Sunday, April 12, 2009
Has the Market Bottomed?
The market's recent 25% advance off the March lows meets the technical definition of a "bull" market rally. The Market has rallied 25% in 4 weeks! Such a huge move in such a short period is truly historic.
The only times we have ever seen the stock market surge close to this much in such a short time frame were: December 1929, June 1931, August 1932, May 1933, July 1938 and September 1982.
In September 1982 and in May 1933, the stock market was indeed embarking on a new bull phase. In the the other 4 instances, the stock market went on to make a lower low in the months ahead. So based on this very small sample, there is a 2/3 chance that the market will decline further before making its final bottom. A wise investor will take this possibility into account as he puts capital at risk.
The Strategic Growth Model doesn't depend on predictions regarding where the Market is going from here. Rather it aligns capital in accordance with prevailing market conditions.
Never 100% long nor 100% short, the SGM's ability to generate excess returns depends more on selecting stocks that are likely to outperform the general market, and then managing the portfolio's risk through hedging. The SGM's allocation model also aims to take a defensive stance when market conditions are especially poor. The SGM's combination of stock selection, risk management, and market timing has enabled the model portfolio to generate uncorrelated, excess returns over the past 5+ years.
Market Conditions are currently positive. The Market's intermediate-term trend is UP. During periods such as this, the model portfolio will scale its allocation between market neutral and net-50%-long. This range of allocations takes advantage of the model's statistical edge, hopefully enabling the portfolio to make a profit over the coming weeks.