Mojena Market Timing

 

January 1, 2012

Timing Model at 98.2

Buy Signal on July 25, 2010*

Strategy

Current Position

2011 Returns

Cash

Money Market (T-Bills)

 +0.1%

Buy and Hold

100% S&P 500

+2.1%

Standard Timing

100% S&P 500

+2.1%

Aggressive Timing

150% S&P 500

-1.7%

 

 

*The timing model issues buy and sell signals based on a mathematical/statistical score that ranges between 0 and 100:  Sell 42 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. 

The last week of the year ends with a whimper, but we managed to eke out a gain of about 2% on the S&P 500 for 2011 during a very volatile and scary year.  At 1258 the index actually ended almost exactly (0.04 lower) where it started the year, the total return solely due to dividends.  The aggressive strategy lost about 2%, as did the Nasdaq.  The Dow gained about 8% with reinvested dividends.  T-Bills were at about 0%, the electronic version of money under the mattress.  Some commodities fared better: gold up 10%, oil up 8%.  The big winners in the flight-to-safety stampede: Thirty-year Treasuries surged about 35%; the ten-years about 17%.  A diversified portfolio with long Treasuries and some commodities paid off this past year.  Expecting another bumpy ride in 2012.

The model’s performance disappointed by not standing aside during the nearly 20% seventeen-week severe correction from April into August, with the steepest declines over the last four weeks.  Still, by not bailing during the selloff, it paid to stay in as the market recovered in subsequent weeks, establishing a new primary uptrend.  Fast, steep declines are always troublesome for models with intermediate to long-term outlooks.  We’ll see if the revised model for 2012 does a better job, with hindsight and without sacrificing prior performances.  Look for the updated, re-optimized model by mid-January.  Meanwhile…

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

December 25

Our benchmark index pops 4% to 1265, as it settles 15% above the October low and 7% below the bull market high last April.  The model remains very bullish as the market crosses over into green year to date, again.  Look for a close above 1285, suggesting a technical breakout and likely run to 1364 and above, confirming and extending the cyclical bull market that began in March, 2009 and stalled last April.

 

Merry Christmas on this very special day

Best Wishes for a Merry and Happy Holiday Season

 

December 18

S&P eases 3% to 1220 as investors fret over the uncertainties of implementing the recent EU fiscal compact, an imminent sovereign downgrade for Belgium, and a negative outlook for France.  The model eases, but remains very bullish.  The investment of choice this year has been long Treasury bonds, returning an impressive 25% or so.  When bond rates start their inevitable upward trajectory from these artificially low levels, investors will likely sell bonds and move funds into equities.  Moreover, should Europe stabilize over the next six months and confidence in our political and financial institutions rebound based on reasonable and implementable debt, deficit, and growth policies, we could have one serious rally in stocks.  Meanwhile, we’re likely to remain range bound… and patient.

 

Best Wishes for a Merry and Happy Holiday Season

December 11

S&P 500 extends week’s gain to 1255, as investors remain cautious over the European situation.  In principle, European Union members did craft a revised fiscal compact that repairs some treaty shortcomings through enforceable penalties for non-compliant state budgets that fail certain metrics, but could not agree on bold steps that would calm markets, as in significantly raising bailout lending capacities and promising the issuance of euro bonds as guaranteed debt at lower than market rates as funding for outrageously leveraged banks that own sovereign debt.  Britain was the lone dissenter (out of 27 EU members), not willing to go along with losing its sovereignty over budgetary controls and weakening its financial district. The piecemeal approach continues… let’s hope it works in the end.

Getting back to black swan events, here’s another possible scenario:  Recent news articles outline our covert war with Iran.  Should this war turn hot, Iran could easily shut down the Strait of Hormuz, through which ships about 40% of the world’s daily oil, an overnight crippling blow to world economies.  We have oil ETF shares in DBO and remain cautiously invested in equity and commodity ETFs while the model is on a buy signal. 

December 4

What a difference a week makes.  S&P surges better than 7% to 1244, as investors turn ecstatic over coordinated liquidity moves by world banks, thus “solving” the euro crisis once again.  The model follows suit, leaping 20 points.  A breakout above the 1285 closing high on October 28 could be technically significant, telegraphing a run at the 1364 bull-market high from last April.   

