An excerpt from my newsletter for those of you who missed last weekend's broadcast:
EXCERPT FROM David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials and Special Alert E-mail Service.
TACTICAL ASSET ALLOCATION WATCH*
Editorial Comment ("EC"): Here is how the major market indexes have played out since Bob Brinker's timing model turned "favorable" based on the S&P 500 Index's close on March 10, 2003 and he recommended investors redeploy their cash reserves into a fully invested position by bulletin issued at 2:00 a.m. on March 11, 2003:
S&P 500 Index: Up 10.95%
Dow Jones Industrial Average: Up 12.6%
Nasdaq Composite: Up 11.2%
NOTE: In October, 2000, Bob Brinker recommended to his subscribers with aggressive objectives that they invest 30% to 50% of their cash reserves in the Nasdaq 100 (QQQ shares). He also recommended to his subscribers with conservative investment objectives that they invest 20% to 30% of their cash reserves in the QQQ shares. That recommendation was repeated in January, 2001. He has maintained a hold on the QQQ shares ever since and now allocates a percentage of his fully invested position to the Nasdaq 100.
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IF YOU MISSED THE BUY SIGNAL, WHAT SHOULD YOU DO NOW?
Caller: This caller has plenty of cash reserves and wants to become fully invested again. Her financial planner has advised her to be cautious about going back into the market, and suggested that she dollar cost average back into the market. Bob first pointed out that his subscribers had ample opportunity to lump sum back into the market at the time he issued his buy signal on the morning of March 11, 2003. Even the following day, and the rest of that week, the market was very low. Bob said that anyone who went fully invested during the week he issued his buy signal was able to get very good prices. This week, however, the market took off with the biggest up week in the market in 20 years. For people who are looking to get back into the market now, Bob thinks dollar cost averaging back into the market is a good idea. Later on in the broadcast, Bob reiterated that in terms of new money going into the market at this juncture, Bob thinks it makes sense to take a dollar cost average approach, using periods of weakness to do so. Bob doesn't like to chase rallies.
EC: Bob's view makes sense, although in practice it doesn't always work out. For example, one of my subscribers pointed out that during last weekend's broadcast, Bob said the same thing -- don't chase rallies, and buy on weakness. Well, if you heeded that advice, you would have missed the rally this past week. This is an issue that Bob is obviously aware of, because he took several calls from people who did not get back into the market yet and are anxious to do so. Read on.
Caller: This caller was out of town when Bob issued the buy signal, and only received the bulletin by mail on Friday. Bob got a little defensive and pointed out that he posted the bulletin on his web site at March 11, 2003 at 2:00 a.m.
EC: I can attest to that fact. I checked his site about 1:00 a.m. on March 11th and it hadn't been posted. The following morning around 7:30 a.m., I noticed it had been posted, and was able to notify my subscribers before the market opened on the March 12th that the bulletin had been posted. How's that for service!
Caller: This caller missed the buy signal completely and wants to know what level of the S&P500 Index would be a good entry point? Bob said he is very comfortable with the level it was when he issued his buy signal. Although the signal was given before the market opened on Tuesday, March 11th, Bob is using the closing number of 800 for the S&P500 Index for purposes of calculating his model portfolio since the portfolio invests in no-load mutual funds. In the absence of the market returning to those levels, Bob would use market weakness to dollar cost average back into the market. The caller wanted to know over what kind of time frame he should dollar cost back in? Bob said it would vary by the investor, since it depends on how much risk you want to take. When you chase a rally, you diminish your potential return and increase your potential risk. Therefore, you have to decide how much you are willing to invest and the risk you are willing to take given the market has already had a great run -- especially this last week.
EC: Since Bob's timing model was triggered at the close of the market on Monday, March 10, 2003, I am using the S&P500 Index's closing number on that date of 807.48 for purposes of keeping track of his recommendation.
Caller: This caller has $300,000 in his IRA with about $150,000 in cash. He is interested in putting the cash back to work in the market, and wanted Bob's advice on what time frame they should dollar cost average back into the market. First, Bob pointed out that if he is right, then the most you can hope for is that this is a cyclical bull market which will have a limited duration (typically 1-3 years). At some point, Bob expects to issue a sell signal, book the gains, and then raise cash reserves in anticipation of the next cyclical bear market. With that said, Bob noted that if you are looking to put cash back into the market on the heels of a 12% gain in just 7 trading sessions, you have to be realistic and recognize that your risk/reward ratio has increased. As a rule, Bob doesn't feel comfortable chasing rallies, and instead recommends reentering the market through dollar cost averaging during periods of market weakness. If, however, you see continued strength in the market, there will not be much of an opportunity to get back in. Right now, the market already has built in the law of diminishing returns and increased risk given the run-up.
