Mojena Market Timing

 

January 2, 2011

Timing Model at 97.3

Buy Signal on July 25, 2010*

Strategy

Current Position

2010 Returns

Cash

Money Market (T-Bills)

 +0.1%

Buy and Hold

100% S&P 500

+15.0%

Standard Timing

100% S&P 500

+5.9%

Aggressive Timing

150% S&P 500

-3.6%

 

 

*The timing model issues buy and sell signals based on a mathematical/statistical score that ranges between 0 and 100:  Sell 53 or below; buy 77 or above. The standard and aggressive strategies determine the trades when timing signals are given.  Signal date is Sunday; trades based on next-day closing price. 

Nice 2010 return for the S&P 500; disappointing returns for the model’s strategies.  A 20-month bull run was interrupted by a severe correction lasting 10 weeks from April into early July. This short, sharp correction fooled the model into a late sell signal just before the primary downtrend bottomed. The switchback buy signal followed in three weeks, but not before the year-to-date damage was done, a fact that will not escape the model’s revision for 2011.

Look for the updated, re-optimized model by mid-January.  Meanwhile…

Best Wishes for a Healthy, Prosperous, and Happy New Year

∙∙∙

December 5

Market pops 3% for the week just past. Sloppy behavior likely to continue as investors stress over US (municipal, state, and federal) and European debt (Portugal & Spain next?), Chinese and US economic growth, US Congressional actions, and the dollar’s conduct.  None of these issues are going away anytime soon.  Still, the market looks attractive to the model in here: Its fundamental indicators are very bullish, technical metrics are positive, monetary and sentiment measures are neutral.  Pause in the continued climb up the wall of worry? The next few weeks will tell the story, especially as the lame-duck Congress considers an extension of the Bush-era tax cuts.  An inability to compromise will mean increased taxes starting January 1, a very unfriendly result for the market.  Agreement and especially an extension for the upper income bracket will likely set off a rally.

Three weeks ago the S&P 500 confirmed the expansion of the cyclical bull market dating back to March, 2009 by exceeding the previous recovery peak in April, 2010.  At 1226 it marked 81% above the bear market low in 2009; it currently hovers just below this mark.  This 20-month bull run was interrupted by a 16% severe correction lasting 10 weeks from April into early July this year.  This short, sharp correction fooled the model into a late sell signal just before the primary downtrend bottomed.  The switchback buy signal followed in three weeks, but not before the year-to-date damage was done, a fact that will not escape the model’s revision for 2011.

Keep in mind that pullbacks are part of the game, offering opportunities to buy stocks while the model is on a buy signal, consistent with risk profiles during these unstable times.  Given the market’s volatility, pullback opportunities present themselves often enough. Still, assuming we’re in a secular trend that’s flat to down, some caution is warranted, as cyclical bulls tend to be limited during secular bears. The current bull is not even halfway to the 44-month average for cyclical bull markets; it’s 20% short of the median advance and 63% under the mean gain.  Presently we remain 22% below the secular high of 1565 in October, 2007.  Three years!  See the FAQ for cyclical and secular definitions and history.

Comments on QE2 and the Election

With the Feds now buying more treasuries and the Treasury “printing” money to support this action, the anticipation from this second round of “quantitative easing” is a further lowering of interest rates and more money in the economy… and a weaker dollar as well.  Given the already low rates, weak consumer demand, excess capacity, the state of housing, high joblessness, business uncertainty regarding government policies, and the ongoing deleveraging of debt, it’s not likely that this action will spur housing, jobs, and the overall economy.  Instead, the probable short-term result of greater money circulation is the creation of asset bubbles, as increasingly evident in the stock market and commodities such as precious metals.  It’s the excessively low rates since 9/11 that lay the foundation for the recent housing bubble and the financial debacle that followed, fueled by well-intended but misplaced politicians’ actions through HUD, Fannie, and Freddie to extend housing to low or non-existent income families with no down payments, predatory lending by too many dishonest lender/brokers, and the packaging of misunderstood, misregulated, and possibly fraudulent exotic derivatives and insurances for these loans by complicit financial institutions. Artificially low rates also promoted the current bond price bubble, while decimating retirees who depend on fixed income investments.  Further out, much higher inflation is anticipated from QE2, although not necessarily detrimental to stocks and commodities, as it would be for the real economy. Moreover, the bond market will not likely accept higher inflation and lower long-term interest rates, meaning that the latter will go up as well, as they have recently.

