Making MoneyMaking Moneyin Today’s Marketin Today’s Market

Bottom FishingBottom Fishingfor Big Run-Upsfor Big Run-Ups

A Timing and Stock Selection StrategyA Timing and Stock Selection Strategyused for about one month,used for about one month,

two or three times each yeartwo or three times each year

Presented by Herb Geissler, Managing Director of The St.Clair Group

And Leader of Rational Investing Special Interest Group of Pittsburgh AAII

Good news: Will show you how to profit during bear markets

Bad news: Bear markets likely to persist for 10 more years

Ugly news: Doing nothing can yield the worst results

Primary Determinants Primary Determinants of Investment Performanceof Investment Performance

Widely held notion that asset allocation policy explains more Widely held notion that asset allocation policy explains more than 90 percent of investment performance between mutual than 90 percent of investment performance between mutual fund managers (with stock selection the remainder) is now fund managers (with stock selection the remainder) is now disputed by Ibbotson Associates disputed by Ibbotson Associates

Ibbotson’s research now demonstrates that “about Ibbotson’s research now demonstrates that “about three-three-quarters of a typical fund’s variation in time-series return comes quarters of a typical fund’s variation in time-series return comes from general market movementfrom general market movement, with the remaining portion split , with the remaining portion split roughly evenly between the specific asset allocation and active roughly evenly between the specific asset allocation and active management (of stocks held).”management (of stocks held).”

March/April 2010 issue of the Financial Analysts JournalMarch/April 2010 issue of the Financial Analysts Journal

Clearly, being in the right direction (bull vs bear) is far more Clearly, being in the right direction (bull vs bear) is far more important than selecting the best industries or best stocksimportant than selecting the best industries or best stocks

There is only one side of the market – and it’s not the bull side or the bear side, but the right side.

- Jesse Livermore

Is the Big Bear Ready Is the Big Bear Ready To Go Into Oblivion?To Go Into Oblivion?

Bears Come in 3 SizesBears Come in 3 Sizes

Twice each century,Secular Bear markets drop more than 35%during depressions requiring capacity corrections

Twice each and every year,Seasonal Bear markets typically drop 5 to 15%

Twice each decade,Cyclical Bear markets drop 20 to 35%during recessions requiring inventory corrections

Mapping Market TerrainMapping Market Terrainto anticipate bottomsto anticipate bottoms

““20” year cycle of lean and fat years20” year cycle of lean and fat years Presidential Cycle of pump-primingPresidential Cycle of pump-priming Annual Seasonal cycle in Spring & Annual Seasonal cycle in Spring &

FallFall

Buy and Hold is in a Buy and Hold is in a ComaComa

with flat returns likely for ten more yearswith flat returns likely for ten more years

Invest (buy & hold) during strong bull marketsTrade (buy & fold) during consolidating decades;

Requires smart timing and stock selection and disciplined entry and exits

Driven by demographics

17.6 year cycle increases two to ten-fold,

then wobbles going nowhere during next 17.6 years

During next 10 years, must make money on the wobbles

Cyclical Economic ForcesCyclical Economic Forces Drive Market Direction Drive Market Direction

Earnings Earnings perper share share

InflationInflation

RateRateInterestInterest

RatesRatesStock Stock PricesPrices

MarketMarket

ConditionsConditions

UpUp UpUp DownDown UpUp Bull market beginsBull market begins

UpUp DownDown DownDown UpUp Bull market thrivesBull market thrives

UpUp DownDown UpUp UpUp Rarely happensRarely happens

UpUp UpUp UpUp UpUp Bull market endsBull market ends

DownDown UpUp UpUp DownDown Bear market beginsBear market begins

DownDown DownDown UpUp DownDown Rarely happensRarely happens

DownDown DownDown DownDown DownDown Bear market thrivesBear market thrives

DownDown UpUp DownDown DownDown Bear market endsBear market ends

Truth Table in VectorVest Views on 3/21/2003 for Economic CycleTruth Table in VectorVest Views on 3/21/2003 for Economic Cycle

Currently, we are in a bullish cyclical period within a secular bear marketWhile industry has cut back debt and cost-excesses at a remarkable pace, tax and interest rate increases in 2011 will stifle economy

It's profitable to be in the market It's profitable to be in the market when the S&P500 EPS is rising andwhen the S&P500 EPS is rising and to hunker down when the EPS is to hunker down when the EPS is

fallingfalling

Presidential CyclePresidential CycleIs Encouraging for 2011Is Encouraging for 2011

DJIA Gains during Presidential Cycle

sincesince 18861886 sincesince 19501950

% up % up YearsYears

Annual Annual GainGain

% up % up YearsYears

Annual Annual GainGain

Pre-ElectionPre-Election 79%79% 11.1%11.1% 100%100% 18.7%18.7%

ElectionElection 6969 8.48.4 9191 10.110.1

Post-ElectionPost-Election 5252 5.05.0 4545 2.02.0

MidTermMidTerm 5555 4.04.0 5555 4.64.6

For Cyclical Periods,For Cyclical Periods, 12 Month Moving Average 12 Month Moving Average

