Securities Research Services

Thursday, October 09, 2008

Keep The Big Picture In Mind

All anyone can do after a day like today – or a month like this month – is just shake one’s head in disbelief. We have never seen declines like we have seen in the market over the past few weeks. The one month decline in the SPY is now almost 27 points or 23% and the month is only 9 days old. By comparison, the biggest one month decline in the SPY during the last bear market was only 20 points, or 22%.

Moreover, the fear index (VIX) is now trading at all time highs.

In times like this it is important to keep the big picture in mind. We admit we were astounded today when our stops on SPY and SSO were sliced through like a hot knife through butter, but realistically we have taken a very conservative approach to this market throughout the year. We still have significant gains on the year. A quick look at Morningstar tells us that the only funds that have a gain on the year are just a small handful of bear market funds; roughly only 20 out of 13,000 funds. The rest of them have losses on the books as of the end of September; significant losses after this market crash to be sure.

More importantly, however, is the vast opportunities that this produces for us. Having preserved our cash we will be in great shape to participate in the upcoming rally. And considering the strength of the sell off and the fact that world governments are now moving heaven and earth to stop the spiraling out of control, we are looking at a massive rally out of this bear market.

First, we a huge bear market rally WILL follow this extraordinary sell off and that rally will offer us moves that are likely to easily surpass our typical 10% price targets. We still contend that that rally could kick off any day now. And, and this is even more compelling, considering fear levels now, a lot of babies have been thrown out with the bathwater here and valuations in some companies are exceedingly cheap here, we are likely very close to the end of this bear market altogether.

Bear markets tend to end much sooner than recessions do as the stock market is forward looking. What is truly great about the prospects for the next bull market is the fact that they are just so much easier to profit from. In 2003, when the last bear market was recovering, we saw huge gains. Stocks that rallied 20, 40, 50, and even 100% in one day were common during this phase and they will be again. Over the past couple of years the market had lost its momentum and it was hard work getting just 10% gains. This will not be the case during the first phase of the bull market when undervalued stocks revalue.

So today, we have moved back to cash, but we eagerly wait for the profitable bounce and have no doubt it will be a big one following this historic sell off. There is nothing new under the sun and this sell off certainly is no exception.

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