Last Friday marked an important day in the financial markets – to some. On that day, the Nasdaq Composite finally made an all time new high from the level set in March of the year 2000. Yes, it took fifteen (pronounced Fif – teen) years for this brave index to recover from the losses incurred through two devastating bear markets in the first decade of the 21st century. I have that same feeling when I see a child get a ribbon for getting last place in a competition. Not to sound heartless as I have two children of my own who have their share of last place finishes, but what message are we sending when we celebrate failure. I’ll give the Nasdaq composite a nod for participation, but let’s certainly not congratulate one of the worst investments in the stock market history!
Lessons in the Value of Risk Management
I won’t belabor this point as we all know it well, but the final recovery of the Nasdaq Composite index has to be highlighted as a classic example of why a robust risk management system must be part of every investor’s approach. Fifteen years is a long time considering the average investor only has the bulk of their investment assets at work for 22 years on average. I feel badly for the mass of investors who bought into the technology craze of the late 90’s just as the dot coms turned to dot bombs. Did they have the strength and the will to hold their Amazon stock through a 92% decline from the peak in early 2000 to the low in August of 2001? Of course not. They sold, at or near the lows and we know this by looking at the sell side Volume in 2001. Now, fast forward to today. Amazon just made another all time new high and is up nearly 400% from the highs in early 2000. I’m picking on Amazon because I got a lot of calls last week wondering if Amazon was a buy (now). The answer is no. The most recent and obvious buy was in late 2014 around the $300 price level when everyone thought Amazon was dead for good. In full disclosure, we did buy a position in Amazon for our New Power strategy on November 11th, 2014 after Amazon had completed a 12 month consolidation in price.
Risk management is a two-sided thing. One side protects us from the downside by telling us when to sell holdings that are reversing into negative price trends. The other side of risk management protects us from buying things that have already moved far beyond the scale of reasonable. At the moment, there are lots of stocks making significant moves higher, especially in the limelight technology names. Some are way out there and not attractive anymore. Others are just now waking up and breaking out of long consolidation patterns like the chart of Amazon above earlier in the year. Remember, buy low, and sell high right? As we watch the Nasdaq Composite finally break out to an all time new high, we should all use the event as a strict reminder that simply putting money into the stock market is not a guarantee of success, especially if one is in the hold an hope camp. Entire countries (Greece), sectors (Energy) or asset classes (Gold, Commodities and Real Estate) all have their days. Our job is to execute our system, to stick with leadership, invest in things trending up (not down) and avoid the permanent loss of capital (aka Risk).
Back In Gear
Last week was a good one for the US stock market and I will celebrate that! Many of the issues I discussed last week including high selectivity, unproductive results and lack of leadership, simply went away with a single week of quiet trading. Now, technology is back in gear as is the consumer discretionary sector. Transportation finally found a bottom and is trading higher. Even the sad and pathetic NYSE finally pushed out to a marginal new high in a race for last with the Nasdaq Composite. Technically, we saw a surge in volume with confirming breadth and participation and now the rest of the world is also leading higher including emerging markets, China, Europe and Japan. Still early in the earnings season, we also see 77% of companies beating VERY low expectations and over 50% are beating revenue estimates so it looks again like analysts have been far too pessimistic toward earnings. Investor sentiment is still pretty bearish to neutral which tells me there is more upside ahead. The US dollar has been blamed for much that has inhibited growth among US companies in the last 9 months. Now it seems the trend of the rising US dollar is slowing down thankfully, even correcting some. Is the uptrend in the US Dollar over? Not likely. If history is our teacher, major currency trends tend to last a minimum of two years so we’re probably not even half way. Don’t bet against the rising US dollar unless the US economy slips solidly into recession. As discussed last week, there is a growing risk of that event but no clear signs of recession yet.
Don’t forget, stocks and stock markets simply reflect a basket of expectations about the future of earnings and the economy. As such, stocks tend to put in a peak at least 8 months ahead of a formal peak in the economy. With all time new highs in several key US stock indices again, the “expectation” is that the US economy will not peak for at least another 8 months. With many economic reports at the zero line and threatening to turn negative, we might therefore expect a robust economic bounce from this level. We’ll see. What would change the picture would be a swift and severe decline right now, right here, erasing the breakout of last week and taking us back under the highs set last July which happens to be….. 10 months ago! I’m doubtful of that outcome given the complete set of positive action last week but I sure would like to make sure this break out isn’t a fake out at this stage of the game.
I’ll leave it there for the week – Have a good one!
Sam Jones
