Fortune tellers, psychics and market analysts all have one thing in common - they are all guessing about the future.  What amazes me is that so many individuals place so much faith on predictions of these future outcomes when it comes to their money and more importantly their retirement.   I was listening to an interview recently by a leading asset manager who says that the markets will be at new highs in 2012 and that you should be fully invested in the market.   This sounds great and maybe he will be right.  However, we heard the same predictions in early 2008 and that didn't turn out so well for those fully invested in the market.  With only a finite amount of time between now and your particular retirement date such setbacks can be fatal to your portfolio.

Furthermore, predicting future market returns based on the current level of interest rates, earnings estimates and valuations have been proven to be very bad timing indicators over shorter periods of time.   I am not saying that value based investing won't yield long term results - it absolutely will.   What I am saying is that if you invested in a value based portfolio at the peak of the market in 2000 or 2008, or just about anytime previous to the bottom of the market in 2009, it is likely that you have less money today than you started with.   That is a generalized statement, of course, but you get the idea.   The market over the past decade has not been kind to investors and with the economic environment already weak, unemployment high, wages declining, housing depressed and households engulfed in a balance sheet deleveraging cycle the next decade may be just as sloppy.

So, this brings me back to the fact that we are all just guessing at what the market is going to do over the next weeks, months or years.   Therefore, in order to be successful long term, and this is especially important if you are close to your retirement date, we must closely adhere to 1) protecting the principal investment and 2) creating returns at a rate to offset inflationary pressures.    The second part is the most critical.  People that try to build wealth by investing in the financial markets tend to lose much more often than not as they inherently take on too much risk in their portfolio trying to chase the markets.   The financial markets are a tool to make sure that your "savings" maintain their future purchasing power parity, in other words, your savings are adjusted for inflation over time.

As portfolio managers we are constantly analyzing the economic data, looking at trends, weighing and monitoring data as it streams in daily.  It is all too reminiscent of Newman's meltdown on "Seinfeld" regarding the postal service; "The mail...it never stops".  However, while all of the economic diatribes, data gnashing and prognostications are all very interesting to listen to it is psychology that drives asset prices in the short term.  Therefore, having a set of tools that measures market psychology and sentiment is extremely critical in assessing portfolio risks particularly in an environment as we are experiencing today.

The first chart above is our "Overbought / Oversold" indicator.   In technical jargon it measures when the market is trading 2 standard deviations above and below the average price of the market over a given time period.  The specifics are unimportant but what is important to note is that when markets are in a positive trending mode the index trades above the moving average.  When this is occurring the rules are to "buy dips" and add risk to investment portfolios.   However, when the market is trading below the moving average the markets are in a negative trend and therefore the rule is to "sell rallies" and reduce equity exposure as the price of the market moves up to the moving average.  

However, while knowing the trend of the market is extremely critical we also just need to simply know when to "get in" or "get out" of the market.  For that our next chart gives us that signal.  This is simply two moving averages (one short and one longer term) on a weekly basis.  When the shorter moving average crosses above the longer term average it is time to "Get In".   When it crosses below then it is time to "Get Out". 

While this seems very simple in nature, and it is, it is simply just telling you when the price movement of the market is moving positively or negatively.  When it is moving in the right direction you want to be invested.  When it isn't - you don't.  The bottom line is that the old axiom of "a rising tide lifts all boats" is quite accurate and it works just as effectively on the way down.  Today, with 85% of all stocks correlated to the actual index it is highly unlikely that you own all the stocks that won't fall with the market when it crashes.  

It is important to remember this.  NONE OF US are investors.  Not in any sense of the word.   We are all SPECULATORS betting on the future price movement of the market.   The difference, just as gamblers in a casino, that will separate the winners from the losers is knowing the odds of success on each and every bet you make.   If the odds of success are high then make a bet.   If not, don't.   I have never understood the rationale of individuals who tell me that they "have to be invested".   Why?  Investing just for the sake of having your money in the stock market casino is a fools bet.   As the old adage goes "if you are sitting at a poker table and can't figure out who the pigeon is...it is probably you."

Knowing the difference of when to be invested, or not, is the difference that will separate out winners from losers in the stock market game.   If you have 30 years from today to be invested you can ignore this article, buy a stock market index fund, and stick money in it every month and most likely you will be fine.  However, if you are like me and the 90 million other Americans who are within 10 years to retirement, or in it already, we don't have the luxury of time on our side and sudden market losses can be devastating to our long term financial sustainability in retirement.  

Our last chart measures the psychology of the market but combining together and weighting various measures of stock market sentiment from the price change of the market to bullish versus bearish sentiment, volatility and a few other things thrown into the mix.   Since psychology and emotion drive markets on a shorter term basis, as speculators, we want to know when the "best" time to be buying or selling is.  

When investing in the market the goal is to "buy low" and "sell high" yet this obvious rule is generally always disregarded as investors panic and sell at market lows and greedily buy at market tops.   It is human nature and emotional based investing almost always results in losses.  For those individuals willing to bet at the casino without even looking at their hand, well, most likely they are going to lose much more often than they win.  

Currently, our psychological indicator tells us that the mood in the market is very pessimistic which is a good sign for potentially wanting to start adding equity exposure to portfolios.   However, in order to make sure that we have the "odds" of success in our favor we need the pessimistic psychology to be very negative and our buy/sell indicator to turn up and give us a buy signal.  

From the levels that we are currently at this will require some more time and positive price action.   This means that the market needs to keep moving up in small steps and consolidating at these levels without breaking back down.   If this happens over the next month or two we will likely be in a good position to begin increasing our exposure to equities in our portfolios.  Until then we remain happy to continue to hold our large pile of cash and income generation positions that we have held since our signal to "get out" back in early May.    We have plenty of room to allow the market to do what it needs to in order to give us a safer entry back into the "risk" pool.

For everyone else...they will come to ultimately realize that just getting back to "even" is not an investment strategy that you can live by.   The most valuable commodity that we all have is "time" and the time lost in getting back to even in a portfolio can never be recovered.   Unfortunately, for far too many Americans today time will run out for them as they are faced with tough retirement choices and being forced to work far longer than any of them ever planned.