Alpha Power Investing NewsletterFebruary 24, 2015
One of the investment truisms that is often forgotten is this: The lower the market goes, the higher its future returns; the higher the market goes, the lower its future returns.
The bull market, which began in March of 2009, is nearing its six-year anniversary. Since the low point, the S&P 500 has compounded at about 17% per year, due to the Federal Reserve's policy of holding short-term interest rates to near-zero, combined with assurances that this policy would continue for a long time. As a result, speculators and income-seeking investors have driven the stock market to its highest valuation ever - higher than the peak in 1929 and 2000.
Long rallies like this have a predictable pattern - always ending badly.
As the market continues to build steam, investor skepticism dissolves. More and more investors see reasons why risk has disappeared and riskier assets are, at last, safe for the long-term. The bandwagon rolls, the music plays, and investors are rewarded for boldness and risk-taking. Their risk-taking behavior goes to more and more extremes, eventually causing big-league speculators to place bigger bets over shorter time periods. The market then becomes ready for a crash as the short-term gamblers with large holdings rush to the exits together when the music stops.
Which brings us to another investment truism, namely: The market will go higher, longer than you expect, and it will go lower, faster than you expect.
Investors who pay attention to valuations relative to historical precedents bailed out of stocks two years ago, thereby missing an almost 50% gain in the market. And anyone with investment savvy has had the gut wrenching experience of buying low and then watching the market continue on down to unexpected depths.
Our philosophy recognizes the near-impossibility of picking bull or bear market inflection points based on conventional wisdom or deep insight into the mechanisms that move the economy. Instead we rely on statistical regularities that emanate from well-known human behavioral axioms.
The Alpha Mid-Cap Power Index strategy is a case-in-point. The strategy is as simple as dirt: own the S&P Mid-Cap 400 Index between late-October and the end of May. Own conservative treasury bonds from June to late-October.
As a long-term strategy, it's hard to beat.
This strategy is based on the propensity of investment analysts, market gurus and other "experts" to issue late-in-the-year predictions for the following year. These predictions are almost always overly-optimistic, and they cause a wave of investor optimism that tends to persist through the early part of the next calendar year.
As the first quarter ends, the real state of affairs begins to emerge. About half the time reality falls short of earlier predictions and the market falters. Since 1950, about 80% of the damage caused by bear markets occurs between early May and late October. Historically, since 1950, this period has been down 40% of the time (Dow Industrials).
Not good odds for a buy and hold style, and avoiding this period is an excellent way for a long-term tactical strategy to reduce risk without sacrificing meaningful returns.
Sincerely yours,1-877-229-9400, Ext. 11
Jerry Minton, Ph.D.
Disclosure: Past performance is not a guarantee of future performance.
© 2015 Alpha Investment Management, Inc.