Yo-Yo Markets

yoyo(By Andy Kessley) This market cycle has been a good test of many investment beliefs, theories and strategies.  Some held up well and others need to be revisited.  The impact of this financial crisis will be felt by plan members and other beneficiaries for many years.  There is clearly value in some reflection, learning from how the events unfolded, the strategies that worked and the mistakes that were made.  The most important thing is to learn from this historic time period and find ways to make better policy decisions, improve risk management processes and more effectively implement active management programs.

Bull markets, it is said, climb a wall of worry. Smart investors buy in early when worries about profits or inflation or wars scare away the faint of heart. Latecomers then bid up stocks as each worry becomes unfounded, until there is nothing left to worry about. Once there is only good news, the market peaks as there is no one left to buy.

Bear markets, on the other hand, fall into what I like to call the pit of doom. Forget about worries—actual bad stuff happens, until nothing bad is left to happen and the market bottoms as there is no one left to sell.

From early May through last week, the market dropped 1500 points into the pit, on the backs of gushing BP oil, riots in Europe, a 30% drop in pending home sales and the news that maybe your next door neighbor is a Russian spy. But now we’ve seen 680 Dow points added over seven straight up days before a slight decline yesterday. What the heck is going on?

Call it the yo-yo market—from the top of the wall to the bottom of the pit and back—and you better get used to it. It’s hard to tell which market moves are real and based on prospects for better profits, as opposed to moves that are driven by all the extraordinary government measures to prop up the world economy. Until a few things are resolved, you’d better learn the yo-yo sleeper trick—that is, keep spinning at the bottom without going up. Read the full article here.