Market Prediction 6/22/12

So what is the market prediction between now and the rest of the year?

The market seems to be suffering lately from lots of bad news.  Some of it our own economic data and plenty of overseas news (esp., Europe) as well.  I don’t see this changing significantly in the near future.

However, it is a presidential election year.  The first way to view it is from incumbancy:

    • When incumbants win, the market tends to go up in a fairly stable way throughout the year.
    • When incumbants lose, the market tends to have a nasty drop beginning around September but a nice bounce after the election.

The second way of viewing this is from the perspective of the party.  In this case, we see:

    • Regardless of whether you have a newly elected Republican or a re-elected Democrat, the market tends to perform very well during the election year.

So, consider this mix:  a weak economy, vulnerability to bad news, the historical tendency to have a weak-flat summer, and the likelihood of economic uncertainty and consumer sentiment being depressed by the election media.  At a minimum, it is a high-risk trading environment.

It would seem reasonable to stay conservative at least until toward the end of August.  Because utilities tend to do well during these periods, I plan to stay with them.  I am also going to hedge my positions by adding some treasury notes and a hedge fund; these are primarily in case we have a really big drop.  It won’t protect me completely, but they will soften the blow.

By early-August, I will start re-evaluating my positioning.  I will either reduce my market exposure significantly or I may just get more hedges to neutralize any downward drop during September-October.

By election day (plus or minus a couple weeks), I plan to be fully invested in bullish securities for the remainder of the year.

It is helpful to articulate an overall plan and strategy.  That way, I have something I can use to measure market activity and my performance.

And, of course, if anything changes, so will I.

Whacking the Market

Have you noticed how sometimes market segments simply don’t do what they are supposed to do?

We all know that when the market gets ugly, we look to gold, consumer staples, utilities, bonds, etc. for downside protection.  And, for the most part, these do work.  However, there are times when the market gets “whacked” really hard, and all the rules seem to go out the window.

I have worked with utilities for the last 2-3 months.  I chose them because of the historical poor performance during the May-October period.  For the most part, it seems that:

  1. When the market drops, the utilities drop only about 50% of the S&P 500 drop.
  2. When the market goes up, the utilities seem to gain about 75% of the S&P.
  3. When the market is choppy, the utilities typically gain against the S&P.

There are times, however, when the market just gets whacked (this week being a good example).  On Wednesday, the utility market misbehaved by being one of the lowest performers in the lead-up to the Fed announcement.  This is understandable because lots of people were hoping for a Fed surprise that would thrust the market up.  Everyone wanted to have their cash ready to buy bullish sectors, which meant few people were buying utilities and many others were selling utility positions to raise cash.

When the Fed decision came and produced a yawn, people seemed to pause.  This seemed to whack the utility sector more than others.  Utilities continued to slide for the rest of the day.

Then came Thursday with some bad economic news and the market started down.  Utilities tried to jump back into their normal role and were up for a while.  But then when the market decided it was serious about going down, the utility hedge factor quickly disappeared.  The one of the “normal rules” (#1) still applied, however, and the utilities only lost about 50% of what the S&P lost for the day (about 30 points).

Today, Friday, the utilities are lagging behind the market.  We are showing a +.4% for S&P, but flat for utilities.  On the sector list, utilities are almost at the bottom.  For the first three hours, aside from opening gap, the market has been flat.  The “quick” money people that jump in and out of the market are busy jumping on the equities that were beat up the worst yesterday.  And everyone else is sitting in cash and licking their Thursday wounds.

I hope the utilities get back to “normal” soon.  They have been good to me for the last 2-3 months, and I want that goodness to continue.


Retirement Attempt #2

I have retired twice now.  I failed on my first try, but I think I am doing better on my second attempt.

In 1997, I retired as President of Insight Recovery Centers, a position I held for 17 years.  It was a great job, great people, and I felt like we really made a difference.  When I retired, I had no serious plan to work again.  I thought I would putz around with computer and technology things (a long-standing interest of mine) and develop a few web pages for some friends.  After about six months of working out of my home, Marge (my wife) came up to me and said, “I am tired of tripping over extension chords and not having any table space to serve meals because they are covered with computers.  You have to move out of the house and get a real office!”  I protested, saying that it was just a hobby.  She told me, “It stopped being a hobby when you hired your sixth employee!”  Thus began another 10 years of employment that I had not planned.

The company evolved from a web design company to a data center specializing in web hosting.  After 2 years of re-working the business to make it easier to sell, I sold the company to another company in Detroit.  Marge and I were extremely lucky, and we sold both our house and the business the same month.  That is when we moved to Muskegon.  And thus began my second attempt at retirement (2007).

This time I have done better.  I attribute this to Marge.  She told me, “You can start any kind of business you want.  But this time, you are not allowed to hire anybody.”  That rule, along with the need to manage my investments (especially in light of the stock market crash in 2008), put me into a new kind of business:  investing.

Naturally, I began by reading lots of books on the subject.  I also set up trading strategies with E*Trade to manage my investments.  I studied equities, mutual funds, ETFs, options, and futures.  To my delight, I seem to have a knack for trading.

My major goal was to develop computer programs to do the trading for me.  I reasoned that as I get older, if I have programs that will automatically make good trades for me, my investment success can be extended far beyond the normal time frame that I might otherwise be able to trade.  And, I won’t be chained to the computer all day long.  To take advantage of the best automated trading platform, I moved everything over to TradeStation.  I developed some excellent programs which give me a variety of tools for trading the markets.  My disappointment is the trading programs seem to have a limited shelf-life, after which they fail to perform as well as they had before.

So far, this second retirement attempt is going better than the first.  I get to work out of a home office.  I can go into work in the morning in my PJs if I want.  Nobody cares.  I don’t have to make extra profit to cover overhead, employee payrolls, payroll taxes, or any of that stuff.  I don’t have a Board of Directors to answer to, agendas and minutes to prepare, meetings to attend.  No customers to contact or appease.  I don’t have to worry about employees: hiring, firing, compensation, personnel issues, etc.

Life is good.  Thank you, Marge!