Interview in the Local Gazette

Every so often I get interviewed in the local paper about the markets. I've given them some good stuff in terms of saying when and why I thought a bear market was starting but I am not sure how often they quote me versus how often they interview me. Below are their questions and my unedited answers.

As the stock market is coming off four consecutive weeks with positive
gains, what's your take on it?

Normal bear market action includes what I call feel good rallies and which other people call sucker's rallies. The biggest, fastest rallies occur in bear markets. This is a truism that repeats cycle after cycle but somehow many folks forget this. It is more likely that when the next bull starts it will be far more gradual. Off the recent bottom, the market rallied close to 25% in less than a month. In the last bull market, the rally was about the same amount but took more like 9-10 months to go up as much as it did in March 2009. A 25% rally in such a short period of time is a form of panic and panicked moves do not come when the market is healthy.

What should investors take away from the market these days and how should
they be investing their money?

For now demand for equities in unhealthy. I want to remain somewhat defensive until demand again gets healthy. I define "healthy" as the S&P 500 being above its 200 day moving average (this is easily observed on Yahoo Finance). Defensive means having a higher cash level than normal but still have exposure to equities. While it is easy to say this is a bear market rally and it is easy to support the argument it might not be a bear market rally, it might be a bull market. While I don't think that is the case I do not want completely miss the next bull market whenever it comes. Many many people sell stocks after a big decline and then miss the move up so they sell low and then won't buy until it is high again which is the exact opposite of what we should be doing.

There are studies that show the market averages a 10% gain per year over the long term, actively managed mutual funds average about 8% (to cover the management fees) and fund holders average about 3% per year due to behaviors like the ones described above; selling low and buying high.

Are there certain sectors people should look to get into and others they
should avoid?

I don't believe in completely avoiding any of the big ten sectors as I view zero exposure as being a big bet. There are rule of thumb answers to this question which must be understood before doing anything else here. Healthcare, telecom, utilities and consumer staples stocks are defensive sectors and tend to lead going into and during an economic slowdown/bear market. Technology, consumer discretionary and industrials tend to lead coming off the bottom and early cycle. Materials and energy have mixed track records in this regard. I have been underweight the financial sector for several years and plan to stay that way for a while yet. Within financials I prefer foreign bank stocks (but not Europe) because they have much simpler business models (meaning less leverage and less complexity).

Any other thoughts?

I think investors need to decide for themselves whether or not they think the stock market is broken, IMO it is not broken. Once they sort that out they need to realize that in the short term there will likely be more volatility but over the longer term "normal" market returns will still be available but the easier path to "normal" in future market cycles will very likely require more foreign exposure than in past market cycles.