Alpha Power Investing Newsletter

April 12, 2013

Party Time

The bull market, which began in March of 2009, rolls on. The major averages have broken out into all-time, new high territory. Investors are shaking off their fear and plowing assets back into mutual funds, which are enjoying their strongest inflows since 2007. T.S. Eliot said that "April is the cruelest month", but for investors today it's a giant celebration.

Time to leave the party and go to bed.

The annual "power zone" is coming to an end. Since 1949, the Dow Industrials have enjoyed robust gains from late-October to early-May and a cumulative loss the rest of the time. The period from early-May to late-October, which I call the "dead zone", has been up just 56% of the time and has contained about 80% of the bear market destruction of the past six decades.

The Alpha Seasonal Strategy, which is currently 50% equities / 50% bonds, will convert to 100% bonds at the end of April. Our other equity strategies - The Formula and the Mid-Cap Power Index Managed Account - will exit at the end of May.

The stock market may continue to rise throughout the "dead zone" this year. No matter. Our job is to systematically reduce risk over the long term. Our clients understand that losses and gains are asymmetrical - a large loss requires an even larger gain to get back to square one. This destroys the primary engine of long-term wealth creation, namely, the power of compounding.

Let me put it to you this way: If an investment advisor offered you a long-term investment that has been up about half the time, contained multiple losing periods of 20% or more and lost money over the past 63 years, would you bite? Of course not. We won't either.

The big picture for stocks continues to be very cloudy. The market isn't cheap. In fact, the Shiller PE (price divided by 10-year, inflation-adjusted average earnings) of the S&P 500 is now in the top decile historically. This is nose-bleed territory, equivalent to the early 1900's, 1929, 1966, and recent market peaks. Long-term returns from this level of valuation have never been robust (about 3% over the next 10 years) and have suffered from sequential bull and bear phases that have sapped investor enthusiasm and driven risk-averse investors to the sidelines at precisely the worst moments.

To see how our strategies have worked since the secular bear market began in 2000, please go to the Programs and Performance section of our website at www.alphaim.net.

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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