Today marks some important changes both in market fundamentals and in psychology. On such occasions we interrupt our regular writing agenda for more specific market commentary. This is an occasion where readers unfamiliar with our recent work should take some time to follow the links.
In recent days we have tried to provide some perspective on the market turmoil and what to watch for. Some of these ideas are starting to play out, but there is more to come.
Here is a brief review of the last few days.
We made timely shifts from bearish to neutral to bullish via our TCA-ETF system. Investors in the program had a gain of 9.7% today. Being in the right sectors means a lot. Our current holdings seem to capture the rapidly revised thinking of market strategists.
We wrote about possible catalysts, including this suggestion:
In addition to the Fed statement today, there was other important news, setting up the rally. The Obama Administration seems to be embracing a major plan to cut mortgage interest rates to 4.5% for everyone. We have the full story on our sister site, ElectionStocks.com. This story is very big in many ways and for many sectors.
We are very cautious with a period of success. There are so many who think they know so much. In fact, investors should look not to a single market call, but to long-term history. We tried to illustrate this with our football analogy. In our own methods, we try to emphasize the long run.
Today's trading could represent a change in market psychology. There are plenty of fund managers who are either caught short or under-invested. The negative sentiment has been palpable. The news of scandals and the market declines have tested the resolve of many long-term investors. We expect some managers and investors alike to shift gears.
There are more catalysts to come. We continue to collect ideas on this front. More to come, with several interesting ideas. Briefly put, those making negative forecasts on the economy, on corporate earnings, and on stocks have a doubtful platform. They are not just fighting the Fed. They are also fighting the Treasury and the incoming Obama Administration.
Investors do not understand government policy, and have expected immediate reaction from the many programs. They have been dazed by acronyms and have lost focus as a result.
There is a firm determination to avoid a major recession. The market will look ahead, beyond the recession that is now a year old. This may already be starting.
We have ridiculed strategists calling for a five-percent gain in the next year. This is silly, when intra-day moves are frequently greater. The only reason to invest in stocks is an expectation for a major rebound. Few are willing to talk about valuation, when the consensus mentality disparages earnings prospects. We note some courage on this front from Morningstar, where they see the Dow as 30% undervalued. (Hat tip to Abnormal Returns, helping everyone see what otherwise might be missed. None of us can check everything!)
We shall comment further on valuation issues, with a focus on expected and trailing earnings.