Sunday, December 12, 2010

Market Highs Coming?

I will probably regret posting this blog, like the baseball pitcher who serves up the winning fat pitch to the home run slugger. I should explain to the increasing number of international members of this blog community my theory that most sports victory is achieved at least in part by the mistakes of the loser.

In the future I can envision that the US stock market rises to at least the level of the former highs in 2007. The first assault on these former peak prices will probably not succeed and could cause casualties in a subsequent push back. Nevertheless, I have confidence that the task will be accomplished. (Perhaps I am too heavily influenced by my US Marine Corp focus on achieving victory.)


Most investors generally accept that on balance the bottom of the US stock market was hit in the first quarter of 2009. Many date the bottom as of March 9, 2009. For the next twelve months we had a substantial recovery, with some portfolios gaining 100% in a year. From April to mid-August there was a period of indigestion until a rather slow rise got underway. Today most observers have a feel that the gains in 2010 are about 9%. Many casual observers do not recognize that through December 9th, the S&P 500 is up about 12.7% and a broader measure, the Vanguard Total Stock Market Index fund, has a 14.6% gain.

Actually there are many investment objective fund classifications that are demonstrating way above average results according to data from old firm now known as Lipper, Inc. As a matter of fact, the average US Diversified Equity fund is showing gains of 15.1%. Within this group there are two different types of funds that somewhat mirror the activities of hedge funds. The leaders of the approximately 8000 US Diversified Equity group are the Diversified Leveraged funds with a gain of 30.8% on average. The laggard and the only group to show negative results were the Dedicated Short Biased funds which sank -28.4%. Within the diversified equity league there were six separate groups which on average were up more than 20%. There were an additional six fund classifications gaining more than 20%, led by the Precious Metal funds’ average gain of 40.9%. (The results above are for the period December 31, 2009 through December 9, 2010.)

I am not predicting that these gains will be sustained in the remaining weeks of this year or repeat in similar fashion next year. What I am highlighting is that in a period of dour economic and political headlines, with two wars underway deploying US troops plus other high level geo-political tensions, funds can gain 15-20%. I wonder what kind of gains we might see in a year when the news is viewed as favorable?

The Artillery

Recently the big guns in the brokerage business have started pounding away with their increasingly bullish pronouncements. Three of the biggest on the institutional side, Goldman Sachs, JP Morgan (who is acting more and more like a broker), and Barclays (exorcising Lehman’s ghost) are seeing positives for the year ahead. Interestingly, at this point the firms that are heavily focused on retail customers have not been leaders in the bombardment.

The Troops

According to one survey, well over half of the investment advisers are bullish. The best single stock market technician that I know personally is very bullish for the next six months or so and his accounts are positioned accordingly.

The Timing

Often, but not always, the US market does pay attention to the so called “presidential cycle.” According to many market adherents, the best markets often occur in the third year of a president’s term. There is less power if the president is in his (and some day her) second term.


We manage a number of different accounts, with each one having its own policy. Considering my generally bullish attitude, I am in the rather embarrassing situation of redeeming fund shares in two retirement accounts under management. At equity commitments of 77%, these accounts were above their equity allocation policy levels due to good performance, thus had to be reduced.

Caveat of All Caveats

I can not successfully predict the future. Certainly we are prone to unscripted surprises; just think about the known and the unknown geo-political risks. Therefore, please be particularly prudent when swinging at my fat pitch of an undated new high on the US market.
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