Observations

Jim Schmidt is the superb editor of Timer Digest. His publication ranks market timers of stocks, bonds, and gold and is penned in Greenwich, CT. He called me a few days ago. He told me, to my surprise, that he used to race his day sailer on the same lake I had my boat here in Akron.

But he did not call to tell me that. The real reason was to tell me that my buy/sell signals were not clear. He could tell that I was bullish in the near term, but my long-term outlook was not so obvious. He was right (he usually is). I did not spell it out as I should have. The reason is that I do not think in terms of buy/sell. When I talk about long-term outlook I focus on the trend of the risk imbedded in the market.

Anyway, after the call, I started thinking about the meaning and use of the two signals from an investor’s viewpoint. How do you use the fact that I am a long-term bear? What do you do when I say I am a short-term bull? Is there a practical application of this information?

My conclusion is “no.” Let me explain how I see it.

There are two main drivers in money management: risk (or the probability of making money) and the relative strength of asset classes and stock sectors.

Stock market risk increases as short-term interest rates rise. Market risk is high right now - and rising. In market timing parlance I am bearish over the long term. As risk rises, fewer and fewer sectors are attractive. Investors can only profit from being in these unique sectors.

Now, what does it mean to be a long-term bear when the market tells us to be selective and we can still make money in the few sectors that are strong?

My point is that changes in risk and the attractiveness of asset classes move continuously and gradually. The task of professional investors is to adjust their position to reflect these changes in the various markets as driven by economic and financial forces.

(This Observations appeared in the 3-7-05 issue of The Peter Dag Portfolio ).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

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