Wednesday, September 29, 2004
Suppose that you were allowed to make a one-time investment and had to hold it for 10 years WITHOUT selling any of it. What would you invest in?
For the sake of discussion, suppose you were only allowed two asset vehicles: a global 100%-equity fund denominated in US$, and the US 10-year treasury bond. In other words, you are allowed two investment vehicles: stocks and the 10-year T-bond.
How would you devise an asset allocation if you had to hold it for 10 years, and CANNOT change asset allocation halfway? Assume for the sake of simplicity that you are allowed to take on any amount of risk you desire and that the only issue is potential returns (for example if you are investing with cash that will never need to be used for any purpose).
The US 10-year note is currently yielding 4%. This yield is very low. I do not believe that this yield compensates bond holders for inflation or potential inflation. I believe that the current rate of inflation in the US is around 3-4%, contrary to govt manipulated/distorted statistics. Hence I would demand that my 10-year note yield at least 6.5-7.5% not only to compensate me for inflation, but to give me some returns over and above it. I don't invest money just to see my purchasing power remain stagnant.
However if I had to hold my investment for 10 years and cannot change asset allocation or sell halfway, I would put all the cash into the 10-year note and leave 0% for stocks.
Yes, that was not a typo error. I would put ZERO in stocks.
I would do this because I do not believe that stocks will return even close to 4% compounded over the next 10 years. It is more like 1-2% at most, in my opinion. As low as the 10-year note is yielding, it is still a better investment compared to stocks for the next 10 years.
However, suppose now my time horizon is 30 years, and I was allowed to invest in stocks as well as the 30-year treasury note which is yielding 5%.
This time, I would put 60% in stocks and 40% in the 30-year note. I think stocks will yield 6%, or maybe slightly more, over the next 30 years. (In fact I believe many of us here will live to see Dow 100,000. But that's another story for another day.) However Iwill still put 40% of my money in the bond because of the certainty of the yield. If risk was a problem (and I am assuming now that it is not), then the bond will also serve to reduce the volatility of my portfolio. Indeed, if I were to take risk into account, I would place 40% stocks and 60% bond because the bond JUST MIGHT outperform stocks on a risk-adjusted basis. One can never know.
So time horizon is of paramount importance in making investment decisions. Time is more important than price.
Last week, the S&P was at an important juncture in price and time.
I opined that if the market had anything worthwhile to say --- good and bad --- it should say it within the next two weeks. Having rallied 70 points off its mid-August swing low of 1060 without having so much as a downturn of its weekly chart, the S&P remained stretched despite a short consolidation phase that consisted of backing-and-filling within 1020-1030.
Last Wednesday, the market delivered what may be the first in a series of verdicts. Both the S&P and the NASDAQ delivered Real Distribution Days and turned their weekly charts down. In addition, both indices closed on a low on Friday and carved out the firstdown week (in fact, the first outside-down week) since the mid-August turning point.
The behaviour of the indices now will give important clues as to the nature of the current trend. Many times, the market will squeeze the shorts after such a downturn, providing a graceful exit for the trapped longs (who can cut their losses at a higher price). But even so, we are now in the 49-55 day culmination zone counting from the Aug 13 low (the period specified is Sept 23 to Oct 4) --- turning points are often found here, both bottoms and tops. The market is now guilty until proven innocent.
In an uptrend (such as the one we witnessed from Aug 13 to Sept 21), the 50% point is often the first meaningful pullback representing the midpoint of the advance, or the midpoint of the first leg of the advance.
The first meaningful pullback on the S&P was the two lower lows on the daily chart carved out between Aug 27 to Aug 31. From Aug 13 to Aug 27 the S&P rose 49 points. Adding 49 points to the Aug 31 low of 1094.70 gives a price target of 1143.70. Very obviously, the S&P failed to achieve this objective.
This suggests that either the rally is not over and higher prices are soon in store for us, or that pattern-failure has occurred. When pattern-failure occurs, it is often marked by downside momentum. Last Wednesday not only saw huge downside momentum on theS&P and NASDAQ but also Real Distribution Days. Hence any follow-through to the downside confirms pattern failure and is a victory for the bears in successfully fending off S&P 1040.
Given the price action over the past week and this Monday, it is my opinion that pattern-failure has indeed occurred.
The rally was from S&P 1060.70 to 1131.55. The midpoint is 1096.15, and is now key support.
Additionally, one must also remember that the capture of the 50-day moving average is often also the mid-point of the advance. The S&P captured its 50-day MA at 1104.50 on Aug 26. Now the 50-day MA is 1100.
Putting together this string of important numbers: 1094.70, 1096.15, 1100, 1104.50, we deduce that the zone 1094.70-1104.50 is a zone of very critical support.
The market may now go into an extended consolidation phase and repeated test of this critical zone. In addition, if this zone is broken, then fresh 52-week lows on the S&P are in order.A more bullish scenario would be for the S&P to turn its monthly chart down in early October and quickly find a low in price and time. For now however, any rallies will fail and should be shorted.
