The Longer the Base the Higher in Space
THE LONGER THE BASE THE HIGHER IN SPACE
There is an old adage on Wall Street – ‘The longer the base the higher in space’.
Simply put sometimes major asset categories consolidate sideways, for 9 months to 2 years, and it has nothing to do with the quality of the companies in the index. Rather those companies are simply being overlooked by Wall Street.
Wall Street eventually comes back to these company’s and they can experience a significant up move in a short period of time, a breakout so to speak.
We never know when the breakout will happen, so sometimes we have to be patient. There are numerous examples of this in history.
Current Opportunity for 2022 – Blue Chips Value Stocks
This is playing out right now where we have very high quality blue chip value stocks (banks, insurance companies, industrials, etc) that have been ignored due to Wall Street chasing bubble stocks, that are at nose bleed valuations, during 2021. Now that the Federal Reserve is tuning off the money printer investors are selling bubble stocks and moving into value.
In my opinion I believe that these stocks could advance well north of +10% to +20%. There are no guarantees of course but looking at the following examples we can see that it is a reasonable expectation.
We shifted into the value stock category in 2021 as the bubble stocks got way too expensive.
S&P 500 Pure Value Index – 2012 through 2018
Here is a good example. The S&P 500 Pure Value Index has experience multiple periods of consolidation and during this period has broken out twice. Once with a +60% gain in 2013 and again in 2017 with a +40% gain. The following chart from www.stockcharts.com illustrates the point.
The S&P Industrials Sector – 2011 trough 2019
The S&P Industrials have experience this numerous times. As bubble stocks get sold off investors return to high quality blue chips. Here you can see very healthy gains of +38% and +55% in 12 month periods following consolidation phases. This is why Wall Street describes these opportunities as ‘the longer the base the higher in space’, the breakouts can be more than significant. (chart source www.stockcharts.com).
2022 Is Such a Situation
The Fed is turning off the money printer and the bubble stocks, that have driven the stock market, are slowing down and in many cases beginning to turn over. The high quality, blue chips have been consolidating for many months. For the majority of 2021 this has been the case. This is like a rubber band that is pulled back and eventually, when one lets go, then the value stocks can really move and have a breakout similar to the first two charts.
Below is the S&P 500 Pure Value index in 2021, consolidating gains and the orange annotations show that they value stocks are gaining ground and have been moving up in spite of the volatility they experienced in 2021.
Outlook
I personally look for a good year from the high quality blue chip stocks that we own.
Note: past performance is not an indication of future results and expectations might not materialize. Current investor concerns could evaporate as fast as they occurred.
LPL 1-05228290
DEFINITIONS
S&P 500 Pure Value Index - The S&P 500® Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme.
S&P Energy Sector Index - The index is a subcomponent of the S&P 500 Index. It invests in industrial companies, such as manufacturers.
IMPORTANT DISCLOSURES
This correspondence expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein and may be subject to change without notice. Neither Highcroft Investment Advisors, Gerald Asplund, nor LPL Financial, has no duty or obligation to update the information contained herein.
The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. This memorandum is being made available for educational purposes only and should not be used for any other purpose.
Some of the statements may be regarded as forward-looking statements. Forward-looking statements are, by their nature, subject to uncertainty. Forward-looking statements may include assumptions relating to future investment and economic scenarios. When used herein, the words “anticipate”, “believe”, “could”, “estimate”, “expect”, “going forward”, “intend”, “may”, “ought to”, “plan”, “project”, “seek”, “should”, “will”, “would” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect an opinion relating to future events and are not a guarantee of future performance or developments. Reliance on any forward-looking statements involves known and unknown risks and uncertainties. Actual results and events may differ materially from information contained in the forward-looking statemen ts as a result of a number of factors. Accordingly, you should be prudent with your reliance on any forward-looking information or statements.
Investing involves risks including possible loss of principal. Past performance does not guarantee future results. Any investment or investment strategy outlined herein are not suitable for all investors, readers should conduct their own review and exercise judgment prior to investing. Wherever there is the potential for profit there is also the possibility of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. The fast price swings in commodities and currencies can result in significant volatility within an investor's holdings.
To the extent you are receiving investment advice from a separately registered independent investment advisor or broker, please note that Highcroft Investment Advisors, Gerald Asplund, and LPL Financial are not an affiliate of and makes no representation with respect to such entity.
Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources. The economic forecasts set forth in this material may not develop as predicted.
Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer.
The sources from which information has been obtained is assumed to be reliable; the accuracy of such information is not guaranteed and the accuracy and completeness of such information has not been independently verified.
This report, including the information contained herein, has been prepared exclusively for the use of Highcroft Investment Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Highcroft Investment Advisors.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results. Investing in the index would require investors purchase an investment product, which would involve fees and expenses.
ABOUT US
Highcroft Investment Advisors provides retirement planning, investment management, financial planning, fiduciary services, and lifetime income planning. As Certified Financial Planners we are positioned to help you plan for and fund your retirement needs. 401(k) investment management provided through LPL Financial's corporate RIA - offering 3(21) and 3(38) services.
Highcroft Investment Advisors serves as a 3(21) and 3(38) Investment Advisor and fiduciary for labor union supplemental 401(k) and pension plans and corporate 401(k) plans. Highcroft works with the union's counsel, recordkeeper, administrator, and the plan's trustees. United Association, Plumbers, Pipefitters, Steamfitters, IBEW, and Carpenters. Serving Wisconsin and Minnesota.
Working with business owners, individuals, and wealthy families near Wayzata, Minnetonka, Plymouth, Orono, Minnetrista, and Minneapolis Minnesota (55402, 55391, 55447, 55364, 55428). As independent financial advisors we are not driven by certain products or services, instead we focus on your needs as an individual. Services include fiduciary fee only, retirement and divorce financial planning, life insurance, capital preservation, lifetime income planning, bonds, stocks, ETF, income, IRA, brokerage, rollover IRAs. Financial advisor near me, financial planner near me, independent planner near me.