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Market Cycles Tell Market Direction

- Alan Lavine and Gail Liberman

Stock analysts that look at trends say the current pull back in stock prices will lead to higher returns for the rest of the year. Others say the long-term trends are best for gold and Asian stocks.

Jeffrey Hirsch, editor of the Almanac Investor Newsletter, Old Tappan, N.J., says a healthy correction finally hit the stock market over the past couple of months. Small company stocks pulled back about 10 percent from their highs. Meanwhile, blue-chip stocks lost 6 percent.

"The market was poised for pull back and recent terrorist fears and political news were only the catalyst," he says. "Our outlook near term is to play it cautious and not chase stocks. Use the expected bounce off of the current correction to take some profits."

Hirsch adds that corporate earnings are strong. Plus, there should be a lot of positive earnings surprises over the next three months.

Others see long-term investment opportunities in gold and Asian stocks. Walter Rouleau, editor of Growth Fund Guide, Rapid City, S.D., says gold is in the midst of a bull market that could last several years.

"Gold remains very cheap on an historical basis, relative to the S&P 500," he says. In Asia, he believes that Japanšs stock market is rebounding from a super bear market low. The Asian markets could go through a correction before heading higher in the near future. Some of the open-end mutual funds Rouleau has include: Gabelli Gold, Tocqueville Gold, Matthews Asian Growth & Income, Matthews Pacific Tiger Fund and Matthews China Fund.

He also owns closed-end funds, which sell a fixed number of shares and are traded on the stock exchange. Those funds include the Korea Fund and the Thai Fund.

Rouleau recommends that investors hedge their stock fund investments. They should own a money fund and stock funds that perform well when the stock market declines. His conservative holdings include about 8 percent in the Prudent Bear Fund and 22 percent in the Vanguard Prime Money Market Fund.

Be advised. Investing based on cycles is no sure thing. Long term, trends may point to higher stock prices. But over the short term, stock prices can be volatile. You could buy a fund or stock only to see it plunge in value. Or you could sell, only to see the price go higher.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).

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