2004 - Looking Ahead
As we turn the calendar looking ahead to 2004, it seems just like yesterday that 2003 was beginning. A weak economy, the threat of war, and further terrorist strikes stared us in the face. As the year closed, our world, and the markets, looked much rosier than when the year began. Every year the markets bring us something new and exciting. Sometimes the markets are rocking to the upside, and other times serious corrections face investors. In still other periods, it seems as if nothing at all happens for the year, yet we often find there was a lot of sector rotation under the surface if one is willing to "look under the hood."
Different markets evoke different lessons and responses. However, you will find that the "rules of engagement" are the same for any market; it's just that different markets bring different lessons to the forefront. It's kind of like the seasons of the year. We know that the seasons change throughout the year. There is always a summer, fall, winter, and spring. Sometimes, summer is really hot and other times it's moderate (though in Texas that point can be argued). Some winters are relatively mild while others are bitter cold.
At the beginning of winter, we don't keep our swim trunks and shorts and t-shirts handy, rather we break out the sweaters and jackets. It's the same way with our indicators that we use to determine our investment direction. Sometimes when they give us a "buy" signal, the rallies are very powerful, like the one we've seen since April 2nd. Other times, the markets move begrudgingly higher despite the strong "buy" indicator. The same is true with "sell" signals. A "sell" signal might be a mere pause for the markets. Other times it is a severe reversal where the baby is thrown out with the bathwater (2000-2003). We prepare for the worst and hope for the best when we see a reversal to a "sell" signal.
Responsibility is defined by Webster's as 1. a: liable to be called on to answer, b(1): liable to be called to account as the primary cause, motive, or agent, (2): being the cause or explanation, c: liable to legal review or in case of fault to penalties, 2. a: able to answer for one's conduct and obligations, b: able to choose for oneself between right and wrong, 3. marked by or involving responsibility or accountability.
At West Point during my Plebe year, I was simply taught, "Seek responsibility and take responsibility for your actions." It worked nicely with one of the "four responses," "No excuse, Sir." Over the past couple of years the investing public has seen so much of the "blame game." We blame corporate corruption and Martha Stewart. Then we blame the fundamental analysts of Wall Street brokerage firms. Now it's the corrupt mutual fund companies. The list will continue to go on and on. What investors really want is someone to step up and accept Responsibility!
Dietrich Bonhoeffer once said, "action springs not from thought, but from a readiness for responsibility." At Lockey Investment Group, we look our clients in the eye and tell them that We alone have the responsibilities for guiding them in their investment decisions for their portfolios. It delivers instant credibility and confidence to our clients. We are not tied to some research department's opinion which may or may not be tainted by investment banking ties. We don't buy and hold because some mutual fund company says we should while we are down in Cancun on a trip paid for by their company. We gather our own independent data and make the best decisions with the information we have at hand. Sometimes the decisions work out in our favor, and sometimes they do not, but that is part of Wall Street. However, when you have a logical, organized, and disciplined approach to stacking the odds in your favor, more often than not, the decisions will come out in our favor.
Having said all of that, what do we do in an extended market like we are in right now? Our key indicator, the NYSE Bullish Percent, along with other important indicators remains in "buy" territory and the offensive team is still on the playing field. The problem is that we are not comfortable with our field position. The NYSE Bullish Percent has been above 70% (70%+ of stocks in the NYSE are in bullish chart patterns) since June 2003 and has remained there ever since. That is the longest that that has happened since the indicator was created in 1955!
Because the indicators are high, however, we do not pull the offensive team off the field. (We have to stick with a logical, organized, and disciplined approach!) If we have clients that are just entering the markets, according to the discipline, they must gain equity exposure here. We attempt to reduce volatility in the portfolio by keeping some of that equity investment in cash. And we will use other asset classes to manage the risk, such as commodities, hedge funds and real estate. As long as the "buy" signal is in place, the offensive team will remain on the field, but there are things we are doing to reduce the volatility of our clients' portfolios. What are you doing to manage risk going forward in 2004 with the markets at historical highs???
