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For Stovall, the Song Remains the Same

S&P Expert’s Seven Rules

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Sam Stovall has seen it all before. As the chief investment strategist of Standard & Poor’s Equity Research, he lives among historical market data and spots trends that he hopes will help investment decisions.

Contrary to the typical cries of “this time, it’s different” when markets go through periods of marked turbulence, Stovall clearly conveys a sense that there really is nothing new under the sun. In fact, at one point during BetterInvesting’s interview with him in mid-April, he quoted the Herman’s Hermits song by saying, “Second verse, same as the first” to sum up his views on bull market recoveries.
“Try to use history as virtual Valium,” he says. “Pull-backs and corrections are normal events. Use most market declines as good buying opportunities.”
Of course, by the time June rolls around, the market is likely to look a little different from its status in April. As this issue went to press, the market was experiencing turbulence after a wild day of trading activity apparently caused by trading-program errors and because of concerns about the European economy.
But members can discover Stovall’s thoughts for themselves by seeing him speak at the BetterInvesting National Convention, which will be June 10-13 in St. Louis. He’ll discuss “Eliminating the Greatest Impediment to Long-Term Investing Success (Your Emotions)” and provide a forecast of the second half of 2010 on Saturday, June 12. (See Clubs Will Take Flight With St. Louis Spirit for more information.)
As for what we’ve seen since the market hit a low point in March 2009, Stovall views the developments as a three-stage process. The typical bull market rebound, he says, includes the following: recover, retest, resumption. If the market pattern continues, we’ll have seen a fairly typical recovery and retest already, with resumption the final stage.
The initial recovery might have been on the high side. By mid-April the Standard & Poor’s 500 index had gained 76 percent over the past 13 months, compared with 30 percent typically. The average retest is 7 percent. In the second year of a bull market, there are additional gains, though the magnitude might be less.
“In both the downturn and recovery, the only thing different was the absolute change,” Stovall says. “The average bear going back to all bears was 38 percent. The decline of 57 percent was a lot more dramatic.” In terms of how various sectors fared, the result was typical.
Sectors, in fact, play a key role Stovall’s new book, The Seven Rules of Wall Street: Crash-Tested Strategies That Beat the Market (McGraw-Hill, 2009). In the book, Stovall details what he’s learned by crunching market data. His seven rules, which are connected to strategies he outlines in the book, include:

•    Let Your Winners Ride, But Cut Your Losers Short. Winners tend to continue beating the market, and they also beat the losers seven out of 10 years.
•    As Goes January, So Goes the Year. The first month of the year tends to set the tone for the rest of the year.
•    Sell in May and Then Go Away. The market often goes on vacation along with everyone else in the summer. At this time investors aren’t spending as much time with their portfolios, Stovall says. Inflows of investment funds also are heavier at the beginning of the year because of tax refunds, bonuses and funding of individual retirement accounts before the April 15 deadline. But some sectors, such health care and staples, tend to outperform others during these months.
•    There’s No Free Lunch on Wall Street (Oh, Yeah, Who Says?). As some sectors rise, others fall. Investors can benefit from understanding the correlations.
•    There’s Always a Bull Market Someplace. “Not all investors are like Fred Astaire on the dance floor,” he explains in his book. “For some, it may be best to let the market take the lead.”
•    Don’t Get Mad — Get Even! Investors in index funds or exchange-traded funds can use equal-weighted indexes at times to improve performance.
•    Don’t Fight the Fed. Certain sectors do better than others when the Federal Reserve Board cuts interest rates.
For BetterInvesting members who favor selecting individual stocks, “the best piece of investment advice I have is from the Clint Eastwood movie ‘Magnum Force’: A man has got to know his limitations,” Stovall says. Emotion often gets in the way of practicing sound investing. “For me, I have to have rules-based investing.”

Adam Ritt, Editor, BetterInvesting Magazine.

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