Hindsight being 20-20, we now know that the best stock market strategy for 2003 would have been one heavily weighted toward gold and technology, particularly the small-cap variety. Heading into Monday's session, the
was up almost 48% year to date, while the Amex Gold Bugs Index was up 66% and the Russell 2000 by about 45%.
With impressive foresight, just such a portfolio was the recommendation of Bernie Schaeffer heading into 2003. On the strength and uniqueness of that call, the chairman of Schaeffer's Investment Research in Cincinnati is this column's "Guru of the Year" for 2003.
This is the fourth year the column has sought to distinguish among those sources whose calls and commentary were noted here. Banc of America's Thomas McManus won the inaugural Guru of the Year (GOTY) award in 2000. The late Bill Meehan was posthumously named GOTY in 2001, while the discipline of technical analysis was selected in 2002. As in the past, contributors to TheStreet.com's various publications were not considered for the award, in order to avoid the appearance of favoritism.
While not among the so-called major Wall Street strategists, Schaeffer is a veteran market-watcher and well known to most traders. And for good reason: He's
No. 1 market-timer over the past three years and No. 5 for the past 10 years.
here, Schaeffer's bullishness on the tandem of tech and gold stocks ran afoul of conventional wisdom. Because of their experience in the 1990s, most investors came to believe there's an inverse relationship between tech stocks (and equities in general) and precious metals. But the
efforts to "reflate" the economy have altered the relationship between the two groups, even if relatively few investors have realized it.
Schaeffer said his contrarian nature first brought him to the small-cap tech/gold combination, he recalled in a recent interview.
"As we moved into December 2002, the overwhelming consensus was to go for the 'quality' blue-chips and stay away from risky stuff," the veteran technician recalled. "I thought, 'Wait a minute, the risky stuff has been leading
since the October 2002 lows,' and since we started heading south in 2000, my take was we'd already had the move out of tech and into 'safer' names." (As an aside, the same "go for safety" recommendations can be heard today, despite the continued leadership of smaller-caps.)
Obviously, smaller-cap and tech stocks sustained their momentum in 2003, as did gold shares, which Schaeffer was bullish on in 2002 and early 2003, as noted
here. "We were going to go all out fiscally, monetarily, interest rate-wise -- whatever it took to get this economy moving again," he said. "I was not taken with this deflation theme -- still prominent
in late 2002 -- and it struck me
as being a bullish environment for gold and gold stocks."
Heading into 2002, a common feature shared by gold and small-cap tech was tremendous skepticism among most Wall Street participants, Schaeffer said, declaring: "I can still make arguments for both tech and gold being in a disbelief stage."
Notably, there's still near-record levels of put interest in the
Nasdaq 100 Trust
options, something he also
cited here in May. Meanwhile, sell-side coverage of gold shares remains relatively sparse, and much of it of the hold and sell variety.
Heading into 2004, Schaeffer maintains a heavy concentration in gold and tech shares, but "I'm not saying people should be invested up to their eyeballs," he said, expressing concern about technical resistance in the 2000-2200 area for the Nasdaq, longstanding bullishness in the
survey, steady inflows into equity mutual funds, and a string of bullish magazine covers in the past six months.
"It's a fairly risky environment and you need a significant cash reserve," he declared.
Currently, Schaeffer recommends an allocation of 30% cash, 20% gold stocks, 30% tech stocks and the remaining 20% in other equities, mainly international.
Schaeffer's master portfolio -- which was up nearly 55% year to date through Monday and about 60% since its inception in November 2000 -- includes positions in miners
Coeur d'Alene Mines
In tech, he owns
Research In Motion
, and recently initiated positions in
XM Satellite Radio
In an effort to "get more focused on tech as sector vs. getting cute on individual names," Schaeffer also owns the QQQs. "When the lumbering herd finally decides to move out of
and into tech, that's where they'll go," he predicted.
Still, Schaeffer's "single favorite stock" for 2004 is a relatively stodgy one:
The stock has roughly doubled from its lows, sports a 3% dividend yield and trades with a price-to-earnings ratio around 13, based on expected earnings of $1.24 in 2004, Schaeffer noted. Yet Wall Street remains very much skeptical of the auto giant -- just two sell-side buy recommendations vs. 12 hold or sell -- a profile similar to that of gold and tech stocks at the beginning of 2003, Schaeffer suggested.
If Ford posts the same kind of returns in 2004 as gold and tech stocks produced in 2003, its shareholders will be quite pleased, and Schaeffer will have once again shown the wisdom of bucking Wall Street's conventional wisdom.