Sunday, April 22, 2007

The Markets - Last Few Months and Going Forward

Since September 2006, markets have gone in just one direction - up - except for a brief pause in Feb. The Dow has now risen in 11 out of the last 12 days, and is now threatening the 13000 mark. I moved half of my portfolio into cash after the markets crashed in February. That in hindsight was not right. Dow and S&P are up 4% now for the year. However, I have moved the other half into cash this last week. Why am I bearish on the market?

There are two reasons for this. First is seasonality. Traditionally, markets are weak between May and September. Almost all the stock market gains over the last 100 years have come between the months of October and March. Second is - this April reminds me of last April. All assets are going up at the same time. Commodities are going up, gold is back above $700, even prices of agriculture commodities are increasing rapidly. There seems to be a general bullishness.

Currently, the earnings season is underway and companies are most likely to beat the 3.3% in operating profit growth forecasted by Wall Street by a wide margin. Once the earnings season is over in the first week of May, markets are again going to start focusing on economic news. That is when things might get a bit tough.

But for the year, I think markets will be up quite handsomely. This is the third year in the US presidential cycle, when markets are up something like 90% of the time. Dont ask me the reason - maybe the President tries to boost the economy to get reelected. But that is a historical fact over the last 100 years.

I sold Motorla in Jaunary at $18 - after they blew up another quarter. What I learned is this - product cycles in tech can be very volatile. Motorola went from beating analyst estimates widely to missing analyst estimates widely in a few months. Just one of their products - Razr - was accounting for the majority of their operating profits. When it fell, they couldn't use it any further to subsidize lower margin products to capture market share.

I also sold DRC at $25 - now the stock is at $32. Lesson I learned - be patient with a good stock. Net net, I lost $100 on the two stocks (Motorola and DRC), but Smith Barney brokerage took another $140 in brokerage commisions to hand me a loss of $240. Good that I am leaving Citi and escaping their clutches. Now I can trade more freely.

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