The monetary announcement essentially gives the European Central Bank more dollars to loan to its national banks, who will then loan to their respective insolvent banks.  This salves the symptom, but not the underlying cause: European countries have to get their fiscal houses in order by spending and promising less, while taking pro-growth actions that stimulate the private economy and print more Euros.  But… starting the printing presses would fan inflation fears, a huge concern in Europe rooted in understandable historical realities.  Greater fiscal restraint and debt deleveraging, however, should counterbalance inflation, at the likely expense of further slowing their economies; hence the need for pro-growth policies.  Again, Germany would require enforceable centralized fiscal policies to approve these moves.  And not all countries in the zone might go along.  And how do all of these offsetting actions net net for the global economies?  These are unpleasant, multi-year medicines and consequences.  And, as well, we should be seriously looking at ourselves in the mirror.  What will the USA do about its current European-like trajectory?  Another European summit is scheduled for Thursday and Friday, August 8 & 9.  We’ll see…

I stay invested, banking on the model to reasonably negotiate the big waves, as it has in its 40-year historical record and 20-year actual performance.  Still, I remain cautious, by not being fully invested, as stated previously.  It is hazardous black swan consequences that worry me… the very rare or extremely improbable, surprising and immensely consequential events that nevertheless do happen in the historical record.  These events, which can lead to either positive or negative consequences, are not capturable in advance by financial models, although it is possible to model black swans after the fact, in hindsight, once they’re better understood.  In our case it would be a series of cascading and interlinked detrimental economic events that engulf the world in a depression that might make the 1930s seem like happy times.  But then… financial extreme tail events are rare indeed… to fear them so that we remain perpetually uninvested would be unwise… and surely a prescription for chronic financial underperformance. Think not investing since the crashes in 1929 and 1987.

November 27

S&P swoons 5% for the week and 8% over the last two weeks, placing the index in the lower half of its seven-month trading range.  At 1159 it’s 5% above the 1099 October correction low and 15% below the 1364 April bull-market high.  The model responds in kind, shaving 17 points from the previous week, although it comfortably remains on a buy signal. 

The European crisis was the catalyst for the selloff, once again.  Bond yields have risen significantly in Italy and Spain, as they did earlier in Greece.  And yields are starting to rise in France and Germany, including a failed bond auction in Germany.  The precipice is near.  Rallies will follow if proposed solutions fan optimism for an eventual resolution, which will likely require a promise from the European Central Bank as the lender of last resort, which Germany opposes.  Will Germany blink?  If not, a government liquidity crisis could turn into a solvency crisis and a permanent shift of investors away from the euro zone as confidence is lost.  This would surely cause bank defaults and a severe recession in Europe, affecting other world economies.  A change to the European Union treaty allowing centralized fiscal control of its member countries would be the best, but not likely, solution, as it would affect the sovereignty of countries by giving up control of budgetary and taxation policies to a centralized authority.  A worse-case scenario for the intermediate term (but not necessarily long-term) would be the breakup of the euro-zone, with perhaps a remaining core of healthy and important economies. 

As stated in earlier comments, it’s this series of events that keep me cautious and not fully invested, now at 40% equities and 10% commodities vs. a targeted 55% and 20% during buy signals.  In particular, see the September 18 and November 13 postings below.  I might adjust lower still if my discomfort grows.  For portfolios thinking of completely “throwing in the towel,” consider the following: the model remains on a buy signal, our economy is slowly improving, and we have entered a very favorable seasonal period lasting into April, although last week’s start to this period is a cautionary sign.  If Europe unravels, however, it could be a “sucker punch” to the model, as stock markets head significantly south into bear territory.  Caution is in order during these very difficult times.

November 20

The bad...

  Euro debt crisis

  Concerns over failure of super committee debt negotiations

  State of world economy in general and US economy in particular

The good...

  Jobs, housing, manufacturing improving

  Stock valuations attractive, especially relative to bond yields

  Model remains very positive

And so the market took it on the chin this week, reacting to the “bad” with a 4% slide to 1216 on our benchmark index.   At about 11% above the October low and 11% below the April high, the S&P is trading at roughly the middle of this six-month range.  With the model on a solid buy signal the operating principle is to buy the drops, for underinvested portfolios that accept the persistent volatility.

November 13

Market’s bipolar reactions to European news (now Italy) continues in volatile week that saw the Dow dive nearly 400 pts (3%) on Wednesday,  yet recovered and then some by the end of the week, as the S&P closes up nearly 1% at 1264.  And a jobs report and consumer sentiment come in better than expected, allaying fears of a double dip recession?  The model remains blissfully positive with its solid buy signal.  It screams "Buy the dives and dips" for underinvested portfolios with a tolerance for volatility and "Stay the course" for "comfortably" invested portfolios.

November 6

Monday and Tuesday swoons break three-week rally, although by end of week the S&P recovers all but Monday’s 2.5% loss.  At 1253 the index is 14% above the 1099 correction low October 3, and 8% below the 1364 bull-market high last April. The six-month trading range remains in place, with the model betting on a breakout to the upside.  I remain wary over European contagion spreading to Italy and Spain, magnitudes more serious than Greece.  And a Chinese “hard landing” would not be good for our markets.  But then, high fear is an ingredient in market bottoms.

