In my mid-year review, I pointed out at that time that it felt like we were in a recession. Finally, it was official that we were in a recession. According to the National Bureau of Economic Research, we have been in a recession since December 2007! The effect of the credit crunch has finally spread to the whole economy. In September, one financial institute after another went into trouble and by October, the U.S. financial system had almost collapsed. Reluctantly, in an effort to rescue the nation’s banking system, the treasury department set into motion the 700 billion dollar bailout plan, but the damage had already been done. In December, the auto industry was in danger of bankruptcy due to the freeze of credit, which forced the Bush administration to provide 17.4 billion dollar loans to prevent the disorderly liquidation of the industry and save the nation from depression. The U.S. government has pulled all the strings and the Federal Reserve has lowered interest rates to 0 – 0.25%, a historic low, to ease the lending and stimulate the economy. With the new administration and new congress coming into office in January next year, economy policies for the past 8 years are coming to an end. Hopefully, the change will bring back confidence, help economy restructure itself, and resume its expansion for the long haul.
The U.S. stock market tried to rally in March but failed to uphold the gain. The S&P 500 index headed south in May and has not since climbed above its trend line (EMA[28]). The weak rally signaled trouble was on the horizon. Sensing the economy was in great danger, the market started the sell-off in September. As the financial system was in jeopardy in October, the sell-off intensified. Within 3 months, the stock market experienced the biggest drop in decades. The S&P 500 index lost 9.5% in September, 17% in October, and 7.4% in November. From the beginning of this year, the S&P 500 has lost 40.5%, and the NASDAQ composite index has lost 42.4%.
This year, losing less means winning. For our model portfolios, SSPP, nSSPP, and iETF have been in cash positions since July and had escaped the October market sell-off. However, SELECT, ETF, and sETF did not fare as well. They tried to hang on to the stronger market sectors and hope for a rebound when the economy was heading south. Finally, they yielded to the vicious sell-off in October, which dragged down every sector in the economy, and moved to the sidelines with big losses. The FEMKX timing model, based on the stochastics, turned in the best performance this year. It went to a cash position in June and only lost 2.9% this year.
In this vicious bear market, it is important to execute the trading plan in a diligent manner. From our record, if you bought and held the NASDAQ composite index for the past 4.5 years, you will end up with a loss a little more than 20%. On the other hand, if you closely followed one of our original model portfolios (SSPP, SELECT, and ETF), you will still come out with a profit!
For now, we can only wait patiently, with cash at hands, for the trend reversal. It may be soon or it may take a while, but we will know when the time comes.
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