Author Topic: MARKET CONDITIONS from Dale at Beverly Highland Capital  (Read 1767 times)

Offline Reginald Hudlin

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MARKET CONDITIONS from Dale at Beverly Highland Capital
« on: April 08, 2010, 02:06:43 pm »
April 8, 2010

Benjamin Franklin, in a letter to Jean-Baptiste Leroy (later reprinted in The Works of Benjamin Franklin) pointed out that “Nothing is certain but death and taxes.” Nowhere is this axiom truer, than in the stock market. In the market, absent certainties, the best we can do is make investment decisions based on probabilities.

One of the market newsletters I read, and have great respect for, is published by Bob Brinker. Brinker’s most recent newsletter (dated April 5, 2010) includes a data spread sheet documenting that in every case, over the past half century, the stock market has registered  a mid-term off-presidential election year bottom, followed by a very significant stock market rally. The data shows that the percentage advance, following mid-term election year bottoms has exceeded 33% for the Dow Jones Industrial Average and 27% for the S&P 500.

Since 1962, there have been 12 mid-term, off-presidential year elections, followed by 12 market rallies of from 27% to as much as 295%! These numbers suggest some pretty impressive statistical probabilities.

12 for 12, makes me wonder if Franklin’s adage about certainties could be modified to read, “Nothing is certain but death and taxes and market rallies following mid-term off-presidential election year bottoms”.

If history repeats itself after this year’s mid term election, it is unlikely that the cyclical bull market that began in March of 2009 will end this year.

Adding credence to this argument are the minutes of the Fed’s March 16th meeting which include the language: "The duration of the extended period prior to policy firming might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further."

The evidence supports the theory that there is a very strong correlation between the markets’ success and the Fed’s interest rate policies. Extended periods of low, to non existent, interest rates should fuel the markets until those interest rate policies change.

In January/February of this year, the market saw a short term pull back of 8.2% that lasted only three weeks. Going forward, in the greater context of the current cyclical bull market, we will almost certainly see more short term pull backs of as much as 10% followed by a series of new market highs. I am of the opinion, that when we see these short-term pull backs, we should capitalize on them by using them as buying opportunities.

Accordingly, we recommend being fully invested in the equities market until the current bull market has run its course or fundamental conditions dictate a change in this position. Having said that, we will continually recalculate probabilities, then use those probabilities to decide when to exercise caution and when to be more aggressive in the markets.

As always, I welcome questions and feedback.