While many believe that the business climate and economic progress are more favorable with Republicans in power, the historical record is mixed at best, depending on many factors, including the political balance and dynamics within the three branches of government, ensuing legislation and rulings, and worldwide macroeconomic and demographic conditions.  Surely getting government debt and deficits under control, simplifying (small) business regulations, implementing financial regulations that curb excesses and “too big to fail,” without unnecessarily hampering market efficiencies through anti-business populist sentiment, passing meaningful tax reform and common-sense health care and energy policies, and fostering legislation that encourages investment in ongoing businesses, startups, infrastructure, and education are all good for the health of the country’s economy and its citizens.  The government needs to implement policies that favor national savings to facilitate seed capital and investments over policies that encourage the excessive debt and over-consumption that fueled the false prosperity of the last two decades.  More stimulus money should have been used for infrastructure instead of misplaced programs like “cash for clunkers,” which increased consumer debt, robbed future demand and retired many perfectly serviceable vehicles… while providing insignificant benefits to the carbon footprint and a net-net zero for the auto makers and dealers. 

The recently issued Presidential bipartisan debt commission’s recommendations outlined policies that address these issues.  The super-majority vote needed to pass it on to congressional action failed… nevertheless, will the Congress have the courage to legislate a significant portion of these necessarily sacrificial changes over the next couple of years?  At least, let’s start a meaningful and serious dialog.

It would appear that the most progress is made when consensus is reached, as in the Reagan years with a Democratic Congress and the Clinton years with a Republican Congress.  The recent lame-duck Congress did practice some partisanship, although the most likely upcoming result will be gridlock, as passionate politicians rooted in the poles of their respective ideologies fail to reach consensus.  Research shows that during “normal” times this is not necessarily a bad thing, as government effectively gets out of the way of businesses doing what they do best: the reasonably efficient allocation of resources, economic growth and prosperity through innovation and productivity, and the creation of jobs, jobs, jobs, particularly from startups. Think future IBMs, Apples, Microsofts, Walmarts, Amgens, Amazons, Googles, eBays & Facebooks in currently incipient or non-existent technological, manufacturing, service, retail, scientific, communications, medical, and energy sectors, not to mention the zillions of new startups we never hear about; don’t think proliferating and gargantuan government agencies with a fraction of the multiplier effect associated with the private sector.  The recent Republican tsunami was surely a response to jobs, jobs, jobs… but its scope and intensity also suggest a likely pushback to a sense that the current (and previous) administration and Congress went too far in political direction, on non-transparent and arrogant legislative procedures, the size and influence of government, and fiscal irresponsibility. The Federal Government’s spending now accounts for some 44% of our GDP and rising based on current projections (it had been in the 30s for the last four decades); Federal government workers, depending on the study and methodology, have benefits and wages about 50 to 85% greater than workers in the private sector (20 to 35% greater for comparable skills), a stunning turnaround from a couple of decades ago.  And with much greater job security to boot.  The same applies to many union-controlled state and municipal workers.  How about changing union contracts to market-based performance pay rather than seniority-based pay?  Will taxpayers continue to fund these excesses and expansions?  Will the bond market vigilantes?  Unfortunately, these are not “normal” times: the Great Recession is more akin to the Great Depression… during which, by the way, was the last time we had negative stock returns during the third year of a new administration.  Fiscal stimulus was necessary and appropriate during the just-passed crisis.  But now?  We will need some consensus to at least start the process of solving our vexing problems.  Although my own views favor many Conservative over Progressive solutions, no one philosophy has a lock on the best implementations.  The genius of our Founding Fathers was the creation of a system with the intent of reaching compromises that at least partially benefit just about everyone, including minority views, although slow and often frustrating.  By the way, Canada was on the financial ropes in the 1990s, yet subsequently scored a knockout when its center-left government implemented a number of the Conservative policies suggested above.  The current center-right British administration is in the process of doing the same now.  The Eurozone as well?  Can we?  It’s they who now admonish us, although their currency, fiscal and debt problems are far, far from over.

