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U.S. Stock Market Rally Over; Buy and Hold Still Bad Advice

Stock-Markets / Stocks Bear Market Jul 15, 2009 - 05:20 PM GMT

By: Mike_Shedlock

Stock-Markets

Best Financial Markets Analysis ArticleJeffrey DeGraaf, the top-ranked technical analyst in Institutional Investor magazine’s poll for the past four years says S&P 500 Rally Poised to End.


The 34 percent rebound in the Standard & Poor’s 500 Index since March shows few hallmarks of a bull market, and stocks will probably stagnate for years, top-ranked analyst Jeffrey deGraaf said.

The S&P 500 is at a level it first surpassed in 1997 even after the steepest quarterly advance in a decade, and is down 43 percent from its October 2007 record, according to data compiled by Bloomberg. The main benchmark for American equities probably will continue to make “no net price progress” for at least two more years, deGraaf said in an interview.

“The market in my best estimation is probably range-bound between roughly 1,000 on the upside and 700 on the downside, but I would put the risk to the downside,” he said. DeGraaf is a senior managing director at ISI Group Inc. in New York and was the top-ranked technical analyst in Institutional Investor magazine’s poll for the past four years.

“Japan from 1992 to 2000 was in what aviators call a phugoid -- which is just this long oscillation in price,” deGraaf said. “It looks to us like there’s a reasonable probability that we’re going to enter into a similar period, with more government intervention and all these things that tend to come about after a bubble, particularly one that’s been driven by credit.”

Long Term Buy And Hold Is Still Bad Advice

I have been saying essentially the same thing as DeGraaf for months. Here is a case in point: Long Term Buy And Hold Is Still Bad Advice

In spite of what you hear from main stream media and self-serving advice from Wall Street, an investment philosophy of long term buy and hold is not what it's cracked up to be.

Unfortunately, many boomers headed into retirement are finding that out now, at the worst possible time. Moreover, looking ahead, I doubt the next decade is going to be much better than the last.

Why Is Bad Advice So Common?

Clearly, stay the course is bad advice. So why is it so common? A personal anecdote might help explain things: In January of this year, an investment advisor from Wachovia Securities called me up and stated "Mish, I am sitting on millions because I see nothing I like". I told the person I did not like much either and that Sitka Pacific was heavily in cash and or hedged. His response was "Well, I do not get paid anything if my clients are sitting in cash".

I called up a rep at Merrill Lynch and he said the same thing, that reps for Merrill Lynch do not get paid if their clients are sitting in cash.

[By the way, that person at Wachovia Securities did the right thing and sat on that cash.]

Massive Conflict of Interest

Notice the massive conflict of interest possibilities. Reps for various broker dealers have a vested interest in keeping clients 100% invested 100% of the time, even if they know it is wrong. And so it is every recession, bad advice permeates the airwaves and internet "Stay The Course".

A Look Ahead

Clearly stocks are a better buy now than in 2007 or 2008. But that does not mean stocks are cheap. Indeed, by any realistic measure of earnings, stocks are decidedly not cheap. Then again, 6-month treasury yields are yielding a paltry .31%.

Can equities easily beat that? Yes they might, but that does not mean they will! Fundamentally, the S&P 500 can easily fall to 500 or below, a massive crash from this point. Alternatively, stocks might languish for years.

Please consider a chart of the Nikkei.

$NIKK - Nikkei Monthly Chart



The Japanese Stock Market is about 25% of what it was close to 20 years ago! Yes, I know, the US is not Japan, that deflation can't happen here, etc, etc. Of course deflation did happen here, so the question now is how long it lasts. Even if it does not last long, there are no guarantees the stock market stages a significant recovery.

Buy and hold is no more likely to be a good choice for the next 5 years than it was for the last 20.

Investment Opportunities

In Comparing Job Losses and Investment Opportunities in Post WWII Recessions I stated:

Technically there is room for huge rallies, but there is also room for plenty of misery (for both bulls and bears). The key will be to stay nimble as the opportunities that present themselves may not follow traditional post WWII recovery patterns.

Stock languishing for years is actually my "good scenario". My "bad scenario" is the bottom is not in. Thus I align myself with DeGraaf who says "the risk is to the downside”. At this juncture, I am quite comfortable holding similar views as DeGraaf.

E-Wave Update

Many people have been asking for an E-Wave Update of the S&P. The problem is the S&P clearly finished 5 waves down and corrective waves are notoriously difficult to count. We are in a corrective rally now.

There are so many valid counts that it seems pointless to discuss them. Besides, the most likely scenario is a sideways pattern over several years in which the lows may or may not hold.

Whether or not the stock market lows hold may very well depend on the fate of the US$, not over the course of the next few months but the next few years. The lower the dollar goes, the more likely it is the bottom is in. Either way, the key to success going forward is understanding this remains a trading environment, not a buy and hold environment.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved

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