Alpha Power Investing Newsletter

November 13, 2013

Stories

Market bottoms are fast, furious and painful. Market tops are long, drawn-out happy affairs.

At market bottoms, the maximum number of investors have capitulated and are convinced that the stock market will continue to decline over the foreseeable future. At market tops, the maximum number of investors have joined the party and are convinced that the market will continue to advance indefinitely.

Both bull markets and bear markets are supported and driven by "stories". A "story" is an easy to understand "cause" of the recent trend in stock prices. The current bull market "story" is that the Federal Reserve will keep interest rates (both short-term and long-term) low for a very long time, thus causing investors to abandon bonds, CDs and other safe (but non-productive) investments for the longer-term, higher returns of the stock market. At current levels, the S&P 500 yields 2%; better than nothing - which is precisely what short-term investments deliver.

Human beings are slow to reverse their beliefs. This explains why most investors stay on the sidelines after they have sold their holdings in fear (near the market bottom). The negative "story" is loud and clear, while the positive "story" has yet to emerge.

After a year or two or three, the new positive "story" becomes widespread and is supported by rising stock prices. Early investors are sporting large gains and the doubters are beginning to look like fools. The reasonableness of the positive "story" and the cheerleaders on Wall Street add to the pressure to join the party. The latecomers are the last to recognize that the positive "story" no longer holds water.

Market tops tend to stretch out over time because investors are conditioned to "buy the dips". Therefore, they look upon a decline as just another buying opportunity similar to the dozens of dips that occurred during the market advance of the past several years. Because they are reluctant to alter their belief in the "story" so soon after adopting it, it takes a few shocks to shake the foundation of their commitment.

At market bottoms, the new negative "story" is accepted by the maximum number of investors. Thus, rallies in the market are viewed with distrust and tend to be seen as opportunities to sell before the next declining phase takes over. Naturally it doesn't, and the cycle repeats.

These phases in the market and in investor psychology are easy to plot out from a distance, but practically impossible to identify during their unfolding. Look back at important junctures in the market and try to find the experts who were on top of the situation - who understood the true "story". A handful at most. But then, that is precisely as it should be.

Today's bull market reflects wide acceptance of the Fed story. When the tide will turn is anybody's guess. Stocks can go up further and longer than anyone expects. That's why it's best for the average investor to disconnect from his or her own limited vision of the investment world and trust in a clear discipline, based on fact, with a very long history of success.

Alpha's seasonal strategies are based on an analysis of investor mass psychology, backed up by decades of confirming data. A good example is the tendency of the market to be very robust from late-October to early-May. This is a "tendency", not written in stone, but it is strong enough statistically to provide an edge to the long-term investor who exploits it. Since 1949, about 80% of bear market damage has occurred between May and November. In addition, the market has been up just 56% of the time during this six-month period each year. Over the past six decades, the rate of appreciation during this half of the year has been negative. Conversely, over the same period, the average daily appreciation of the Dow Industrials between November and May has been about 27 times greater than the six-month "dead zone" between May and November.

We are now in the annual "power zone". Odds are that the bull market will continue a while longer.

For more information about our strategies, please go to the Programs and Performance area of our website at www.alphaim.net.

Sincerely yours,

Jerry Minton, Ph.D.
President
1-877-229-9400, Ext. 11

Disclosure: Past performance is not a guarantee of future performance.

 
© 2013 Alpha Investment Management, Inc.
Alpha Power Investing Newsletter Archives