6/19/2014 6:45 PM ET|
How to invest in an aging bull market
Stay with stocks, particularly those in the energy and health care sectors, says Jim Stack -- a market analyst with a terrific track record.
The U.S. economy shrank in the first quarter. The Russell 2000 index of small companies tumbled nearly 10 percent this spring. High-octane "momentum stocks" likewise got clocked. And the bull market is now the fourth-longest since 1928. Time to sell stocks?
Not so fast, says Jim Stack, editor of InvesTech Market Research Analyst, who's advising subscribers to put 82 percent of their investments in stocks. Stack, in my view, has sound reasons for being bullish. What's more, his record offers a reason to take his market calls seriously.
Calling market turns is a perilous business at best, and Stack has made mistakes --most significantly becoming bearish too early in the 1990s. But his long-term record is superior. Over the past 15 years through April 30, the authoritative Hulbert Financial Digest reports, Stack's model portfolio returned an annualized 8.5 percent, compared with 5.0 percent annualized for the Wilshire 5000, a measure of the broad U.S. stock market.
Stack was also on target about the onset of the bear market on October 9, 2007, and about its conclusion, on March 9, 2009. He's been (correctly) bullish ever since.
Stack employs both economic data and technical analysis to make his market prognostications. Here's what he sees now:
Stock market breadth
Many more stocks are rising than falling. Technicians like Stack read that as a bullish sign. Likewise, far more stocks are setting new 52-week highs than new lows --another healthy sign. What's more, an index Stack has compiled of stocks that he says tend to lead the market has been making new highs.
Market advances are inclined to become increasingly narrow when bull markets are drawing to a close, technicians believe. Such a bearish development is nowhere on the horizon, Stack says, despite the recent weakness in small-cap stocks. The blow-off of high-octane tech and biotech "story stocks" in March and April, Stack says, dealt a blow to market excesses. "You need those kinds of corrections to temper speculation."
A slowly growing but improving economy
Yes, economic growth remains achingly slow, but Stack sees this as bullish: A slow recovery makes it less likely that the economy will overheat, leading to an increase in inflation. But the decline in gross domestic product in the first quarter at a 1 percent annualized rate was almost certainly due to weather.
Data from the Institute for Supply Management surveys show increasing growth both in the service and manufacturing sectors. The Conference Board's measures of consumer confidence, CEO confidence and its leading economic indicators all point to economic expansion.
The market's technical and the positive economic signs suggest to Stack that the bull market is in no imminent danger of ending. Historically, he points out, the end of bull markets tend to be slow, rounded affairs. That means you don't need to sell stocks the first week the market declines to avoid getting clocked. (New bull markets, by contrast, typically take off like rockets.)
Not that Stack doesn't see negatives. Here's what worries him:
The bull market's age
In investing, patterns tend to repeat. Since 1928, only three bull markets have lasted longer than the current one, which is nearly 63 months old. "Bull markets don't die of old age," Stack says, but as time goes on, the odds against their continuation lengthen.
Sales of existing homes and other housing indicators rebounded after the Great Recession ended, but they have been weak of late. Part of that was due to the bad winter, but further declines could increase the odds of a recession.
Housing and related spending account for almost 20 percent of GDP. What's more, housing can have a big influence on overall consumer confidence. Even homeowners who don't plan to move tend to cut back on spending when housing prices fall in their area.
Margin debt, money borrowed in brokerage accounts (and often used to invest more heavily), has dipped from near record highs in recent months. High levels of margin show increased speculation in the market. When margin begins unwinding from high levels, stocks often fall.
Stack's best guess is that the bull market will end sometime over the next six to 24 months. What's worse, he expects the next bear market to be doozy.
From the start of the bull market through June 3, the Standard & Poor's 500 Index ($INX) has delivered a total return, including dividends, of 218 percent (or 24.7 percent annualized). Since 1928, every bear market save one, Stack says, has taken back more than half of the prior bull market's gains. That's sobering.
What to do now? Rather than selling stocks, Stack recommends that you emphasize sectors that have historically done well both in the final 12 months of a bull market and in bear markets: energy and health care. Stack's recommended portfolio also has big positions in consumer staples, which often do well in down markets, and technology, which tends to outperform in the last few months of bull markets.
Stack currently recommends that fund investors put 82 percent of their money into various SPDR-brand, exchange-traded sector funds. His biggest positions are in Health Care Select Sector SPDR (XLV), 14 percent; Consumer Staples Select Sector SPDR (XLP), 13 percent; Financial Select Sector SPDR (XLF), 12 percent; and Energy Select Sector SPDR (XLE), 11 percent.
Frankly, I think Stack's approach is a little too cute. In my view, the safer course is to stay invested, but load up on stock funds that invest in lower-risk blue chips that have a history of holding up well in bear markets. The three funds I recommended in my last column fit that bill, as do my four domestic fund suggestions in this piece.
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This bull market was created by $80 billion a month supplied by the Fed. There will be plenty of opportunities to make money after the inevitable adjustment, maybe in a year or two. But to trust your money in this environment is very risky.
Well I say BS. Nobody's past Record will hold water concerning forecasting moving forward. When folks state we are in uncharted territory, they aren't pitching BS. Anyone stating otherwise, is. Never in World History have we been so indebted collectively. Never in World History has there been this Grand of an Scale of Global Corruption and Manipulation of Interest Rates. When this Fails and it will, it shall be Epic. You simply can't Rob Peter to Pay Paul without paying a Major Price, regardless of any moment in History, That has never changed.
Some have compared us to Japan and state they didn't fail so neither should we. Well don't forget this moment in time.
Nikkei 225 Hits All-Time High of 38,957.00 on December 29th, 1989 ..
Nikkei Index: 15,361.16 on Jun 19 2014
After you buy them, once a year you research the stock all over so you can give yourself a concise, informed, 2-minute speech as to why you should keep or sell the stock.
"A slowly growing but improving economy"
No it isn't and no it won't. Only a market shill regurgitating Fed and Oboob administration propaganda, misinformation and outright lies.
Avoid small company U.S. stocks because they're overvalued and too risky. Blue chips only! Find your mojo in ticker SCHD (Charles Schwab High Dividend Fund) with lowest fees according to morningstar. Perfect choice for an IRA.
You might remember in the last column he referred to he was recommending every fund from Vanguard. It was so biased it was pathetic.
We have a Centrist and Progressive President, behaving like a real Republican, named Obama, who is guiding us through one minefield after another successfully while the far right wing fanatical Tea Party-controlled GOP Congress does absolutely nothing to help him or our country except try to push us into yet another un-winnable war and another financial abyss. Imagine where the stock market would be if both sides were on the same page.
All you can do is stay with the winner, President Obama, and put your money into high quality blue chip stocks in a slow growth, trickle up economy. I recommend ticker SCHD (Charles Schwab High Dividend ETF) and ticker BX (Blackstone Group) as two ways to succeed in this environment. Stay fully invested because we are going higher. I will be all cash only when Obama leaves office. Thank you for saving our retirements Mr. President. GO AMERICA!!!!!!
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