Dow Loses 300 points Thursday, Makes Recovery, and Long Term Investors Who Haven't Sold in the Recent Panic are the "New Contrarians"
Earlier today I wrote a post on the Motley Fool board, "Macro Economic Trends and Risks" in which I "fessed" to being one of the few investors who hasn't been busy "churning" my account, trading in and out, like a nervous jackrabbit during the recent swoon in the Dow.
Yesterday, I posted a chart of the Dow in daily form.
Today, I post a new chart with the latest "Japanese Candlestick" now showing on the same chart.
(The daily chart I am talking about is the second of the two posted above.)
A certain trend reversal formation has formed on the daily chart. It is called a "hammer". The hammer is classified by a tiny "head" on top of a long "shadow". (Someone once described to me a "hammer" as looking more like a hatpin.) What this particular candlestick tells investors is a trend was decidedly "bearish" in a session, with the later part of the session turning bullish.
Notice on this daily chart that the "head" of the "hammer" closed above the 200 day moving average line AND my trendline. Although my trendline has now broken down (using Japanese methods of drawing trendlines NOT Western methods) I am still "bullish".
Which leads me to point out to Nervous Nellies who've been selling their Blue Chip Big Cap stocks in the face of what seems like an Armageddon event:
The Dow Monthly chart is still hale and healthy.
Look at the monthly chart (the top chart of the two).
That Dow chart shows a 25 year old trendline.
That's 25 years of 12 candlesticks per year showing the 1987 market crash and the 2000-2003 bear swoon including the dot.com meltdown and 9/11 and its bear aftermath (which reset the trendline to a less severe rate of rise).
Now I want to point out something to many of you out there.
My longterm trendline for the Dow starts out at 769.68.
That low for my trendline took place in August of 1982 . . . so we are talking exactly 25 years ago this month.
Next, I want to do a mental exercise where we shoot down a few hyper-ventilating Armageddon Sell analysts who are telling everybody to sell everything in the recent sell off of the Dow.
1. First, let's think about the Dow.
It's a weighted average of 30 of this country's greatest companies. It's the oldest "index" for the NYSE, or New York Stock Exchange.
Names you know, such as Verizon, Johnson and Johnson, Exxon, are all members of this Index. And these names, for the most part, have been neglected by buyers of stocks since the dot.com bust in 2001.
Big Cap Blue Chips have sorely "underperformed" the overall markets as I've pointed out in earlier posts on this blog.
To make money in any kind of investing, you must buy dollars for .40 cents. Go where the herd does not tred.
Hence, I think a "flight to safety", i.e., Big Cap Blue Chips, is exactly the kind of move all risk adverse investors should be making in these trying times.
Onward.
2. Using 770 (rounded off 769.68), most investors will look at that number and say "Aha, the Dow has gone up about 16 times in 25 years . . . therefore it is way overbought."
However, let's look at this 770 start point and double it.
That gives us 1540. The Dow first hit 1540 in January of 1986.
That's like 3 1/2 years for a double. That is above the "normal" mean where we seek to "double" our stocks's values every 5 years.
{Dr. Jeremy Siegel points out the 100 year average for S&P 500 type stocks is about 11% per year which would be a "double" every 6 1/2 years; however, through proper timing of your buys, I, Warren Buffet, and even Dr. Siegel firmly believe . . . and have empirical knowledge . . . that many investors can expect "normal" average returns of 13-14% and better. Meaning that I expect to "double" my stocks's gains (with dividends reinvested) every 5 to 6 years.}
Anyway, let's get back to our exercise.
So we hit 1540 sometime in January in 1986.
Our next double of 3080 takes place in December of 1992. Okay, instead of 3 1/2 years, this next double takes about seven years, from January 1986 through almost January 1993.
So, stay with me, the Dow doubled twice in 10 1/2 years total, right?
Our next double would be 6160. When did that take place?
This next double of 6160 took place in October or November of 1996.
This was our quickest "double" of the Dow yet. It took a little less than 3 years to take place.
Now, let's do one more "double".
We are looking for the first appearance of 12,320.
Guess what? This double took the longest of all, almost ten years exactly.
Look for yourself at the monthly chart. This new double of 12,320 took place in October or November 2006 . . . ten years after that last double in October or November of 1996.
So the Dow has doubled four times in the past 25 years.
Length in time for the Dow to double those four times in 25 years . . .
First double: 3 1/2 years
Second double: 7 years
Third double: 3 years
Fourth double: 10 years
Take Away on the above observation
If we are using a 25 year old chart of the Dow, then the next double of the Dow . . . 24,640 . . . will probably take place in less than five years if . . . I said IF . . . historical "norms" continue through thick and thin times.
The only thing to destroy my outlook would be a Worldwide Depression.
And if a Depression comes, I'm still not selling off my stocks which I've bought at undervalued prices.
As I said in a Motley Fool message board post today titled Contra Thoughts from Accused Perma-Bear . . .
I'm looking over my charts right now.
I'm seeing banks, many REITs and the currencies showing contra-moves against the overall markets. The Bank Index is up almost 4% today.
It's like the financials are expecting a "Greenspan Put" from Bernanke or they know something we don't know. (I still am too nervous to buy financials outright, although Bank of America is tempting me.)But, I'm not looking at financials as a buy as I don't trust their "off book" investments are doing.Hence, I am looking over other sectors.
