Alpha Power Investing Newsletter

March 7, 2013

New Dow High

The Dow recently bested its 2007 October high as investors clamored to re-enter the market after an almost four-year rally from the lows of early 2009. Mutual funds are now experiencing solid inflows after years of outflows. Investors' fears of another bear market are dissolving. Wall Street is pounding the drum announcing a new bull market.

The "buy and hold" crowd is crowing, "See, if you just hang on, the market will recover and you'll recoup your losses."

Not so fast. There's this little thing called "inflation". In reality, inflation is theft by government. The Federal Reserve, without a moral qualm, has announced a 2% inflation "target". In plain English, what that means is that they plan to steal 2% of investors' wealth every year. Fed meetings are actually conventions of crooks. So when we factor inflation into the equation, what has happened to stock market investors since the halcyon years of the nineties?

The graph below shows the total return (including dividends) of a 10% investment, the Dow Industrials, the S&P 500, the Russell 2000 small company index, and the S&P MidCap 400 Index since 2000 adjusted for inflation.

Not so pretty. Only the 10% investment and the S&P MidCap 400 Index have provided the kind of growth necessary for a successful investment program. The S&P 500, by contrast, is still underwater. What's even worse is that more than 80% of big-name mutual funds have underperformed the S&P 500.

But that's all water under the bridge. Maybe things will get better. Maybe the new Dow high is a precursor to a new bull market or not.

Let me suggest that trying to forecast the next twist and turn of the stock market is a loser's game. If you play it, you're letting yourself in for an emotional roller-coaster ride that always comes off the tracks. If it could be done, there would be evidence of it - and there is none.

That's not to say that the stock market is completely unpredictable and random - it isn't. There is a cycle, caused by human nature, which affects the market every year. Some years it exerts a strong influence, some years not, but it works over the long-term, affecting every developed stock market globally.

I call it the "annual forecasting cycle". It is caused by the army of earnings forecasters who issue predictions at year-end for the next calendar year. These predictions tend to be overly optimistic, causing the investment "climate" to become more tolerant of bad news and more expectant of good news. This optimistic "climate" lasts from late in the year through the early part of the next year. It explains why, since 1949, the average daily appreciation of the Dow Industrials from November to May has been 27.4 times greater than the average daily appreciation the rest of the year. If this is right, then we would expect that sitting out the months of summer and early fall would improve investment results over the long-term.

The graph below is also adjusted for inflation, but in this example the S&P MidCap 400 Index is owned from November to June every year, and intermediate treasury bonds are held the rest of the time. We'll call it the Alpha Seasonal Mid-Cap Index.

As you can see, avoiding the five months beginning in June, which I call the "dead zone", dramatically increases the long-term investment performance of the index. What is so powerful about this methodology is its simplicity. Instead of guessing what the market's going to do, it provides an ongoing discipline for long-term risk management.

This discipline is the basis for Alpha's Mid-Cap Power Index Managed Account strategy. For complete details on this strategy, please visit the Programs and Performance section of our website at www.alphaim.net and download the brochure and fact sheet for the Alpha Mid-Cap Power Index Managed Account.

Sincerely yours,

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

Past performance is not a guarantee of future performance.

 
© 2013 Alpha Investment Management, Inc.
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