Pinpoints ReversalsPinpoints Reversals

During past 10 years, would have averaged 6.6% annual gain with 11.5% max draw-down

vs 1.2% gain and 52.6% mdd with Buy & Hold

Explained more fully in Dynamic Allocation book

Two Corrections Each Two Corrections Each YearYear

Wait for that FAT pitch

Warren Buffet

Bottom-fishing lowest momentum Bottom-fishing lowest momentum stocks produced spectacular stocks produced spectacular

resultsresults

Jail Break gained 201% between 3/9 and 4/17, as SPX gained

27%

Key Elements inKey Elements inBottom Fishing StrategyBottom Fishing Strategy

1.1. Identify “juicy” low points in marketIdentify “juicy” low points in market

2.2. Determine when bottoming is overDetermine when bottoming is over

3.3. Find “strongest midgets in the room”Find “strongest midgets in the room”

4.4. Enter positions cautiously, with a tailwindEnter positions cautiously, with a tailwind

5.5. Exit before the party is overExit before the party is over

6.6. Enter momentum strategy for more gainEnter momentum strategy for more gain

7.7. Exit momentum to assure cash for fishingExit momentum to assure cash for fishing

8.8. Wait patiently for the next “fat pitch”Wait patiently for the next “fat pitch”

I made the most money in the waiting.- Jesse Livermore

SPXA50R Reveals SPXA50R Reveals The Really Juicy PointsThe Really Juicy Points

Bottoms Are Juicy When Bottoms Are Juicy When Less Less Than 1/3Than 1/3 in S&P 500 are over in S&P 500 are over

their MA50 their MA50 Good Entries and Exits when SPXA50R crosses its MA20

Vector Vest Has ManyVector Vest Has ManyBottom Fishing StrategiesBottom Fishing Strategies

Historical Results were Historical Results were Spectacular,Spectacular,

even with simple one-month holdeven with simple one-month hold

4 out of 5 forays were profitable4 out of 5 forays were profitable Winning forays were 3-4 times more Winning forays were 3-4 times more

profitable than the few losersprofitable than the few losers Small Cap strategies averaged 25% Small Cap strategies averaged 25%

gain within 1 month, beating Jail gain within 1 month, beating Jail BreakBreak

Small Caps were profitable 90% of Small Caps were profitable 90% of time with average gain of 30% in time with average gain of 30% in

one monthone month

Thanks to Earl Novendstern for the analysis

During past four years,During past four years,

small cap bottom-fishing small cap bottom-fishing gained gained 65%-90% per 65%-90% per yearyear

2 or 3 forays each year, held for one month per foray

Stops Help Somewhat,Stops Help Somewhat,But Must Be RefreshedBut Must Be Refreshed

FINVIZ.comFINVIZ.com

Enter With TailwindEnter With Tailwind

Buy positions after “amateur hour”, only if Buy positions after “amateur hour”, only if market indexes are moving upmarket indexes are moving up

Premature entries are more costly than a Premature entries are more costly than a delay of a daydelay of a day

Buy “half position” on MA10, balance at Buy “half position” on MA10, balance at MA20MA20

But if $SPXA50R > 50%, it’s too lateBut if $SPXA50R > 50%, it’s too late Panics end more abruptly than “climbing the Panics end more abruptly than “climbing the

wall of worry”wall of worry”

Exit When Comfortable,Exit When Comfortable,before the party endsbefore the party ends

Hold for One Month or…Hold for One Month or… Exit all when SPXA50R < MA20 or…Exit all when SPXA50R < MA20 or… Exit each stock at 30% gain or….Exit each stock at 30% gain or…. Exit each with Chandelier stop or….Exit each with Chandelier stop or…. Exit each at its’ MACD crossover Exit each at its’ MACD crossover Then switch into a Momentum Strategy

Knowing When Knowing When You May Be WrongYou May Be Wrong

1.1. When SPXA50R fails to cross its MA20 When SPXA50R fails to cross its MA20 within a few days of crossing MA10within a few days of crossing MA10

2.2. When foray loses more than 7% When foray loses more than 7% during first week during first week

3.3. When subsequent decline exceeds 5% When subsequent decline exceeds 5% of initial investmentof initial investment

Re-evaluate entire market environment and VIX and SPXA50R to decide

Exit When Drops Below MA20Exit When Drops Below MA20to Preserve Cash for Bottom to Preserve Cash for Bottom

FishingFishing

RecapRecapKey Elements inKey Elements in

Bottom Fishing StrategyBottom Fishing Strategy

1.1. Identify “juicy” low points in marketIdentify “juicy” low points in market2.2. Determine when bottoming is overDetermine when bottoming is over3.3. Find “strongest midgets in the room”Find “strongest midgets in the room”4.4. Enter positions cautiously, with a tailwindEnter positions cautiously, with a tailwind5.5. Exit before the party is overExit before the party is over6.6. Enter momentum strategy for more gainEnter momentum strategy for more gain7.7. Exit momentum to assure cash for fishingExit momentum to assure cash for fishing8.8. Wait patiently for the next “fat pitch”Wait patiently for the next “fat pitch”

Any Questions?Any Questions?