Looking Back to See Ahead

04/11/2012 8:45 am EST


Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

It was 35 years ago when my father started his newsletter, and applying the lessons learned at my father's side through the years, it gives us valuable perspective on how we can take advantage of today's—and tomorrow's—markets, observes Doug Fabian of Successful Investing.

Talk about perfect timing. My dad, Dick Fabian, started the Telephone Switch Newsletter in April 1977—two years before the two-decade-long roaring bull market of the 1980s and 1990s.

Being a bull in stocks during this time meant that it was a lot easier to make money than it had been in the decade-plus leading up to this bull. Consider that from 1966 to 1979, the US stock market suffered one of its longest slumps in history. The Dow first reached 1,000 in January 1966, and it didn’t break out above 1,000 significantly until 1982.

The period of time when the market goes nowhere is called a secular (or long-term) bear market. I think that since 2000, we’ve been immersed in a similar secular bear market. If you look at the market from 2000 through today, we see that the S&P 500 has been virtually flat. The Dow is up about 1% over the past 11 years.

The lack of upside in stocks over the long term clearly shows that we are in a secular bear market once again. This is a fact that all Fabian subscribers must keep at the forefront of their minds until this secular bear market has come to an end.

During secular bear markets, downtrends are more frequent, while uptrends typically are shorter in duration. The more problematic issue, especially for the Fabian Plan, is that whipsaws become more frequent—along with frustration on the part of investors. A whipsaw occurs when we get a buy signal in the Fabian Plan, but soon thereafter the volatility in the market prompts a sell-off that forces us out of equities.

Admittedly, it’s been tough to make money in this market, and it’s been easy to lose money. I am very happy that for more than the past decade, we have offered advice that has preserved capital and not subjected investors to the huge downward spikes that occur in secular bear markets.

The recent decade has been a lot different than the markets of the 1980s and 1990s, where we saw the average Fabian Plan buy cycle last 17 months. The average gain per cycle during those years was 27%. The accuracy of the plan in identifying uptrends was almost 70%. This means that whipsaws, or “false” signals, still happened, but they were few and far between.


The compounded rate of return for the 23 years from April of 1977 through March 2000 was over 18%. We know that the stock market peaked in March 2000. Since then, we’ve been in this cycle of short-term bullish spikes within the wider secular bear market.

Also since 2000, there hasn’t been a single year that the Fabian Plan did not receive a false signal, aka a whipsaw. Just last year, the plan had five signals, three sells and two buys. In 2010, we had two whipsaws in the span of two months. Needless to say, this secular bear market has not been kind to the Fabian Plan.

Because of the vulnerability of the Fabian Plan to false buy signals and whipsaws during secular bear markets, I have made the decision to manage the plan with controlled allocations, based on my best judgment, regarding the market and conditions in the economy that affect equities.

Admittedly, my current call to avoid allocating to equities so far has been a bit too conservative. However, history has shown that secular bear markets are prone to sharp pullbacks, and this risk is what I think is critical for investors to avoid.

In retrospect, it’s easy to say we should have allocated to stocks earlier this year. During future buy signals, we plan on doing just that. But keep in mind that as long as we are in a secular bear market, we will be susceptible to whipsaws.

Also keep in mind what I explained at the beginning of this letter, namely that the lost opportunity so far this year is much easier to digest than actual lost money.

What’s Our Next Move?
Given our current stance on the equity markets, it’s natural to ask what our next move might be. I am of the opinion that there are several great buying opportunities in the works right now.

Perhaps the best of them is in gold and gold mining stocks. The gold sector saw a huge run higher through the first two months of 2012. But since March, we’ve seen a big sell-off in the price of the yellow metal, as well as in the value of the stocks tied to its fortunes.

I know we have been pounding the table for months now that there is a great buying opportunity coming in gold. In December, we released our special report, The Complete Guide to Gold Exchange Traded Funds. In that report, we told you that when gold is under pressure to undergo a correction, we usually see some very aggressive selling that takes prices down very fast, and in a very big way. This situation is exactly what has happened in March.

The next move is to wait for gold to settle down, and then to begin a rebound that takes it back above its medium-term, 125-day moving average. This indicator is what the Fabian Gold Plan is based around, and it tells us when it’s time to get back into gold and/or gold mining stocks.

From a fundamental standpoint, every driver of gold prices remains firmly in place. They include:

  • various quantitative easing policies from the Federal Reserve, as well as the central bank’s insistence on keeping interest rates at near-rock-bottom levels through 2014
  • high demand for gold jewelry from cash-rich emerging market nations, such as China and India
  • and the perception that gold can act as a safe haven during times of global economic uncertainty

Those factors still make funds tied to gold’s fortunes a great bet, once the next wave higher begins.

Other moves on our radar right now include the potential of using bear-market ETFs to take advantage of what I think will be a strong correction in this overbought equities market. In the weeks leading up to this writing, I’ve seen a pullback in the value of stocks in the emerging markets, and in large-cap international stocks.

The iShares Emerging Market (EEM) fell about 3% in March, while the S&P 500 was up 3%. If we see a breakdown in international equities, we may use inverse ETFs to get some tactical exposure to this downtrend.

Of course, we still hold a 15% allocation to the US dollar via the PowerShares DB US Dollar Index Bullish (UUP). The fund remains above its 200-day moving average. The dollar enjoyed a strong bounce off of its 200-day average when the Fed recently announced that it would not be launching a new bond buying program anytime soon.

I want you to continue holding the dollar here, as I suspect it will act as a safe haven during an international market pullback.

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