Market tumbles to 1402
on the “500” as we cling to the cliff; model tanks 20 points as technical indicators
deteriorate. Look for a good last
trading day of the year if the pols reach some sort of agreement by
Monday, however unambitious; another bad market day if not. Still, the year’s returns look pretty
good, for now.
Many happy returns in the upcoming year… and beyond.
January 1 update:
Market soars on last trading day as partial cliff deal is reached
at the last moment. Full year
returns shown above.
83.5 Cash: 0.1% Buy & Hold: 16.2% Standard Timing: 16.2% Aggressive Timing: 20.7%
It looked like an optimistic week out of Washington, with
the stock market responding in kind, until the politicians smashed into
the cliff wall by Friday, as did the resulting market selloff on that
day. Still, it could have been
worse, and the overall gains for the week impressed, with the S&P
settling at 1430. With just five trading days left in the
year, the year-to-date gains look pretty good. But then those trading days left will
not lack for drama as the political theatre continues to the
“deadline.” The model sits tight
in comfort as the final act unfolds.
Here’s wishing you a very Merry Christmas and Happy Holiday week.
80.3 Cash: 0.1% Buy & Hold: 14.8% Standard Timing: 14.8% Aggressive Timing: 18.6%
Quiet week as market settles a bit below the flat line,
1414 on the “500.” With just over two trading weeks left
in the year and a looming negotiations deadline, expect less calm in the
stock market. Or we could end with
a whimper if the negotiating parties agree to postpone this artificial
deadline by leaving the status quo in place, until a more substantial
deal than now expected is put together over the next several months. Or maybe we have a temporary deal on
tax rates with “promises” to seriously address tax and entitlement
reforms in the coming year. A
headache for planning purposes and for the IT and budgeting folks, to be
sure, but maybe best for the economy and markets.
83.2 Cash: 0.1% Buy & Hold: 15.1% Standard Timing: 15.1% Aggressive Timing: 19.1%
Market marks time as political negotiations continue
and economic data on consumer sentiment and jobs, such as they are, ease
concerns. Some of you, I’m sure,
questioned my SDS trade last
week, as inconsistent with the model’s buy signal. True, from a longer-run (months to even
years) perspective, the model’s perspective. I also, however, do some short-term (days to weeks) trading
to protect the stock portion of the portfolio with shorts when I see
imminent events that might
trigger a major slide (during a buy signal), as in the current fiscal
cliff situation. This is a
tactical strategy that I use occasionally to minimize a possible maximum
short-term drawdown within a retirement portfolio that I live off of. The tactic is not a long-term trade
based on the model. These infrequent
trading decisions are based on both judgment and the behavior of some
short-term technical indicators that I pay attention to. Note that the use of SDS allows me to
protect all or a portion of the stock portfolio without selling stocks.
It’s standard temporary insurance by traders to be both long and
short at the same time, during times of unusual uncertainty. The trade is closed once the event
shows more clarity and the indicators firm up. Accordingly, I sold (covered) half the
short position last week, with a whopping 0.2% gain. Not all SDS, yet, as concerns still
remain. And note that the primary
objective is not to make a profit, although that is certainly welcome, but
to provide some degree of insurance… to temporarily insulate the
portfolio from a possible shock.
Also note, as discussed in the third and fourth FAQs
and elsewhere in these postings, that my portfolio is not entirely
stocks; it carries some commodities (including gold), corporate bonds
(including junk), and cash. The
stock portion is about 60% during a buy
signal, give or take, a percentage I’m comfortable with during
retirement and at my age. In the
1990s I was 100% stocks during buy signals, a good thing given the
magnificent returns during that decade.
And I strictly use ETFs over mutual funds. When the model issues a sell signal I unload all stock and
commodity positions, shift most proceeds to a money market, and the
remainder (up to 10%) to SDS, in recognition of the aggressive timing
82.6 Cash: 0.1% Buy & Hold: 14.9% Standard Timing: 14.9% Aggressive Timing: 18.9%
Market and model ease forward even as fiscal cliff
negotiations apparently do not.
Let’s hope that what we read and hear are pre-deal public
posturing and what we don’t see is private progress. The market’s paranoid but somewhat
positive tone suggests that a deal will be made before the end of the
year, while fretting that we either get a “bad” deal or slip over the
cliff. This past week could be the
last quiet week for the remainder of the year.
Get ready for more taxation, and not just the
“rich.” Its many Federal
incarnations (ignoring “fees”) include: income, payroll, dividends,
capital gains, Medicare, Affordable Care Act (12 out of 21 new taxes that
eventually impact the middle class).
Here are some quotes on taxation to think about:
Will Rogers (1879-1935)
There is some talk of lowering (the
income tax), and they will have to. People are not making enough to pay
The crime of taxation is not in the
taking it, it's in the way that it's spent.
trouble with the Republicans is their fear of an increase in income tax,
especially on higher incomes. They speak of it almost like a national
(The top Federal
marginal rate went from 25% in 1931, when this was quoted, to 63% in
1932, as the depression worsened;
it’s now 35% and likely rising.)
From a paper
coauthored by Christina Romer, former
Chair of President Obama’s Council of Economic Advisers
tax increases are highly contractionary. The effects are strongly
significant, highly robust, and much larger than those obtained using
broader measures of tax changes. The large effect stems in considerable
part from a powerful negative effect of tax increases on investment.
baseline specification suggests that an exogenous tax increase of one
percent of GDP lowers real GDP by roughly three percent… and that
[capital] investment falls sharply in response to exogenous tax
(This National Bureau of
Economic Research working paper from 2007 was subsequently published in the
June, 2010 issue of the National Economic Review.
Shortly thereafter Romer resigned her position in the Obama
From a Wall Street Journal editorial, November 30, 2012
the oldest lesson in tax policy: Tax something and you get less of it. In
this era when envy trumps growth, the government is raising taxes on
thrift, investment and risk-taking in the name of fairness and to finance
more government spending. No one should be surprised when there are fewer
dividends and capital gains to tax.
(Note that these two taxes are
investment taxes; see Romer quote.)
Capital Formation and the Fiscal Cliff, Thoughts from the
Front Line, November 26, 2012, John
taxes will drag down GDP growth in both the short and long term. The
longer-term effect will be a decrease in available capital. That $50,000
that our millionaire does not have this year? Over ten years it becomes
$500,000, and even more if the money is well-used. But if those funds
cannot be invested in productivity-enhancing tools, services, and
businesses, there will be fewer jobs and reduced consumption down the
line. There are consequences. As a country, we must decide whether to pay
(Less private money means less
capital investment, means less jobs; see Romer quote.)
For now, while this political football is unresolved,
I’ve neutralized about 80% of my stock portfolio by buying SDS,
the ETF that shorts the S&P 500 by twice (-2x). In other words, I bought 40 cents of
this trade per dollar invested in equities. The bias still favors 20% of my stock
ETFs, given the current buy signal, but with much less volatility. I’ll sell this derivative when the fog
clears over the next several weeks, assuming we remain on the buy signal.
80.3 Cash: 0.1% Buy & Hold: 14.3% Standard Timing: 14.3% Aggressive Timing: 18.0%
Oversold holiday market on rising optimism and thin
trading leaps 3.6% to 1409 for
the “500;” model soars 49% to “safe” 80.
The market and model pull back from their own cliffs, rising to
the middle of last week’s nearly 8% pullback from the September high. Those of us who committed more funds to
the market this past week should be happy, especially if this marks the
end of the pullback and a confirmation of the primary uptrend that could
take us to new bull-market highs.