So, after these ramblings, where do we stand on what to do with our investments?  No one really knows.  Bulls can make a compelling case, as can bears.  Long term the present trajectory points to a likely undesirable socioeconomic future, akin to the continuing and evolving problems with the social democracies in Europe… and an extension of the current flat to down secular trend.  But there’s hope.  At least their governments now seem to be “getting it,” more or less, and maybe we will as well.  Shorter term, we have the model, don’t we?  And thankfully it’s apolitical.  Conflicting philosophies and conclusions by very smart people on opposite policy sides end up sowing confusion for we mortal investors.  We don’t want to be prisoners of fear by putting our money under the electronic mattress, especially given that the market net advances about two-thirds of the time.  And we don’t want to be foolish lemmings that go over the cliff buying and holding, given the four devastating bear markets in the just-completed decade.  For myself, the model is the best thing I have going, giving me a high degree of confidence after 20 years of actual use, the first ten during a historic bull market and the last ten during a series of relentless bear markets that put major indexes underwater over that “lost decade.”  It’s imperfect, but much less so that my rudderless investment actions based on emotions swayed by my own and others philosophical analyses and cigar-smoking musings on political economy.

∙∙∙

August 8

Surge on Monday saves gains for the week as market responds to pressure from negative housing and jobs reports.  Monday’s 1126 high was just over 10% above the July low, an encouraging sign that a new primary uptrend is in place, but would not be confirmed until this high is breached over a two-month span into early September.  At 1122 our benchmark index is about 10% above the July low and 8% below the April high.  The model jumped into the mid 90s, a comfort zone that will likely keep it from a switchback to a sell over the next several weeks.  Its technical indicators have firmed up with last week’s positive action, joining its monetary, sentiment, and especially fundamental indicators in positive territory.  The model’s volatility measures remain high, a result likely to continue as this schizophrenic market tries to evaluate the direction of US and global economies within this transitional fog.  Are we having a slow recovery?  Are we entering a double-dip recession, although rare? Do we remain in a recession?  For now the model comes down on the optimistic scenario.

August 1

Flat week eases the S&P 500 to 1102, 9% below the 1217 April high and 8% above the July 1023 low.  During a buy signal pullbacks are opportunities to buy stocks, consistent with risk profile.

July 25

The model has switched back to a BUY signal, effective at the close on Monday, July 26.  Accordingly, the model’s standard portfolio switches 100% into the S&P 500 and the aggressive portfolio invests 150% in the same index. 

The three-week sell signal was a big disappointment, to say the least, giving up gains of about 7%, although finalized percents will be based on Monday’s close.  Switchbacks are uncommon, but more likely in fast-moving volatile markets.  Out of 59 past signals for this model’s forty-year history, 8 included switchbacks of three weeks or less, or about 14% of the signals.  There have been 4 one-week (with net loss or foregone gain averaging 2%), 1 two-week (13% loss in January, 2009), and 3 three-week (average 5% negative) turnarounds.  The only three-week sell-buy switchback prior to the current one occurred in 1980, sacrificing the same 7% gain as the current.  At that time, the subsequent buy signal became a one-week switchback and the succeeding sell signal lasted 84 weeks, avoiding a market loss of 13%.

The model continues its struggle with borderline inflection points that signal the intermediate direction of the market, a learning experience that will be assimilated in next year’s version.  The sell signal three weeks ago barely crossed the sell threshold and the score the following week came within a hair of a buy signal.  The buy signal this week is well above the 77 threshold, although given current uncertainties regarding economic recoveries here and abroad, legislations that impact business, and the upcoming US elections, this bipolar and volatile market is likely to continue, probably within the context of a flat to down secular trend.  For now, though, the cyclical bull market that began in March, 2009 remains intact, until proven otherwise by a greater than 20% decline from the 1217 April high.  At 1103 the index sits 9% below this high.  See the FAQ for details on bull and bear markets.

July 18

Friday market swoon erases gains for the week, and then some.  Model eases back in harmony with a 13 point decline to 1065 for the S&P 500, but remains within striking distance of a signal reversal.  While the market is volatile, so will be the model, as it struggles with borderline inflection points that signal the intermediate direction of the market.  This looks like a time for caution, to lighten portfolios, assuming the model is right on the negative direction of the primary trend. 

