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Answer:
Dear
Mr. O'Leary,
There
are lots of quirky investing theories roaring around
-- many of which should be taken with a grain of salt,
such as the necktie theory. This one maintains
that when ties widen, as they did in the late 1960s
and again in the mid 1970s, the market widens. Then,
of course, when ties become thinner, the theory says
we're heading into a bear market.
To
keep things even between the sexes, there's yet another
clothing related investment indicator -- the hemline
theory. This once popular "coincidence" theory is
no longer accurate (if indeed it ever was), because
hemlines are all over the place.
The
thought behind the theory is that short skirts indicate
an up market and long hemlines indicate that the market
is going into a decline.
It
dates back to the short skirts of the 1920s "flapper"
era, a decade when the market made one of its biggest
gains in history. Then in the 1930s, ankle-length
skirts became the rage -- and along came the Depression.
Personally,
I recommend going with the tried and true indicators
such as inflation, interest rates, unemployment rate,
company earnings and debt levels, P/E ratios and bankruptcy
filings.
All
About November
Having
given you the above cautions, it is also true that
toward the end of the year investors often try to
breathe new life into their portfolios -- selling
losers and replacing them with stocks they think will
do well in November and December and into the new
year. It's also a time when investors become more
aggressive.
Keep
in mind that last Tuesday, the Federal Reserve Board
raised interest rates for the 12th consecutive time,
increasing the rate banks charge each other to 4%.
(It was at 1% in June 2004.)
At
the time of the announcement, the Fed also indicated
that it may raise rates again in order to keep inflation
in line. Subsequent higher rates could (I use the
word "could" because it's not a sure thing) hold down
the economy. That in turn would mean that further
interest increases would not be necessary. If this
scenario plays out, then stocks might have a solid
year-end boost.
The
Weatherman
Along
with Nicholas Cage, you might want to watch the weather.
A warm winter will help the market -- in fact it will
help all of us who pay heating bills, directly or
indirectly. If winter is not too cold, we'll use less
fuel and be able to put our money elsewhere -- some
of it into the market.
Follow
The Leader
If
stocks begin to climb toward the end of the year,
the so-called big money -- mutual funds, institutions
and money managers for wealthy individuals -- is likely
to buy stocks in order not to miss out on any year
end rally. If indeed the institutions respond in this
fashion, their activity in the market will further
push up stock prices.
Bottom
Line
Continue
to buy and hold stocks that have solid management
teams, that report increased profits and that are
industry leaders.
Good
luck!
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