By “safe” I mean to say that the model’s score is safely above an
imminent sell signal and just outside its “sensitivity range” of 30 to
75, a range outside of which it’s less responsive to changes in its
indicators. Still, caution is
warranted, as the market and model can respond dramatically to changing
perceptions and events in Washington,
Europe, and China… but
especially Washington. The remainder of the year is
market-critical for such events.
For now, let’s celebrate good cheer, given the solid year-to-date
Longer term is another story. Government overreach is one of my main
economic concerns. The
consequences are well stated by JP Morgan’s Kenneth Langdon, as quoted in
the November 20 edition of Things
That Make You Go Uhmmm… by Grant Williams. (It’s worth a read
just for the Muhammad Ali quotes and analogy.)
The net result of
this partnership between fiscal and monetary authorities is a continuous
drain of productive capital from the private sector into the
non-productive public sector. Little of that capital will be put to
productive use once in the hands of government bureaucrats. As a result
of this decimation of capital formation in the private sector, growth
will be permanently lower, which in turn creates a negative feedback for
the collection of taxes. Major economies are literally being bled to
death by this drain of capital from productive uses. Voters are
sanctioning this economic suicide.
53.7 Cash: 0.1% Buy & Hold: 10.3% Standard Timing: 10.3% Aggressive Timing: 11.9%
Model stays on buy signal, although dropping 8 points as the “500” shaves 1.5% for the week to 1360. The pullback now
registers 8% from
the 1466 peak two months ago, 5% just
since the election. Over this span
the change in the model’s demeanor has been dramatic, a loss of 44 points. As near I can tell, a drop in the
S&P to around 1340
(another 1.5%) at the upcoming week’s close could result in a sell signal, a score 43 or below. We are, however, entering a favorable
seasonal period into the end of the year… so maybe we remain on this 2+
year buy signal, the market rises, and we have yet another pullback
opportunity to commit more funds to stocks. But then again… this is not your
Whether or not the model would have given a sell signal last
week came down to last Friday’s market action. The market calmed down and reversed its
slide on that day, following the conciliatory tone expressed by both
political sides post the President’s meeting with Congressional leaders. Still, the model and market remain
shaky. The overriding concern right
now is the fiscal cliff. The market will rally should optimism
grow that the issue will be resolved or at least postponed while
negotiations continue into the new year.
Even so, the economy and market face serious headwinds over the
coming year, so market action might remain choppy as it reacts in
particular to Federal policies regarding expenditures and taxation, not
to mention global concerns over Europe and China. For now we remain on a week-to-week
watch over the model’s judgment.
Let’s put aside our concerns and enjoy a Happy Thanksgiving.
62.2 Cash: 0.1% Buy & Hold: 11.8% Standard Timing: 11.8% Aggressive Timing: 14.4%
Post-election market takes haircut with the S&P 500
selling off 3.4% to 1380 by
week’s end; model responds more than in kind, collapsing 19 points or 23%. The pullback now stands at 6% from the 1466 bull-market high in September.
The status-quo election results raise once more the specter
of the fiscal cliff, first described in the August 12 posting: “The fiscal cliff refers to the
looming tax increases (expiration of Bush, payroll, and other tax cuts
and new taxes for dividends and the health care law) and legislated
budget cuts (the debt ceiling deal) in January, 2013.” If a compromise
between the President and Congressional Republicans is not reached before
the end of the year, 2013 will surely include a recession, with obvious
serious implications for the economy (read: jobs) and the stock
market. A comprehensive agreement
regarding a tax policy overhaul (mostly the tax rate vs tax
revenue/deductions debate) and deficit reductions (primarily entitlement
and defense) is not at all likely in such a short period of time, but an
agreement to delay the cliff into next year while a compromise is worked
out is the more likely scenario.
Meanwhile, both sides will posture with their positions, the stock
market will gyrate, and the media will have plenty of material to talk
about. Still, both sides should
have ample motivation to make a deal, to overcome their paralysis, given
the predicted dire economic outcome and the subsequent reelection
consequences of not doing so.
however, will not stand by idly.
The scope of its decline this week surprised me, primarily on
greater than expected weakness in the market’s strength based on changes
in trend and internals regarding up v down volumes, advances v declines,
and new lows v new highs. As best
I can tell by running simulations (tricky because of so many
assumptions), a decline this upcoming week similar to last week’s could trigger a sell signal. This would mean a drop in the “500”
into the 1350 neighborhood at
the close on Friday, a distinct possibility if hope for a negotiated solution
deteriorates based on what we see politically over the coming two weeks,
especially following the meeting on Friday between the President and
Congressional leaders. Can
Obama/Boehner pull off the beneficial compromises achieved by
Reagan/O’Neill in the 1980s and Clinton/Gingrich in the 1990s? Let’s hope so. Or, given that we have the same players
and issues now as before, with no mandate, does the next two-year
election cycle begin now? Let’s
80.9 Cash: 0.1% Buy & Hold: 14.6% Standard Timing: 14.6% Aggressive Timing: 18.7%
Market and model flatline in Hurricane-Sandy-shortened
week. Now, we wait for next week’s
election results. From the posting
on April 15:
Which party does the market favor? While many believe that the business
climate and economic progress are more favorable with Republicans in
power, the historical record is confused at best, depending on many
factors, including the political balance and dynamics within the three
branches of government, ensuing legislation and rulings, the point in the
business cycle, and worldwide macroeconomic and demographic
conditions. Just looking at the
Presidential Cycle without the confounding elements mentioned, Fisher Investments determined the following:
* Third and fourth years of a presidential term are
positive for the stock market, based on average returns.
* A switch in presidency from one party to the next is
positive for the upcoming year, regardless of party.
* A re-elected Democrat is positive for the next year,
whereas a re-elected Republican is negative, on average.
So, it looks just based on these stats that next year
should be positive.
But then, these are averages with small data
points. My judgment for this particular election,
strictly based on economic and
stock market considerations, is that a Romney/Ryan victory will be
more positive for both the economy and market than an Obama/Biden
re-election, over the next
Fortunately, greater post-election clarity should be positive for
either outcome. And the fiscal
cliff looms shortly, the European crisis subsequently, both game-changing
outcomes. Still, under current
economic circumstances, it comes down to which policies will have a
greater influence on positive economic growth regarding reductions in the
national debt and deficits, tax reform, smart regulations, comprehensive
energy, with an emphasis on domestic gas and oil and conservation,
entitlement and market-based health care reform, and a leaner more
efficient Federal government… policies that will encourage far more jobs
than those of the past four (to twelve) years, especially in the
small-business sector, the engine of job growth in this country. Moreover, which candidate can better
negotiate with the opposition party, a necessary talent for breaking the
current gridlock? Romney’s record
as governor in Democrat-dominant Massachusetts
speaks for itself. My reading of
the times, historical record and past research clearly favors the
The April 15 posting continues:
Having said that, I listen to what the model tells
me. The model is apolitical,
unemotional, neither politically correct nor politically incorrect, but…
it’s not clueless regarding political events. Its indicators do react indirectly to
political policies that affect the economy and market. For example, interest rates have become
politicized to the extent that the Fed has become politicized: Not only
do artificially low interest rates help the economy (in the short term,
at the expense of fixed-income savers) but also lower the government’s
debt service, as in paying off our mortgage with a low rate. Several of the model’s monetary
indicators monitor interest rates.
And its technical indicators that measure trends, volatility, and
market internals such as volumes, advances and declines, and new lows and
new highs themselves react to economic events that are affected by
An interesting, seminal time, to be sure, with
potentially very long-term consequences.