July 11

Surprising 5% market rally for the week, its best week this year, takes the model to the verge of a buy signal.  Is the correction low over, giving us the possibility of a new primary uptrend?  Or is this a sucker’s rally within the context of an upcoming bear market?  The model estimates a nearly 77% probability of a new primary uptrend (8% or more gain from the 1023 low over at least eight weeks from July 2), but not quite enough to reverse its signal.  The model will likely reverse itself if the market closes higher by the end of this week, above the current 1078 for the S&P 500.

July 4

The model has issued a sell signal, effective at the close on Tuesday, July 6.  Accordingly, the model’s standard portfolio switches 100% into a money market fund based on T-Bills and the aggressive portfolio shorts the S&P 500 100%. 

 

The just completed 21-month buy signal was unimpressive, gaining 3%, 2%, and 13% for the Dow, S&P, and Nasdaq, respectively, based on Friday’s close and without reinvested dividends.  Tack on dividends & the gains improve to 9%, 7%, and 15%.  During this buy phase we had the bad luck of buying in on a Monday close that rallied 12% just for that day (a flat day would have added 12% to our buy-signal return for the S&P), skiing down a harrowing 28% eight-week bear market slope in 2009, and coming in late on the current sell signal.  We did, however, ride an 80% bull market into April of this year.  Finalized percents will be based on Tuesday’s close.

 

The current 1023 low is 16% below the 1217 recovery high in April, now confirming a 10-week primary downtrend, a result that will be incorporated into the 2011 model.  The disappointingly-late sell signal is unusual for this (2010 version) model’s history.  Since 1970, we have experienced 14 periods of greater than 15% declines.  Of these, 8 or just over half degenerated into bear markets, subsequently logging greater than 20% declines. The model was on a buy signal at the inception of 4 out of these 8 bear markets, but switched to a sell within 6 to 9% declines in 3 of these, well in front of the average 28% loss that ensued.  The lone exception was the 34% four-month bear in 1987, when the model gave a sell signal at the 15% decline mark, about the same as the current signal.  And over the 84-year history of the index, declines of 15% or more end up crossing the 20% bear threshold about 75% of the time. Bottom line: it’s likely we will be entering a cyclical bear market.

 

To be sure, there’s plenty to worry about, given the alarming world-wide and our own federal and states sovereign debt problems, concerns about the viability of global economic recoveries, and business (large and small) uncertainties regarding the subsequent effects of health care, energy, financial regulation, and tax legislations by the current US Congress... policies which will likely worsen our own sovereign debt dilemma and hamper or delay job growth and any subsequent economic recovery.   Assuming the upcoming earnings season is positive and given that we have an oversold market, this bipolar and volatile market is likely to continue, but probably now within the context of a bear market cycling around a flat to down secular trend.  As usual, the operating policy with a sell signal is to sell or lighten stock portfolios during rallies.

∙∙∙

June 13

Bipolar market takes back some lost ground for the week, with major indexes remaining in corrections.  At 1092 the S&P 500 is about 10% below its recent high of 1217 on April 23.  Its closing low of 1050 on June 7 marked the correction low at nearly 14%.  Pullbacks between 5 and 10% and temporary corrections contained in the 10-15% range are healthy outcomes in ongoing bull markets, reality checks if you will, a cleansing of the fearful fence-sitters, providing opportunities for new money on the sidelines to fuel a resumption of the uptrend.

 

Do we have an unfolding but contained correction? Or are we facing a new bear market?  Keep in mind that the model judges the patient’s vital signs over the intermediate term (months rather than days).  With the score swinging between the 90s and 70s the model is reflecting the market’s volatility.  Still, the model stubbornly concludes that we remain in a primary uptrend rather than a primary downtrend that logs an 8% or more decline over at least a two-month period based on Friday closings.  The current correction, the first since the March low last year, has exceeded the model’s 8% benchmark, but first happened over a short four-week period and continued into a sixth week for the low, still under the model’s eight-week criterion.  Remember that sharp, short declines are mostly under the model’s radar, a design criterion that considerably improves its historical annual performances and reduces the number of trades.  It’s not a trading model that’s unduly influenced by daily or sometimes even weekly action.  It’s been mostly right in the past, although this could be one of those exceptions, especially if the European crisis and world economies significantly deteriorate from here.  As an aside, we need to seriously address our own growing sovereign debt problem, lest we find ourselves in similar circumstances a few years down the road.  As Fed Chairman Bernanke stated recently regarding current policies: “the federal budget appears to be on an unsustainable path."

