Alpha Power Investing NewsletterJuly 10, 2013
Over the past month, as interest rates shot up and bonds took a beating, the Russell 2000 small-cap index steadily rose, striking a new all-time high a few days ago.
Normally, this would be a very bullish sign for the stock market, as bull markets are almost always paced by the small-cap sector. These stocks represent the most speculative sector of the market and when speculation is strong, the market as a whole is buoyed up.
Our equity programs are currently in intermediate bonds, suffering losses after strong gains in the first quarter. It's one of those times when it's tempting to wonder if our discipline might be failing.
Since a conservative investor's primary objective is to avoid large losses, and since market-timing gurus with a super long-term record are impossible to find, I decided to plot the annual forecasting cycle against small-cap stocks. In other words, how do small-cap stocks react to the November through May "power zone" and the June through October "dead zone"? The past 15 years have encompassed two major bear markets and some powerful bull markets - a fair test, I'd say.
As you can see, the policy of investing in small-cap stocks during the five-month "dead zone" every year is a long-term loser's game. On the other hand, the seven-month "power zone" has provided robust returns with strong risk management - based on the very long-term propensity of investors to be optimistic late in the year and early in the subsequent year. The behavior of small-cap stocks during the "dead zone" reflects the devastating effect of "bad news" on these speculative securities.
We're staying in bonds until late-October.
The average long-term investor can hardly do better than avoiding large losses while participating in most of the market's upswings. The annual forecasting cycle is infinitely better than a market-timing guru when it comes to controlling the long-term risk of a portfolio: no ego, great track record, simple to implement, easy to understand rationale.
Sincerely yours,1-877-229-9400, Ext. 11
Jerry Minton, Ph.D.
Disclosure: Past performance is not a guarantee of future performance.
© 2013 Alpha Investment Management, Inc.