October 30

Market soars following Tuesday’s air pocket, extending three-week rally.  At 1285 the S&P is 19% above the 1099 correction low four weeks ago, and just 6% below the 1364 bull-market high six months ago. A new primary uptrend (8% plus gain over at least eight weeks based on Friday closings) is now confirmed based on weekly closes.  The model’s positive stance at the low appears justified, rewarding those who added to equity positions during the correction.  Still, the well-known conditions that caused market fear are far from over.  Continued downdrafts present investment opportunities for portfolios that tolerate risk, especially with the model near its maximum value. 

October 23

Monday’s swoon recovered by end of week, and then some, as S&P closes at 1238.  The index ekes into positive territory year-to-date, including dividends, and now stands about 13% above the correction low and 9% below the bull market high.  This market is not for the faint-of-heart, but does offer opportunities to buy, while the model is positive.

October 16

S&P surges 6% for the week to 1225 and 11% since the 1099 correction low on October 3.  The strong rebound is encouraging and consistent with the model’s position, suggesting that the deep correction has been a buying opportunity.  The index remains 10% below the 1364 bull market high in April.  The technical action was very good and, according to Ned Davis Research, third quarters with 14% or more declines have been followed by rebounds 89% of the time in the fourth quarter, averaging gains of about 5%. 

October 9

Collapse on Monday takes S&P to a closing 1099, within a fraction of an “official” (20% loss) bear market.  The index then rallied 6% into Thursday’s 1165 close, before pulling back to 1155 at Friday’s close.  The model remains unfazed by this violent behavior.  I’m hanging in there with it, at a cautious 40% exposure to the equity market.  It is the infamous October after all, a month that’s historically disposed to declines.  Based on the Dow, about half of the biggest percentage losses were in October.  The same month also registers 70% of the biggest percentage rallies.  I’m assuming that we’re either near or have seen the bottom of the current correction, that the market has priced in the bad news, although all bets would be off if Europe melts down.  Very recent debt downgrades for Spain and Italy and a negative watch on Belgium are inauspicious, although not particularly surprising.  Events in Europe, upcoming retail and consumer sentiment reports, and the start of earnings reporting season will likely give us another roller-coaster week.

October 2

Friday’s swoon erased gains for the week as difficult quarter ends on a bad note, marking five straight months of losses.  The events du jour for renewed bipolar distress were “déjà vu all over again:”  European debt crisis, disappointing economic reports (China again), and the possibility that the US will tip into a new recession, if not there already.  The S&P closed at 1131, a deep correction that now stands at 18% and perilously close to a new cyclical bear market.  The model appears unperturbed, while the rest of us remain on “pins and needles.”  Postings for the past two weeks are still relevant.

September 25

S&P 500 gets crushed 6.5% for the week on renewed European concerns over their debt crisis, disappointment in the Federal Reserve’s outlook and solutions, and reports that suggest a worsening global economic outlook.  At 1136 the index is back in deep correction territory, 17% below the bull market high of 1364 last April and just 1.5% above the 1119 August correction low.  From a technical standpoint, the close above the correction low is a non-confirmation that the primary downtrend remains active, a positive that gives little comfort to those of us experiencing market volatility.  A close below 1119 this coming week would be a confirmation that the primary downtrend that started last April is still in place, thereby calling into question the model’s judgment that we’re in a new primary uptrend.  A sharp rally that closes above 1231 would bear out the model’s judgment.  A close below 1091 would be a new cyclical bear market. 

Expect continued event-driven volatility, although an unlikely “shock and awe” response to the euro-crisis, such as a massive and coordinated increase in the euro-bailout fund, could ignite a significant global rally.  Dicey week coming up, to say the least. 

September 18

Market pops 5% for the week, to 1216 on the S&P 500 and nearly 9% above the correction low end and 11% below the bull-market high end of the recent 1119 to 1364 range for the S&P 500.  The model now estimates a 95% likelihood that we’re in a new primary uptrend (an 8% or more gain over at least eight weeks), as measured from the 1199 low on August 5.  A rally that scales 1295 after September 30 would be a confirmation of the primary uptrend. 

Times are scary to be sure, given all the well-known bad news out there that I’ve cited over recent weeks.  So, why is the  model so upbeat?  Its technical indicators regarding trends, new lows vs highs, advances vs declines and up vs down volumes have improved.  Moreover, an important oversold indicator concerning new 52-week lows gave a major buy signal recently.  Monetary and fundamental indicators are very positive, especially the relationships between interest rates and either earnings yields or dividend yields on stocks, one being an alternative investment to the other.  Negative sentiment is also a positive contrarian indicator, including the VIX “fear index,” which gave a major oversold signal several weeks ago. 

