A Bullish Long-Term Sentiment Indicator
10 Resolutions
A Group to Watch
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I know you’ve probably heard this a thousand times before, but let me personally wish you and yours a very happy New Year. Let’s hope it’s far more prosperous than 2008.
In fact, I’ll start off today’s Cabot Wealth Advisory with some data that suggests it’s likely. Every month, the American Association of Individual Investors (AAII) polls its readers on their current portfolio’s stance--how much they have invested in stocks, how much in bonds, and how much in cash. AAII’s been doing this since late 1987, and it has the history posted on their (subscriber-only) Web site.
Looking at the data, it’s just as you might guess--the amount invested in stocks is near its lows at the end of bear markets (when everyone is pessimistic and believes the world is coming to an end) and at its highs near the tops of bull markets (when enthusiasm is peaking). It’s the opposite for cash levels--highest near bear market bottoms, lowest near bull market tops.
For much of this year, the data wasn’t really saying much, and indeed, it usually doesn’t; the survey only reaches extreme levels once every few years. But December’s figures have just been released, and they have reached what I believe are bullish extremes for the market.
Specifically, the amount members have invested in stocks is down to 42%, which is similar to readings seen at the lows of 2002 and soon after the bear low of 1990. For perspective, it nearly topped 80% during the bubble in 2000, and has stretched toward 70% more than a handful of times during the 2003-2007 bull market.
Moreover, the amount held in cash also reached above 40%, and as far as we can tell, it’s the highest level ever recorded by this survey (which, again, dates back to late 1987). There’s no doubt, then, that this group of small-ish investors is as cautious/bearish as they’ve been in 20 years.
Is this reason enough to start buying? No, I don’t think so ... sentiment is a secondary indicator, and as we saw last year, there were many “panic” readings from many indicators that never stopped the wave of selling, especially in the fall.
However, it’s a great background indicator, and with the indexes and some leading stocks acting better, I do think it’s a good idea to at least begin to put some money to work in the days ahead. More important, I believe readings like this tell us that when a new uptrend gets going (whether it’s now or later), it’s likely to run for a while, as all those investors now on the sideline get more heavily invested, pushing stocks higher.
Just something to keep in the back of your mind going forward.
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OK, by now you’re probably sick about hearing of New Year’s resolutions; heck, Paul Goodwin even wrote about a few pointers a couple of weeks ago and Elyse Andrews discussed some in last weekend’s digests. (These and all past issues can be found in the archives on our Web site.)
Even so, I like to write down some New Year’s investing resolutions every January, and I think you might get a valuable nugget or two out of them. So here are 10 to consider (in no particular order):
1. Cut ALL losses short. You’ve read enough about this one, from me and others, so I’ll just leave it as is.
2. Calculate your risk for every trade before (or as soon as) you execute it. That means you’re effectively telling yourself, “I’m buying XYZ at 50 a share, and I’m buying $10,000 worth of it. If it falls 15%, I’m selling, no questions asked, which means my total risk is $1,500.” It’s just that simple ... but it means you’re not extending yourself too far if things go awry.
3. Keep records of every stock you buy and sell. You can’t expect to learn if you don’t review at least some of your trades (preferably, the really good ones and really bad ones). You don’t have to be overly meticulous, but keeping transaction records, printing out a few charts and jotting down some notes (on why you bought or sold) every few weeks can prove valuable.
4. Keep records of your portfolio. Far too many investors simply go day-to-day, week-to-week, without really knowing how much money they’re making or losing. I know you get statements, but you should also enter your portfolio’s total value into a spreadsheet at the end of each month. (Don’t do it every day ... it can be overwhelming and tedious.) Make a few charts to track how you’re doing, too.
5. Set performance goals. Of course, it’s easy to say, “I want to make 50% this year!” But better goals might be, “I’m going to outperform the market by 15%,” or “I’m going to avoid having three losing months in a row.” In other words, something that’s more under your control, as opposed to effectively hoping the market acts well (which might allow you to make 50%).
6. Find someone else to share your goals, successes and failures with. Goals are nice, but if you’re the only one who knows them, it’s too easy to lose track of them. Thus, even if it’s someone who’s not in the market (you might share some investment goals with your spouse, and he/she might share some professional goals with you), letting someone else in on your aspirations is a good thing.
7. Set a maximum percent-invested position when the market’s trend is down. Maybe you want to alter this resolution, but the point here is to force yourself to respect market timing. If the market turns down (possibly via our Cabot Tides, which measures the intermediate-term trend), you want to raise at least some cash.
8. Sell some winners on the way up. I call this “forcing yourself to fall out of love.” In my experience, most investors hate to sell their stocks, both winners and losers. Hooey! If this is you, then you should try to sell some of your shares on the way up in 2009 ... yes, even if the stock still acts great. Doing so will put some profits in your pocket, while also getting you mentally accustomed to selling offensively, instead of defensively (i.e., waiting for a stop to be hit, etc.).
9. Reward yourself. Too many investors buy and sell, buy and sell, until the profits and losses lose some of their meaning. Thus, if you have a good first six months of 2009, or a good quarter, or even one superb trade (say, doubling your money on a stock), don’t be afraid to take some of those winnings out of your brokerage account and enjoy them; take your spouse out to a fancy dinner or plan a family vacation. If it’s a retirement account you’re using, you can’t take the money out ... but you can still use some of your “regular” money to reward yourself for a job well done.
10. Take a couple of regular breaks during the year, and also a couple of spontaneous ones if your stress level gets too high. If you’ve made a few losing trades in a row, or if you’re in the midst of a losing streak, there’s nothing wrong with walking away for a week or so, taking a deep breath, and re-assessing. The investors who keep forcing the issue usually are the ones that dig themselves into deep holes.
So consider this list in 2009. Adopt one of them, adopt them all--whatever works for you. But I’m hoping to adhere to all of them (and more) in the months ahead.
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Lastly, I wanted to leave you with a group to watch this week and next. I’m talking about education stocks, which we’ve written about regularly in many of investment advisories, including this one. While December was a quiet time for most indexes and stocks, it allowed many groups to build basing structures--I’m talking about multi-week bases, where stock gets transferred from weak hands to strong hands--which could propel them to gains in 2009.
Education stocks are no exception, with stocks like Apollo (APOL), DeVry (DV) and Strayer Education (STRA) all consolidating relatively quietly in recent weeks. I wouldn’t say the group is strong ... but that could change.
Apollo Group is basically the gorilla of the bunch, and it’s reporting earnings on Thursday, January 8. My general thought is this: If Apollo’s numbers and outlook are met with skepticism, then all bets are off. Just move on.
But if they’re greeted with enthusiasm, it could propel not just APOL, but also DV, STRA and others much higher. And because all these stocks are in basing patterns, any big-volume rally could represent the start of a major upmove!
Of course, education stocks aren’t my favorite group; the growth in these companies is solid but not spectacular. But there’s nothing wrong with getting on board a stable leader as it gets off its launching pad. Keep an eye on these stocks this week and next to see whether any take flight.
All the best,
Mike Cintolo
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