Monday, June 24, 2013

Which Animal Spirit Are You?

Okay, maybe just one more post before taking the summer off …

The stock market climbed above 1685 (S&P 500) in May but finished today under 1575. What’s an investor to do?  To help figure it out, let’s look at two active market participants: Billy Bear and Bobby Bull.

Billy Bear

Billy was very nervous about the stock market because of the weak economy and the unstable world financial markets.  Billy sold his stocks weeks ago when the market was just less than 1600.  However, Billy suffered physiological distress and “sellers” remorse as the market climbed higher and higher.  This made Billy a sad, sad, bear.  “I should’ve held on to my stocks and sold when the market was much higher”, Billy lamented.

Billy’s nemesis, Bobby Bull, found great delight in Billy’s plight and ridiculed him unmercifully.  “You shouldn’t have sold, you stupid bear!” he said.  “Look at all my new found profits and I’m even going to have more wealth when the market goes even higher!  You won’t get any of these great profits because you are an idiot!” he boasted.

But the market now has dropped below where Billy sold off.  While this alleviates Billy’s psychological stress and has caused Bobby to shut his pie hole, it doesn’t help Billy figure out what to do.  Although Billy has seen that the market can go higher, he will not buy because he is afraid the market may still crash.  So:

Cause little Billy, Billy Bear won’t - go buy
But you can’t force Billy to
Billy won’t go
Try saying it’s a bargain, but oh no
Cause little Billy, Billy Bear won’t - go buy

Bobby Bull

Bobby laughed at all the “wimps” who got out of this smoking hot market in May.  He was riding this rocket to the moon.  He is very disappointed in this very minor, very temporary setback.  Hell no, he ain’t selling.  “Are you crazy?” he asks.

He is not going to sell now because it would be very psychologically distressful knowing that he could have sold when the market was above 1685 but didn’t.  He tells himself if the market gets back above that level he can always sell.  But the sad truth is if the market goes back up, Bobby still won’t sell.  This is because the momentum that would drive the market up to that point would cause Bobby Bull to think the market was going much higher.  So:

Cause little Bobby, Bobby, won’t - go sell
No can’t push Bobby out
Bobby won’t go
Try warning him of danger, but oh no
Cause little Bobby, Bobby, won’t - go sell

And all the other animals in this menagerie stand watching the action, confused, wondering what to do ……..

Monday, June 10, 2013

This Market Is So Awesome – I Need a T.O. Baby!

Time now to check in with stock market analyst “Dickie V” for his take on the current market: “Oh this market is on fire.  It’s so hot, it’s smoking.  It’s beating all expectations. It’s beating those naysayers. People like that knucklehead Don Ake who said the S&P wouldn’t top 1600! He should just stick to marketing.

Let me tell you this: this is the best market of all time.  It’s a peak performer.  It a PTP’er (prime time player). It’s slamming, it’s jamming. When the market is this strong, this powerful, this determined, it is unstoppable, simply unstoppable! It’s awesome baby!
This market's awesome baby!

And the market continues to be awesome.  The S&P has been as high as 1687 this cycle and economists (according to a survey last week) see no bubble, no problems.  Everything is just fine and investors are happy, happy, happy.  Of course economist never see stock market problems before that happen, they just explain the problems after they happen (sort of like your mother-in-law).

This market is zooming despite:

-         Very slow job growth
-         Very slow economic growth
-         High level of uncertainty (implementation of the Healthcare Act)

This market resists all obstacles – so far it is unstoppable:

-         Last Monday - the purchasing managers’ index for May was horrible. Result: Dow up 180 points!

-         Last Friday - another sorry jobs report. Result: Dow up 207 points!

Model T Update

The Model T prediction for peak S&P this year was 1550 so it missed by at least 7%, which is a failure.  At the beginning of the year I listed a several S&P predictions for this year by major firms and they all were wrong.  However I do remember that someone (I didn’t save my notes) had predicted a peak in the mid-1600’s, so someone knew what they were talking about.  At the beginning of the year you called that forecast a “crazy outlier”, today you would simply call it “boss”.

The Model T also said the S&P would peak in the May/June time period. If I had no narrow it down to a one month time period it would have been May 15 to June 15, which means that time is about up.  Because the current peak is 1687 and today’s finish is 1642, the model still has a chance to be correct. But this market is tremendously unpredictable. Some analysts still predict a crash and some say this is the beginning of a big bull.  If this were a poker game, I would “check”.  I’m not ready to fold, but I’m not betting any more chips. 

The good news is that if the market dips (notice I did not say when); the Model T says the market bottom will be around 1440; previously the predicted bottom was 1350.   Also, before the correction was forecast to last around a year, now the correction may last only a few months.

Something To Consider #1:
The economy and the stock market are still dancing way out of sync. Therefore, one of them has to change course soon.  I know I said my flamenco dancers often don’t perform the same dance, but there are limits and we are testing them.

Something To Consider #2:
The stock market is a very painful psychological game to play, even when you play it correctly.

I took money out of the market at the very end of April.  I was nervous because the Model T’s upper limit (1550 plus 2% error) had been breached and two friends who follow the model had already pulled money back.  Of course watching the market keep going up has been psychology distressful.  I am not hoping for a market crash but the market closed today 2.8% higher than when I made my sale. It still may have been a good move, but the game of course is not over.

Yes, this is an evil game.  You feel bad when you play it well, you feel worse when you play it badly. And it is time for me to sit back and just watch the game. 

The Model T is taking the summer off to see how this all plays out.  If you are on my mailing list, I will still be sending out some “Model T Classics”, the best posts of the last 4 years. (Click here to get on the list) And I will continue my Ake’s Pains humor blog through the summer.

Good luck in this game, because we are all going to need it!