Van Meerten's picks

February 2009 Archives

The Market has already bottomed out

My good friend Jack has restored a 1946 AirCoupe and promised me a ride in a plane a year older than I am. I couldn't resist. It was a nice sunny day so we drove over to Peachtree-Dekalb where he has the plane hangered and went through the check list. Soon we taxied down to the runway got clearance from the tower and we lifted off.

This is pure seat of the pants flying - old school style. A very uncluttered instrument panel, a tach, an altimeter, a gauge that tells the rate of ascent and descent and one the simulates the relationship of the nose and the wingtips to the horizon. I looked for a fuel gauge and couldn't find it. Jack pointed out that the tank is right in front of the wind screen and there is a float in the tank with a wire through the cap. The length of the wire tells you how much fuel you have left.

The plane has no flaps, no pedals, not even a joystick. It just has a steering wheel like a car that you push or pull to go up and down and turn from side to side to bank the plane.

He knew I was itching to fly it so he told me to take over the controls. It had been a long time since I piloted a plane so I kept close watch at what few instruments the plane had, I leveled of at about 3000 feet and kept glued to the instrument panel. Jack told me to enjoy the view but at 3000 feet in an 85 horsepower AirCoupe its hard to tell what's happening. Jack saw I had my head buried and wasn't enjoying the view so he pulled open the cockpit roof and let the wind blow through our hair. "How do you think they flew before they invented those instruments?"

He told me to quit looking at the instruments and just position the nose and wing tips to the horizon. Now I was looking forward not buried into the instrument panel and really starting to enjoy myself. It was one of those highlight days.

So what has all this got to do with the stock market? Too many of use have had our head buried in the instrument panel watching every little tick of the indicators that we rely on and not had a chance to look out at the horizon and enjoy the big picture.

While we were busy charting and plotting the market slide down and on 11/21/08 all three major market indices the Dow ($DOWI), the S&P 500 ($INX) and the Value Line Index ($VLA) hit their rock bottom low point and have since recovered.

Remember, the stock market is a leading economic indicator. Normally its ups and downs precede the general economy as a whole by 3 months to a year.. It started sliding back in 2007 before there was even one headline of the bad times to come. The Value Line Index peaked the week of 7/09/07 and slide from 2509 down 1493 points to 1016 on 11/21/08, a loss of almost 60%. The Dow peaked on the week of 10/08/07 at 14198 and slide down 6749 points to a low point on 11/21/08 of 7449, a loss of almost 48%. The S&P 500 also peaked on the week of 10/08/07 at 1576 and slide down 835 points to a low point of 741 on 11/21/08 , a loss of almost 53%.

We bounced off all those low points now and the Dow has gained 7%, the S&P gained 11% and the Value Line index is up almost 27%. Start looking at the horizon!

The election was a good thing. We got to hear all the pros and cons and the economy was probed and analyzed and we discussed and debated all the good and bad. There was no stone left unturned and by the time of the election outcome all the cards on the table had been turned over. Isn't it remarkable that the election debate ended in the same month the Market turned??

The Market is a big battleship and even after it has the order to turn there is a lag and we have to look out at the horizon and record our progress one degree at a time until we've turned the full 180 degrees.

So what's the battle plan. I can't predict which sector will recover first anymore than I could predict which sector would fall fastest and longest. I'd advice you to look at the broad market index Exchange Traded Funds. Look at Large Cap S&P 500, Mid Cap S&P 400, Small Cap S&P 600, Micro Cap and Real Estate ETFs. Decide would much conviction you have and how much risk you can take, then look at IShares for the conservative, Ultra ProShares for the aggressive and the Direxion 3X Bullish ETF's for you Screaming Eagle investors.

Don't buy all at once but dollar cost average your portfolio into the market at about 10% per month until this market gets some legs.

As always please use stop losses to protect yourself against the unknown.

What if I'm wrong and the Market tanks and the Value Line Index crosses the 1000 line? Then my plan B:

I'll go to cash, sell everything else of value on E Bay and go to the John Denver Survival Plan:

Blow up your TV, throw away your paper
Go to the country and build you a home
Plant a little garden, eat a lotta peaches
Try and find Jesus, on your own.