Are You Speculating Or Investing?

The markets are down anywhere from -50% to –60% off their all-time highs, yet people still are buying Citigroup at $3 and AIG at $1.5 hoping to double their money.

Bear Markets don’t end when people are wildly speculating and the media is in a you-must-buy-now frenzy, a week off of a 12-year low. Bear Markets end when nobody wants to own stocks anymore.

Bottoming will be a process. It will not be a rally on good news. Bear Markets bottom on Bad News and keep rallying – the “Wall of Worry”.

The key skill is the ability to interpret how the Big Boys are deploying their money and following what they do.

The Bull Market of 2003-2007 started to unravel as key individual sectors were sold by Big Money. Each time one of these sectors topped and rolled over, that removed support for the Broad Market Indexes, like the S&P 500 ($SPX).

Mortgage Finance ($DJUSMF) started it all, topping in last 2004
Home Construction ($DJSHMB) topped in June 2005
Commercial Real Estate ($REIT) in January 2007
Retail ($DJWUR) and Global Real Estate ($DWGRST) in May 2007
Construction ($DJUSCN) in March 2008





It got to the point where the only stocks holding up the markets were a handful of technology companies (Apple, RIMM, Google and BIDU) and some Basic Materials companies.
In January 2008, these Technology stocks topped and then the Materials ($DJUSBM) companies topped in March and June of 2008.

Then the markets crashed and the rest is a history lesson.

My point to this is that you could see this coming. If you were doing your homework every day, you could have protected capital like I did during the Bear.

It was the topping of Real Estate-related sectors and the enormous differential in the cost of owning versus the cost of renting that led me to sell my house in November of 2005. I have been renting ever since.

It was the topping of the NASDAQ and Commodities that let me know that the last market leadership was gone and it was time to get defensive in stocks.

You will need to do the same homework to figure out when the markets are bottoming, to see what is holding up the best and has the best chance of leading in the next Bull Market.

Look at how different Markets and Sectors performed in the 2000-2003 Bear Market. The S&P 500 ($SPX) got killed, Small Caps ($SML) held up. That told you to looking to own Small versus Large in the next Bull Market.

Look at how different Sectors held up – Basic Materials (XLB), Energy (XLE), Consumer Discretionary (XLY) and Healthcare (XLV)
They were telling you that Big Money was not willing to sell them, even as the overall markets were getting crushed. They were telling you that they were going to lead the next Bull Market.

Real Estate ($DWGRST) was actually up during the 2000-2003 Bear!

I keep relative strength readings on key asset classes. Asset classes tend to lead or lag for periods of 5 – 7 years.

You want to own what is leading. You want to own what is working. Leaders lead for several years and trends run farther than you think they can or will.

You need to forget about past leadership and focus on what will work in the future!!

You tell me where you think Big Money is looking to put their money. Here are the charts. A rising line means outperformance for the first symbol versus the second (SPY:RSP) -

Cap-Weighted (Large) versus Equal Weight (Small)
Large is outperforming Small.
Large led from 1994 - 2000
Small Led from 2000 – 2007
Large has led from 2007 - Present

US versus International
US led 1994 – 2000
International led 2000 – 2008
US has led since

US versus Emerging Markets
US led 1996 – 1998
Emerging Markets led 1998 – 2008
US has led since

You don’t need to understand this stuff. You just need to know that I understand this stuff.

I have no clue how far these trends of outperformance run, but I have the systems to measure them and will know when they reverse and it is time to deploy money elsewhere. It is more of an art than a science, but that is an expertise that I bring to the table.

The focus of Wall Street is to keep you “fully invested” at all times, so they can get paid their fees. The goal of the Financial Media is to get you all excited and drive transactions.

My goal is to protect money on the way down and make money on the way up. The linear 12% advancement is in hibernation. We are now in a violent trading market similar to 1933-1945, NASDAQ 2002 - Present and the Nikki 1980 – Present.

The sooner you figure this out, the better you will able to navigate the markets (I’ll post on this soon).