The Week in Review (updated Sunday 05/10/09, 11:59 PM EDT)

May 08— More than one email questioner asked early this week how the Moose could have opted out of such a nice rally in stocks over the past seven weeks. Most long time readers know the answer, but I suspect that there are just as many new or casual new readers who are wondering the same thing. So I will take a circuitous moment to explain.

I read somewhere, early on, that the most successful investors settle on one strategy, with which they personally are comfortable, and from which they rarely deviate. I decided to do that, and being a pragmatist, determined that I would be most comfortable using a strategy comprised of tactical components that appeared to have worked in the past.

My research on technical indicators and previous models based on a century of data pointed to intermediate term constructs as the most promising. Since I don’t have a trader’s hyperactive mentality, nor am I a fan of long term buy and hold strategies, nor am I any longer of the tender age at which I could put greed before fear with reckless abandon, the intermediate term was a better fit. It worked, but more importantly, it made me more personally comfortable. Along the way, I fell into the understanding that timing stocks is greatly simplified when you’re timing everything else too.

In the late eighties, I needed a holistic way to rationally discuss stocks, bonds, currencies, gold, and foreign equities in my newsletter, and found it through Robert Levy’s relative strength work in the 60’s. He used a sub-intermediate time frame (26-weeks) instead of an intermediate one (40-weeks), but it worked. I tweaked it a little, started using it, and immediately began to notice the inter-related nature of the capital markets.

US stocks have gotten most of the media attention in this country forever and a day. It is only recently that investors have started to look at alternative assets in a big way. Some mutual funds have always dealt with alternative assets, but they were opaque, traded end of day, and were often expensive. It wasn’t until ETFs arrived that things really took off in the alternative space.

Ultimately, then, there are two reasons that the model would avoid a solid US stock rally like this one. Either (1) the intermediate trend criteria have not been met, and/or (2) there are better places to put your money. In this instance, both reasons have been valid—so far. The S&P has not cleared its intermediate trend hurdles, and other markets have been more attractive.

Models are nothing more than mechanisms that attempt to standardize disparate situations. Think of it as putting a series of averages together, and then monitoring market behavior against those averages. The most widely used intermediate-term average, for example, is the 200-day, or 40-week. When an asset’s price goes above its 200-day moving average, it is considered bullish. Below it, the asset is considered bearish. If that average alone were your “model”, the S&P would still not be bullish! Even though the index has risen 28% in the past seven weeks, its price is still below that average.

Of course, rarely is there ever an “average” situation. They are usually only recognized in hindsight. In this latest instance, the speed and ferocity of last fall and winter’s stock market crash was unusually atypical— something you might see once every 70 or 80 years. At the January Bottom, the S&P was 40% below it’s 200-day average. That’s a very long way to go to return to intermediate-term respectability, which is why it hasn’t happened yet. To put that in perspective, it was almost twice the “average” medium term deficit after a sell-off.

To date, we are told that this rally appears to have been a fast money phenomenon, predominantly fueled by hedge funds and traders. Intermediate money, in particular mutual funds, has only just begun to take notice. Fearful money, those individual investors who recently ran screaming from the exchanges between September and March, may be out for a long while, if not forever.

It is a fool who walks into a planning meeting with only one scenario. The Moose is one scenario, albeit a pretty good one. There are a variety of other ways to look at the markets, macro and micro, and to make sense of them. Many of those methods get passing mention in this space. When one works, I’m convinced it isn’t necessarily because of the quality of the indicator or methodology. Many times it has to do with the broadness of its appeal. If enough people are making the same assumptions, it can often become a self-fulfilling prophecy.