During the Hot summer days of 2007 everything was great on Wall Street, stocks continued their steady march up, Jobs were being created, inflation was low, the Fed had no plans to change interest rates and even one Famous Hedge Fund manager interviewed in Forbes magazine claimed all is good and he expected low double digit index returns for 2008.
Remember this, when everyone is content and everyone believes something is going to happen for sure or the market will continue on the same pace as always, PAY ATTENTION! The market has a way of doing what it wants, when it wants. I’ve studied every Bull and Bear Market back to the crash of 1907. I also know that the average Bull market typically lasts an average of 3-4 years before it rolls over, corrects and expands again. At this point we’ve been on the ride for 4+ years and some warning signs are starting to show up. Each investment that I’ve made month after month continues to make me less and less each time. Mortgage defaults are starting to pop up and Europe is having some financial issues.
By the end of July through Mid August we got a ton of Distribution days and the market selling off pretty hard. Distribution days are down days with higher volume than the previous day’s trading. This is a sure sign of Big Money starting to sell stock. This is Mutual Funds, Hedge Funds, Pension Funds, not Grandma and Joe Shmoe down the street. This is a huge Red flag. Coupled with the fact that the current Bull Market is 4+ years old and the stocks that I’ve been buying are showing lower and lower profits was enough for me to make some changes for my clients. I managed over 300 client’s portfolios and began pretty quickly to convert their investments to Money markets, Bonds and cash equivalent investments. My clients and my own accounts were completely out of harm’s way by Mid August 2007.
You know what happened next? The freaking market went up! Oh, sh*t, did I miss read this? Did I just keep my clients from making real money? I had a long 2 months and about a 1000 phone calls questioning me why we moved to cash and were missing out on all of these moves. It was gut check time. I studied everything I had all day and every night trying to find out how I was wrong. The thing that gave me confidence was my stock list. Fewer and fewer stocks that met my criteria showed up and the market was advancing on lower volume, meaning less and less “people” were buying and the prices went up. This is the opposite of how it looks when the market is healthy. The market, when healthy goes up on larger volume not consistently lower volume.
Finally, Mid-October, one of the biggest trade days in a long time. The market actually hit another new high and reversed all the way into negative territory for the day on HUGE volume. Distribution Day number 1. We got 4 more Distribution days over the next week and half. In early November the market really started to fall apart and we all know the rest of the story. Rent “The Big Short” and you’ll know just how scary this time was for our country.
I’d like to say in closing that I had no idea how bad the housing market was, I didn’t know how exposed the banks were with Sub-Prime Mortgages or even how bad the economy was about to get. I will say that I’ve seen these markets forecast and tell us what is likely to happen year after year, Bull Market after Bull Market just by applying simple rules, following a simple strategy that once learned and practiced has helped me be on the right side of every market since I’ve been investing. No I never buy at the very bottom, no I never sell at the top, but I get in and choose the right stocks at the right times and I keep most of what I’ve made and get out before the bottom eventually falls out.
Until next time, Be the smartest Investor in the room.
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