Fortune Watch

Stocks rose on Tuesday, with the Dow and the S&P 500 closing at new all-time highs as Federal Reserve officials’ comments eased some concerns that the central bank could start reducing its stimulus program.

Dow component Home Depot gave the market a lift after the world’s largest home improvement chain raised its profit outlook, driving its stock to a record intraday high.

JPMorgan also bolstered the Dow, rising more than 1 percent to a 52-week high after the bank’s chief executive won a vote of confidence from shareholders.

Stocks extended gains in afternoon trade after New York Fed President William Dudley said he cannot be sure whether policymakers will next reduce or increase the amount of purchases, due to the “uncertain” economic outlook.

Earlier, James Bullard, president of the Federal Reserve Bank of St. Louis, had urged the European Central Bank to consider employing a U.S.-style quantitative easing program to counter slowing inflation and recession in the euro zone.

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A rally is a beautiful thing, particularly when the correction preceding it was embraced enthusiastically. This is the time to harvest your profits — pipe dreams of great wealth and inflated ego aside — jump on those profits before they erode before your disbelieving eyes. If you over think the environment or over cook the research, you’ll absolutely miss the party.

Unlike many things in life, stock market realities need to be dealt with quickly, decisively, and with zero hindsight — and this market reality? No rally in financial market history has ever escaped the ensuing correction. In the real world of investing, most unrealized profits eventually hit the tax return as realized losses

Here’s a list of ten things to do and to think about right now to protect yourself better than you did the last time a correction blindsided you:

1. Your present asset allocation should have been tuned in to your goals and objectives. Resist the urge to increase your equity allocation because you expect a further rise in stock prices. That would be an attempt to time the market, which is, rather obviously, impossible.

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Fascinating, isn’t it, this stock market of ours, with its unpredictability, promise, and unscripted daily drama. But individual investors are even more interesting. We’ve become the product of a media driven culture that must have reasons, predictability, blame, scapegoats, and even that four-letter word, certainty.

We are a culture of investors where hindsight is rapidly replacing the reality-based foresight that once was flowing in our now real-time veins — just like in basketball, golf, and football.

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If you were to Google “Stock Market Volatility”, you would find a wide range of observations, conversations, reports, analyses, recipes, critiques, predictions, alarms, and causal confusion. Books have been written; indices and measuring tools have been created; rationales and conclusions have been proffered. Yet, the volatility remains.

Statisticians, economists, regulators, politicians, and Wall Street gurus have addressed the volatility issue in one manner or another. In fact, each day’s gyrations are explained, reported upon, recorded for later expert analysis, and head scratched about.

The only question I continue to have about all this comical hubbub is why don’t y’all just relax and enjoy it. Jon Methuen nailed it in his August 15, 2011 parody of the financial world’s ridiculous obsession with “volatility”. “A Reasonable Guide To Stock Market Volatility” is a must view — but only for mature adults with a semi-sick sense of humor.

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This won’t take long, but think about the message and act accordingly.

Never, ever, in the history of the investment world has a major correction in the stock market not been a major buying opportunity — particularly in Investment Grade Value Stocks (IGVS).

Always, every time and without exception, the general media has predicted the end of the financial world, financial experts have pointed out the remarkable differences from the last correction, and investors everywhere have been encouraged to take their losses and sit on cash or gold until the smoke clears.

Every time, the short sighted fear mongers have been wrong. Not just most of the time mind you — absolutely all of the time. Similarly, the investing public has always been mesmerized into a take-no-further-action coma by whomever and whatever they listen to.

At the same time, every time, without exception, while the financial markets plummet out of control down the most recent “Double Black Diamond” Wall Street favorite, the few investors who practice Market Cycle Investment Management are collecting IGVSs in their cash rich shopping carts, preparing for the next “Silver Bullet” up the mountain.

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Gripped by fear of a new recession, the stock market suffered its worst day Thursday since the financial crisis in the fall of 2008, the markets are definitely gripped by gear of a new recession The Dow Jones industrial average fell more than 500 points, its ninth-steepest decline.

The sell-off wiped out the Dow’sThe remaining gains for 2011 were wiped out. It put the Dow and broader stock indexes into what investors call a correction — down 10 percent from their highs in the spring.
“We are continuing to be bombarded by worries about the global economy,” said Bill Stone, the chief investment strategist for PNC Financial.

