Friday, September 10, 2010

Sell Rosh Hashanah...Buy Yom Kippur

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

I was watching Squawk Box this morning on CNBC and heard an interview with a Chicago regular who offered that stock market volume may remain low for the rest of 2010 as many large market players are in the process of essentially closing up shop, not for the quarter, but for the YEAR. By "closing up shop", I don't mean that they are liquidating all of their portfolios and going to cash, but rather, not committing new money to trades, not taking on more risk and hedging where appropriate. It's dumb enough to hear this mindless drivel in October when mutual funds have their own fiscal year ends, but now? With four full months left in a toss-up year? It's absurd!

I can’t imagine what my clients would say if I took that tact, yet still charged them management fees. I’ve always thought we were hired and paid to do a job over the long-term. If we compromise that for an arbitrary annual date, how long until it’s quarter by quarter and then month by month?

Turning to the markets, we left off with stocks set to Explode Higher or Implode Lower? at a critical juncture and my call for a significant rally looking like the former division leading San Diego Padres, losers of 10 games in a row. The Dow was trading just below 10,000 and it was make or break time for the bulls. With all of the positive indicators and supportive sentiment, the market was supposed to rally strongly. If it could not, I feared an imminent meltdown that would have really turned our own very good year into sour grapes.

The bears came close, but their efforts were thwarted several times in late August and the bulls turned around and shot stocks higher, something I was very glad to see! The stock market continues to support a rally, although it's come very far, very fast. A few days down to refresh the rally would be healthy and welcomed, and set up another assault on the June and August highs this month.

With the Jewish holidays upon us, the old Wall Street adage may apply. Sell Rosh Hashanah, buy Yom Kippur, which means the market tends to be on the weak side during the week that separates the two holidays.

As I mentioned recently, I fully expect this rally to be more selective with some sectors rising to new 2010 highs, like our largest positions, REITs and Consumer Staples, while other sectors, like banks, will be pulled along but lag the market.

The ultimate peak, which I had forecasted to be in place by Labor Day still seems unclear to me. It could have been the April high, but there just may be enough energy to test that high before long. As always, we'll take it one day at a time and let our models guide us. Unless we see dramatic improvement in market internals, like the number of stocks going up and down, new highs and lows along with sector leadership, the potential for a 10-20% decline still exists this year.

On the bond side, there continues to be a tsunami of money heading that way from the investing public along with corporations issuing debt at a record pace, just like we saw with tech stocks in 1999 and 2000 and housing after that. Similar to tech and housing, the bond party isn't going to end well, whether that's this year or 2011 or 2012. Manias tend to go on much longer and higher than anyone forecasts, but when they end, it's with a bang and not a fizzle.

Several of our investment programs own high yield, investment grade and treasuries, but are under no impression that it's for the long-term. As I mentioned here and on CNBC, we happily rode the treasury bandwagon for many months in our Global Asset Allocation Program before becoming more active of late with our trades. I continue to believe that the more nimble you can be, the better the chance to avoid the upcoming bond collapse and earn money elsewhere.

I will be on CNBC’s Squawk on the Street this Monday, September 13, at 9:35am.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz
Heritage Capital LLC

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