Friday, February 24, 2012


Good Morning. One of the most interesting/difficult aspects of trying to manage money in the stock market is the fact that the game is always changing. And I'm here to say that one of the most dramatic changes I've ever witnessed in my 24+ years in this business has occurred in the past four months. In short, never before has the importance of being flexible been more evident as this market morphed from a violent, bucking bronco that moved hundreds of points on the latest headline or rumor out of Europe into a steady-Eddie, Energizer Bunny.

Ever since I started managing "other people's money" in 1987, I've felt it was important to have a investment process that was repeatable. And for me the first step in the process has always been to identify the environment that you are dealing with. The thinking is that if you know what type of beast you are doing battle with; you might have a shot at choosing the right weapon with which to fight.

For example, investors have likely learned (the hard way) that utilizing the same pedal-to-the-metal approach that was all the rage in the late 1990's was a recipe for disaster during the ensuing Tech Bubble Bear that took a massive toll on tech and growth stocks from 2000-2003. So, while margined dotcom's were the weapons of choice in 1999, it was cash, value stocks, and bonds that made for better holdings for the next three years.

In looking at the current market environment, it is clear that the market environment has changed. The violence that was so pervasive from late-July through mid-December is gone. In its place is a relentless march higher with nary a hiccup seen over the past ten weeks. From an historical perspective, we saw the bull that began on March 10, 2009 end in a violent fashion last August when what will be technically defined as a cyclical bear market occurred. And since the S&P has now moved up more than 24% from the October low, it is important to recognize that we've now got a cyclical bull market on our hands.

So, does this mean we can start doing something else besides watching every headline out of Europe, China and the Fed? And can we perhaps just let our chips ride this wonderful wave for a while? Or will the current joyride end with a bang once Dow 13,000 is eclipsed?

In all honesty, I'm not sure (again, I'm sorry to report that my crystal ball is in the shop). What I can say is that the average cyclical bull market that occurs within the context of a secular bear cycle (the one that began in 2000), tends to last about a year. And in terms of what we might be able to expect out of this bull move - from a big-picture standpoint - it is worth noting that the median gain for cyclical bulls within secular bears is something north of 75% and the average gain is over 105%.

But, before you run out and start buying UPRO's on margin, we should remember that history is only a guide. If one looks closely at the data, you will find that the actual returns for all the cyclical bulls that occur within a secular bear are all over the map. For example, since 1960 there have been five cyclical bulls with returns greater than 85% (two over 100% and one over 290%) and six bulls that sported returns of less than 35%. Thus, given that this market changed costumes so quickly and that there are still a few macro issues out there, one could argue that the current bull may not make it to the mean or median columns.

However, I like to stick with what is instead of worrying about what could be. Therefore, we need to recognize that the market has changed from a news-driven bear to a new cyclical bull. And the key going forward will be to try and identify anything to indicate that our current bull is about to make yet another quick costume change

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