 

The past week was encouraging from a technical standpoint, as the market bounced nicely from the low over a four-day period.  The model’s fundamental indicators such as p/e ratios and yield comparisons to bonds are very positive; new bear markets rarely unfold with these metrics in buy mode. Still, the model remains somewhat sensitive to downside technical action.  If the index drops about 6% from here to about 1025 at Friday’s close, the model could give a sell signal, depending on the exact changes in some of its other technical indicators and on market sentiment. This what-if scenario assumes market behavior similar to that two weeks ago. Should the market continue its turnaround this week or even if the damage remains contained, under invested portfolios willing to take on risk could still see a very nice buying opportunity in here. 

∙∙∙

May 9

It was a harrowing week, to be sure, with the Dow sporting its biggest ever intraday plunge of 1139 points from the day’s high to its low, over a coffee-break time span.  The exact cause remains unknown at this time: Trader pushed wrong button?  Wall-Street conspiracy?  Cyber attack?  Unanticipated complexity in computerized trading?  All of the above?  The market was already very nervous about the European sovereign (governmental) debt crisis and the very real possibility of a spreading global contagion.  Are we facing another precipice, like the one we went over in 2008?  And, surely, robotic high-frequency computerized trading, the norm today, exacerbated the decline, but likely not the final outcome for the day, a 3% drop that wrapped up a 6% fall for the week.  And a temporary correction of 10% would not be surprising, given the 80% gain from the March, 2009 low. 

 

So, let’s consider some perspective.  Yes, the headline-grabbing 1000+ fall was the biggest in history, but at 10% was not much bigger than the 8% slide in October, 2008 and significantly below the 22% plunge in October, 1987.  Moreover, the markets were already weak in the earlier single-day swoons, with the models during those times on sell signals, unlike the current buy signal.  At 1111 for the S&P 500, the present pullback marks 8.7%, about the same as the completed 8.1% pullback last February.  Pullbacks between 5 and 10% and temporary corrections contained in the 10-15% range are healthy outcomes in ongoing bull markets, reality checks if you will, a cleansing of the fearful fence-sitters, providing opportunities for new money on the sidelines to fuel a resumption of the uptrend.

 

Do we have a pullback that’s nearly over?  An unfolding but contained correction? Or are we facing a new bear market?  Keep in mind that the model judges the patient’s vital signs over the intermediate term (months rather than days).  With the score dropping from the high 90s to the low 80s there clearly has been deterioration since the recovery high two weeks ago.  At this time, however, the model judges that we remain in a primary uptrend rather than a primary downtrend that logs an 8% or more decline over at least a two-month period based on Friday closings.  Remember that sharp, short declines are mostly under the model’s radar, a design criterion that considerably improves its  annual performances and reduces the number of trades.  It’s not a trading model that’s unduly influenced by daily or even weekly action.  It’s been mostly right in the past, although this could be one of those exceptions, especially if the European issue significantly deteriorates from here.  As an aside, we need to seriously address our own growing sovereign debt problem, lest we find ourselves in similar circumstances a few years down the road.

 

At this time, the model is most sensitive to its technical indicators, particularly the weekly change in the S&P 500 and the number of NYSE highs and lows for the week.  Sentiment (how bullish or bearish investors are) is also influential in here.  Different what-if scenarios for the model tell me that a decline in the index on the order of 5% from here to the close on Friday, from 1111 to less than 1060, will likely trigger a sell signal, providing the model’s other indicators roughly respond as they did this past week.  If the number of weekly lows for this coming week exceeds last week’s number, then it would take even less of a decline to issue a new sell signal.  For example, a 50% increase in the number of weekly lows from last week to this week could result in a sell signal should the index drop below about 1085, a 3% decline from here.  Should bullish sentiment deteriorate, as I expect it will, that would be a positive (contrarian) influence on the model.  That could drop the 1085 trigger back to the neighborhood of the 1060 trigger.  Should the number of highs decrease by 50% along with a 50% increase in the number of lows, the trigger drops to about 1020, an 8% decline from here.  The number of highs plays a contrarian role in this case.  Remember that we’re speculating here with four specific numerical indicators with an infinite number of outcomes… and that these numbers are based on this coming Friday’s close. 

