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Short-Term is the Best Place 

If you could look forward to the end of the year, which do you thinks will be better off, the short-term investor or the long-term investor?  Well there is an interesting tension developing in the investment arena, which should cause the short-term investor (holding a position for less than 60 days) to do remarkably better than the long-term investor (holding a position for 6-18 months.)  Now donít get me wrong, the long-term investor should be able to make a small return on his investments this year but nothing in comparison to the short-term investor.  

There is an interesting phenomenon going on this year.  The Federal Reserve is cutting interest rates.  Thatís good for the stock market and almost always leads to higher stock prices.  More and more people hold stocks than at any time before.  This is because there are more self-funded retirement plans and more baby-boomers scurrying to fund their retirement accounts in the last few years ahead of retirement.  Each and every pay period millions of dollars are deducted from employees pay checks and sent off to a money manager, many of which by their chartersí are only allowed to hold a specified low percentage of their portfolios in cash, the rest must be put into the market.  Each week these dollars are looking for a home in the stock markets.  These purchases by fund managers increases the demand for stocks and thus the price of stocks.  We have two great reasons for stocks to go up! 

Now here is the bad news.  Corporate earnings are one of the best forecasters of stock prices.   In recent weeks weíve seen reports of weaker earnings from the most recent quarter, and guidance from many companies for lower earnings in the next one to four quarters.  If earnings forecast share prices than stock prices should move lower over the coming year.  So on one hand we have two strong reasons for stocks to move higher and on the other hand we have a good reason for stocks to move lower.  That is the tension that will entangle the stock market for the bulk of the year.  All totaled the markets may be near equilibrium with little impetus for them to move much higher or lower.  As the Fed cuts rates and fund managers buy stocks the markets will move higher and then weak corporate earnings will pull the markets lower.  These forces will be in play for most of the year.  The year will likely be characterized by small swings within a modest trading range.  Many long-term investors may be chagrined to see that their portfolios are worth just as much at the end of the year as they were at the beginning.  But for the short-term investor there will be many nice up and down swings of a couple of hundred points for the short-term investor to carry right to the bank.

   
 
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