Are We There Yet?
Flexible Plan Investments
By Jerry Wagner
February 5, 2013
Last week we talked about the numerous commentators urging investors to “buy the dips.” We pointed out that many of them (unlike many of the Flexible Plan strategies) were under invested during the stock market rally that began last November and thus were simply trying to finally get on the market band wagon.
We also remarked that “buying the dips” was not an easy task in practice. Why? Because investors had to answer three questions to be able to profitably “buy the dips.” I wrote, “The key to such a strategy is that one must know whether the market is in an uptrend, when the dip is a deep enough dip, and when the dip is a dip worth buying and not the beginning of a bear market.”
I ended the article last week going out on a limb and opining that “Given that this tends to be a positive week seasonality-wise and that the positivity commences again around the 11th of February, the next two weeks may be your best opportunity to get on board the rally.”
Well, the market fell a bit in the days following my article – down 44 on Wednesday and another 50 Dow points on Thursday. Was that the dip? Was that the time to buy? It’s like when the kids are in the back seat on a trip – they’re always asking, “Are we there yet?”
It did look like it on Friday, when the market roared ahead 140 points on the Dow Industrials. Yet, during the day today the market has given back almost all of that, as it opened lower. But that just raises the question again, “Now is it time to buy?” “Are we there yet?”
Doesn’t the last week indicate the futility of trying to manage your investments based on the headline numbers of the market averages? If you were an investor that had missed the market rally, the advice to “buy the dips” was a good one. Yet even though we had identified that it was a good time to buy the dips, who bought last week? Who bought today?
Pulling the buy trigger is a difficult action to take. The fear of being wrong and losing money at times overcomes even the best stock market traders. It often results in missed opportunities and a different set of regrets. I know. I’ve been there. Just like I know you have been too.
The difficulty we have pulling the buy trigger is matched by the trouble we all have in pulling the sell trigger. Whether you have a profit or a loss on a stock position, the average investor is filled with conflicting anxieties and emotions just contemplating the action.
Of course, all that difficulty is exactly what attracted me to computerized investing way back in 1968. While the concept was still in its infancy and we had to do our research with computers the size of buildings and programs built from card decks, it held the potential of providing the means to avoid the emotion of investing. Although only time would tell if each trade generated would yield the best result, it could provide a logical basis to reinforce the discipline needed to make the best trading decision given all the known facts.
On the one hand, today, we see interest rates moving higher (a negative) and earnings reports beating expectations at a rate better than we have seen since 2010 (a positive). On the other hand, economic reports have been mixed. Last week, fourteen were worse than predicted while thirteen exceeded expectations (not much guidance).
It’s no wonder that investor expectations have swung in just the last week from more than 50% bullish to less than that mark. And just the opposite occurred in the previous week.
The world we invest in is fast moving and filled with conflicting facts and events. Adding emotions to the mix makes it an impossible task. Computerized investing eliminates the emotions while providing a means to sort through the facts on a logical basis.
Towards that end we are always working to improve our various strategies. This week we are upgrading our MAPS, SAS, and Schwab MSP allocation process to better reflect the strategy performance data available to us.
In the past, the allocations have focused on just returns and downside risk. Since none of the strategies traded exactly like the others, we did not explicitly take the degree to which they did not track each other into account.
Diversification in and of itself took much of that into account. Now we have added the degree of non-correlation over multiple time periods into the formula. Our back tests demonstrate quite an improvement in returns, especially among the suitability profiles that can accept more risk.
New Research Reports will soon be available detailing the results of this upgrade. I have always believed that when an investor places dollars with an investment advisor, he or she is not just buying a static strategy. Rather, the client is investing in the research abilities of that advisor to adapt and develop improvements to deal with the constantly changing financial marketplace. This change reflects our commitment to that belief.
Today, most of the tactical and rotational strategies at Flexible Plan remain fully invested. Yet our Political Seasonality Index has turned negative until mid-month. This reflects the fact that historically February is a negative month in the stock market, second only to September. Still, we are encouraged even on a seasonality basis that when January is as strong as it was this year (up over 5%), most of the time in the past 50 years stocks have gone on to record a positive February and remainder of the year.
In addition, the Federal Reserve continues to keep the pedal to the metal. Robert Hanna, who follows these things in his terrific Quantifiable Edges Weekly Research Newsletter, estimates that the Fed provided about $86 billion in liquidity in January. This is the result of the latest Quantitative Easing, and is almost as high as the levels reached during the market’s rally under QE2. Just as was the case then, the markets have rallied in response to the January Fed purchases.
Now Rob is reporting that Fed purchases (according to the Fed itself) will total another $84 billion in February. That could easily fuel the market averages on a trip much higher!
Isn’t it great when you can answer the question “Are we there yet?” in the affirmative? If you’ve been with Flexible Plan, you’re already invested in our active strategies and they are providing the answers daily. If not, it’s time to buy the dips.
All the best,
(c) Flexible Plan Investments