Guest Author - Guido Deboeck

One of the first articles I wrote last year for BellaOnline was about the market direction. The title of that article was “ Market direction determines who has the ball”. I wrote then:

The direction of the market also affects how we live and what we can or cannot do. If you know the market direction at all times (or at least most of the time), you have fewer problems knowing how to invest. If you have less problems investing, you make more money (maybe even to the point where your day job may become a minor distraction...); you may have more choices. If for some reason you never seem to know what the market is about or where it is heading, then you are likely to feel frustrated, not knowing where to put your savings. Frequently, those people blame the markets for low portfolio returns.

If you did not read it, you can still find it in the archives. I have been away for several weeks and not much seem to have happened. But now it is time to get back! What is the direction of the markets now that we are six weeks into 2007?

Can you figure it out from the following data?
The S&P500 went from 1416 to 1454 (first figure is the close on 01/02 and the second is the close as of midday today 02/14) that is a 2.7% increase. The NYSE composite went from 9139 to 9419, a 3 % increase. The NASDAQ went from 2415 to a high of 2508, to a low of 2418, to another high of 2495 and is at 2488 right now; in sum the NASDAQ increased by 3%. The S&P small cap 600 went from 400 to 416, an increase of 4%. What should be your conclusion: the M in CANSLIM has turned positive. What does that imply for your portfolio…yes, you know it (or can look it up again if you forgot last year’s article).

The US markets are clearly breaking out after a relatively short and not severe correction. What about the rest of the world? Using ETFs (see my article of yesterday) we quickly find that Europe (IEV) went from 104.97 to 108.7 or 1.6% up. Latin America (ILF) went from 169.9 to 180, or up 5.9% (you read that right!); the pacific excluding Japan (EEP) went from 49.39 to 52.93, in other words up 7.1% !!!

In sum, the markets overseas are so far this year doing even better than the US. This should definitely have some influence on your portfolio allocation. Here is an exercise, based on the above information design a portfolio, taking into account all that has been written at this site in the past year (e.g. about how to allocate assets between various holdings, how much to diversify/concentrate, how much risk to assume). Also keep in mind the three important lessons we learned from Ken Fisher’s book (see my article “On the eve of Christmas”)

Tomorrow I will follow up by presenting a model portfolio that will be monitored throughout the year.

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