Might the model be wrong?  Yes, of course, although not often based on its history, and not for long.  This could be an exception during exceptional times, to be sure. Still, to be invested in risk assets, such as the stock market, we have to tolerate pain in order to reap gain.  It’s the nature of markets.  The actual performance of the model’s annual versions since 1990 shows a significant reduction in, not an elimination of “pain,” as confirmed by its risk, standard deviation, and drawdown metrics in Reality Check.  And while it  misses out on some returns, it still beats overall “gains” by the S&P 500 over a 21-year period of actual use. 

The banking crisis in Europe still worries me; if it really unravels it would dwarf our subprime debacle.  And it’s not going away anytime soon.  I remain cautious, as cyclical bulls tend to be limited during secular bears, assuming we’re in a secular trend that’s flat to down, influenced in no small way by economic headwinds from an extended (multi-year) unwinding of the insane and greedy public and private global debt supercycle of the last two decades, not to mention, but I will anyway, government mismanagement and dysfunction and poor leadership here and Europe, creating additional uncertainty and loss of confidence in our institutions. Nevertheless, I count on the model to sidestep a really prolonged and deep cyclical bear market, as it has in the past.  See the FAQ for cyclical and secular definitions and history. 

Underinvested portfolios with a tolerance for risk might view the current correction as an opportunity to buy, while the model remains on a buy signal.  If volatility keeps you up at night with too much perceived risk, then consider the commentary on July 3: “For those portfolios that follow the model and where risk is an issue, caution is in order.  For example, a normal allocation of 60% to equities during a buy signal could be lowered to a ‘comfortable’ percent.”  I did just so at the time and then bought into the decline in subsequent weeks, given that the model remained on a buy signal. 

September 11

The President announced the jobs bill and stock futures reacted little to the proposals, their expected cost, and the unannounced means by which they will be paid for.  The events that turned the market from positive to negative for the week were euro-centric: Friday’s renewed specter of a Greek default and the sudden resignation of Germany’s rep to the European Central Bank’s board, confirming suspected discord over the means to solve the European debt crisis.  For the week the S&P dropped 2% to 1154 and the model eased back 4 points. We stand 3% above the low end and 15% below the high end of the recent 1119 to 1364 range for the S&P 500.  The event-driven market continues: good news we see a pop; bad news we see a swoon.  With bad dominating good we remain in a correction. 

August 28

S&P 500 jumps nearly 5% to 1177 and model significantly increases its probability to 88% that we’re in a new primary uptrend. We’re now about 14% below the bull market 1364 high from April this year and 5% above the 1119 correction low on August 8.   “Dead cat bounce” or back in the business of sustained, although volatile, market gains?  One week at a time.  Time will tell.  The banking crisis in Europe worries me; if it really unravels it would dwarf our subprime debacle.  And it’s not going away anytime soon.  I remain cautious.  Previous commentaries are still relevant.

August 21

Another volatile week sheds almost 5% on the S&P, closing at 1124, bringing this deep correction back to nearly the -18% level, as angst turns to fear regarding the solvency of European banks, its effect on the global economy generally and US banks specifically, and new economic data in the US that came in much weaker than expected, possible harbingers of another recession.  The model dropped as well, now figuring there’s a slightly better than fifty-fifty chance that we have a new primary uptrend.  Still, it remains on a buy signal, suggesting it’s either out of its mind and should have had us out of the market several weeks ago, or knows something we don’t know.  Meaning what? That it views the current swift decline as nearly over, as it has in the past when not issuing a sell signal during a fast correction.  Given this perspective, I cautiously added to my portfolio at the end of the week, as I had the previous two weeks.  Still, at about 40%, I remain well below my stock allocation target of 60% during “normal” buy signals.  For the intrepid, or maybe foolish, fearful declines are often opportunities to buy.  Yet, the model could throw in the towel should a panicky selloff continue this coming week, at roughly down 6% at  Friday’s August 26 close, to the neighborhood 1055 on the S&P, but also depending on how other data that I have roleplayed settle. 

August 14

Tumultuous, violent week ends in two up days, paring the S&P’s loss to 2% for the week, after Monday’s 7% debacle, urged in no small way by the US debt downgrade and renewed fear of contagion and possible downgrades in the Eurozone. The Dow industrials gyrated more than 400 points in four consecutive days this past week, an event not seen in the index's 115-year history.  The VIX for the S&P 500, a measure of volatility used by the model, rose to a very panicky 48 on Monday’s shambles.  Just five times since its inception in 1993 has the VIX exceeded 45.  Four of these presented buying opportunities over the succeeding year, the panic of 2008 the exception. 

