Stock Smarts: Time to Market Time?

A lot of investors have made a lot of money while everyone else was losing their shirts the last few years. How do they do it?

Market timing.

If you put $10,000 in the Dow three years ago, you would have $8,230. But that same $10,000  invested on July 23, 2002 through Aug 22, 2002 would have turned into $11,750. And $10,000 invested on Oct. 9, 2002 through Nov. 27, 2002 would have jumped to $12,260.

So with huge swings like these, is it riskier not to time the market?

Jonas Max Ferris of Maxfunds.com says you should give market timing a try, but he says his approach is not about predicting where the market will go and making short-term trading decisions.  He says if you actively rebalance your asset allocation, the market itself will help you to market time.  If, for example, you had 50 percent of your money in stocks and 50 percent in bonds and stocks lost ground, but bonds gained ground, you could end up with an imbalance of 40 percent stocks to 60 percent bonds. When you rebalance that allocation back to 50/50 you will take profit in the bonds-- selling them at a higher point in the market--and use that profit to buy more stock at a lower price.  He says the strategy takes you out of areas of the market that have rallied and could be overbought, and helps you buy into areas that are undersold and provide good value.  This way you are not aggressively trading the market but you are doing some selling at higher points and taking advantage of lower prices elsewhere while maintaining your position in the market.

Jonathan Hoenig of Capitalistpig Asset Management says rebalancing takes you out of strong positions and he doesn’t recommend it as a strategy.  He prefers to continue to bet on strength where he finds it.  He uses charts to find areas of the market that are trending higher and bets long.  As for timing the market, he doesn’t recommend that the average investor try to capture small fluctuations.  He prefers to bet on broader trends, and lately the trend has been down for larger cap stocks, so he is betting against that group by shorting the Dow.

Wayne Rogers of Wayne Rogers & Co. says there are all kind of ways to time the market.  You can use stop-loss orders that take you out of a losing position, or write a covered call to hedge against a stock you hold when you feel it could lose ground.  But he does not think it’s a good idea to try and jump in and out of the market with all of your assets to try and capture small moves.  He prefers to hold good companies with solid fundamentals and use hedging strategies when he thinks those stocks may be over bought.

Hilary Kramer of Montgomery Asset Management says it’s tough time this market because the war is moving it in directions that are impossible to predict.

Dagen McDowell of FOX Business News agrees with Jonas that rebalancing is a good conservative approach to timing the market.

Be$t Bets

If you’re trying to make money by timing these big swings in stocks you need to know when to buy, and -- as millions have learned the hard way -- when to sell.  Our group looked at three ways to play the broader market averages and the prices at which they would buy and sell them.

Trading The Market!

Diamonds (DIA) – Track the Dow Jones Industrials Index
SPDR Trust
(SPY) – Track the S&P 500 Index
NASDAQ 100 Trust
(QQQ) – Track the Nasdaq 100 Index

Wayne says... Diamonds
Buy at $79
Sell at $89
Friday's close: $80.24

Wayne adds that while he would buy at $79 he would get out if it drops $2 below that point, but otherwise he would take profit at $89 – the point at which he thinks it could be over bought and could fall again.  Jonathan is short the Diamonds and he thinks the trend is still down.  He would not bet long on these until he sees the downtrend reverse.  He says he would need to see 9,000 to 9,500 hundred on the Dow before he would bet long on the Diamonds.  Hilary says she’d prefer to buy individual stocks right now rather than the Dow.

Hilary Says... SPDR Trust
Buy at $75
Sell at $100
Friday's close: $85.21

Hilary says she wouldn’t buy SPDR’s unless there was a significant dip which she says is possible during the prolonged build up to war. Jonathan says the trend here is down not up and he wouldn’t buy until that changed.

Jonathan Says... Nasdaq 100 Trust
Don't Buy!
Friday's Close: $25.17

For the same reasons he wouldn’t buy the Diamonds and SPDR’s, Jonathan says he would stay away from the QQQ’s until they saw a significant move up.   He says that while the Nasdaq 100 has seen its ten biggest up swings ever during this bear market, the long-term trend is still down, and he’d wait until there was more evidence that that had changed.  He says it would take at least a 50 percent move up to convince him.   Hilary says she is wildly bullish on the QQQ’s and she’s a buyer right where they are now.  Wayne says the QQQ is too narrow an index right now and it would make him too nervous too own it.

Mutual Fund Face-Off

Jonas: T. Rowe Price Japan Fund (PRJPX)
1-Year Return: DOWN 8.6 percent (as of 2/20/03)
Minimum Investment: $2,500
Expense: $14.80  for every $1,000 invested

Dagen: iShares Russell 1000 Growth (IWF)
1-Year Return: DOWN 28.9 percent (as of 2/20/03)
Minimum Investment: $34.50
Expense: $2.00  for every $1,000 invested

Money Mail

Wayne, Dagen and Jonathan capped off the show by answering some of your questions.

Question: What are your thoughts on buying defense stocks now?

Wayne says that defense stocks statistically do better than the broader market between February and September, and the theory behind those numbers is that they follow the Federal budget.  He says he is not necessarily in favor of buying big defense stocks right now, but if you are shopping, he says Raytheon (RTN), Northrop Grumman (NOC) and United Technologies (UTX) are at prices that look good right now.  Dagen suggests buying Fidelity Select Defense & Aerospace (FSDAX) if you are in the market for defense stocks.  Jonathan says it’s a weak group, and he’d avoid it.

Question: Why hasn't Shell (SC) followed energy prices?

Jonathan says these big oil companies are just not working.  If you want to play oil prices, he says the energy trusts are a better way to go.  He suggests San Juan Basin Royalty Trust  (SJT).  Wayne agrees; he likes Plains All American Pipeline (PAA).  He says some of the bigger oil companies are just too big and poorly managed. Dagen points out that Shell has a 4 percent dividend that at least gives you some downside cushion.

Question: What are good stocks to buy for children?

Dagen suggests buying Vanguard Total Stock Market Index (VTSMX) to get a lot of stocks instead of just a few.  Jonathan says put money in savings or even some gold and wait.

Question: As computers get more powerful, it seems people won't have to upgrade as much. Is that a sign to sell computer stocks like Dell (DELL) and Hewlett-Packard (HPQ)?

Wayne says he thinks both Dell and Hewlett Packard are priced correctly right now.  He says he wouldn’t sell, nor would he buy here, but he is holding Dell which he says is a wonderful company. He thinks it’s a good company.  Dagen agrees. Jonathan says if you own them, put stop loss orders on them and let the market take you out.

Transcripts

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