The day was reminiscent of the wild swings across the financial markets that defined the financial crisis in September and October three years ago. Gold prices briefly hit a record high. Oil fell even more than stocks — 6 percent, or $5.30 a barrel. And frightened investors were so desperate to get into some government bonds that they were willing accept almost no return on their money.

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Technical Analysis — Blinded By The Math

Without too much of a stretch, it could be documented that the Investment Grade Value Stock (not just “value stocks”) bubble of 1987 was caused by investor focus on company fundamentals. It would be a piece-of-cake to prove beyond any doubt at all that blind faith in technical analysis created the dot-com bubble at the turn of the 21st century.

More recently, blame for the late 2007 through early 2009 “financial crisis” could easily be nestled down at the feet of big government, misguided regulators, and maniacally creative Modern Portfolio Theory (MPT) practitioners, not to mention their ROTF-LOL institutional mentors. What’s next?

Pick a day, any day, where the DJIA is up or down by more than 100 points. Take a look at the “most advanced” or “most declined’ listings and note the shortage of plain vanilla common stocks. What you see is a pari-mutuel spreadsheet listing of the most popular derivative betting mechanisms, adjusted day-to-day, depending on the direction of their wagers.

With index ETFs significantly outnumbering the companies whose prices they are attempting to keep track of, isn’t it even less likely than in the past that technical analytics can be useful? Aren’t these numbers simply the result of demand for casino-esque sector funds and their seemingly limitless varietals?
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A Stock Market sell off may be about to begin which could take the Index lower  for the full year. These six reasons demonstrate why one of the most impressive stock market runs may have ended:

1. Markets can’t rise all the time. This probably is obvious to most people. A significant is what a market requires to go higher for a market which has more than doubled in two years. Recent economic news shows that support to be lacking. The S&P has risen to more than double from 683 in March 2009 to almost 1,400 two months ago.

2. Corporate earnings have been pressured by an economic slowdown and margin drops. Many companies in the retail, transportation and manufacturing sectors counted on low commodities prices back in 2009 and 2010 to help profits. That help is gone. Oil has rallied from below $50 in mid-2009 to almost $100 recently. The price is down from $110, but it is still historically high. Prices on cotton and many agricultural commodities have also risen in the same period. The result: The cost of making and moving goods is higher, and margins on items like clothing have dropped.

3. Consumer sentiment has faltered. Recent data from from the Conference Board said “Consumer Confidence Index, which had declined in May, decreased again in June. The Index now stands at 58.5 (1985=100), down from 61.7 in May.” Many retailers have posted slow same-store sales. Activity at the world’s largest retailer, Walmart (WMT), has been down on a same store basis for its U.S. operations.
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The “Bargain Stock Monitor” is one of three market statistics used as performance expectation analyzers for portfolios that are designed and managed using the Market Cycle Investment Management (MCIM) methodology.

It is derived from the month end Investment Grade Value Stock Index (IGVSI) “watchlist” screening program, which identifies IGVSI companies that are trading at least 15% below their 52-week highs.

The “15% down” break-point allows you to keep your eye on “Bull Pen” items. (You really need to be familiar with the selection rules to get the most from the BS Monitor – chuckle – and from the Watch List program.)

The fewer IGVSI equities at bargain prices, the stronger the stock market and the more “smart cash” you should be accumulating in the equity asset allocation “bucket” of your investment portfolio. As the list of bargain stocks grows (indicating market weakness), portfolio “smart cash” should be finding its way back into undervalued securities.

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Periodically, the stock markets go through a mid-cap and small-cap excitement. We are in such a stage currently. Over the last one year, the small- and mid-cap indices have outstripped the large cap indices by wide margins. This performance is also reflected in the typical mutual fund as well. The average large-cap focused funds are up while mid and small cap funds are up much more. There’s also no shortage of analysts proclaiming that the smaller companies is where the action is.

However, as always, investors need to be extremely wary of this space. Volatility and liquidity have always scuppered investors’ gains in this space, mostly because by the time the mass of investors notice the action, things are already over the hill. You can make money in these stocks, but you need to be careful.

So let me give you a different perspective on small and mid-cap performance. The Small Cap Index may have risen 200 per cent from the bottom in March 2009, but to reach that bottom, it had fallen to one fifth its value. It takes a lot more than a 200 per cent gain to wipe out that kind of a fall.

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