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Secular
Bear/Cyclical Bull - Time To Get Real |
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Last
week when we made a tongue-in-cheek point about the worthless - almost
contrarian - timing of theNBER's
"official" recession announcement, we had no intention of revisiting
the idea of market-timing again. Since then though, enough of you
have provided feedback that leaves us comfortable enough to deliver a related,
higher-level
message. It all begins with a question though...
 Even
if the market has already made a bottom, won't simply patching the economy
rather than healing the economy just put us back in this same predicament
in the near future?
Great question
- one worth everyone asking not because of what's going on right now, but
because of where we're likely to be three to five years from now.
Generally speaking,
the staff of the Micro Cap Press feels the market has either made a bottom,
or will very soon. The bulk of that opinion is based on several
factors, not the least of which is the fact that the National Bureau of
Economic Research usually announces we're in a recession right about the
time the recession is coming to a close. Our data verified that very tendency.
Even without the data though, we'd be apt to view things more bullishly
than bearishly right now.
Nevertheless,
the answer to our posed question is yes, throwing money at our problems
(automakers,
lending, unemployment, deflation, etc.) is a short term band-aid,
but not a long-term cure for the underlying ill.
So why do
it? Here's why - fixing the problem could take years; fixing the
symptom should only take months. It's better to not let things get
worse no matter what the cost. It's not fair, but we're choosing
between the lesser of two evils at this point.
And what
lingering problems are we going to be facing three to five years from now?
Interest rates are beyond low, which means we're eventually headed back
into a credit bubble ... one not unlike the one that got us here. And,
despite all of Washington's scrambling, we still don't have the
one thing we need now - oversight and separation of all the financial
industries.
The ultimate
solutions to those issues will eventually materialize; let's just
hope they materialize before the next bubble gets too big to safely pop.
However, even if the solutions are in place very soon, and even
if the market and economy get healthy again, there are still going
to be some lingering symptoms that could take several years to fully
shake off.
That's our segue
into a point we weren't sure we wanted to make last week, but are more
confident we can make now without inciting any undue hysteria.
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It's
All a Matter of Perspective |
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Though we're
generally bullish right now, it's critical to understand that we're just
cyclically
bullish; we also believe we're still in a secular bear market.
Say what?
You read that
right - we're looking for stocks to make a long-term recovery - as in
a few years - but we're not sure that recovery will take us any higher
than the prior two peaks (from 2000 and 2007) did.
These prolonged
periods of sideways movement may play host to two, three, or even more
business/economic cycles and any corresponding market cycles. In the grand
scheme of things though, secular bear markets can last for more than
a decade, and never really provide any net gain for the market's
indices.
 The
idea of a secular bear market - which truly is more of a sideways trend
than a downward trend - is nothing new. It's just that this one
may be the first one most investors have ever experienced, creating a little
frustration. Knowing is half the battle though, so, the nearby chart
of the Dow can illustrate that they're not the end of the world. For
a bigger, full-screen chart, click here.
A frightening
thought? That was our initial concern, so we want to be crystal clear
about your next question .... No, we do NOT think this is a reason to
get out of the market indefinitely. There is still some very
good money to be made in a secular bear market - much of it to the upside.
A secular bear
market should only discourage you from what are commonly called "lifetime
holdings"... stocks you buy and hold, and hold, and hold.
Holding onto a stock for a decade while it just moves sideways simply ties
up capital which could be more productive doing other things.
In that light,
there are some strategies - perhaps 'mindsets' is a better word -
that will help you get the most out of stocks during a secular bear market,
if we're really in one. Notice how these are things you should be doing
anyway, in any environment. You can get away with not doing all
of them in a secular bull market (where the rising tide lifts all boats),
but in a sideways trend, more precision is needed to keep growing
your portfolio.
The key things
to remember during a long-term flat market...
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Be strategic about
sector selection (and sector rotation)
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There's nothing
wrong with dividends
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Use 'trailing'
stops to protect profits
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Charts can tell
you as much as fundamentals do, so use them
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Find ways to profit
from pullbacks (inverse funds, put options, etc.)
There's nothing
new or unusual in the list, but those tips are increasingly important when
the undertow isn't decidedly bullish. We'll add details to today's
thoughts, as needed, in future newsletters.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