The model remains on a buy signal, concluding that we’re looking at a 70% likelihood of a new primary uptrend.  If so, we have a buying opportunity for underinvested portfolios with a high tolerance for risk.  Might the model be wrong?  Yes, of course, although not often based on its history, and not for long.  This could be an exception during exceptional times, to be sure. Still, to be invested in risk assets, such as the stock market, we have to tolerate losses in order to reap gains.  It’s the nature of markets.  “No pain, no gain” as the aphorism goes.  The actual performance of the model’s annual versions since 1990 shows a reduction in, not an elimination of “pain,” as confirmed by its risk, standard deviation, and drawdown metrics in Reality Check.  And while it  misses out on some returns, it still beats overall “gains” by the S&P 500 over a 21-year period. 

These are unusually volatile times, no doubt.  As stated on July 3: “For those portfolios that follow the model and where risk is an issue, caution is in order.  For example, a normal allocation of 60% to equities during a buy signal could be lowered to a ‘comfortable’ percent.”  I did just so at the time and have been buying into the decline these past two weeks, given that the model remained on a buy signal.  By the way, corporate insiders have also been buying, the most since the bear-market’s bottom in 2009.  With newspaper front-page headlines such as “Global Panic” and “Worldwide Meltdown” on Tuesday morning, a contrarian might conclude that we’ve probably seen or are near the lows.

The 1119 close on Monday brought the S&P to 18% below the 1364 cyclical bull market high last April, dangerously close to a new cyclical bear market.  Still, the cyclical bull market dating back to March, 2009 remains in place, until proven otherwise.  At 1179 we’re currently nearly 14% below the high and 5% above last Monday’s deep correction low.  Longer term, caution is warranted, as cyclical bulls tend to be limited during secular bears, assuming we’re in a secular trend that’s flat to down, influenced in no small way by economic headwinds from an extended (multi-year) unwinding of the insane and greedy public and private global debt supercycle of the last two decades, not to mention, but I will anyway, government mismanagement and dysfunction and poor leadership here and Europe, creating additional uncertainty and loss of confidence in our institutions. See the FAQ for cyclical and secular definitions and history. 

August 7

Dramatic selloff for the week crushes S&P 500 7% to 1199, confirming a 10% official correction and a new primary downtrend (decline of 8% over at least eight weeks based on Friday closings) at 12% below the 1364 cyclical bull market high in April.  The budget/debt ceiling standoff was resolved (for now), the market yawned (resolution was anticipated), and serious selling began as fears over the growing Eurozone crisis, a US debt rating downgrade, and a possible global recession came back front and center.  Moreover, over the weekend, S&P downgraded US sovereign debt, raising concerns that interest rates will now rise (not certain), further increasing the likelihood of another recession.

Is there any good news?  Corporate profits and balance sheets continue strong, stock valuations are cheap relative to bonds (an indicator in the model), interest rates are still low by historical standards, and the model remains on a buy signal, primarily based on a 52-week new lows indicator showing a deeply oversold intermediate market, without which we would be very near a sell signal.  And a ratings downgrade could be a silver lining that encourages the US to get its house in order.  It also raises the likelihood that the Fed, in coordination with other governments, will start another round of easing, although I’m not holding my breath here.  The stock market will likely respond negatively to the downgrade, so I’m looking for continued volatility this coming week, although it’s hard to say just how volatile, given that the downgrade had been widely anticipated, fair or not (S&P made a $2T math error in its calculation, making the evaluation worse than it really is).  And the downgrade is by one rating agency; two other key agencies remain on a negative watch, not a downgrade.

The model “sees” the current situation as a continuing opportunity to buy for underinvested portfolios with high risk tolerances.  It did disappointingly miss an early detection of the new primary downtrend, a fact that will be noted when next year’s model is revised.  The current model’s test history, however, shows that missed primary downtrends have not lasted long following their actual confirmations, the latest such event the sharp and swift 16% correction into July, 2010 followed by a recovery to new pre-correction highs by December of that year.  The current model stayed on a buy signal throughout that nail-biting time frame; last year’s model issued a late sell signal at the end of the correction, but lasting just three weeks.  Looked at another way, there have been 20 weeks out of 2140 tested weeks (from 1970 through 2010) when the S&P had lost more than 6.5% in a week.  Out of the 20, the model was on a buy signal in 3 of these weeks, as it is now, and on a sell signal in the remaining 17.  For the three weeks when the model was on a buy signal and the weekly declines exceeded 6.5%, on average, the market was up 4%, 9%, and 13% one, two, and three months out, respectively, with all nine data points showing positive returns.  Yet another take: The model’s score estimates a 73% likelihood or odds better than 2 to 1 that we’re at the beginning of a new primary uptrend.  In the final analysis, it’s a game of probabilities, with historical likelihoods on the model’s side.  That’s good enough for me.  No guarantees, time will tell. 