Consumer staples are also doing very well in these down markets.
But it's not only that sector.
You can find a good bunch of Blue Chip dividend payers to start buying into today.
According to a great Barron's piece 8 weeks ago, the record margin is almost all hedge funds, mutual funds, etc. It's not us small investors getting the margin calls . . . unless . . . of course . . . you used margin on your own or you invested in a fund which relies on leverage.
Despite all the turmoil, my ports are still up for the year and dividends paid within the past two weeks are buying much larger hunks of fractional shares in solid companies which will not blow away in any market tsunami.
People got to eat, use gas, buy electricity.
Invest accordingly.
Call me crazy, but I believe now is a great time to begin buying Proctor and Gamble, Johnson and Johnson, Pfizer, Huaneng Power etc. Average up, average down. Let those dividends reinvest.
It seems everybody's on board the downbound train. Yeah, we know Kudlow and crew are perma-bulls, but like posters on this board have said about perma-bears (which I've been incorrectly called), even a broken clock is right twice a day.
This is a classic time, IMO, to start taking the contra view of seeking good solid companies whose shares were sold off by funds so the cash could pay off riskier losing bets elsewhere.
I'm not suggesting you go hog wild and throw all your dry powder into the markets today. I am simply suggesting you look over those great companies which you've been hoping would come down in price for an initial buy.
Buy some now.
Maybe the markets will continue down. Maybe not. Average down. Average up if the markets take off again.
Warren Buffet has to be going nuts with his cash buying cheap shares of his favorite companies. I know he recently doubled down on Johnson and Johnson. I can't wait to see where he's feasting while big players run for the exits.
Maybe September 15th will be the bottom via ajaskey's (note to blog readers, ajaskey is the alias of a regular Motley Fool poster) Gann Theory. And then maybe not.
Maybe the Dow will drop below it's longterm trendline breaking the y axis at 12,000. Maybe not.
Trying to time a perfect bottom is tricky business. It takes a lot of monitoring of LIVE software, charts and news to jump in and out of positions like a nervous jackrabbit.
I say everybody here should be rotating into solid great companies, begin sleeping like a baby, and go fishing.
The clouds we saw on the horizon in 2005 and which were ignored by 99% of investors are now storms taking out people stuck in the door jambs as the flood surge rushes above their heads.Don't lose yours to panic selling.
Use this time to begin buying where others fear to tread.
p.s. I think another 5% fall on the Dow is doable. I feel another 10 to 12% fall on the S&P is doable and would be good. And a 30% to 40% drop on the NASDAQ would not freak me out. But I could be wrong and all of my trendlines taken out by some major catastrophe like a Great Depression. So what do I do? Go live in a hole with an AK-47 and wait for Doomsday?
Nah, I bought great companies over the past four years and all of them will hit the "Return Accelerator" with their DRIPs if their shares fall dramatically.
Moreso, I believe there will be a natural flight to safety on great Blue Chips which have been the most neglected stocks of the past 10 years. A lot of my port is diversified into these great companies and I'll be buying more.
Just because I am still bearish on Housing, doesn't mean I can't see bargains in Housing developing. It's just Housing markets move much much slower than stock markets. Today, I see many real bargains in the stock markets. And obviously Warren Buffet, Bill Miller and Anton Van Den Berg see these same opps too.
This is a time for Value Investors to shine.
(end of Motley Fool post)
As I've state before, there is always something "on sale" in the stock market.
If you know your history, if you've read Dr. Jeremy Siegel's book "The Future for Investor's" and you grasp the beauty of compounding dividends through dividend reinvesting, and you buy quality companies when no one wants them . . . you too shall thrive while others are losing their minds jumping from one mania to another.
You remember the first official stock pick of this blog, Johnson and Johnson? While the Dow has lost about 10% in two months, JNJ is still at or close to our buy in point of $63.41.
In fact, JNJ dropped at one point in July to $59.72 low. During the June 15th through July 15th recording period for Insitutional buying, Warren Buffet doubled his position. During the recording period of July 15th through August 15th, Warren Buffet increased his position another 9.21% with a total holding now of JNJ stock showing 53,145,848 shares worth $3,257,840,000.
Mr. Buffet is wading in when others are fleeing in panic.
The smartest investor of all time has other companies he's buying . . . and several of these shall be discussed in upcoming blog posts.
Meanwhile, I assure you, Johnson and Johnson . . . despite the recent failings of its stent business . . . is a booming healthcare/consumer staples macro play. When you see the new "Band Aids" with Neo Sporin gel being advertised, that's your baby. When you see the new "Listerine Mouth Whitening Strips", that's your company too. Johnson and Johnson's consumer staples division has caught fire, and they are going to give Proctor and Gamble, Colgate, Unilever and others a run for their Consumer Staples bucks . . . just wait and see.
When you buy "safety" when it is extremely undervalued (as Johnson and Johnson, Proctor and Gamble, Pfizer, etc., are today) rewards shall be reaped by the patient.
Action to take: keep buying Johnson and Johnson and other quality Blue Chip Big Caps which will not blow away during any major Armageddon event.
As always,
Caveat Emptor
Rock
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