Best Six Months for Investing Ends Today

George Brooks |

George Brooks Stock MarketBrooksie’s Daily Stock Market blog: An edge before the market opens.

Friday, April 29, 2011 9:24 am EDT

DJIA: 12,763.51
S&P 500: 1360.48
Nasdaq Comp.: 2872.53
Russell 2000: 861.55

I was bullish in late February and early March 2009. I had no problem coaching readers to “Lock and Load” ( Feb. 27 – 7,182) ; “Ready….Aim” (Mar.2 DJIA 6,832); Fire” (Mar. 10 - DJIA:6,805).

But I am having some problems being as bullish now, at least short-term. I can’t say my unease about piling into the market now is “technical,” because a number of the classic overbought indicators are not ripe enough yet.

Clearly it is not because there is a lack of interest, or that corporations are not making money. Not only are they beating (low-ball) estimates, but they have trillions in cash reserves. Global economies and securities markets didn’t collapse in 2008-2009; in fact, we are seeing an impressive recovery in both.

It is probably because a part of me thinks contrarily – against the grain. Wasn’t that what enabled me to be bullish when the world was coming to an end with the major market averages down more than 55% ?

That’s not all bad, even if the market continues its push upward. Institutions have no alternative but to buy common stocks, and they have plenty of cash to put to work. For every buyer there is a seller, so the potential “buy-power” doesn’t change, just that the other guy now has cash to put to work.

But that is not good reason for individuals with limited cash to get careless, because like a thief in the night, we will get a correction in the market, and institutions aren’t going to feel the pain that an individual investor does.

A correction will run its course ( down 5% - 8%) and rebound …….unless unexpected negatives arise at that juncture to break it down further before it has a chance to rebound, ergo a correction of 8% - 12% (ugh !).

How can that happen ?

Well, the “Best Six Months” for investing (Nov. 1 to Apr. 30) comes to an end this month. This period has consistently outperformed the six month period ( May 1 to Oct. 31) for many years.* This year the Nov. – May period was up close to 15%. But the six months surge really started on August 31 and the gain from that point to now is close to 29%.

What does this say for the next six months, a period that may include corporate earnings that don’t “beat” guidance and projections by as handsome a margin ?

The Fed just stated it will continue a policy of low interest rates, unless inflationary pressures persist.

Is it concerned that the economy will hit headwinds ? Is this why it continues to track a policy of low rates ?

The big question is, has the BIG money been selling into the better-than-expected Q1 earnings reports ?

Don’t know ! We won’t have to wait long for the answer.

Enough ! If I ruined your day and weekend, I did it because I am more concerned about readers getting
Waffled by an unexpected correction, than making some more fast money.

Personally, I feel a cash reserve in line with one’s tolerance for risk makes good sense. Money earmarked for investment can be worked conservatively or aggressively with the “possibility” that we could see a nasty correction which would produce losses that may take months to recoup.

While an investor may not want to sell, he/she may opt to defer purchase for better prices.

This is a pre-presidential election year, historically the best of the four-year cycle.

My gut is that Q3 will be bumpy for stocks with one or two corrections, followed by a strong Q4 (a beginning of another “Best Six Months”).

George Brooks
sensiblesleuth@gmail.com

*Stock Trader’s Almanac

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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