To be continued…
81.4 Cash: 0.1% Buy & Hold: 14.3% Standard Timing: 14.3% Aggressive Timing: 18.5%
Market resumes pullback on renewed concerns over the
global economy in general and corporate earnings in particular. The S&P 500 settles at 1412 for the week, up from the
pullback low of 1409 last
below the September 1466
bull-market high. It looks to me
like companies might be hitting the wall to further cost reductions and
productivity gains, thereby ending the current positive profit cycle,
unless revenue rebounds sufficiently with a recovering economy. With companies this lean, strong future
top-line gains will turbocharge earnings and the next upleg of the bull
market. And it will be accompanied
by more hiring and greater consumer confidence, important factors that
promote revenue gains. Meanwhile,
more than the usual uncertainty will remain until there’s greater clarity
regarding Europe’s proposed “solutions,”
our fiscal cliff, and the election.
Which likely means that the market will remain choppy during this
pullback and possible correction.
The model retreated 12 points as some of its trend and
technical internals weakened.
Still, while the model is on its buy signal, pullbacks in the 4 to 10% neighborhood more often
than not present opportunities to beef up stock holdings, for those
portfolios that remain underinvested.
93.1 Cash: 0.1% Buy & Hold: 16.0% Standard Timing: 16.0% Aggressive Timing: 21.2%
Last Friday marked the Black Monday stock-market crash on
October 19, 1987. In a single day the Dow plunged 23%, the S&P
500 20%, and the Nasdaq
single day! The worst single
day ever, before and since. Global
markets also crashed and panic followed in the aftermath. Some headlines:
Wall Street Journal
Crash of '87: Stocks Plummet 508 Amid Panicky Selling
STOCKS PLUNGE 508 POINTS, A DROP OF 22.6%; 604
MILLION VOLUME NEARLY DOUBLES RECORD
on Wall St.
New York Post
Wall Street's blackest day rocks nation
Los Angeles Times
Rout on Wall Street leads stocks to record falls
The selling far exceeded anything seen in the worst
days of the 1920s and 1930s
I panicked along
with most everyone. The
evaporation of retirement dreams, the loss of financial freedom? The
1980s up to then had been a very good decade for stocks; my portfolio was
getting serious. I sold half the
portfolio’s stock portion on the 20th.
The aftermath? A repeat of
the 1930s? The Dow bottomed that
day, the “500” chopped its way to a low in December of that year, and the
Nasdaq put in a bottom nine days later.
The indexes gasped to the finish line, slightly up for the
year. The decade returned an
annualized 17% per year; the
1990s upped the ante to an annualized 18%. Spectacular
gains were realized over a twenty-year period, for those who stayed
invested. The best 20-year run
ever! Buy and hold was
reborn. Yet, a great number of
investors were so frightened by the crash that they didn’t dip their feet
in the market for years, some forever.
And then came the first decade of 2000. A negative annualized return of 1% for that
decade, punctuated by four bear markets with declines of 37%, 34%, 52%, and 28%. That ten-year span trimmed a buy and
hold portfolio based on the S&P 500 by 9%, including reinvested dividends; off 24% if not. Ten years and we’re down 9 to 24%? What a way to start the new
millennium. Devastation for
many. The lost decade. Cash was king. The buy and hold philosophy
decimated, especially for those near retirement. Once again, investors left the market
in droves. Were you in then? Are you in now?
That crash in
1987, those days of terror, made for some soul searching. My 1971 PhD was in quantitative
analysis and finance. The
financial buzz since the 1950s included terms such as Modern Portfolio Theory (MPT), the
efficient frontier, portfolio insurance, markets as random walks, the folly of timing the market. “Folly” was a kind word. It was more like “stupidity,” and
worse. Subsequently (in 1990) the
Nobel Prize in Economics was awarded to three Americans for their
pioneering work in the theory of financial economics, including Harry
Markowitz for his development of MPT.
Never mind. Within a week of the crash I started
thinking about and subsequently developing a model rooted in financial
hypotheses and constructed with the building blocks of mathematical
statistics and forecasting.
Invention is born out of necessity, alarm in this case. After more trial and error than I would
want to recount, or even remember, I had the first really good working
model by mid-1989, with full-year implementation in 1990. Each year since then the model has been
tested, revised, and improved. A
new model each year. (All models gave sell signals one week before the ‘87 crash.) The current model
is optimized (in theory) to max the value of the standard portfolio,
based on historical data since 1970; the actual (live) performance of
each model since 1990 (for its respective year) is seen in Reality Check.
I would not have
retired in 2007 if not for the model’s guidance over nearly two decades.
By the way, the
market last Friday celebrated the crash twenty-five years ago by selling
off, a mere 1.5% to 2.2%, depending on
92.6 Cash: 0.1% Buy & Hold: 15.6% Standard Timing: 15.6% Aggressive Timing: 20.6%
Read travel blog. (pdf file)
98.3 Cash: 0.1% Buy & Hold: 18.1% Standard Timing: 18.1% Aggressive Timing: 24.7%
Read travel blog. (pdf file)
97.5 Cash: 0.1% Buy & Hold: 16.5% Standard Timing: 16.5% Aggressive Timing: 22.1%
Market marks two-week
pullback, with the S&P settling at 1441, nearly 2% below the bull market high a couple of weeks ago. A deeper decline could be in the works,
offering once more a possible opportunity to beef up underinvested
portfolios relative to risk, given that the model remains on its buy
As regular readers
know, the benchmark index for the model and its performance is the
S&P 500, the standard by which money managers and mutual funds are
often evaluated. During a buy
signal my investments always include the ETF surrogate for this index, SPY. As stated elsewhere in these postings,
I also diversify by holding other ETFs that include stocks, bonds, and
commodities. In particular, I’ve focused
on various technology investments, the clear strength of global and in
particular American tech companies.
Keep in mind, however, that these investments are more volatile
(have higher beta) than the
“500.” Here are four tech categories that I either hold or consider during buy signals.
1. Digital content... This category is
media in digital form such as digitized books, magazines, newspapers,
music, video, animation, games, medical records, social media, you name
it. In short, anything that can be
published, distributed, or used in digital form. Creators and distributors provide the
content and users fulfill the demand, especially with the increasing
worldwide use of mobile devices such as smartphones and tablets. Sales of these products and their apps
are projected to continue their recent global surge. Companies in this space are quite
varied and include cable and satellite companies, content and device
providers such as Amazon, Apple, and Google, entertainment companies such
as Lions Gate, music companies such as Sony, news companies such as
Gannett and News Corp, gaming companies such as Activision and n-Space,
and on and on. ETFs are tough to
pinpoint here because the industry is so diversified. See for example PBS.
2. Robotics... The field of
automated machines is meant to replace humans in industrial, service,
medical, military, exploration, and home settings, among many
others. iRobot (IRBT) is a
leading company in this field.
Bloomberg lists over 100 automation/robotics companies. This is another hard ETF to identify,
as the space is very diversified.
See the technology equities category in the ETF Database. See here for top ETFs that
3. Additive manufacturing or 3D
printing... This is a manufacturing process that "prints"
three-dimensional objects using digital technologies. This practice creates the object by
successive layering of materials, unlike traditional manufacturing that
decomposes materials by cutting, drilling, and shaving. It's graduated from prototyping to
full-scale, widely-varied and flexibly-produced products in diverse
fields such as manufacturing, medicine, and archaeology. And even includes smart phone
apps! A leading company in this
field is 3D Systems (DDD). Here are
funds and ETFs that hold DDD.
4. Biotechnology... This category
researches and applies living systems to make products in such diverse
fields as medicine, pharmaceuticals, agriculture, energy, industrial
processes, and marine biology.
Here's a list of the 100 top biotech companies and biotech ETFs.
I have invested in IBB and XBI
since the buy signal in July, 2010.
