Collective stock market wisdom is chock full of rules of thumb that work -- until they suddenly don't. "Sell in May and go away" was disastrous advice in 2009. Nor did September live up to its reputation as the weakest month in the investment year. That said, understanding how rules of thumb that govern the market do, and don't, tend to work, is the key to maximizing your profits for the remainder of 2009. Understand that as much as we think each period in market history is unique, there is little new under the financial sun.
Piling into the Market: The Future Isn't What It Used to Be
Things rarely work out the way we expect them to. Despite the "greatest financial crisis since the Great Depression," the price of gold failed to soar in 2009. Nor did U.S Treasuries collapse, despite the U.S. government piling on an estimated $10 trillion of debt to its balance sheet over the next decade. Hedge funds that bet on the market collapsing in September are licking their wounds. And I don't know of anyone who predicted that the U.S. government would be making billions of dollars on the bailouts of Citibank and Bank of America.
It is also remarkable how soon after the "greatest financial crisis since the Great Depression" that the world's most prominent Cassandras have thrown in the towel. Jim Rogers is no longer betting on a market decline for the first time in many years. Permabear Jim Grant has predicted a "V shaped" recovery. Even Marc Faber, the original "Dr. Doom," says that thanks to the coordinated stimulus packages across the globe, equities are the place to be over the next two to three years. It's only then that wars will break out, stock markets will collapse, and Western civilization will end as we know it. Cassandras, after all, are never "wrong." They're just "early."
Piling into the Market: A Bold Prediction
Like many others, I, too, have been caught off guard by the strength of the market's move up since March. The biggest, single position in my funds was a bet against U.S. Treasuries, which I was forced to exit as it moved against me. The fact that my funds are up substantially this year is not because my predictions were accurate. Instead, they are up because of my willingness to admit that I was wrong. And the smarter you think you are, the harder that is to do.
With that caveat, here's my latest prediction. I expect the stock market to continue to perform well for the rest of 2009. My rationale is simple. It has to do with the weight of money. A lot of the world's largest institutional investors have been caught flat footed in the markets, and have missed out on the most powerful rally in U.S. and global stock market history. And big, dumb, institutional money isn't shifted around at the drop of a hat. Instead, picture a committee of insufferably boring men, sitting around conference tables in New York and London, trying to guess what the other insufferably boring men in the building across the street are planning. My guess is that they will be increasing their exposure to riskier assets, most notably, global stock markets. The game is all about keeping up with the Fidelitys.
So, how is this investment thesis doing? So far, so good. Every slight pullback in global markets tends to be quickly overwhelmed by a flow of new money entering into the market. Risky assets are being re-priced upward. Investors are happy to party like it's 1999.
Piling into the Market: Pure Speculation
Here's something I've never heard anyone else admit: Whether I turn out to be right or wrong, my "bold prediction" is pure speculation.
And here's what's curious. Speculation is the dirtiest word in the investment world. Yet, Wall Street is built on little else. Consider that most MBA students graduate with at least a rudimentary understanding of "Graham and Dodd" and the principles of value investing. But I doubt there has ever been a course taught at Harvard Business School with the word "speculation" in it. In fact, you'd be more likely to take a course with the word "pornography" in its title at a top U.S. business school than a course with the word "speculation." Speculation is just not something respectable people talk about.
Curiously, John Maynard Keynes -- who actually had a poor record as a speculator -- is the only economist of note who has ever even acknowledged the existence of speculation.
In his "General Theory," Keynes famously likened playing the stock market to judging a beauty contest. Here's how he explained it.
In the 1930s, British newspapers ran contests where they would print 100 photographs of attractive women and you could write in and vote on which six faces you liked most. If you picked the most popular face, you were automatically entered in a raffle, where you might win a prize.
As Keynes wrote:
It is not a case of choosing those [faces] which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.
George Soros, the greatest speculator in history, put it more succinctly: "If I see a bubble, I buy it." Of course, what makes Soros great is that he also has the discipline to sell when the market turns against him.
So how can you best make money from my prediction of a fourth quarter rally? Buy into volatile asset classes that soar during the good times. A bet on the Russian market through the Market Vectors Russia ETF (RSX) is a good start. Russia is a global thermometer for risk. It ends up being either the best-performing market in the world every year or the worst. At the same time, also recognize that the fourth quarter rally may not happen. But that's why God invented stop losses. Make sure you stick to yours.
After all, this is all pure speculation...
Nicholas A. Vardy Editor, The Global Guru
P.S. Subscribers to my trading service, Global Bull Market Alert , are well positioned to profit from the coming Q4 rally. The current portfolio has five double-digit percentage gainers -- including a bet on emerging markets that is up over 50%. Don't miss out on the biggest quarter of the year for emerging markets, sign up for Global Bull Market Alert today.
P.P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me onTwitter on @NickVardy.