08/05/2012 another long view

Small Portfolio	XLF & IAU	9.91%
Position	Date	Return	Days
CSGS	10/3/2011	40.19%	307
KBR	10/27/2011	-8.28%	283
VG	10/27/2011	-40.43%	283
BT	1/4/2012	8.50%	214
SAI	5/30/2012	6.56%	67
XEC	6/5/2012	10.56%	61
DECK	6/15/2012	-12.86%	51
CVX	7/5/2012	3.49%	31
RIMM	7/16/2012	-3.59%	20
UEIC	7/30/2012	12.54%	6
S&P	Annualized	2.88%
Small Portfolio	Annualized	8.38%
Large Portfolio	Annualized	11.13%

Rotation: sell KBR; buy QSII

This is a week early, but there was a great deal of sector and industry rotation this week.

Normally price rises to match money-flow.  In the case of KBR, money-flow has fallen to match price.  Either way, it’s time to move on. That doesn’t mean there’s anything wrong with KBR as a company.  It’s still a good company, with very little debt.  It’s an attractive buyout for a big company to snack on.  But the industry it is in will likely track the rest of the market for now.

Not much to say about the broad market.  There is a lot of whiplashing going on.  But I do want to point out the long view of the S&P (from 1952 to today):

Although the numbers are unreadable, the lines are pretty easy to see.  Each line represents 1 standard deviation, or approximately 33%.  We are a little higher than 1 standard deviation below the long term trend (the center line).  That center line is fair value for a long term buy and hold investor: as of Friday, that was at 1687.99.

That’s about 21% higher than today.

If you know someone who doesn’t like to pick stocks, and they want to know what to do, tell them that their 401k should get an extra 21% kick during the next 10-15 years (in addition to the normal 10% return that SPY would give from price appreciation and dividends).  That may be no guidance for the short term, but people who don’t look at fundamentals shouldn’t be trading in time periods shorter than decades anyway.  Although technical analysis is popular, MOST classical technical analysis tools stopped working when the HFTs were born.  Those machines already know classical technical analysis.  It’s been programmed in so they can snack on all of us amateurs out there.

Now, keep in mind that we are ALSO above what I described a few weeks ago as the secular limit (see: http://market-mousetrap.blogspot.com/2012/07/small-portfolio-xlf-iau-8.html).  The market SHOULD have a pause and another sell-off sometime during the next year.  But with all of the political machinations and central bank intervention, it’s extremely difficult to call these kinds of things.

My point is that “timing” has to do with “time frames.”  In the extremely long term, the worst time to be in the market was at the end of the 1990s when we were 2 standard deviations above the long term trend and HAD to sell-off.  March 2009 was 2 standard deviations BELOW that trend.

That’s a whopping 4 standard deviation turn-around.

But it was also the most natural thing in the world.  As scary as this past decade has been (and as annoying as the next will likely be), this is just a little wilder than normal.

Oh, and 942.11 is 2 standard deviations below the long term trend.  Another dip COULD take us that far, but that wouldn’t be the end of the world.

Nor would it be the end of our investments.  It would just be a good time to buy more.

You cannot predict WHEN these kinds of moves will occur, only THAT they will occur.  The goal of technical analysis should no longer be about market timing as much as about money management.  What should we DO if the market hit 1687.99 or 942.11?  Most folks will do the exact opposite of what they should – because they won’t have a plan, and they’ll be caught up in the excitement of the moment.

If things get TOO exciting, take a step back and look at the long, long, long view.  Things look a bit different from there…

Tim