I also always
invest in QQQ during a buy signal, as a reasonable surrogate
that crosses these four categories.
Moreover, the S&P 500 is about 20% tech.
For an excellent
video on these topics see Alex Daley's presentation The Greatest Growth Sector in the World. It’s long, but well worth it. See also some of his other videos on
the same page.
I will be traveling abroad for a couple of weeks without my
notebook computer, but should be updating the site using available wifi,
my smartphone, and the Google cloud.
Postings will be barebones, no commentary, just stats. Back stateside and regular postings on
97.7 Cash: 0.1% Buy & Hold: 18.0% Standard Timing: 18.0% Aggressive Timing: 24.6%
index eases back to 1460 in quiet
market week, despite demonstrations and attacks against US facilities in
mostly Muslim lands. The model
remains copacetic and on its buy signal.
The market is somewhat overbought at this time, so a pullback
would not be surprising. As stated
many times, very underinvested portfolios might use the frequent 3+% dips to add to
stock holdings, while the model stays positive.
Don't gamble; take all your savings and buy
some good stock and hold it till it goes up, then sell it. If it don't go
up, don't buy it.
How did you go bankrupt?
Two ways. Gradually, then suddenly.
―E Ernest Hemingway, The
Sun Also Rises
Perhaps more than anything else,
failure to recognize the precariousness and fickleness of confidence –
especially in cases in which large short-term debts need to be rolled
over continuously – is the key factor that gives rise to the
this-time-is-different syndrome. Highly indebted governments, banks, or
corporations can seem to be merrily rolling along for an extended period,
when – confidence collapses, lenders disappear, and a crisis hits.
Reinhart & Rogoff, This Time is Different: Eight Centuries of Financial Folly
…we risk passing an economic,
fiscal and financial point of no return. The problems are close to being
unmanageable now. If we stay on the current path, they will wind up being
completely unmanageable, culminating in an unwelcome explosion and
The fixes are
blindingly obvious. Economic theory, empirical studies and historical
experience teach that the solutions are the lowest possible tax rates on
the broadest base, sufficient to fund the necessary functions of
government on balance over the business cycle; sound monetary policy;
trade liberalization; spending control and entitlement reform; and
regulatory, litigation and education reform. The need is clear. Why wait
for disaster? The future is now.
Shultz, Boskin, Cogan, Meltzer, Taylor, The Magnitude of the Mess We’re In,
The Wall Street Journal, September 16, 2012
97.5 Cash: 0.1% Buy & Hold: 18.4% Standard Timing: 18.4% Aggressive Timing: 25.4%
quantitative easing (QE3) is announced by the Fed and the market surges,
the S&P 500 settling at 1466,
a new high for the current cyclical bull market. The long-term (secular) trend is likely to remain flat to slightly negative
for several more years (it’s now 12 years) given the headwinds of the
necessary and continuing unwinding of high debt by consumers (housing
mostly) and governments (municipal, state, Federal and European). Economic growth, main street and jobs
in particular remain weak, and will continue to be so in the absence of
effective, implementable (politically doable) fiscal policy regarding the
budget, deficit, national debt, taxation, energy independence, and
The Fed’s role in
propping up the economy with easy money mostly had the effect of pumping
up bank balance sheets and putting excess liquidity into assets such as
stocks and commodities, as weak lending and demand and paltry bond
returns discourage other forms of investment. Hence the positive stock market
responses to the three QEs. But we
don’t really know the extent of long-term consequences from an extremely
skewed, unprecedented Fed balance sheet.
High inflation? Severely weak dollar? Declining U.S. sovereign debt ratings?
Bond market crash?
As stated before,
we don’t want to confuse a flat (or even down) secular stock market trend with its cyclical companion. We
are in a proven cyclical bull market that the model has jumped on for the
ride. Far too many investors have
missed out on this three-plus-year bull, either based on advice regarding
an unfriendly secular trend or paralyzed by excessive fear from the
wicked roughly 50+% declines in the 2000-2002 twin bears and 2007-2008
bear. I would have as well, if not
for the confidence that the model provides. World conditions and concern over a
possible (however unlikely) black swan do make me more cautious than otherwise
over a portfolio that fuels my retirement, but not so much so that I
would ignore what the model is telling me.
97.0 Cash: 0.1% Buy & Hold: 16.1% Standard Timing: 16.1% Aggressive Timing: 21.8%
purchase intentions and the possibility of additional easing by the Fed
jump market to new cyclical high, as the S&P at 1438 reconfirms the bull market that began three and one-half
years ago from the bear market low of 677. This cyclical
bull now shows an index gain of 112% over 42 months, putting it at about
length and gain of bull markets dating back to 1932. Accounting for dividends puts the
increase at 127%. Over this bull market run the model
remained on a buy signal, except for the mistaken switchback (three-week)
sell signal in July, 2010. The
model’s standard strategy gained 109%, the aggressive
The new high also
justifies the model’s judgment that the 9.9% near-correction in June of this
year was either (a) not a new primary downtrend that would lead to lower
lows or (b) one that would be short-lived. Since that time the “500” has gained
The flat to down secular (long-term) trend dating
back to the all-time high double peaks (mid 1500s) in 2000 and 2007 remains in place… that is, until
the S&P 500 comfortably exceeds these highs. Our benchmark index now sits just 8% below the 1565 all-time high in October,
2007. As stated elsewhere in these
pages, a good timing model will show gains even when the market exhibits
flat to negative secular trends, as it has over the past 12 years. Most everyone makes money in a rising
secular trend, but not so otherwise; it takes a good model and investment
strategy to (mostly) ride the up market cycles and (mostly) avoid the
down cycles that predictably fluctuate above and below secular
95.6 Cash: 0.1% Buy & Hold: 13.5% Standard Timing: 13.5% Aggressive Timing: 17.9%
Market eases back
second week straight, with the “500” settling at 1407. The Republicans
concluded their convention and the Democrats will have their say this
coming week. Then the campaign
begins in earnest as the days to November 6 count down. There will be more clarity on policy
positions, especially as they affect the economy and stock markets.
Traders and politicians are back from vacation. World central banks look primed to
stimulate, again. Good for now,
unintended negative consequences for later? Consumers, businesses, and
economies remain uncertain.
October, the most volatile month of the year, is not far
away. And then there’s the
election. Buy the dips if very underinvested, as long as the
model remains on its more than two-year buy signal, which shows gains of
about 25% for the S&P
and Dow and 34% for the Nasdaq, without reinvested dividends. Add about another 5 percentage points
to include dividends. But let’s
not get crazy, yet.
96.2 Cash: 0.1% Buy & Hold: 13.8% Standard Timing: 13.8% Aggressive Timing: 18.4%
close. Our benchmark index fails
to technically confirm the cyclical bull whose start dates back to March,
2009, by not breaching the 1419
high that was scaled last April.
At 1411 the index is 109% above the 677 bear low in 2009 and 10% below the
all-time 1565 high in
2007. It remains just 8 points
under the cyclical bull’s April high.
The market muddles within its recent trading range, although the
model says the primary uptrend
remains intact. Recall that the
model’s goal in life is to identify changes in the primary
trend, an 8% or more reversal over at least eight weeks based on
Friday closings. As usual, the
operating strategy for under-invested portfolios is to buy the frequent 3 to 7% pullbacks, at the
expense of some additional volatility.
96.6 Cash: 0.1% Buy & Hold: 14.4% Standard Timing: 14.4% Aggressive Timing: 19.3%
At 1418 the S&P nudges up to
within one point of the cyclical bull’s April high, as the rally marks
six straight weeks of gains and extends its run to eleven weeks from the
June nearly 10% pullback low. The model
barely moves, but remains on a high note, insisting that the primary uptrend remains in
place. The market continues its
stealthy creep up as Americans and Europeans distract themselves over
their August vacations.