For the sake of discussion, suppose you were only allowed two asset vehicles: a global 100%-equity fund denominated in US$, and the US 10-year treasury bond. In other words, you are allowed two investment vehicles: stocks and the 10-year T-bond.
How would you devise an asset allocation if you had to hold it for 10 years, and CANNOT change asset allocation halfway? Assume for the sake of simplicity that you are allowed to take on any amount of risk you desire and that the only issue is potential returns (for example if you are investing with cash that will never need to be used for any purpose).
The US 10-year note is currently yielding 4%. This yield is very low. I do not believe that this yield compensates bond holders for inflation or potential inflation. I believe that the current rate of inflation in the US is around 3-4%, contrary to govt manipulated/distorted statistics. Hence I would demand that my 10-year note yield at least 6.5-7.5% not only to compensate me for inflation, but to give me some returns over and above it. I don't invest money just to see my purchasing power remain stagnant.
However if I had to hold my investment for 10 years and cannot change asset allocation or sell halfway, I would put all the cash into the 10-year note and leave 0% for stocks.
Yes, that was not a typo error. I would put ZERO in stocks.
I would do this because I do not believe that stocks will return even close to 4% compounded over the next 10 years. It is more like 1-2% at most, in my opinion. As low as the 10-year note is yielding, it is still a better investment compared to stocks for the next 10 years.
However, suppose now my time horizon is 30 years, and I was allowed to invest in stocks as well as the 30-year treasury note which is yielding 5%.
This time, I would put 60% in stocks and 40% in the 30-year note. I think stocks will yield 6%, or maybe slightly more, over the next 30 years. (In fact I believe many of us here will live to see Dow 100,000. But that's another story for another day.) However Iwill still put 40% of my money in the bond because of the certainty of the yield. If risk was a problem (and I am assuming now that it is not), then the bond will also serve to reduce the volatility of my portfolio. Indeed, if I were to take risk into account, I would place 40% stocks and 60% bond because the bond JUST MIGHT outperform stocks on a risk-adjusted basis. One can never know.
So time horizon is of paramount importance in making investment decisions. Time is more important than price.
Last week, the S&P was at an important juncture in price and time.
I opined that if the market had anything worthwhile to say --- good and bad --- it should say it within the next two weeks. Having rallied 70 points off its mid-August swing low of 1060 without having so much as a downturn of its weekly chart, the S&P remained stretched despite a short consolidation phase that consisted of backing-and-filling within 1020-1030.
Last Wednesday, the market delivered what may be the first in a series of verdicts. Both the S&P and the NASDAQ delivered Real Distribution Days and turned their weekly charts down. In addition, both indices closed on a low on Friday and carved out the firstdown week (in fact, the first outside-down week) since the mid-August turning point.
The behaviour of the indices now will give important clues as to the nature of the current trend. Many times, the market will squeeze the shorts after such a downturn, providing a graceful exit for the trapped longs (who can cut their losses at a higher price). But even so, we are now in the 49-55 day culmination zone counting from the Aug 13 low (the period specified is Sept 23 to Oct 4) --- turning points are often found here, both bottoms and tops. The market is now guilty until proven innocent.
In an uptrend (such as the one we witnessed from Aug 13 to Sept 21), the 50% point is often the first meaningful pullback representing the midpoint of the advance, or the midpoint of the first leg of the advance.
The first meaningful pullback on the S&P was the two lower lows on the daily chart carved out between Aug 27 to Aug 31. From Aug 13 to Aug 27 the S&P rose 49 points. Adding 49 points to the Aug 31 low of 1094.70 gives a price target of 1143.70. Very obviously, the S&P failed to achieve this objective.
This suggests that either the rally is not over and higher prices are soon in store for us, or that pattern-failure has occurred. When pattern-failure occurs, it is often marked by downside momentum. Last Wednesday not only saw huge downside momentum on theS&P and NASDAQ but also Real Distribution Days. Hence any follow-through to the downside confirms pattern failure and is a victory for the bears in successfully fending off S&P 1040.
Given the price action over the past week and this Monday, it is my opinion that pattern-failure has indeed occurred.
The rally was from S&P 1060.70 to 1131.55. The midpoint is 1096.15, and is now key support.
Additionally, one must also remember that the capture of the 50-day moving average is often also the mid-point of the advance. The S&P captured its 50-day MA at 1104.50 on Aug 26. Now the 50-day MA is 1100.
Putting together this string of important numbers: 1094.70, 1096.15, 1100, 1104.50, we deduce that the zone 1094.70-1104.50 is a zone of very critical support.
The market may now go into an extended consolidation phase and repeated test of this critical zone. In addition, if this zone is broken, then fresh 52-week lows on the S&P are in order.A more bullish scenario would be for the S&P to turn its monthly chart down in early October and quickly find a low in price and time. For now however, any rallies will fail and should be shorted.