July 31

S&P sheds 4% to 1292 as the budget fight moves front and center, rating agencies threaten a US credit-rating downgrade (it’s likely coming), and an ugly GDP report raises the specter of another recession.  We’re looking at the possibility of a cathartic selloff if Congress doesn’t resolve the issue by early in the week.  The model took a 10-point haircut, putting it near the beginning of a steep point on its curve, meaning it can drop more dramatically from that point.  Still, it remains comfortably positive and will not update until the close on Friday, time enough for the market to bounce back from a potential selloff, assuming the crisis would be quickly resolved should we cling to the edge of that cliff. 

Underinvested portfolios with a high tolerance for risk might view any significant selloff as another opportunity to buy.  For now the model says we remain in a primary uptrend, as defined in the Timing Model page; a drop in the S&P to near 1228 should cause it to rethink its outlook.  The cyclical bull market dating back to March, 2009 remains in place, until proven otherwise.  We’re currently just 5% below the 1364 bull-market high last April.  Longer term, assuming we’re in a secular trend that’s flat to down, influenced in no small way by economic headwinds from an extended (multi-year) unwinding of the insane and greedy public and private global debt supercycle of the last two decades, some caution is warranted, as cyclical bulls tend to be limited during secular bears. See the FAQ for cyclical and secular definitions and history.

July 24

S&P 500 snaps back for the week, to 1345 and within 1.4% from the top of its recent 1265-1364 trading range.  Market took courage from good earnings reports, the latest Greek bailout, and with what appeared to be progress on the debt-ceiling-deficit negotiations, which have since broken down once more after the market’s close.  It’s back to the brink as the political drama continues.  And this is now the sixth euro “solution” to their debt/deficit crises… and counting. The latest Greek tragedy is a type of default, actually, and again “solves” debt with more debt, with little hope of full payback for a neo-socialist nation with a chronically weak economy.  And the Greek problem is small potatoes compared to the potential “bailouts” of, say, Italy and Spain.  We’re looking at a multi-year contagion problem here.  Back to the present, with the model this strong, any significant fear-driven drop in the market this week could present an opportunity to add to stock positions for underinvested portfolios, consistent with risk profiles.

∙∙∙

July 3

Oversold market surges with a vengeance, popping 5.6% for the week, to 1340 for the S&P 500 and within 2% of the 1364 recovery high in April and 6% above the 1265 pullback low last month.  Weekly gains above 5.5% are an unlikely 1.4% of the time over the past four decades, or about 2 weeks on average every three years.  The last gain in this rarefied category was in July, 2009 as the market vaulted 7% for the week.  It then went on to a 20% gain for the remainder of the year.  In July last year, the market jumped 5.5% in the first week, logging an 18% gain from the second week in July to the end of the year.  While outsized gains would not be expected in this worrisome year, last week’s performance augurs well for the remainder of the year, particularly if the model remains on a buy signal.

The catalyst was a default postponement and second bailout for Greece, although a deeply oversold market and some good manufacturing data surely helped the direction and magnitude of the gain.  Still, the Greek drama is far from a resolution and only buys time through maybe the summer before the crisis rears its head a third time.  Moreover, it appears that money is flying out of banks not only in Greece but also from other troubled European nations (Ireland, Portugal, Spain, Italy), suggesting a potential credit and banking crisis and subsequent recession that could precede and possibly dwarf the next sovereign debt crisis.  So, continued volatility is surely baked in the cake, further enhanced by concerns over the controversial implications of not raising the looming debt ceiling in this country. 

For those portfolios that follow the model and where risk is an issue, caution is in order.  For example, a normal allocation of 60% to equities during a buy signal could be lowered to a “comfortable” percent.  Meanwhile,  I will count on the model’s next sell signal to tell me when the current stock-market party is about to end ( a reversal in the primary trend from up to down).  Hope you benefitted from last week’s birthday present for the Fourth of July.

