|
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 (10% plus gain
over at least eight weeks) 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 (a 10% or more gain over at least eight
weeks), as measured from the 1119 low on August 8. A rally that scales 1231 after
October 3 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 (correction
over at least eight weeks) 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: a 10% or more correction over at least
eight weeks. 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.
∙∙∙
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.
∙∙∙
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.
∙∙∙
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.
∙∙∙
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.
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 © 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!
|