 

One thing is clear:  The model is closer to a sell signal than I would have anticipated just a week ago, an indication that its sensitivity is now greatly heightened.  In other words, it can drop very fast from this point.  (For those of you technically inclined, the score’s location is at a very steep point on the model’s non-linear multi-dimensional response surface.)  Still, I would not recommend second-guessing the model during the week.  Let’s wait and see what happens by Friday.  Should the market begin a turnaround this week or even if the damage remains contained, portfolios willing to take on risk could see a nice buying opportunity in here. 

∙∙∙

January 17

The last year of the decade marked its best performance since 2003, a nearly 27% return with reinvested dividends for the S&P 500.  The standard model went along for the bumpy ride, also posting a 27% gain for its portfolio.  The aggressive portfolio upped results to about 34%.  The model remains extremely positive as we enter the new decade, with little chance for a switch signal anytime soon.  Under-invested portfolios should consider adding to equities during the frequent 3% to 7% pullbacks.  The last pullback was 5.6%, ending on October 30.

 

2000-2009

Live Performances

 

Strategy

Annualized
Return

Ending Amount
Starting w/$100,000

Cumulative
Return

Cash

2.7%

$131,000

31%

Buy & Hold

-1.0%

$91,000

-9%

Standard Model

4.7%

$158,000

58%

Aggressive Model

6.3%

$184,000

84%

That’s the good news.  The bad news is the completion of a lost decade, the worst performing ten years in the S&P 500 index since its inception in the 1920s.  Surprisingly, the economically-devastating 1930s just about broke even for a buy and hold investor, a much better performance than the current decade’s cumulative 9% loss, which works out to a 1% annualized loss.   A passive portfolio of $100,000 based on the S&P 500 Index at the start of 2000 would have ended with about $91,000 at the end of last year, including reinvested dividends.  Compared to the discredited buy-and-hold strategy, cash was king.  A portfolio invested in three-month treasuries (our money-market benchmark) would have ended with a value of nearly $131,000, or about $40k more than the stock portfolio.  The standard portfolio beat buy & hold by $67k and the aggressive version outpaced buy & hold by $93k.  The aggressive portfolio more than doubles the buy-and-hold portfolio.  And keep in mind that these are actual results, not theoretical results based on back testing.

 

A revised and re-optimized model for 2010, new write-ups, and a downloadable data file will be forthcoming sometime this month.

Will announce when ready.

 

NOTE

The TimerTrac link at left is a free report provided by an independent company that tracks the performance of market timers. Note that the report does not account for reinvested dividends, as we do, and as would be the case for reported returns in the media, thus showing lower returns for both buy-and-hold and the standard strategy during buy signals than those seen under the live performance table in our Reality Check page.  This is a significant difference in cumulative returns over long time horizons as reinvested dividends make up about a third of S&P 500 total returns.  Also note that the timing model is a statistical mathematical model that issues buy and sell signals.  The strategies (standard & aggressive) are the trades that are made when these signals are issued. 

Distribution
Copyright © 2010 Richard Mojena. All rights reserved. All materials contained on this site are protected by United States copyright law and may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of Richard Mojena at mojena.com. You may not alter or remove any graphics, copyright or other notice from copies of the content.  You may download or print one machine readable copy and one print copy per page from this site for your personal, noncommercial use only.

 

Disclaimer

Specific and personalized investment advice is not intended by this communication. Its contents are for the public record as a free public service. Information is based on the analysis of past data and assessments by the models. Future performance may not reflect past performance. Profitable trades are not guaranteed. No system or methodology ensures stock market profits. No guarantee is made regarding the reliability or accuracy of data. In other words, use this stuff at your own risk!

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