Maybe the Worm is Beginning to Turn

The mysterious, challenging, and even inviting thing about the stock market is that you just never know what's going to happen. Once those who sell securities, as well as those who talk and write about the market, sense that the market is on a roll---either a bearish or a bullish one--- no one knows for sure where or when its top or bottom will be reached. All of which adds to its intrigue for everyone involved from investors to historians, those on the side-lines and even reporters.

For those who like history, look back at the Crash of 1929 and you'll see that it took 34 months for the Dow Jones Industrial Average (DJIA) to go from peak to trough. More specifically, the closing day high of 381.17 was reached on September 3, 1929 ; the closing day low of 41.22 reached on July 8, 1932.

More recently, if the current bear market did hit bottom in October as some have suggested, it will have had a 33 month reign. The peak hit on January 14, 2000 when the Dow Jones Industrial Average (DJIA) closed at 11,722.98; and the low, 7,286.27 at the close of the day on October 9, 2002, according to Dow Jones.

Don Cassidy, a senior research analyst at Lipper, is one who thinks that this market has hit the bottom. " We had a classic panic sell-off in July, bottoming around the 23rd and 24th, and we had a test bottom on the 9th of October. Volume was much lower and our numbers show that mutual fund redemptions were lower than they were in July. And, at some point the market stops going down."

While bond funds have been popular purchases for fund investors over the past few years, Cassidy said that the money rolling into fixed-income funds lately is going into the shorter maturing bond funds rather than funds with portfolios made up of long-maturing bonds. "People are being fairly sophisticated," he says. " They've been buying short-intermediate and intermediate funds with only about 10 percent of new money going into long bond funds."

Investing in short and intermediate bond funds makes good sense in any market for a couple of reasons. First, interest rates change. And, given that they've fallen so dramatically over the last two years, there will come a time when they begin to rise again.

Being invested in short- to intermediate-maturing bonds means that investors are better poised to capture a better interest rate return than they could if they were invested in very short fixed-income securities such as money market mutual funds. And be in a better position to take advantage of any change in interest rates quicker than they could if they were holding long bonds.

Short- and intermediate- maturing bonds also are subject to less price volatility than long-maturing bonds when interest rates change. (Remember, when interest rates go up, the prices on bonds falls; when interest rates fall, the prices of bonds goes up.)

Second, when it comes to risk and fixed-income securities, the riskiest bonds are considered to be those with the longest maturities. Why? Because it's believed that the longer a bond's maturity, the more risk there is that bond issuers won't be able to make timely interest and principal payments on it. FYI, a long-bond is considered one that has a maturity of 10 years or more. That doesn't mean all long-bonds are bad investments---there are many bonds in the marketplace with maturities of 12, 20, or 30 years and even longer that have great credit histories.

If the stock market has hit bottom and you're looking for new equity opportunities, one place to look is at fund types that have had poor performance histories and are beginning to turn around.

Using the month of October as the example, all but five of the 35 different fund types that make-up Lipper's equity universe had plus-side returns. In fact, stock funds gained on average 5.77 percent last month. That's a plus figure we haven't seen for the average fund in over five years.

The fund types gaining the most ground from September 30 though October 31, were Telecommunications Funds, ahead 20.15 percent; Science & Technology Funds, ahead 16.61 percent; and Latin American Funds, up 11.47 percent. Even Large-Cap Growth, Core and Value funds were all up at least 7 percent.

While a one-month return isn't enough to signal any long-term pattern changes in the market, it's at least a refreshing change. And one that could get folks thinking about investing in stock funds once again.

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Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.