Making Money in Today s Market Bottom Fishing

Making Money in Today’s Market

Bottom Fishing for Big Run-Ups A Timing and Stock Selection Strategy used for about one month, two or three times each year Presented by Herb Geissler, Managing Director of The St. Clair Group And Leader of Rational Investing Special Interest Group of Pittsburgh AAII

Good news: Will show you how to profit during bear markets Bad news: Bear markets likely to persist for 10 more years Ugly news: Doing nothing can yield the worst results

Primary Determinants of Investment Performance n Widely held notion that asset allocation policy explains more than 90 percent of investment performance between mutual fund managers (with stock selection the remainder) is now disputed by Ibbotson Associates n Ibbotson’s research now demonstrates that “about three-quarters of a typical fund’s variation in time-series return comes from general market movement, with the remaining portion split roughly evenly between the specific asset allocation and active management (of stocks held). ” n n March/April 2010 issue of the Financial Analysts Journal Clearly, being in the right direction (bull vs bear) is far more important than selecting the best industries or best stocks There is only one side of the market – and it’s not the bull side or the bear side, but the right side. - Jesse Livermore

Is the Big Bear Ready To Go Into Oblivion?

Bears Come in 3 Sizes Twice each and every year, Seasonal Bear markets typically drop 5 to 15% Twice each decade, Cyclical Bear markets drop 20 to 35% during recessions requiring inventory corrections Twice each century, Secular Bear markets drop more than 35% during depressions requiring capacity corrections

Mapping Market Terrain to anticipate bottoms “ 20” year cycle of lean and fat years n Presidential Cycle of pump-priming n Annual Seasonal cycle in Spring & Fall n

Buy and Hold is in a Coma with flat returns likely for ten more years Driven by demographics 17. 6 year cycle increases two to ten-fold, then wobbles going nowhere during next 17. 6 years During next 10 years, must make money on the wobbles Invest (buy & hold) during strong bull markets Trade (buy & fold) during consolidating decades; Requires smart timing and stock selection and disciplined entry and exits

Cyclical Economic Forces Drive Market Direction Currently, we are in a bullish cyclical period within a secular bear market While industry has cut back debt and cost-excesses at a remarkable pace, tax and interest rate increases in 2011 will stifle economy Earnings per Inflation Interest Stock Market share Prices Rates Conditions Up Up Down Up Bull market begins Up Down Up Bull market thrives Up Down Up Up Rarely happens Up Up Bull market ends Down Up Up Down Bear market begins Down Up Down Rarely happens Down Bear market thrives Down Up Down Bear market ends Truth Table in Vector. Vest Views on 3/21/2003 for Economic Cycle

It's profitable to be in the market when the S&P 500 EPS is rising and to hunker down when the EPS is falling

Presidential Cycle Is Encouraging for 2011 DJIA Gains during Presidential Cycle since 1886 since 1950 % up Years Annual Gain 79% 11. 1% 100% 18. 7% Election 69 8. 4 91 10. 1 Post-Election 52 5. 0 45 2. 0 Mid. Term 55 4. 0 55 4. 6 Pre-Election

For Cyclical Periods, 12 Month Moving Average Pinpoints Reversals During past 10 years, would have averaged 6. 6% annual gain with 11. 5% max draw-down vs 1. 2% gain and 52. 6% mdd with Buy & Hold Explained more fully in Dynamic Allocation book

Two Corrections Each Year Wait for that FAT pitch Warren Buffet

Bottom-fishing lowest momentum stocks produced spectacular results Jail Break gained 201% between 3/9 and 4/17, as SPX gained 27%

Key Elements in Bottom Fishing Strategy 1. 2. 3. 4. 5. 6. 7. 8. Identify “juicy” low points in market Determine when bottoming is over Find “strongest midgets in the room” Enter positions cautiously, with a tailwind Exit before the party is over Enter momentum strategy for more gain Exit momentum to assure cash for I made the most money in the waiting. fishing - Jesse Livermore Wait patiently for the next “fat pitch”

SPXA 50 R Reveals The Really Juicy Points

Bottoms Are Juicy When Less Than 1/3 in S&P 500 are over their MA 50 Good Entries and Exits when SPXA 50 R crosses its MA 20

Vector Vest Has Many Bottom Fishing Strategies

Historical Results were Spectacular, even with simple one-month hold 4 out of 5 forays were profitable n Winning forays were 3 -4 times more profitable than the few losers n Small Cap strategies averaged 25% gain within 1 month, beating Jail Break n

Small Caps were profitable 90% of time with average gain of 30% in one month Thanks to Earl Novendstern for the analysis

During past four years, small cap bottom-fishing gained 65%-90% per year 2 or 3 forays each year, held for one month per foray

Stops Help Somewhat, But Must Be Refreshed

FINVIZ. com

Enter With Tailwind n n n Buy positions after “amateur hour”, only if market indexes are moving up Premature entries are more costly than a delay of a day Buy “half position” on MA 10, balance at MA 20 But if $SPXA 50 R > 50%, it’s too late Panics end more abruptly than “climbing the wall of worry”

Exit When Comfortable, before the party ends n n n Hold for One Month or… Exit all when SPXA 50 R < MA 20 or… Exit each stock at 30% gain or…. Exit each with Chandelier stop or…. Exit each at its’ MACD crossover Then switch into a Momentum Strategy

Knowing When You May Be Wrong 1. 2. 3. When SPXA 50 R fails to cross its MA 20 within a few days of crossing MA 10 When foray loses more than 7% during first week When subsequent decline exceeds 5% of initial investment Re-evaluate entire market environment and VIX and SPXA 50 R to decide

Exit When Drops Below MA 20 to Preserve Cash for Bottom Fishing

Recap Key Elements in Bottom Fishing Strategy 1. 2. 3. 4. 5. 6. 7. 8. Identify “juicy” low points in market Determine when bottoming is over Find “strongest midgets in the room” Enter positions cautiously, with a tailwind Exit before the party is over Enter momentum strategy for more gain Exit momentum to assure cash for fishing Wait patiently for the next “fat pitch”

Any Questions?