Buy and Hold Investing

I have been reviewing the credibility of the case for the Buy and Hold for the Long Term approach to investing.

As I understand it, the thesis goes something like this. No one can consistently forecast the stock market so it can only be viewed as a series of random events. The exception is that the market history supports the view that the markets always recover from a bear market. Therefore, if one buys "good stocks" and holds for the long-term, then the investor will eventually receive a good return on the market investments. The trick is to ignore market flucuations no matter how deep or how prolonged they may be.

This investment philosophy can be combined with dollar-cost-averaging, which is also based on the belief that it is impossible to time the market. One buys market equities/funds, say every month with a fixed sum. In that way...as the prices fluctuate one buys more at lower prices and less at higher values.

There is no question, as long the country remains in business the index will come back eventually and surpass the pre-bear high. And, dollar-cost-averaging ensures that for prolonged bear markets one will be buying some shares at lower prices.

The whole think hinges, in part, on not picking stocks that never recover from the bear market and unfortunately that does happen. An index fund will eliminate that risk. But there is another little known risk. Unfortunately, the Buy and Hold approach only looks attractive if one "models it" using carefully selected portions of stock market history. In other words with good "market timing".

There have been periods of time when the market would have tested the patience of anyone subscribing to the buy and hold approach. The periods of market history I refer to are the 1929-1954 and the 1968 to 1982 time periods. The markets, as defined by the DIA Index, took 25 years to recover after the 1929 crash. And, the ~1968 to 1982 time period although a less severe bear in terms of depth (-45 % compared to the -89 % loss of 1929) but it was a time period where the market went sideways for about 15 years.

It is easy to show that for these two time periods, a lump sum, that was invested at the pre-bear peak, would have performed much better had it been in a nominal rate GIC. The green lines on the graph of the DJIA show a few recovery times, including the two mentioned above.

"GM considering Chapter 11 filing"

This headline may be just the excuse the stock markets have been waiting for. Even the suggestion of this has the potential to create a run for the exit in any related stock.

The chart for GM shows that, at least for this stock, the bear market actually started at the burst of the dot.com bubble in 2000. Some other stocks also started their decline back in 2000.

This news also comes at a time when the markets are technically poised so that they have "the potential" to fall quite quickly, at least in the short term. If that were to happen then this could create sufficient downward momentum for all indexes to break below their Nov. lows. Some people view this low as a technical level of support. A drop below the Nov. lows would be viewed as the next important step in the bear market. Some who bought since Nov. thinking a big rally was at hand or the end of the bear had been seen may sell to cut their losses.

This is just speculation on my part but it is fun to guess which way "the crowd" will run.

TD Toronto-Dominion Bank (TSX)

TD Bank continues in the bear trend. It recently broke below the November low, as did Royal Bank and The Bank of Nova Scotia. The Bank of Montreal has not done so yet but it may be a safe bet it will.

Too soon to buy Canadian Bank stocks. The P/Es are still in the 8-10 range.

SBUX Starbucks Corp

I see that Starbucks will be selling an instant brand of their coffee. Not sure if that will make much of a difference for them.

The stock price looks like it will continue lower, below the Nov. low of $7. A nice example of how stocks move in trends. As long as the price stays to the left of the trendline, the bear trend is still in effect.

CNR Canadian National Railway Stock...lower lows expected Feb. 11, 2009

I believe that earlier I mentioned that the US DJTA Index, the Transports, had already broken below its November low. This lead me to look on the Canadian side of the border to see if there was a Canadian Stock that one might expect to see doing the same thing.

Sure enough, CNR was following the same playbook. CNR had a nice 14 year bull market, running up from about $5 to a high near $60. The trend has now changed from an upward bull market trend to a downward bear market trend. A simple 4 year trend is shown. This action by CNR is totally consistent with everything else going on these days.

So far the bear trend for CNR has retraced about 35 percent of the bull. Don't be surprised to see it hit ~$26 or lower before this bear market is over. The P/E = 11, still too high for the bottom of a severe bear market.

TSX Capped Financials Index...the Canadian Canary in the Coal Mine?

The TSX Capped Financials Index, the one that includes all the Canadian banks like Royal Bank etc. has recently broken below it's November low. It has only done so "by a hair" but that is significant from a technical point of view. It all goes back to Elliott and the limit of the second wave. In addition the wave pattern is consistent with just a pause in a continued downtrend.

I know a lot of people have their hopes up for an end to the bear at the November lows, or at least a large temporary bear rally at this time. However, if anything, I continue to see more and more data predicting a near term collapse of markets to lower levels.

By near term I mean it could happen this week or a few months from now. This sideways pattern could continue to stall out the markets for some time to come. The timing of these things is always the biggest part of the mystery.

Wish I had better news.

DJTA Index...Canary in the Coal Mine?

The DJTA Index...broke below its November low this morning. This may turn out to be a significant early warning sign for the US - and perhaps other world wide stock markets. This event will likely make the daily news soon.

After some of the large cap components like UPS and FDX recently broke new lows, the Dow Transport Index broke below it's November low this morning. This appears to eliminate any possibility of an EWP wave two correction as part of a larger rally that many have hoped would occur at this time.

I also see similar wave and volume patterns in the other US and Canadian Indexes, suggesting that they will "most likely" follow on the heels of the DJTA Index. The volume patterns for the TSX Comp and Nasdaq are not as well defined as the others but it's there as well.

The DJTA Index may turn out to be this months canary in the coal mine. If the DJIA Index also breaks below it's November low then this we create the classic and time proven Dow confirmation of a continuation of the current trend. The current trend is a bear market downward trend. In other words, a technical analysis confirmation that the bear has not ended.

From a practical market monitoring point of view this event also suggests that the trendlines can now be adjusted as shown. I have shown them for UPS and the Dow Transport Index. The most exposed point of the recent sideways move now becomes the last anchor point for the most current trendline shown here. This new boundary becomes our trendline going forward.