Summary
Another look at my sell-stocks recommendation of 3/20/06.
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Early on yesterday, the stock market successfully parlayed a Bernanke speech and a "plunge" in producer prices into a spiffy rally. A different, less optimistic mood took over by the session's close, however. At its zenith yesterday, the S&P 500 was up almost six points, only to finish the day down almost eight. This is the kind of intra-day behavior that makes traders awfully nervous!
I raised more than a few eyebrows with Monday morning's "sell-stocks" pronouncement. Quoting from that brief missive, "I suspect -- and strongly -- the stock market either is at or is very close to what will prove a major inflection point..."
The action was predicated on an amalgam of fundamental, technical and gut judgments. Included prominently in the last category is my sense that there has been a material deterioration in the geopolitical landscape, one that is likely to continue. This goes for the domestic political backdrop as well.
(Yesterday's "GRA Running Commentary & Data" discussed some domestic political matters.)
I will employ individual missives and the GRA "Commentary" column to monitor the sell-stocks pronouncement closely, until the situation is resolved one way or the other. Let me point out that I would not have done what I did unless I believed the prospects for an on-balance decline of at least 5% to 10% were strong.
A good place to begin is by creating a setting of where the market was at the outset, and for this purpose, I will call upon the GRA seven-measure tracking group. A good deal of thought was put into the composition of this vehicle at its inception several years ago. I wanted it to be representative but with a relatively small number of components. It has served its purpose well.
As of last Friday's close, here's what it looked like:
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SELECTED STOCK-MARKET MEASURES
(GRA Seven-Measure "Tracking
Group," Listed by YTD Returns)
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03/17
03/17 2006 12/31 Week From 2006 YTD
2006 High 2005 Ended 2006 as of as of
Close Close* Close 03/17 High High 03/17
===== ===== ===== ===== ===== ===== =====
Russell 2000 746 746 673 2.7% 0.0% 10.8% 10.8%
Value Line (G) 442 442 413 2.3% 0.0% 7.2% 7.2%
NYSE Comp. 8272 8272 7754 2.4% 0.0% 6.7% 6.7%
Wilsh. 5000 13177 13177 12518 2.1% 0.0% 5.3% 5.3%
DJIA 11280 11280 10718 1.8% 0.0% 5.2% 5.2%
S&P 500 1307 1307 1248 2.0% 0.0% 4.7% 4.7%
NASDAQ 100 1686 1758 1645 2.3% -4.1% 6.9% 2.5%
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Average 2.2% -0.6% 6.7% 6.1%
Median 2.3% 0.0% 6.7% 5.3%
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*All 2006 closing highs set on 3/17, except
for the NASDAQ 100, which set its on 1/11.
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As indicated above, six of the group's seven components closed at 2006 highs last Friday. Most of these also were multi-year or even all-time highs. (The Russell 2000 fell into the all-time high category.)
The group's 6.1% average gain represented a price-only annualized return of almost 29%. In the case of the Russell 2000, its 10.8% advance represented an annualized return exceeding 51%!
These annualized gains factor heavily in the timing of my sell recommendation. In my opinion, there simply is no way the US stock market is going to generate principal returns anywhere near the above numbers. If not, "slope modification" becomes the name of the game, and I think various factors favor the process beginning about now.
More to come...
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