Buy And Hold Strategy - Revisited

After some early selling the indices turned around and the Dow was up over 100 points two hours into the trading day. As we have seen so many times in the past, the gains did not hold and by 2pm the Dow was at the low of the day, down over 100 points. But a late day rally sent the index to new highs as it closed up 172 points or 2.1%. The S&P 500 added 21 points or 2.6% and the NASDAQ rallied 2.9% or 42 points. Gold fell $8/ounce and oil closed down 17 cents near a new 4-year low.

No big surprise that the volatility remains and triple-digit gains to the upside and downside are seen in one trading day. The one surprise was the rally at the end of the session even though the economic news continued to worsen today. The Beige Book, ADP Employment number, and ISM Services all came in below expectations and at levels that are historically very poor. Then again, why should I be surprised the market does not move lower on the news? The S&P 500 is already down nearly 50% from the October 2007 high. One can argue (me being one of them) that the bad economic news we will receive over the next few months is already baked into the poor market performance in 2008. That being said, the market is not always rational and another 10% to the downside could happen in weeks before a bottom is found. What I am trying to say is that from day to day this market is as bipolar as it gets. I can see it in the emotions of my clients. When the market is up for a few days they are cheery and ready to buy everything. Two days later after the market takes a hit, the world is once again ending and cash is king. In a way it is both funny and sad. Funny because if I let it become anything else I would be bold before my next birthday. Sad in the fact that there are a LARGE number of investors doing this on their own and basing their investment decisions on emotions brought on by the most volatile stock market in the last 75 years. As I have said in the past, if you cannot handle this market or if your performance is not keeping up with the returns of the indices - PLEASE seek professional help from an investment advisor.

An example would be if I did not take my car into a specialist, but rather did the servicing at home with subpar tools and a lack of knowledge that a professional mechanic has. I may be able to get through changing the oil and maybe even rotating tires. But when it comes time to replace the breaks there is a chance I will do more harm than good and it could become dangerous to drive my car. The best thing for me to do is get the car to a specialist before the damage I have done gets worse. The same can be said for your portfolio. Just as I will not drive my car into a lake, you should not throw your portfolio out the window.

THE END OF BUY AND HOLD STRATEGY? TAKE 2!

Yesterday I presented you with the chart below and asked you to think about it for the night before I gave my opinion. Here it is.

The chart is a snapshot of the Dow over the last 48 years and it highlights three major trends in that time. From 1966 through 1982 the Dow was virtually unchanged. Granted there were a number of major rallies and sell-offs during the 16-year span, at the end of the day, the index was unchanged. The great bull market of the 80-90’s began in 1982 and saw the Dow move from a low of 700 to a high of nearly 12,000. The tech bubble ended the 18-year bull market and since that time the index is back within a trading range similar to the 66-82 timeframe. The top has been the high of last year and the bottom is the 2002/2008 lows. So I ask in the chart, are we in the midst of another decade and a half consolidation phase? The chart does not show it, but from 1942 to 1966 the Dow experienced a bull market similar to the one that ended in 2000. As you can see all the trends range between 14 and 18 years and go all the way back to the great depression.

Considering the market is already 8 years into the consolidation phase, investors should not take their money and run for the exits. Because as I stated earlier, there are plenty of buy and sell opportunities in the consolidation phases. From 1968 to 1970 the Dow lost 37%, but several years later, from 1974 through 1976 the index surged 77%. When I look at the chart as of today, the index is sitting on the low of 2002, which is the lower support level of the consolidation pattern. Instead of letting the buy and hold strategy scare you away, now is the time to be buying and holding for a few years before reevaluating when the index is back at the upper end of the consolidation pattern.

I can go on for hours about the intricacies of this chart, but I will keep it brief and get my point across that we could remain in a consolidation pattern for years to come. BUT, there will be plenty of opportunities to buy and sell along the way and right now we are definitely on the buy side!

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