The S&P 500
VIX, a measure of expected volatility (risk or fear) used by the model,
settled at a YTD weekly low, consistent with a quiet market and a
positive for the model. It will
likely pick up over the coming months, as the market once again heats up,
weakening the model by this measure.
Still, this is one indicator out of 15 and one data point out of
20 currently used by the model.
The model is more complex than one data point or indicator; market
reality far more so. No complaints
here…it’s a very good year for the market and the model’s strategies, so
96.4 Cash: 0.0% Buy & Hold: 13.3% Standard Timing: 13.3% Aggressive Timing: 17.8%
Market adds gains
in calm week as YTD returns settle at new high for the year. At 1406
the “500” is 1% below its April cyclical high and just 10% below its
all-time high in 2007, five “long” years ago. Do we break out above the 1419 April ceiling or do we head
toward the lower half (below 1348)
of the recent trading range, a 4% or more dip from here? The model and its technicals favor an
upside breakout. High negative
sentiment also favor a continuation of the uptrend. Far too many investors have missed out
on this bull run. Europe and the fiscal cliff remain serious
concerns, for sure, although the former’s “can” keeps getting kicked down
the road. More reckoning is sure
to come over the next year or two.
The fiscal cliff refers to the
looming tax increases (expiration of Bush, payroll, and other tax cuts
and new taxes for dividends and the health care law) and legislated
budget cuts (the debt ceiling deal) in January, 2013, with likely very
negative consequences for a US economy that’s at or near
another recession. For more
details see What is the Fiscal Cliff? Grant Williams states it this way in
In the run-up to December 31,
you can guarantee that the issue of the US Fiscal Cliff will replace
Europe as the major concern facing the world in general and the US in
particular and, if things continue to deteriorate at their current pace,
anything that will lead to even a 0.5% cut in GDP will be seen as a
disaster. Morgan Stanley said
this week that concerns about the fiscal cliff are reaching new heights
across a wide range of industries. It is already seeing reductions in
business orders and hiring, among other areas. ...a stop-gap measure
will be found to enable the can to be kicked once more down the
road...‘The Fiscal Cliff’. Familiarize yourselves with it, folks. You’re
going to be hearing a lot more about it from here on in, I promise you.
be dire, with political fallouts for both parties, so most likely there
will be a compromise “solution,” probably after the election. Another can?
95.3 Cash: 0.0% Buy & Hold: 12.1% Standard Timing: 12.1% Aggressive Timing: 15.9%
Market swoons as
Draghi/ECB and Fed disappoint (see last week's post); market recovers
(overreacts?) on decent jobs report and “hope and change” from Europe; model yawns. The “500” at 1391 is in the upper part of its recent trading range, just 2% below the current
cyclical bull’s 1419
high. We remain hostage to the
European drama: its economy and globally interconnected banks impact our
own economy and markets. No
short-term solutions here. The
buy-signal strategy remains operational: dips are opportunities to buy
for underinvested portfolios that are willing to take on more risk.
95.0 Cash: 0.0% Buy & Hold: 11.6% Standard Timing: 11.6% Aggressive Timing: 15.3%
Thank you Mr.
Draghi, Super Mario! The European
Central Bank president’s “whatever it takes” remark to save the euro also
saved this week’s market. Over the
first three days of last week, the “500” took an additional 2% haircut,
bringing its dip to 7% below the 1419
cyclical bull high-water mark, providing another good opportunity to “buy
the dip.” Then the remark… and the
market got giddy, gaining nearly 4% in two days to close up for the week
at 1386. No protest from the model as it popped
nearly 5 points to a very comfortable 95, propelled by firmed-up
technicals. And no matter that
Gross Domestic Product in the second quarter came in at an anemic 1.5%,
all the more reason to anticipate further Fed action that stimulates the
economy in principle, but the market in reality (see last week’s
GDP number, here’s what the Wall Street Journal had to say:
most recent comparable recession occurred in 1981-1982 [deeper than the
recent December 2007 to June 2009 recession]. Yet as the nearby chart
shows, the Reagan expansion exploded with a 9.3% quarter and kept up a
robust pace for years. By the 12th quarter of expansion, growth popped up
to 6.4.%. At this stage of the Reagan expansion, overall GDP was 18.5%
higher versus 6.7% for the Obama recovery, according to Congress's Joint
Economic Committee… This may sound like an abstraction, but it is the
difference between a robust job market and lost opportunity for millions
of Americans. It is the difference between a small federal budget deficit
and more than $1 trillion for four straight years. It is the difference
between a rising or falling poverty rate.”
and maybe unfair to compare two recessions, as their causes differ and
the usual assumption “all other things equal” in economic models never
reflects reality. Still, stats are
stats and consequences are consequences.
GDP report the New York Times comments:
mired recovery makes the United States
more vulnerable to trouble in Europe
and, at home, the potential expiration of several tax breaks and other
buoyant measures at the end of the year, known as the fiscal cliff.”
complaints here regarding the market.
Just look at the YTD figures above. Do we work our way higher? The model
just says last week’s close is consistent with a primary uptrend. Expect continued volatility as Europe deals with its crisis and we deal with a
looming “fiscal cliff.” The market
could take a hit this week if the ECB and political leaders don’t follow
up on Draghi’s promise. More on
these topics in future posts.
90.3 Cash: 0.0% Buy & Hold: 9.7% Standard Timing: 9.7% Aggressive Timing: 12.4%
The week was
looking good as fine earnings and the prospect of more quantitative
easing (QE) from the Fed sparked mini-rallies, and then... Europe wobbled on Friday as Spain
got grimmer. Still, the major
indexes managed gains for the week, with the S&P stabilizing at 1363. There’s little evidence that QE1 and
QE2 helped the “real” economy (things like jobs and income), but there’s
good evidence it propelled stocks and eased the government’s debt service
(lower interest payments through lowered rates). It will likely be more of the same with
a QE3, although probably less intense as the Fed’s bullets get
spent. So, bad economic news
begets thoughts of more QE, good news for the market as the thinking
goes. And when it doesn’t? Probably the beginning of another
cyclical bear, unless government policies that encourage real economic
growth are put in place: Such as targeted infrastructure spending by
government, policies that promote capital investment and innovation in
the private sector, a market-oriented energy program, and simplified
regulations, health care, and tax codes that help small businesses in
particular. Too complicated for
sure. I’ll let the model sort it
all out as we move along.
strategy during a buy signal continues: buy the frequent 5 to 10% dips if
underinvested. From May into June
the “500” spent about six weeks in this “buy the dips” range; it’s
currently 4% under the April 1419
high. Looking for less volatility
in your investments? See these ETFs.
90.1 Cash: 0.0% Buy & Hold: 9.2% Standard Timing: 9.2% Aggressive Timing: 11.7%
breaks a six-day losing streak with a Friday rally that saves the week,
barely, at 1357. The index now stands 4% below the
April cyclical high and 6% above the pullback low on the first day of June,
somewhat above the middle of its recent 1278-1419 trading range.
