The S&A Digest: Three Large Down Days - Time for a Rally

Porter's gone... The Sjuggerud video goes up... WaMu goes down... Berkshire hits new high... No Google in China... Try AT&T... A short-term bottom…

Goldsmith comment: Porter's taking the day off, so I'm taking charge.

 Our webcast problems are solved. After releasing the web team from the stockade and washing off the rotten fruit, we sent them back to work perfecting the video. We've been assured the new webcast can handle more than 100,000 simultaneous viewers. We challenge you to crash the servers again... Try here.

 In today's DailyWealth, Porter recommends buying companies that "give more money to shareholders than they spend on themselves." Here's one to consider... AT&T today announced a dividend increase to $0.40 from $0.355 and a $15.2 billion-share buyback. The company plans to repurchase 400 million shares by 2009. Last year, it spent $13 billion buying back shares, while only spending $8.3 billion on itself.

 Washington Mutual, the largest U.S. savings and loan company, will cut its dividend from $0.56 to $0.15, lay off more than 3,000 people, and raise $2.5 billion through the sale of convertible preferred stock. The announcement came after WaMu wrote down the value of its home lending unit by $1.6 billion.

 Why is Google capturing less than half as much market share as Baidu, the leading Chinese search engine? Because locals can't pronounce the name. "G-O-O-G-L-E is not a normal Chinese spelling and people don't pronounce it right," Kai-fu Lee, Google's president of Chinese operations, said in a November 30 Beijing interview. "Most people call us 'go go.'"

 To grab, or not to grab... Seven companies recently announced special dividends that caught my eye. In total, shareholders will reap $762 million in total payments. I'm currently researching these opportunities and will issue recommendations this week to S&A Dividend Grabber subscribers. To learn more about the S&A Dividend Grabber,

 click here.

 As I write, Berkshire shares passed $150,000... the highest per-share price in the history of the markets. Extreme Value readers are up almost 80%.

 New highs: Plum Creek (PCL), McDonald's (MCD), Baxter (BAX), Berkshire Hathaway (BRK-A).

 Of course Porter leaves the office when the mailbag gets juicy (though he did take the time to comment on one e-mail). The rest of the personal attacks – there are hundreds – must wait until his return. What's on your mind, friend? Let it all out... feedback@stansberryresearch.com.

 "Mr. Dansker appears to have been educated within the past forty years. The observation is based on his disdain for everything that had made America great before the touchy feely bedwetting liberal kooks turned the country into a laboratory for wacky social experiments. His frame of mind is a typical result of the hate America, Socialist brainwashing operations the National Education Association has made of our schools over the past two generations." – Paid-up subscriber Stan Kurzet

 "Yes, we do need some government-the 'free market' can never police itself. However, big business has learned well, how to manipulate the government and make legal, much that is unethical and should still be illegal – so someone has to try a little bit to control the unbridled greed that would license itself, if unrestrained. That being said – almost nothing in our various governmental bodies – from the local levels to the hallowed halls of congress – shows the least tendency toward honesty, if it means getting in the way of enriching those who occupy the seats of power in their little bailiwick. Between the clinton administration and the current bunch of crooks, everything about government on every level screams 'grab everything of value and run for the exits' – the end of this beautiful experimental republic is about to crash into the dustbin of history." – Paid-up subscriber Joe

 "While I do not necessarily agree with everything you say, I do enjoy your feisty Digest. Despite the quite remarkable reaction to your very perceptive and obviously fake GM Shareholders' Letter, there you go again today, courting controversy with your blatant flirtation with irony. What did you guys used to do to the folk in Ellis Island? Besides delousing, did you also perform humorectomies? Oh, and just to spice things up even further, I am going to wish you and your crew a 'Merry Christmas' – none of that Happy Holidays or Hug A Tree crap! Keep it up – I just hope it doesn't cause another run of cancelled subscriptions." – Paid-up subscriber Stewart Fergus

 "You really are spoiled. I just hope you never have the misfortune of trying to get out of a jam. My daughter is caught in a negative am loan in which the property has lost 27% this year! I'm glad it is trying to help. I could call you all kinds of names, but my point is: YOU DON'T HAVE A CLUE! Governments ARE there to help. I am a retired Federal Civil Servant and a retired Navy Captain. I resent like hell your characterization that Governments (viz., Government EMPLOYEES) are somehow universally dishonest, non-caring, idiotic, money-grabbing, etc. I'm now a consultant at the FBI. You insult me directly when you make such comments as above. It must be nice to sit in judgment when you have NO RISK in the decisions made other than to keep your subscription mill running, while the REST OF US are trying to make the world better. Shame on you! You owe a heap of folks (particularly us subscribers) an apology."

– Paid-up subscriber Steve Dansker

Porter comment: Trying to make the world better at the FBI... Mmmnn.

Regards,

Sean Goldsmith

Baltimore, Maryland

December 11, 2007

Three Large Down Days – Time for a Rally

By Ian Davis

Back on June 23, 1970, the S&P 500 got crushed... but it was a great time to buy stocks.

You see, this market rout was the third time in the previous 30 trading days that the index fell by 2% or more... and investors were worried.

However, in that instance, the worry was unfounded.

Over the following three months, the market rallied by 10.7%... And over the following year, the market rallied by an impressive 35.9%.

As the chart below shows, this situation is not uncommon. When the S&P 500 falls by more than 2% repeatedly over a short period of time, a short-term bottom usually develops.

Repeated Falls Lead to Panic... And Market Bottoms

It's hard to see short-term bottoms on long-term charts, so let's crunch some numbers as well...

When the S&P 500 falls by 2% or more at least three times in 30 trading days, (marked with orange circles on the above chart), the S&P 500 produces the following returns during the next three months.

So, for a three-month period following these repeated down days, the S&P 500 continues to be volatile. But the direction of the market, more often than not, is upward.

In fact 73.5% of the time, the market is up three months later... and the average change is 5.7%... significantly better than the 2.2% the market usually returns over a three-month period.

This explains why most investors are poor short-term traders. They usually hang on through a few of these large corrections. However, before long, their confidence is shaken, and they decide to bail out.

Unfortunately, this is exactly the wrong time to sell... More experienced traders wait for these soft-money investors (referring to the ease at which they get shaken out of a volatile market) to bail ship before buying-up stock in anticipation of a short-term bounce.

Unfortunately, this strategy is by no means foolproof... In 2002, the market fell by 2% or more 11 times in just 30 trading days – roughly one-third of the time for about two months. If you had bought after just three of those down days, you'd be staring at a 13.2% loss three months later.

However, that was a worst-case scenario near the tail of a horrible bear market.

Frightening counterexamples aside... when I invest, I like to put probability on my side.

We have had some large down days lately.

Eleven days ago, the market fell by 2.3%, which is the fourth large correction over the previous 30 trading days. But don't be afraid, history tells us that a rally may be just around the corner... In fact, the market has already started moving in the right direction, rising 1.5% on December 5, then another 1.5% on December 6.

Good investing,

Ian Davis

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame