Actually, hindsight and the Investment Grade Value Stock Index (IGVSI) Bargain Level Monitor tell us that it died early in March 2009. More realistically, however, corrections don’t die quite so abruptly. They are supplanted by rallies— and vice versa.
The IGVSI Bargain Stock Monitor tracks the price movements of an elite group of New York Stock Exchange equities. Their “eliteness” is earned by a B+ or higher S & P rating, a history of profitability, and the fact that they pay dividends to their shareholders.
Unfortunately, they are the same companies whose boards of directors allow senior executives to pillage treasuries with obscene salaries and bonuses— and elite does not mean invulnerable to the whims of markets and governments.
But, for Working Capital Model (WCM) equity investments, they are just perfectly less risky (historically) than the others.
An IGVSI equity becomes a bargain stock (or “OK to add to your portfolio if it meets strict WCM diversification and price standards) when it falls at least 20% from its 52-week high. From 15% to 20% down, it is held in a mental “bull pen”, getting ready for the “bigs” after a few more down-tics.
The fewer IGV stocks at bargain prices, the stronger the market, and the more profit taking WCM methodology investors should be experiencing. The most important thing most investors fail to do during rallies is to prepare for their “supplantation” by the next correction.
Fewer equity bargains and higher prices should result in growing “smart cash” levels. Smart cash results from dividends, interest, profit taking, and systematic portfolio contributions.
Why smart cash? Its not reallocated to other classes of securities, it anticipates the next turn in the market cycle, and it patiently waits for new (and pre-defined) opportunities. Uh-uh, smart cash is never market-timing cash.
Here’s what the Bargain Level Monitor has been reporting:
* The 2007 monitor showed a decreasing number of bargains through May, followed by rapidly increasing numbers through year-end when nearly half the population was down 15% or more.
* The trend worsened in 2008, and at the February 2009 month-end bottom, a dartboard stock selection approach would probably have worked fairly well.
* Second Quarter numbers were the best in nearly two years— meaning there were far fewer investment opportunities to choose from. The Third Quarter figures surpassed them by 31%.
* September was the best rally month since early in 2007, with fewer than 8% of the entire IGVSI selection universe qualifying as “bargain stocks” by month end.
Here’s what the Bargain Level Monitor is telling you:
* The seven-month-old “fat lady” is signaling the death knell of the last stock market correction. WCM portfolios should be within striking distance of the all time market value highs achieved 28 months ago.
* We are absolutely in a potent rally, in both equities and closed end income funds. Profit-taking opportunities are staring you in the face, heckling, whispering to hold on for even greater returns.
* The last time we experienced six consecutive months with less than 20% of the IGVSI population down 20% or more from 52-week highs? Yup, the third quarter of a 2007.
So if you have not taken profits (and realized a few not quite as bad as they might have been losses in your major “thank you Mr. Congressman” disasters), one of these things is happening:
* You are being greedy by ignoring the WCM profit taking guidelines.
* You have no profits because you believed “the financial world is coming to an end thesis” and kept your stash in some form of mattress.
* You don’t want the tax burden associated with short-term gains or you think this new rally will actually last forever.
* You are waiting for the experts to pronounce that this upturn has become a new trend and that you may once again feel good about paying more for something than anyone else on the planet has ever paid— ever.
There is no question that we have experienced a powerful rally. The only unknown is its duration. So what do me do in rallies?
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