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A week ago I wrote that in spite of any recent progress, the market’s upward trend remained intact. The next day (Friday) I was at an expo event for senior citizens and was distracted all day by the plunging Dow. I worried that the advice I’d given might no longer be valid. I worried because I don’t like to try to predict market movement because I understand the futility of such efforts. I also worried that there might be additional sharp follow-through on the downside, which so far has not been the case.

With the perspective of an additional week, I am glad to say that last week’s advice is generally still valid. Much of Friday’s losses were recouped earlier this week. In spite of the downward movement, technical indicators remain positive for stocks at this point. But remember that technical indicators generally lag the market. In other words, they tell us what has been happening rather than what is likely to occur.

Perhaps the most important lesson to be learned from Friday’s action is that many traders and investors are very nervous. They are standing by the exits, ready to rush out at any sign of trouble. That means we need to be cautious, because even if technical and fundamental indicators are strong, we could get trampled by other investors trying to get out.

The chart below gives a good picture of the current situation. The black line on the top portion is the daily price action of the Nasdaq. The gold line is a 50-day moving average (MA). Notice that the Nasdaq isn’t even close to its 50-day MA. If we were on the verge of a serious correction, we would normally see the Nasdaq penetrate below that line within just a few days. Instead, this correction still seems to be moving generally sideways, albeit with some increased volatility.

On the bottom two portions of the chart we see a moving average convergence divergence (MACD) and a relative strength index (RSI). Although the RSI is right at the 50 level, both of these indicators remain positive for now.

So even though Friday’s drop gave us a bit of a scare, the best advice for investors right now is to continue to hold long positions because the long-term upward trend is still in force.
F.S.

Today’s message will be brief, because I am preparing to spend the next couple of days at a show for senior citizens in Salt Lake City.

The past couple of weeks we’ve watched as major indices pulled back from the highs reached earlier in the month. This is a fairly typical pattern after the market has experienced a period of solid gains. Based solely on how the market is reacting, the current situation seems to be more typical of a sideways consolidation rather than a sharp downward correction.

The black line on the chart below shows the daily price activity of the Nasdaq. I’ve marked the current market formation in red, along with several prior similar patterns. Recent serious corrections have been much steeper and faster, with a lot of the damage occurring in just a few days.

Since bottoming in mid-August, stocks have had a strong run and were ready and overdue for at least a brief pause. But so far, there is nothing to indicate that the long-term uptrend is in jeopardy.

F.S.

If you would like an investment strategy that attempts to minimize risk but still provides the opportunity for solid growth, check out the Foundation Strategy from Strategis Financial Group.  This actively managed strategy is designed to take advantage of the experience and expertise of some of the nation’s best mutual fund managers. To learn more, call me, Flint, at 800-279-3377.

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The most common question a money manager hears is: “What do you think the market is going to do next?”

The honest answer is not what the questioner wants to hear–especially if that person happens to be a client. The truth is, there is no manager on the planet that knows what the market is going to do next. Numerous studies have shown that market gurus–the ones who make a living by predicting what the markets will do–are actually very bad at it.

Unfortunately, there are many people who base their financial futures on these inaccurate predictions.

To help keep people from making poor decisions with their pension and retirement money, here are a few suggestions:

1. Don’t lose money. This is legendary investor Warren Buffet’s motto, but it is also the mantra of virtually every credible, respectable investment professional. That means investors need to be conservative with their retirement accounts. 

2. Look for investment options that are in an upward trend. This is self explanatory. One of the great things about investing is that we can place our bets on horses that are already running well midway through the race.

3. Choose investments with low volatility. We want the overall market to have some price swings, because that gives us a better opportunity to make a profit. But we prefer to have very little volatility in our individual investment choices.

4. Manage risk. This encompasses everything mentioned above and more. You need to be diligent and active in protecting your investment assets. During periods of market weakness, don’t be afraid to move assets to cash. When that isn’t an option, diversify assets among the lowest-risk choices.

