Sunday, March 22, 2009

Stocks Don't Fight the Tape

I first heard Martin Zweig utter these words--Don't Fight the Tape--at speech he gave in New York city. At the time it really caught my attention. A very simple rule that is easy to understand.

When the Federal Reserve lowered bank reserve requirements at the depths of the recession in 1991-1992, Zweig went bullish after being bearish for some time. He astutely understood that the FED action would have a major impact on banks and then the stock market. Stocks began their march up to 10,000 on the Dow shortly thereafter.

When the Treasury announced this week that they would be purchasing $1 Trillion in assets--Treasuries, mortgages, etc.--those words of Zweig immediately came to mind. The immediate reaction to the news was a monster reversal and rally in the stock market. Jim Cramer was at his manic best right after the news. In the next few days as Congress spent hours and hours discussing the AIG bonuses the market sagged. Nothing like obscuring the real issues to get some free face time--the $165 million is a drop in the bucket.

I think the news that the Treasury is going to buy assets, and keep interest rates low for a long time bears close watching. Often it takes more than a few days for news of this magnitude to get into the market.

Frankly, this is a very bullish development. The big question for me is simple. Is this the news that will help the market consolidate, or is this big big news that sends the market sharply higher. My guess is that we are going to have one monster rally shortly. I could envision the market on the S and P 500 soaring up to 900 or 1000. That would qualify as one heck of a rally.

The best approach in my opinion is to buy stocks that will benefit from inflation. An ETF like MOO would benefit from an increase in inflation (note: I own this ETF).

For those of you that are bearish remember these words--Don't Fight the Tape. For those of you that are bullish take heart--a big bear market rally is coming soon.

Investing Strategy
Martin Zweig's basic stock market strategy is to be fully invested in the market when the indications are positive and to sell stocks when indications become negative. Risk minimization and loss limitation are crucial to his strategy. His book Winning on Wall Street describes how he determines whether to be fully invested or not.

Zweig says, "People somehow think you must buy at the bottom and sell at the top to be successful in the market. That's nonsense. The idea is to buy when the probability is greatest that the market is going to advance". Zweig uses fundamental company data to select stocks to buy while the market is positive.
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