Top-Down vs. Bottom-Up Approach

by | Jan 23, 2012 | Stock Market Comments

January 2012: the US stock market is off to a good start. It’s hard to predict what the rest of the year will bring, but indicators like the Santa Claus rally and the January Effect are working. There is no fundamental basis that the “January Effect” or “Santa Claus Rally” will bring success in 2012.

Sectors working well so far in the new year include Machinery, Electronics (in Manufacturing), Biotech.
Even some retailers are seeing positive breakouts appear on their charts. Suddenly, Consumer Discretionary names are breaking out daily. And with that (amazingly), the home-building sector is also working its’ way higher on the charts: NOT necessarily the actual home-builders, but companies that sell things going IN the house (paint, furniture, etc).

Some of these sectors which are participating are sectors that (historically) participate in the early stage of a bigger move. With many sector and individual charts starting to broaden out, this positive move in the market MAY have some legs here. But again, we do NOT make predictions.

Financial companies are still lagging. These charts provide some interesting speculation off the bottom, but there is still FAR too much risk in the group to think about buying across the board for all clients. Financial stocks — at the present time — appear really for traders only.

The approach we employ to manage money for clients is a top-down vs. bottom-up approach. When comparing top-down vs. bottom-up styles, there really could not be two different approaches.
We use a top-down approach, employing relative strength and point & figure charts.
The first step we need to know is, is the market on offense or defense? If it is on defense, our entire strategy changes from wealth-building (trying to make money) versus wealth preservation (trying to protect our assets to play another day).
Next, we need to know what area of the globe do we want to be in now? In the 1980’s, it was a US-driven market. But we have seen periods in the past few years where the US markets were one the WORST places to invest. We need to know that!

Next, which sectors are favored? And then, which sectors have the best relative strength?
At this point, with the vast (and still growing number of Exchange Traded funds (ETF’s), some folks can stop right there and simply stick with the sectors providing the best opportunities.
We then drill down one more level and want to know which are the names (companies) leading the sectors?

A bottom-up manager would employ the exact opposite: they are looking at the specific company fundamentals to choose where to place their money. Companies with strong fundamentals, low P/E ratios, growing market share, great management are things that matter most to bottom-up money managers. To a bottom-up manager, it does not really matter if the sector is in or out of favor, or even if the market is on offense or defense. I would also add the following:

Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment or investment strategy will be profitable or equal to past performance levels.

All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions, or withdrawals may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for an investor’s portfolio.

If you are relying on a blog post for specific investment advice, you are making a huge mistake. Please speak with an investment adviser before making ANY investment decisions.
If you do not have an investment adviser, we encourage you to contact Mullooly Asset Management at 732-223-9000, or through our website. Under no circumstances should the content discussed here to be considered specific investment advice.