09/13/11
Stocks opened sharply lower yesterday, but the the Dow made several attempts to battle back and finally closed with a flurry, very reminiscent of what we saw last Tuesday when the Dow closed 200-points off of the low. The Dow closed up 69-points after being down about 180 earlier.
These kind of intra-day reversals tend to trigger at least a temporary follow-through rally over the next day or two, but we have seen this movie before recently and instead of being bullish, these rallies have turned into good selling opportunities.
For the TSP, the C-fund gained 0.70% yesterday, the S-fund was up 0.61%, the I-fund lost 1.05% because of the late U.S. rally, and the F-fund (bonds) lost 0.15%.
The rumors were that the Italians were looking to China to buy their bonds in an attempt to avoid default. The market seemed to react positively, but can it last?
The S&P 500 broke through the lower end of the bear flag intra-day, but was able to close back within it. Within the bear flag, I am seeing two bearish head and shoulders patterns (H&S), one completed (red circles) and one potential H&S (in blue) that does not have a a right shoulder yet. The question will be whether we see a right shoulder on Mr. Blue or if the bear flag and neckline on Mr. Red breaks first.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The chart above was a little too congested so here's the Dow that also shows how the last 2 (and actually 4) rallies have failed within days, only to see a test near the lows again.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
With the indices trading below the 20, 50, and 200-day EMA's, and the faster EMA's all below the slower (i.e. the 50 is below the 200, etc.) I still think we need to anticipate a bearish outcome in the end. Rallies in a bear market can be strong, but they don't tend to last very long.
In one of our premium service message board forums we had a discussion about relative account gains and losses. I thought it would be a good subject today for our market commentary.
How do you define a successful year in your TSP account? Is any annual gain a success? Is any loss a bad year? What is your goal for your account each year, beside trying to make money?
It is a lot easier to make money in a bull market than in a bear market. Seems obvious. But if a TSP account is up 10% in a year when the S&P 500 is up 25%, I would define that as a sub-par year in that account.
On the other hand, if the S&P 500 is down 20% in a given year, and someone's account is down just 12%, I would say that person had a pretty good year. This concept seemed to elude some with their belief being that any down year is a bad year.
To me, what counts is your long-term return and I think if you can beat the return of the S&P 500 over a long period of time, something that the majority of professional money managers can not seem to do, you are doing very well.
If you are not beating the S&P 500 you may want to consider a buy and hold strategy. You probably won't be able beat the S&P every year, but over the course of your investment career, beating the S&P 500 can make a huge difference in your account balance.
I found the chart below of Warren Buffett's Berkshire Hathaway returns to use as an example. I noticed that the column on the right is being highlighted as the important information. While the chart shows Buffett's annual return, what it is stressing is how his return compared to the return of the S&P 500. After all, any buy and hold investor can get the return of the S&P 500, so Mr. Buffett has to show why his investment strategy / philosophy, is better.
You can see that in 2008 his return was a loss of 9.6% but that was 27.4% better than the return of the S&P 500, which was down 37%, so they seem to be showing that it was a successful year. In 2009 he made 19% while the S&P 500 was up 26.5% so they considered that a negative year.
Source: http://www.gurufocus.com/ListGuru.ph...Warren+Buffett
Looking at the 5 to 30 year cumulative period returns you can see why Warren Buffett is so revered. Because returns are compounded and not added up, just beating the S&P 500 by a couple of percentage points a year on average, will give substantial returns over the buy and holder in the long-run.
If you can't seem to be able to beat the S&P 500 return, perhaps you should consider a buy and hold strategy. Either that or you might want to use a service that can help you beat the S&P 500.
Bottom line: Don't get too dejected if you are having a down year. It is difficult to have a positive return when the indices are down for the year. Instead focus on maximizing gains by getting aggressive during positive market years, and minimizing losses and being more defensive during down years. If you happen to have a positive year while the S&P 500 is down, it's just icing on the cake.
Thanks for reading! We'll see you back here tomorrow.
Tom Crowley
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