short-term traders or as I would like to call them - blind speculators. The reason they are “blind” speculators is because not only are they speculating on the daily movements of the market, they are doing so without the full understand of how the markets work. Considering how difficult it is even for the best traders, an amateur trying to chase the market could be decimated in a matter of months.

Think about the last few years, investors could rely on momentum investing - buying all healthy pullbacks in stocks that were in uptrends and selling on the next leg higher. That has not been the case because the pullbacks continue to not hold and therefore you get stopped out more often than not. The other strategy is to buy when stocks are oversold and weak, but again this has not been the best move because often times stocks can remain oversold much longer than you can remain solvent. If you have been bold enough to continue going short after the market has already fallen 40% you better be able to cut your losses when you are wrong. The shorts have made good money the last year, but if you are a trader and a news story causes a short squeeze, the position you are holding can go against you like no other time in history.

The point I am trying to make is that 2008 has been a very difficult year for anyone involved in investing and on top of it the world has been a somber place with the negative news. Do not give up on the US or global markets and look at 2009 as the Year of Opportunity. As you may know, because Penn Financial Group is a RIA we cannot freely give out our returns for the year due to strict oversight. But we can say that we have once again easily beaten the market this year and are prepared to take advantage of the opportunities presented to us in 2009!

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