EC: The time frame for dollar cost averaging back into the market is a critical one for those who missed Bob's buy signal and still want to get back into the market. The issue is important because if the market takes off from here, and never looks back, the shorter the dollar cost averaging period the better. On the other hand, if the market pulls back in the months ahead, it would be better to dollar cost average over a longer period of time.
Caller: This 66-year old caller in retirement is invested in Bob's Model Portfolio III. Bob interjected noting that for 14 years, he has advised that people who are in or near retirement to utilize a balanced approach to investing, which is the design of Model Portfolio III. The caller then noted that he was out of town, and didn't really have a chance to catch this rally. Bob reiterated what he said in response to the last caller, which is that if you are coming into the market at this level no matter what type of investor you are (i.e. aggressive/moderate/conservative), it makes sense to be "judicious" and "disciplined" in your approach. Specifically, Bob recommended that investors dollar cost average any new money that is not yet invested in the stock market as opposed to putting it all in via a lump sum investment. In addition, Bob said if the opportunity presents itself, he would take advantage of periods of stock market weakness to dollar cost average back into the market. If you are able to do that, dollar cost averaging will spread out your time risk following such a big rally.
EC: That was fairly specific advice coming from daBrink. He certainly didn't want to say jump in with all of your money Monday morning, because if he says that, and the market tanks after that, he is going to be criticized. His last comment suggests that he does believe there will be periods of market weakness to take advantage of getting back into the market, although the question is will they be periods of weakness below the current levels, or above the current levels. That is an answer I do not expect that Bob will give on air. As noted at the beginning of my newsletter, I will be patient in waiting for periods of market weakness before I begin investing my remaining amount.
WHY THE RALLY?
Brinker Comment: Bob noted that the market action last week was "totally awesome." Indeed, it was the greatest week of stock market gains for the Dow since 1982. Stocks went up every day during the week. Bob addressed three factors that he believes are contributing to the recent gains on Wall Street.
First, Bob thinks that investors last week were responding to the collapse in the price of a barrel of oil. Just two weeks ago, oil was almost $40 per barrel and the "bad news bears" were predicting that oil prices could go to $100 per barrel. In the three words made famous by daBrink, "they were wrong!" Today, oil prices are closer to $27 per barrel as prices collapsed in the wake of the developments over the past week. The widely anticipated demolition of Iraqi oil wells did not occur, and instead an amazingly small number of wells have been set ablaze. The drop in oil prices has been one of the major contributors to the buying frenzy on Wall Street. Investors recognize that a drop in oil prices is the equivalent of a massive tax cut to the U.S. consumer who will now have more money to spend on other items, rather than devoting their income to energy costs.
Bob then noted the recent positive action of the U.S. Dollar. Bob patted himself on the back for pointing out a few weeks ago that the dollar had firmed up and was looking better after being in free-fall for so long. Over the last few weeks, the dollar has been gaining against the euro and the yen. A strengthening dollar is another factor that has been contributing to the bullish behavior of U.S. stock market investors. In response to a caller later in the weekend, Bob won the award for modestly calling himself the "voice in the wilderness" in his so-called "discussion" of the direction of the dollar. Bob told the caller that he continues to believe the trend in the dollar will remain strong.
Finally, investors are encouraged by the Federal Reserve's stance on monetary policy. The Federal Reserve is more accommodative than at any point in time during Bob's entire life. This means easy money in terms of lower interest rates. Likewise, the current fiscal policy is also beneficial to the stock market. Our government is running a deficit in the $300-$400 billion range and this spending should have a stimulative effect.
EC: The Federal Open Market Committee decided to keep its target for the federal funds rate unchanged at 1-1/4%. In its press release announcing its decision to leave interest rates unchanged, the FOMC left some market watchers scratching their heads when they decided to forego their usual risk assessment statement. Does it mean the Fed is clueless about the direction of the economy? Either that, or they don't want to look foolish if the war puts a damper in their predictions. Specifically, here is what they said or didn't say as it were:
"In light of the unusually large uncertainties clouding the geopolitical situation in the short run and their apparent effects on economic decision making, the Committee does not believe it can usefully characterize the current balance of risks with respect to the prospects for its long-run goals of price stability and sustainable economic growth."
The FOMC did issue one positive statement -- a statement that I think daBrink finds support in his economic indicator; namely, the prospects for the growth in the economy given the abatement of oil prices:
"While incoming economic data since the January meeting have been mixed, recent labor market indicators have proven disappointing. However, the hesitancy of the economic expansion appears to owe importantly to oil price premiums and other aspects of geopolitical uncertainties. The Committee believes that as those uncertainties lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to economic activity sufficient to engender an improving economic climate over time."
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