StockWatch
Who Wants Bragging Rights?
Whoever finishes with the most money wins.
That may seem unobjectionable enough -- even obvious.
Yet, try injecting this thought into the debate over how to classify the market's rise since March 9. You'll get lots of objections from investors who consider it of upmost importance to determine whether we're in a new bull market (as opposed to a mere bear market rally).
But, how important is it, really?
If you can make money from it, does it matter what you call it? Doesn't this debate boil down to little more than just bragging rights?
Giving these questions added urgency: It's possible for an adviser to win bragging rights and still lose a lot of money.
Just take Harry Schultz, editor of the International Harry Schultz Letter. Fellow columnist Peter Brimelow named it Newsletter of the Year for 2008 because of a prescient prediction in the Fall of 2007 that the investment markets faced an imminent "financial tsunami".
Schultz was spectacularly right, of course.
And, yet, according to the Hulbert Financial Digest's calculations, the newsletter's model portfolio lost 76.1 percent during 2008, more than doubling the 36.7 percent loss for the Wilshire 5000 Total Market Index. (For the record, I should note that Schultz's letter contains hundreds of recommendations, only some of which make it into his model portfolio. The Hulbert Financial Digest numbers reported here reflect only that portfolio.)
Who needs bragging rights like those?
Imagine, for a moment, the Dow Jones Industrial Average rallying another five thousand points to reach the 14,000 level and then commencing an extended decline that takes it below the March 9 low of 6,547. Would the entire rise to the 14,000 level be considered a bear market rally just because the Dow did not reach a new high before it reached a new low?
It's surprisingly difficult to answer this question with a precise definition that fits all of what we, in the past, have considered bull and bear markets. It's reminiscent of the challenge the Supreme Court faced when discussing pornography: They conceded that they didn't know how to define it although they insisted that they knew it when they saw it.
One definition that I have often relied on in my columns is the one devised by Ned Davis Research, the quantitative research firm. According to them, a bull market requires one of three conditions to hold, at least a:
- 30 percent rise in the Dow in 50 calendar days
- 13 percent rise in the Dow in 155 calendar days
- 30 percent reversal in the Value Line Geometric index
This definition strikes me as eminently reasonable. And, according to this definition, the market's rise since March 9 is indeed a bull market.
Note carefully, however, that if you adhere to this definition, you also must classify as a bull market the rally from late 1929 to early 1930. That rally began on November 13, 1929, following the 48 percent loss for the Dow that occurred over the previous three months. Between then and the subsequent April 17, the Dow rallied 48 percent.
Not surprisingly, investors' mood became markedly cheerier during that rally. President Hoover's Treasury Secretary, Andrew Mellon, stated in February 1930 that "there is nothing in the situation to be disturbed about."
Yeah, right.
Over the 26 months following that April 17, 1930, high, as we now know all too well, the Dow lost 86 percent.
The lesson to learn, I think, is that, regardless of whether the Dow's 48 percent rise between November 1929 and April 1930 is called a bear market rally or a new bull market, profiting from it required nimble footwork. Agreeing on what to call it made little difference.
You could be right and still lose a lot of money, just as you could be wrong and, nevertheless, turn a handsome profit.
I would apply that same lesson today.
So, be my guest: Call the rally since March 9 either a bull market or a bear market rally. The important question is what to do with your portfolio to maximize returns and minimize risk.
Mark can be contacted via email at mhulbert@marketwatch.com.
