Transcript Making Money in Today’s Market Bottom Fishing for Big Run-Ups A Timing and Stock Selection Strategy used for about one month, two or three times.

Making Money
in Today’s Market
Bottom Fishing
for Big Run-Ups
A Timing and Stock Selection Strategy
used for about one month,
two or three times each year
Presented by Herb Geissler, Managing Director of The St.Clair Group
And Leader of Rational Investing Special Interest Group of Pittsburgh AAII
Good news: Will show you how
to profit during bear markets
Bad news: Bear markets likely
to persist for 10 more years
Ugly news: Doing nothing
can yield the worst results
Primary Determinants
of Investment Performance
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Widely held notion that asset allocation policy explains more than
90 percent of investment performance between mutual fund
managers (with stock selection the remainder) is now disputed by
Ibbotson Associates
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Ibbotson’s research now demonstrates that “about three-quarters
of a typical fund’s variation in time-series return comes from
general market movement, with the remaining portion split roughly
evenly between the specific asset allocation and active
management (of stocks held).”
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March/April 2010 issue of the Financial Analysts Journal
Clearly, being in the right direction (bull vs bear) is far more
important than selecting the best industries or best stocks
There is only one side of the market –
and it’s not the bull side or the bear side,
but the right side.
- Jesse Livermore
Is the Big Bear Ready
To Go Into Oblivion?
Bears Come in 3 Sizes
Twice each and every year,
Seasonal Bear markets typically drop 5 to 15%
Twice each decade,
Cyclical Bear markets drop 20 to 35%
during recessions requiring inventory corrections
Twice each century,
Secular Bear markets drop more than 35%
during depressions requiring capacity corrections
Mapping Market Terrain
to anticipate bottoms
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“20” year cycle of lean and fat years
Presidential Cycle of pump-priming
Annual Seasonal cycle in Spring & Fall
Buy and Hold is in a Coma
with flat returns likely for ten more years
Driven by demographics
17.6 year cycle increases two to ten-fold,
then wobbles going nowhere during next 17. 6 years
During next 10 years,
must make money on
the wobbles
Invest (buy & hold) during strong bull markets
Trade (buy & fold) during consolidating decades;
Requires smart timing and stock selection and disciplined entry and exits
Cyclical Economic Forces
Drive Market Direction
Currently, we are in a bullish cyclical period within a secular bear market
While industry has cut back debt and cost-excesses at a remarkable pace,
tax and interest rate increases in 2011 will stifle economy
Earnings per
Inflation
Interest
Stock
Market
share
Prices
Rate
Rates
Conditions
Up
Up
Down
Up
Bull market begins
Up
Down
Down
Up
Bull market thrives
Up
Down
Up
Up
Rarely happens
Up
Up
Up
Up
Bull market ends
Down
Up
Up
Down
Bear market begins
Down
Down
Up
Down
Rarely happens
Down
Down
Down
Down
Bear market thrives
Down
Up
Down
Down
Bear market ends
Truth Table in VectorVest Views on 3/21/2003 for Economic Cycle
It's profitable to be in the market
when the S&P500 EPS is rising and
to hunker down when the EPS is falling
Presidential Cycle
Is Encouraging for 2011
DJIA Gains during Presidential Cycle
since
1886
since
1950
% up Years
Annual Gain
% up
Years
Annual
Gain
79%
11.1%
100%
18.7%
Election
69
8.4
91
10.1
Post-Election
52
5.0
45
2.0
MidTerm
55
4.0
55
4.6
Pre-Election
For Cyclical Periods,
12 Month Moving Average
Pinpoints Reversals
During past 10 years, would have averaged
6.6% annual gain with 11.5% max draw-down
vs 1.2% gain and 52.6% mdd with Buy & Hold
Explained more fully in Dynamic Allocation book
Two Corrections Each Year
Wait for that FAT pitch
Warren Buffet
Bottom-fishing lowest momentum stocks
produced spectacular results
Jail Break gained 201%
between 3/9 and 4/17,
as SPX gained 27%
Key Elements in
Bottom Fishing Strategy
1.
2.
3.
4.
5.
6.
7.
8.
Identify “juicy” low points in market
Determine when bottoming is over
Find “strongest midgets in the room”
Enter positions cautiously, with a tailwind
Exit before the party is over
Enter momentum strategy for more gain
Exit momentum to assure cash for fishing
Wait patiently for the next “fat pitch”
I made the most money in the waiting.
- Jesse Livermore
SPXA50R Reveals
The Really Juicy Points
Bottoms Are Juicy When Less Than
1/3 in S&P 500 are over their MA50
Good Entries and Exits when SPXA50R crosses its MA20
Vector Vest Has Many
Bottom Fishing Strategies
Historical Results were Spectacular,
even with simple one-month hold
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4 out of 5 forays were profitable
Winning forays were 3-4 times more
profitable than the few losers
Small Cap strategies averaged 25%
gain within 1 month, beating Jail Break
Small Caps were profitable 90% of time
with average gain of 30% in one month
Thanks to Earl Novendstern for the analysis
During past four years,
small cap bottom-fishing gained
65%-90% per year
2 or 3 forays each year, held for one month per foray
Stops Help Somewhat,
But Must Be Refreshed
FINVIZ.com
Enter With Tailwind
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Buy positions after “amateur hour”, only if
market indexes are moving up
Premature entries are more costly than a
delay of a day
Buy “half position” on MA10, balance at
MA20
But if $SPXA50R > 50%, it’s too late
Panics end more abruptly than “climbing the
wall of worry”
Exit When Comfortable,
before the party ends
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Hold for One Month or…
Exit all when SPXA50R < MA20 or…
Exit each stock at 30% gain or….
Exit each with Chandelier stop or….
Exit each at its’ MACD crossover
Then switch into a Momentum Strategy
Knowing When
You May Be Wrong
1.
2.
3.
When SPXA50R fails to cross its MA20
within a few days of crossing MA10
When foray loses more than 7% during
first week
When subsequent decline exceeds 5%
of initial investment
Re-evaluate entire market environment and VIX and SPXA50R to decide
Exit When Drops Below MA20
to Preserve Cash for Bottom Fishing
Recap
Key Elements in
Bottom Fishing Strategy
1.
2.
3.
4.
5.
6.
7.
8.
Identify “juicy” low points in market
Determine when bottoming is over
Find “strongest midgets in the room”
Enter positions cautiously, with a tailwind
Exit before the party is over
Enter momentum strategy for more gain
Exit momentum to assure cash for fishing
Wait patiently for the next “fat pitch”
Any Questions?