The operating strategy during a buy signal is to buy the dips, for
underinvested portfolios that are willing to take on more risk.
the model’s portfolios are either in or out of stocks completely, to
properly compare their performances to buying and holding the S&P
500, the most common benchmark index against which returns are
measured. As cited often on these
pages, portfolio investments should be diversified not only across stock classes but also
across other assets such as bonds, commodities, real estate, and money
markets. The percentages in each
class are typically a function of expectations and risk profile, the latter
determined by an investor’s propensity for risk, age, and other
circumstances. A simple and
generalized often-cited allocation for a mid-life investor is 60% stocks
and 40% bonds. Younger investors
might allocate more to stocks and older investors near or in retirement
might allocate less. In my case,
at 70 and living off my portfolio in retirement, during a buy signal (about 70%
of the time) I invest up to 55% in equity ETFs (SPY,
and others such as IBB, IWM, VWO, SCZ, VIG, GRID, and XLU);
no more than 15% in commodity ETFs, such as energy equipment and services
or a commodity index (DBC); 5% in gold (GLD);
the remaining 25% or more in bonds (TLT,
and a money market. During a sell signal I dump all
stocks and commodities and allocate the proceeds to a money market
account and up to 20% short positions such as SDS
and maybe TBT in place of TLT.
Note the following:
The model’s predictive focus is the S&P 500,
which reflects about 75% of total stock market valuation. Many other stock index and ETF
alternatives are highly correlated to the “500.” This means they tend to move in the
same direction, but not the same magnitudes or rates. This implies that a buy signal based on
the S&P 500 is also relevant for many other equity investments.
My max target percentages are riskier than normal
for my circumstances, a stance I’m willing to take because of confidence
in the model.
But… I’m currently below my target maxima, and
more cautious than usual, as stated in recent posts, with about 50%
committed to stocks and commodities, rather than my normal 70%. If the S&P were to drop near the
lower end of its trading range, I would allocate more to the market, as
long as the model stays on its buy signal and is at or above the middle
of its 43 to 78 sell-buy range (about 60). See, for example, June 3 as a good
89.4 Cash: 0.0% Buy & Hold: 9.0% Standard Timing: 9.0% Aggressive Timing: 11.4%
jobs report and renewed concerns over Spain unsettled markets,
leading to a global selloff. The
S&P and Dow trimmed just one percent for the week, while the
Nasdaq barely kept its head above water.
Déjà vu all over
again? Expect more of the same
up/down weekly action as we likely work our way from the current S&P 1355 to the high end of the
three-month 1278 to 1419 trading range. A breakout to the upside will probably
require greater certainty that acceptable resolutions are underway for
the known negatives.
Why does the
model remain bullish with all of the bad news that’s out there? Its
technical indicators are positive, as are its monetary and
fundamental indicators. Moreover, the widespread negativity is very
positive for the model’s contrarian
indicators: investor pessimism is high, as in the weekly bull/bear stats
put out by the American Association of Individual Investors; mutual fund
managers and individual investors are hoarding cash. In other words, too many market
participants are already out of stocks and will use their cash piles
sometime in the future to reenter the market, rather than letting these
funds languish forever under the “electronic” mattress. Greater certainty and confidence will
set this pattern in motion. Most
of the tentative investors already have been shaken out of the market,
judging by the huge cash outflows from stock funds over the past three
years (during a bull-market run!).
There are less investors left that are likely to sell. Out of fear precipitated by the savage 52% 2007-2008 bear market and the
follow-up 28% flash bear
in early 2009, far too many investors have missed all or a major portion
of the current 113% gain (with
reinvested dividends) from the March, 2009 low that started the current
cyclical bull. (The model scored a 96% gain.) By the way, the S&P marked a 55% net loss over the span of the two
recent bears (October 2007 to March 2009), even accounting for the
intervening 24% flash bull;
the live model lost 38% over this 17
month time frame. Combining the
losses and gains from the October 2007 all-time high (and the start of
that bear market) to now shows the following: the “500” lost 4% over the last 57 months (over nearly
five years and accounting for dividends!) while the live (in actual use)
model gained 22%, a 27% advantage for the model.
might increase confidence and bring these late investors back into the
market, fueling the next leg of the current run? Maybe the November election and
political (bipartisan) agreements that yank us back from the “fiscal cliff” before the end of the year? Yet, it could get much worse as well,
before it gets better, as in a eurozone meltdown. The model watches and processes,
rendering its judgment at the end of each week. It’s the model’s buy signals that give
me the confidence to stay in the market during trying times.
94.1 Cash: 0.0% Buy & Hold: 9.5% Standard Timing: 9.5% Aggressive Timing: 12.4%
liked Friday’s European summit news, the “500” popping 2.5% on that day,
reversing a weekly loss up to that point and ending at 1362. The model approved of the technical
action, jumping 19 points to a very solid mid-90s. Why the good news? The eurozone agreed, with Germany’s
apparent blessing, to directly cash transfuse bailout funds to ailing
banks, bypassing governments and thereby avoiding greater sovereign
(governmental) deb. Band-Aids. Libertarian economist Doug Casey amusingly puts it like this: “So you've
got two sets of bankrupt institutions [banks and governments] trading
debt back and forth between themselves.” No agreement to buy up troubled
bonds, nor details on increased fiscal controls. The devil will be in the details. Expect continued euphoric and
despairing reactions to come, depending on announcements and financial
realities. We’re going to live
with this for some time.
Court essentially upheld the health bill; the market reacted little,
except for the principal health care players: hospitals rose smartly,
expecting more paying patients and greater efficiencies, although what
states will do with the Medicaid expansion component is uncertain; health
insurers declined, on the basis of cost squeeze requirements and
uncertainties on just how many individuals and businesses might opt out
of premiums and into penalties, oops, “taxes;” medical device makers also
declined, expecting additional taxes; pharmaceuticals were flat,
protected by agreements and by expectations that volume increases will be
negated by additional fees and generics.
And it’s going to cost you more to go to a tanning salon! Look for lobbying by hospitals, drug
companies, insurers, device makers, businesses, labor unions, state
governments, and other participants affected by the law to change
specifics and implementations to their benefit. Moreover, in no small way, the fate of
health care and its mid- to long-term economic consequences will be left
up to the electorate in November… and to our politicians and technocrats
now and in subsequent years.
74.8 Cash: 0.0% Buy & Hold: 7.3% Standard Timing: 7.3% Aggressive Timing: 9.0%
Two-hundred-fifty point Dow
swoon on Thursday puts the kibosh on the market for the week, with the
Dow and S&P backtracking 1%; the Nasdaq bucks the trend,
advancing about half a percent.
The model eases back as well, shedding 8 points. Volatility continues, with Thursday’s
selloff a response to renewed concerns over the global economy. The gush of bearish global data was
followed after the close by a Moody's downgrade of 15 global banks,
including the 5 largest US
lenders, citing significant exposure to volatility and the risk of large
losses from capital markets activities.
Yet, the market rallied on Friday, most likely a response to
buying the dip from the previous day and relief that the downgrades were
not as bad as the worst-case-imagined scenario. So, we sell off on downbeat news; we
rally on positive, hopeful, or "it's not as bad as we thought"
news. The beat goes on…
This week the
Supreme Court will announce its ruling on the health care law. Regardless of the decision, it will
have profound effects over the long run, both socially and
economically. It should have an
immediate effect on the stocks of healthcare providers… hospitals,
pharmaceuticals, insurers, managed care companies… each reacting
differently depending on the outcome… but the decision will not likely
affect the overall stock market for long, if at all. Looking out over decades, however, the
quality and availability of health care for our citizens are surely
serious concerns. And the impact
on medical costs for consumers, companies, Medicare, and Medicaid will
certainly affect the market’s secular trend,
either positively or negatively, depending on what we end up with. If the law stands, it will have to be
revised to overcome the currently projected negative cost impact on the
economy; if struck down in whole or in part, it would be back to the
drawing board, adding to uncertainty.
