Major indices drift upward approaching prior highs
Over the past six months, major stock indices have moved upward but it has not been a smooth ride for investors. Most of these indices peaked in early January and then retreated fairly sharply. Since bottoming in early February, most of these indices have recovered most of the ground they gave up.
The accompanying chart shows the six-month performance of four major indices: the New York Stock Exchange Composite (NYSE), the Nasdaq, the Dow Jones Industrials Average (DJIA), and the S&P 500.
Since the February bottom, the Nasdaq has been the strongest of this group. So far it is the only one of the four that has exceeded its most recent January high. The broadest index, the NYSE, is still under water for the year but it has rallied strongly from its recent February low.
For investors who have been in the market during this period, it might not feel like much of a rally. After all, at their February lows, these four indices had generally sacrificed the gains they accumulated during the previous four months.
As I wrote last week, however, most technical indicators for stocks are now positive. And in spite of the pullback in January and February, the uptrend that began in March 2009 is still intact.
The second chart shows the typical phases of a secular bear market—the type of market numerous economists and analysts believe we are currently experiencing. I added a red arrow that points to the spot of the cycle that we believe likely corresponds to our current position.
Many investors right now are wondering if the best course of action over the next couple of years might be to move the bulk of their assets to the protection of a certificate of deposit (CD). It is a fair question.
First it is important to understand that while the pattern shown by this chart might be typical for the bear market studied, there is no guarantee that in this instance the market will follow this pattern.
While we think we are currently in the rebound rally area, it is possible that the market has already moved into a sideways trading range. Or the rebound rally might persist for several more months.
If things progress in a typical fashion there should be another correction soon followed by a prolonged trading range. While the trading-range period is an overall sideways pattern, we believe an active management system can capture profits during such periods. Of course investing carries no guarantees and past performance is no indicator of future success.
Unfortunately, all bear markets do not follow a fixed pattern. The trading range could begin tomorrow. The next down-leg of the correction could begin next week. There are no guarantees. But over the next several years, we believe our market tools will enable us to capture a greater return than by simply remaining in a money market or a CD.
Right now CD rates are quite low by historical standards. Many economists believe that an increased inflation rate is inevitable in the near future. Rising inflation will erode the value of today’s current rates. And rising inflation means that interest rates will likely be higher in the future. As a result, we believe this is not a good time to lock in low long-term rates.
F.S.