Revisiting Wall Street’s Bias!

No matter where we are in a cycle an investor listening to Wall Street representatives on financial TV shows, or seeing their advice in financial publications, hears only that they should be buying stocks somewhere, never anything about taking profits, or heaven forbid, repositioning for the downside by selling short, or buying inverse mutual funds and etf’s.

To hear Wall Street tell it, there is no time that it’s wise to sell, no time that it’s wise to take profits. Oh sure, after a big decline has created serious losses in a sector or the overall market, Wall Street’s advice turns to talk of if the bottom might be near, whether it’s time yet to buy the tech stocks, or the financials, or the home-builders again, implying that, although you didn’t hear it from them, there certainly had been a time to sell them.

But that would be market-timing you say. And Wall Street tells us the market can’t be timed. Even after two hundred years of the most successful investors in each generation, hedge funds, corporate insiders, and mutual funds, proving otherwise, too many investors still believe it.

There are forces at work that prevent Wall Street firms from admitting how well market-timing works, even though that is the strategy they use for their own money.

To begin with, there's no profit for Wall Street firms, only problems, if they tell investors when to sell.

 Among the problems, a firm that issues a sell recommendation will reap the wrath of the corporation whose stock they advise selling. They will certainly not get their share of the company's future investment banking business. In addition, mutual funds that own the stock will be angry, and mutual funds are far bigger customers of brokerage firms than are individual investors. When the time comes to sell a stock, or a lot of stocks, mutual funds want to quietly unload their portfolios while individual investors are still buying. Otherwise who could they sell to?

It might help investors realize the game Wall Street plays if we recall the late 1990s.

In 1997, Wall Street was pushing the Internet sector hard, which was a good move that worked until 1999, pulling investors into those stocks, with most making good paper profits. But investors were not told to take their profits in 1999. It was only investors thinking for themselves, and noticing that those who were recommending Internet stocks, including the founders who dreamed them up, the venture capitalists who financed them, and the institutions that were favored with the shares in the initial public offerings, were selling them as soon as lock-up periods ended. They were not holding them for the long-term growth that was promised.

 Sure enough, the Internet stocks crashed in 1999, with no forewarning from Wall Street, except their own prior selling. The average Internet stock plunged 65% in a matter of months.

 Wall Street quickly changed its story. It was the high-tech stocks that 'enable' the internet, those that provide the software, fiber-optics, switching networks, and the like, that were the place to be. After all, the internet is here to stay. So, no matter whether internet companies themselves make a profit or not, the high-tech sector would thrive and grow for decades.

 So the high tech sector, already over-valued, soared into a bubble by March of the next year, 2000. Then, again with no warning from Wall Street, the bottom dropped out. The Nasdaq plunged 34% in a month, and was down 67% twelve months later.

And once again, while Wall Street institutions were still touting high-tech as the place for investors to have their money, the institutions themselves had been moving the opposite way with their own money.

As I reported in this column in April, 2000, “The statistics show that 81% of the selling in the tech sector over the last 6 weeks, (and it was considerable, with volume on the Nasdaq hitting numerous new daily records), was by Wall Street institutions, while public investors remained confident. Mutual funds have reported very little in the way of selling or redemptions by individual investors. Brokerage firms say they also see little increase in selling by individual investors.”

So Wall Street obviously knows when to sell, knows the market can be timed, but won't ever tell you when to sell. That's a decision you have to make on your own.

The market can be timed, and certainly not only by Wall Street institutions, mutual funds, hedge funds, and other so-called ‘smart money’. My Seasonal Timing Strategy (STS) has more than tripled the S&P 500 and Nasdaq over the last nine years (since it was introduced publicly in my 1999 book Riding the Bear – How to Prosper in the Coming Bear Market), with no down years and only 50% of market risk. It’s also well ahead of the market so far this year, with the Dow having fallen 8.5% since our STS exit. (We have the Aggressive Seasonal Timing Strategy 50% positioned for the downside, so far making more profits from the downside).

And in my Market-Timing Strategy my technical indicators triggered a sell signal four weeks ago, and I had my subscribers begin taking profits from upside positions, and move into downside positions, reaching 50% downside positions, 20% cash, and only 20% left in upside positions two weeks ago.

I may be wrong. It wouldn’t be the first time. But the fact that Wall Street says it’s not worried, and is still recommending retail stocks, financial stocks and emerging markets to investors, even as they plunge lower, is no reason for me to think so.

Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beating the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!