And hopefully next time it will better address the shortcomings of
both the current law and the current state of healthcare. For example, the law has the noble and
morally desirable, even imperative, goal of expanding health care
coverage for all; yet it falls far short of means by which to reduce and
even moderate the economic impact of health care. (Read David Walker interview.) Moreover, many critics argue that the
quality of health care will suffer as well under the law, assuming a
scenario of more patients and less providers (driven out by costs and
regulations). Woody Brock’s
seminal book American Gridlock: Why the Right and Left Are Both Wrong
- Commonsense 101 Solutions to the Economic Crises shows through
rigorous deductive logic how increasing the nature and
quantity (supply) of health care would not only increase coverage but
also both improve quality and reduce cost. Easier deduced than done… all too often
politics on both sides get in the way.
Let’s hope we eventually get it right.
82.7 Cash: 0.0% Buy & Hold: 7.9% Standard Timing: 7.9% Aggressive Timing: 10.0%
continues in volatile week; model firms up as it settles within its
“comfort” zone (above its buy trigger of 78). At 1343
the “500” sits in the center of its 9.9% “baby” correction from high to low: 5% above the 1278 low on June 1 and 5% under the 1419 April 2 cyclical bull
high. So far, the correction has
offered a buying opportunity for underinvested portfolios relative to
risk, the operating strategy while the model remains on its buy
signal. And the buying opportunity
remains, although the expected continued volatility is not for the faint
rally this past week perplexed many market observers, given the usual
negative news regarding continued Greek, Spanish, and Italian woes. Jobless claims, retail sales, and
industrial output were all shaky, further adding to concerns. So what gives? The market is a forward-looking
mechanism… and the forward look right now is that global central banks
will coordinate additional easy-money policies, economic
“firewalls,” through sovereign
bond market manipulations, lowered interest rates (a third Quantitative
Easing or QE3 in the US?), and a relaxation of global banking rules known
as the Basel accords. We will see
how long these measures might be effective.
Right now all
eyes are on the Greek election today, which could signal a monumental
shift in the cohesiveness of the European Union, Europe’s “Lehman
moment,” should Greece
lurch to the left and signal it will not honor its austerity commitments,
with a possible eventual exit from the eurozone. If this were the case, I would expect
the market to first react negatively, then follow with another rally as
concerns are soothed by positive offset policy pronouncements, starting
this week with the G-20 powwow in Mexico and the Federal Reserve meeting,
and followed by the EU summit later this month. Still, volatility will continue, as the
sobering realities are re-examined and solutions are questioned, again,
and again, and again… until more clarity is established as the global
economic system rights itself.
Mauldin’s recent post The Bang! Moment is Here is a worthwhile read
regarding the European crisis, including quotes from This Time is Different. He ends it with this comment:
But change is coming to Europe.
One way or another, a new order and a new balance will be forced upon
them. Either a fiscal union or break-up. They have kicked the proverbial
can down the road until it will roll no more. You can feel the Bang!
moment arriving. This is the Endgame.
What to do
should the market turn south in the near future? One offsetting investment is EPV,
a twice short (-2x) on a European stock index. This is a volatile short-term
investment that will move opposite to a US
stock portfolio, given that US and European stocks are highly
correlated. I have a small
position in this ETF from time to time, depending on short-term market
moves and moods, as a partial offset to declines in my portfolio based on
negative reactions to European events.
long treasuries using TLT is another risk-off small position that I’ve
taken, to further insulate my portfolio from declines. Overall, my portfolio remains on a
cautious buy, explained in previous posts, while I let the model guide me
as it monitors market reactions and makes its judgments.
72.9 Cash: 0.0% Buy & Hold: 6.4% Standard Timing: 6.4% Aggressive Timing: 7.9%
difference a week makes. S&P
pops 3.7% to 1326, while the model firms up 13
points. Still, the model is inside
its sensitivity range 30 to 75, within which it can change
very rapidly. For now, though,
it’s looking like the near-correction might be over, with the market and
model suggesting a primary uptrend remains in place. Yet, problems are far from solved,
either just words and intent or minimalist solutions for now from the
power elite, so volatility is likely to continue until comprehensive policies are put in place that engender
certainty and confidence, in the US,
Europe, and China. The next
few weeks could tell some stories, as Greece holds new elections June 17
(A further turn to the left and a more likely eurozone exit?); the
Federal Reserve's rate-setting committee meets June 19 and 20 (More
stimulus?); and European Union leaders convene yet another summit on June
28 and 29 (Will they rescue Spanish banks? Will Germany agree to the issuance
of eurobonds in return for greater centralized fiscal controls?). Well, maybe Greece doesn’t step up to the
plate, for now. As of this
writing, the union employees who work the Greek election are threatening
a strike unless they get more pay.
Is there hope for Greece? Take a look at this video.
take, my crystal ball… If proposed solutions are unconvincing and the
market reacts to the downside, the model might issue a sell signal
sometime this summer, probably sooner rather than later. More likely, hope springs eternal and
we muddle along with a buy signal.
We will get a sell
signal at some point as the primary trend changes to negative and we
likely enter a cyclical bear
market, say, within the next year.
And then, when the dust clears, we’re in for a long, sustained,
and significant secular bull
market, two, three, or four years from now. Meanwhile, my portfolio remains on a
cautious buy signal, as explained in earlier posts… and the model keeps
its ear to the ground as it relays the rumblings it hears.
60.1 Cash: 0.0% Buy & Hold: 2.6% Standard Timing: 2.6% Aggressive Timing: 2.2% S&P:
Market renews slide, the
S&P tanking 3% for the week to 1278,
not liking the recent news from Europe, China, emerging markets, and
US jobs; the model responds in kind, sinking 17 points, yet retaining its
two-year-old buy signal. The pullback
now stands at the door of an “official” correction, 9.9% from the cyclical
bull market high of 1419 last
April and 18% below the all-time 1565 peak in October, 2007.
And the model’s definition of a primary downtrend (8% decline over at least eight weeks)
is nearly confirmed. As posted on
May 20: “Corrections in this
neighborhood are in the vicinity of the model’s design boundary, meaning
it can give the model fits if we just have a sharp, short correction
within a bull market, which is what happened in 2010. Or, we might be on the verge of a sell
signal in a new bear market, as in June, 2008.” My sense is that we likely remain in
the flat to down secular trend from 2000 that will continue for
maybe several more years, until the unwinding of the public and private
debt supercycle plays out. This
unwinding also includes an eventual fix to the eurozone crisis, which
could include the departure of one or more countries and possibly the
ultimate federalization of Europe, a union of countries with a monetary
and fiscal central authority, as in the US.
Now, we do have cyclical bull
markets within secular trends. The
current example would be the 110% cyclical bull that began in March,
2009, should the April top define the beginning of a new cyclical
bear. Still, cyclical bears are
more likely to occur and with greater intensity during secular
downtrends, than not. So, it would
not be surprising that we’re now in a cyclical bear. Yet, the model does not directly deal
with bear markets; rather it attempts to define whether or not the past
week is consistent with a primary down or up trend. And, as would be expected, primary
uptrends are more frequent during bull markets, as primary downtrends are
during bear markets. For now, the
model judges that we remain in a primary uptrend, although the strength of
that judgment has weakened considerably (its probability is down to about
60%). As best I can tell, a
decline to the neighborhood of 1235
(about 3.4% from here)
at the Friday close could trigger a sell signal. The present near-correction could also
be an opportunity to increase equity holdings, for underinvested
portfolios relative to risk, should the currently oversold market
reconfirm the primary uptrend and buy signal with a rally over the coming
77.5 Cash: 0.0% Buy & Hold: 5.7% Standard Timing: 5.7% Aggressive Timing: 7.0%
Market rallies on Monday and
then flatlines the rest of the week, as the S&P 500 goes to bed at 1318; model jumps 10 points while
its technical indicators settle down.