5. Don’t chase performance. This is a common mistake of amateur and professionals alike. They find the investments that did well last year, move their portfolio to those investments and hope they will do well again this year. Unfortunately, that usually isn’t the case. 

6. Have realistic expectations. Don’t expect to average gains of 20% a year. Any year where your investments earn 10% is a very good year. At times you will hear friends or co-workers talking about an investment that gained 100% or more in a brief time. Be happy for them. Congratulate them. But do not go out and buy that investment with your retirement money. If you want to chase a speculative investment, make certain you do it with a small amount of money that you can easily afford to lose, because most of the time that is what will happen.

7. Use professional management. It is ironic that people who would never consider going to an unlicensed dentist are willing to trust investment decisions to friends, co-workers or even a stranger with no investing credentials. Fee-based managers usually charge 1% to 2% annually, depending on the type and size of account.

Next week we’ll spend a couple of days talking to people at a senior citizen expo in Salt Lake City. Invariably during that time we will talk to several seniors who had to make dramatic changes in their retirement plans because bad advice or investing mistakes wiped out an IRA, 401K or other pension account they were counting on. Sometimes these folks have been forced to postpone retirement plans indefinitely as a result.

In short, investors should handle their pension accounts as if their lives might someday depend on them, because that is exactly what will someday occur.
F.S.

If you would like an investment strategy that attempts to minimize risk but still provides the opportunity for solid growth, check out the Foundation Strategy from Strategis Financial Group.  This actively managed strategy is designed to take advantage of the experience and expertise of some of the nation’s best mutual fund managers. To learn more, call me, Flint, at 800-279-3377.

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Nearly 20 years ago I was getting my first introduction to the financial markets by handling the logistics for options trading seminars. The man teaching the seminars–one of my investment mentors–was Kenneth Trester. During the class, one of the observations he taught was that investments tended to advance laboriously–like someone climbing a steep mountain. Corrections, on the other hand, tended to be quick and dramatic, kind of like jumping off a cliff.

Over the past 20 years market behavior has changed substantially and one of the changes is how markets react after a correction. While downturns frequently remain swift and steep, today the recovery is often jut as fast. The market’s most recent correction is a good example. Take a look at the chart below. The black line is the Nasdaq. The gold line is iShares S&P Latin America 40 Index Fund (ILF) and the blue line is Merrill Lynch Oil Sv HOLDRS Dep Receipt (OIH).  The latter two funds represent two of the year’s top-performing industry sectors.

Notice that for all three of these positions, the correction that began after mid-July bottomed about four weeks later. About a month after that low point, the three positions had gained back all that they lost. Since then all have continued to move ahead and set new highs for the year.

My personal opinion is that the most recent correction was an overreaction to market conditions. That might help explain why the impact of that downturn has so quickly bee negated. We saw a similarly fast recovery, however, after the market’s downturn in the summer of 2006. In a historical context, these kinds of rebounds are unusual. As my mentor pointed out, two or three decades ago market recoveries tended to take two or three times as long as the preceding downturn.

So far in 2007 we saw a nice advance from early March unto mid-July. The rally that began in mid-August has had a much steeper slope by comparison. Going forward, I anticipate that the market will not be able to maintain that degree of advancement. We are likely to see some more sideways consolidation over the next few sessions before the market resumes a less pronounced rally for the remainder of the year.

Of course, this is just an educated guess based on the long-term trend continuing. Economic and market fundamental appear to be strong enough to sustain the advance.

Have a beautiful fall weekend.
F.S.

If you would like an investment strategy that attempts to minimize risk but still provides the opportunity for solid growth, check out the Foundation Strategy from Strategis Financial Group.  This actively managed strategy is designed to take advantage of the experience and expertise of some of the nation’s best mutual fund managers. To learn more, call me, Flint, at 800-279-3377.

You requested this MarketOwl free e-newsletter. Please add support@marketowl.com to your e-mail address book to ensure prompt delivery.