June 26

Volatile week ends up slight loser on the last day, the seventh decline over the last eight weeks, as the Greek drama and renewed worries over European debt, defaults, and contagion take center stage.  At 1268 on the S&P 500, the pullback stands at about 7% below the recent high of 1364 in April, and just below where it started the year, with year-to-date returns solely due to dividends.  The rubber is meeting the road as the market flirts with the 10% limit that registers an “official” correction, not seen since last year’s 16% haircut over a fast and extremely volatile ten-week period that ended in July.  At that time, it marked a reversal of the primary trend from up to down: an 8% or more pullback over at least eight weeks based on Friday closings.  Yet, the current (this year’s) model ignored that event and stayed in for the ride that shot the market back up to a recovery high within four months and a 15% gain for the year.  With the model remaining on a strong buy signal, the present pullback might be an opportunity to buy more stock-based mutual funds or ETFs, for under-invested portfolios, consistent with risk profiles.  We are in scary times for sure, yet these often present investment opportunities, especially for the maverick investor who is willing to buck the current negative sentiment, particularly when the model’s contrarian indicators remain positive, as they are now, although not at desirable extremes. 

While the model is not directly influenced by current military, political, and natural or man-made disasters, it does have its finger on the pulse of the market-patient based on its diagnostic readings, which do react to current events through its technical and sentiment indicators.  And for sure, red-flag current events are a cause for significant worry: the continuing European debt crisis, with the potential for cascading defaults among its weak members, leading to a global financial crisis; concerns over a Chinese economic speed bump; a sputtering economy with low job growth, busted housing, sagging consumer confidence, slowed manufacturing, the impending end of QE2, the lingering effects of Japanese supply-chain disruptions, and oil concerns over Middle-East instability, all suggesting the possibility of another recession; and uncertainty by businesses and consumers regarding Federal economic, deficit, debt, tax, financial reform, energy, health care, and environmental policies. For now, the model’s positive stance views these downbeat events as affecting short-term pullbacks that will not change the primary uptrend in place since July last year.  Despite shocks to the system (volatility), the “patient’s” vital signs (model scores) remain strong.  Longer term, assuming we’re in a secular trend that’s flat to down, influenced in no small way by economic headwinds from an extended (multi-year) unwinding of the insane and greedy public and private global debt supercycle of the last two decades, some caution is warranted, as cyclical bulls tend to be limited during secular bears. Ideally, the model will tell us when the current stock-market party is about to end.  See the recently-updated FAQ for cyclical and secular definitions and history. 

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April 24

Market adds to gains for the week, despite a dizzying variety of concerns: continued worries over Japan, instability in the Middle East, renewed worries over European sovereign debt (Portugal has joined Ireland and Greece in the bailout camp, and there’s talk of debt restructuring for Greece), serious disagreements over the looming debt ceiling and the 2012 Federal budget, the fiscal outlook for the US, whose credit rating was questioned by Standard & Poor’s, and continued weakness in the dollar.  And yet, the model is solidly bullish for the intermediate term, with a score that hovers near its maximum value.  While the model is not directly influenced by current military, political, and natural or man-made disasters, it does have its finger on the pulse of the market-patient based on its diagnostic readings, which do react to current events through its technical and sentiment indicators.  For now it views harmful events as affecting short-term pullbacks that will not change the primary uptrend in place since July last year.

The 1257 S&P 500’s low a month ago marked over a 6% pullback from the recent 1343 high.  At Friday’s 1337 close, the index is a fraction below the high and nearly double the March, 2009 low. 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.  Given the market’s volatility, pullback opportunities present themselves often enough, especially if another European country (Spain?) defaults, greater than anticipated Japanese supply-chain disruptions come to pass, continued Middle East instability affects oil prices to a greater extent than it has so far, and Washington politicians lurch toward a failure to extend the debt ceiling. 

Extending the debt ceiling will likely require another Federal spending compromise, a good thing; failure to compromise by the time the debt limit is reached sometime in May will be problematic for the market.  Creative accounting would delay any default by Treasury into the summer, allowing more time for compromise.  Barring an eventual agreement, an unthinkable debacle would ensue; so unthinkable, in fact, that an agreement is virtually guaranteed.  Nevertheless, market volatility is in the cards as deadlines loom without agreement.  Longer term, assuming we’re in a secular trend that’s flat to down, influenced in no small way by an extended (multi-year) unwinding of the public and private debt supercycle of the last two decades, some caution is warranted, as cyclical bulls tend to be limited during secular bears. See the recently-updated FAQ for cyclical and secular definitions and history.

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March 27

The following commentary is focused on the economic and stock market effects of recent tragic events in Japan and the Middle East and is in no way meant to minimize the attendant human suffering and loss of life caused by these events.

Market  jumps nearly 3% this past week, despite continued worries over Japan, instability in the Middle East, and renewed worries over European sovereign debt, the focus now on Portugal.  The economic effects from the earthquake, tsunami, power, and radiation events are very serious for Japan.  As the third largest world economy that plays an integral role in international supply chains, there will also be economic disturbances in world markets, not good news in the current fragile recoveries.  Military engagements and disruptions of oil supplies in Libya are much less consequential to economies than a potential armed conflict evolving on the Arabian Peninsula between Shias and Sunnis generally and Saudi Arabia and Iran specifically, with Bahrain the current flashpoint.  Moreover, serious instability in Yemen threatens Saudi Arabia’s underbelly, opening possible inroads by both Iran and al Qaeda.  A serious compromise in the flow of Arabian oil fields or a blockage of oil shipments through the Straits of Hormuz chokepoint would most likely double or triple oil prices from the current high levels, wreaking havoc on industrialized economies, particularly Japan’s.  Longer term, possible regime changes in the Middle East, democratic or not, will not necessarily be friendly to Western (oil) interests.

The model rebounded and remains solidly bullish for the intermediate term.  While the model is not directly influenced by current military, political, and natural or man-made disasters, it does have its finger on the pulse of the market-patient based on its diagnostic readings, which do react to current events through its technical and sentiment indicators.  For now it views harmful events as affecting short-term pullbacks that will not change the primary uptrend in place since July last year.

The 1257 S&P 500’s low two weeks ago marked over a 6% pullback from the recent 1343 high.  At Friday’s 1314 close, the index is about 2% below the high and 94% above the March, 2009 low. 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.  Given the market’s volatility, pullback opportunities present themselves often enough, especially if Portugal defaults, greater than anticipated supply-chain disruptions come to pass, and continued Middle East instability affects oil prices to a greater extent than it has so far. Moreover, assuming we’re in a secular trend that’s flat to down, influenced in no small way by an extended (multi-year) unwinding of the public and private debt supercycle of the last two decades, some caution is warranted, as cyclical bulls tend to be limited during secular bears. See the recently-updated FAQ for cyclical and secular definitions and history.

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February 27

Middle East (read oil) instability chills hot market with nearly 3% pullback before rebounding some on Friday.  At 1343 the week before, the S&P 500 had extended the cyclical bull market to 98% above the bear market low in March, 2009, a near doubling of the index.  The current bull is halfway to the 44-month average for cyclical bull markets; it’s 3 percentage points short of the median advance and 46 percentage points under the mean gain.  Presently we remain about 16% below the secular high of 1565 in October, 2007.  Over three years!  See the FAQ for cyclical and secular definitions and history.

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.  Given the market’s volatility, pullback opportunities present themselves often enough, especially if continued Middle East instability affects oil prices to a greater extent than it has so far. Moreover, assuming we’re in a secular trend that’s flat to down, influenced in no small way by an extended unwinding of the public and private debt supercycle of the last two decades, some caution is warranted, as cyclical bulls tend to be limited during secular bears.

The revised and re-optimized model for 2011 is now operational.  Its buy band of 77 remains the same as its predecessor, but its sell band is much lower at 42, versus 53 for last year’s model.  As we might expect, the wider range generates fewer timing signals over its 1970-2010 time span, averaging 1.1 signals per year versus 1.5 for the 2010 model (47 vs 61 signals).  It also beats the preceding model’s ending portfolio value ($5.4 vs $4.1 million starting with $10k in 1970), but at slightly higher risk (0.90% vs 0.83%).  Last year’s model gave a late three-week sell signal at the end of the short and sharp 16% correction, damaging its performance for the year (6% for the standard strategy vs 15% for buy and hold).  Not so for the current model: it stayed on a buy signal throughout the year, matching the 15% return for the year. 

Historically, severe downturns over short time spans give the model headaches, often resulting in late signals both for the downturn and the subsequent recovery.  Witness the past year.  As would be expected, a model more sensitized to abrupt changes does a better job of detecting volatility, but at the expense of far too many switch signals and to the detriment of overall performance as measured by ending portfolio values over the tested time span.  The current model is tuned to better ignore this kind of volatility while improving overall portfolio returns. 

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January 16

Major indexes marked new recovery highs during the last week of the year, with the S&P 500 turning in a very respectable 15% return for the first year in the new decade, including reinvested dividends.  At 1293 into the second week of the new year the S&P 500 extended the cyclical bull market to 91% above the bear market low in March, 2009.  This 21-month bull run was interrupted by a 16% severe correction lasting 10 weeks from April into early July last 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 damage to the year’s return, 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 just under halfway to the 44-month average for cyclical bull markets; it’s 10 percentage points short of the median advance and 53 percentage points under the mean gain.  Presently we remain about 17% below the secular high of 1565 in October, 2007.  Over three years!  See the FAQ for cyclical and secular definitions and history.

A revised and re-optimized model for 2011, new write-ups, and a downloadable data file will be forthcoming sometime this month.

 

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. 

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Copyright © 2011 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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