The S&P 500 now stands nearly 2% above its pullback closing
low on May 18 and 7% below the bull market closing high on April 2. Is the 9% pullback over or is this a pause on
the way to a new primary downtrend and possibly the confirmation of a
cyclical bear market? Answers
might be just weeks away.
Last week’s meeting of the
European Council in Brussels
was inconclusive and the new Greek election on June 17 could be a game
changer masquerading as a referendum on leaving the eurozone. Europe looks like it has slid into
recession and China
continues its slowdown, suggesting negative future implications for world
economies. Moreover, the Economic Cycle
Research Institute is forecasting a contraction this year for the US. The eurozone crisis is so dicey and the
economic outlook so pessimistic that I’ve cushioned my portfolio for some
weeks now with ETF positions that are negatively correlated with my ETF
stock positions: long-term Treasury bonds using TLT
and European stock shorts using EPV. Still, my net stock position remains
long, while the model stays on its buy signal. For now, the model appears to believe
we will muddle on. Stay tuned.
67.9 Cash: 0.0% Buy & Hold: 3.8% Standard Timing: 3.8% Aggressive Timing: 4.3%
Eurozone realities smacked the
market hard last week, pummeling the S&P 500 4% to 1295. Our benchmark index is now about 9% below the 1419 bull-market high just under
seven weeks ago. The model reacts
in kind, sinking 16 points, primarily based on deteriorating technical
indicators that reflect trends, momentum, strength, and relationships
among volumes, highs v lows, and declines v advances. Its current score of about 68 puts it within its sensitivity
range of roughly 30 to 75, meaning that it can change
dramatically in either direction within this range. Poor market performance this coming
week could ratchet the score below its 43 sell point,
thereby issuing its first sell signal since July, 2010. That signal was a three-week switchback
based on a short, sharp correction within an ongoing bull market. (See Reality Check.)
The current buy signal is now two months short of two years and shows a
gain of 16% based on the S&P (plus dividends of about 5%). The still intact (until proven
otherwise) cyclical bull market dates back to March, 2009 with an index
gain of 92% (plus 8% dividends).
Compared to averages, the current bull is somewhat shy in length
So, what now? The ongoing pullback is just short of
the 10% correction
standard and well under the 20% bear market definition. The model is theoretically tuned to
detect a primary downtrend as an 8% or more decline over at least 8
weeks. We now stand at 9% over 7 weeks. Corrections in this neighborhood are in
the vicinity of the model’s design boundary, meaning it can give the
model fits if we just have a sharp, short correction within a bull
market, which is what happened in 2010.
Or, we might be on the verge of a sell signal in a new bear
market, as in June, 2008. We’re
now in a critical week regarding the model’s behavior. As best I can tell, an S&P drop to
as little as 1265 (a 2.3% decline this
week) or as much as 1210 (6.6%) might
trigger a sell signal, based on scenario simulations for the coming
week. I say “might” because the
model’s complexity includes data for indicators that are impossible to
accurately predict from one week to the next, not to mention
counterbalancing reactions among the indicators. The sell trigger could be somewhat
below 1210 or above 1265. Remember
that these index numbers are based on the week’s close, usually Friday. A market bounce this coming week would
preserve the current buy signal.
The market and model now bear our undivided attention.
83.9 Cash: 0.0% Buy & Hold: 8.5% Standard Timing: 8.5% Aggressive Timing: 11.5%
Market eases back to 1353 as eurozone worries, slowing
Chinese growth, and global economic health stay on the front burner. Model shaves 5 points as
its technical indicators weaken further.
The pullback low from the current bull market high now stands at 4.6%.
Frustration with current
political leaders was evident in the French and Greek elections, and
likely in the coming German election.
elected a new president, a socialist, which probably means less
austerity, more stimulus spending, higher taxes, bigger budgets, and
additional national debt. The debt
service in France,
the cost of paying interest on the national debt, is second only to the
cost of education. Interest rates
to service this debt will rise should France’s debt rating lose
another notch, adding to the budgetary burden. Unless effective market growth policies
are put into place to compensate, the French outlook looks tenuous. France in denial? Europe
in denial? Or is it growing
desperation? In Greece the neo-Nazi right and
far left gained enough electoral votes to deny any party a majority, thus
requiring either a difficult-to-form coalition or new elections. Greek unemployment is about 22%,
bankruptcies are soaring, and the stock market has plunged about 90%. The eurozone would survive if Greece
totally defaults and leaves. World
banks have had time to massage their Greek loan exposures and, after all,
Greece is small
potatoes: Its population of 11
million is not that much bigger than New York City’s 8 million; its GDP
would rank 15th in US states.
Still, there would be financial turmoil should Greece exit the
eurozone. For Greece, the consequences
would be severe for a time. Now, Spain is another order of magnitude more
serious; its GDP is about the same
our number one state by GDP.
Spanish banks are basket cases.
Most would be shut down in this country based on the ratio of
non-performing loans (those in or near default) to bank capital, which
are four times the 5% allowed in the US.
And then there’s the specter
of contagion. There is already a
run on Greek banks, as citizens try to preserve their savings by sending
euros abroad. If Greece reverts to the
drachma, and investors in the other peripheral countries suspect
additional exits from the euro, might there also not be a run on Spanish
banks or Portuguese or Italian or Irish, as investors avoid denominating
their investments in weak national currencies by seeking a stable
currency? Moreover, it’s possible
that one or more northern European countries are secretly making plans to
reinstitute their own currency, should it be in their best interest to
leave the euro.
Is a monetary union without
fiscal responsibilities by its southern members tenable, regardless of
how noble the experiment has been?
It looks to me that the eurozone continues its devolution, a slow
downward spiral that will end in more tears. And it will seriously roil world stock
markets should part of this frayed fabric tear off. European banks as a whole are much
larger than US banks. A weakened
banking system there would acutely affect world trade, increasing the
likelihood of deepening recessions.
This is the pessimistic view.
Some optimism? In the
longer run a partial breakup of the eurozone, such as the southern
members leaving, will be healthy overall, but with a lot of peril in the
meantime. Or, the eurozone might
be saved if the European Central Bank throws serious money at underwater
national banks by printing massive amounts of euros (much, much more than
the one trillion that evaporated a few months ago), raising the specter
of inflation, a policy resisted by Germany, given its history of
hyperinflation following WWI. For
perspective on this fear, in 1923 “the exchange rate between the dollar and the Mark was one
trillion Marks to one dollar, and a wheelbarrow full of money would not
even buy a newspaper.“ The
eurozone is worth paying attention to.
Can we avoid this slow-motion crash?
Early last week I added EPV
to my portfolio, to allay my fears over Europe. This investment shorts an index of
European stocks from sixteen countries; its daily return is twice the
inverse (-2x) of the index. In
other words, a daily index loss of 3%, for example, translates into a
targeted gain of 6%; conversely, a 3% gain in the index means a likely 6% loss. This is a volatile investment that
hedges long (invested) portfolios against losses, and so only should be
used with the usual caution,
as a small percentage of the portfolio (5% in my case), and likely not
over extended time periods of many months.
Last week’s comments regarding
overinvested v underinvested portfolios remain relevant.
89.2 Cash: 0.0% Buy & Hold: 9.7% Standard Timing: 9.7% Aggressive Timing: 13.4%
Market gives up last week’s
gains and then some to settle at 1369,
marking a pullback of about 3.5% from the April 1419 recovery high.
Friday’s jobs report put the kibosh on the market, as the economy
added a disappointing number of jobs.
Although the unemployment rate ticked down to 8.1%, the drop was
accounted for by a reduced labor force.
Signs remain mixed on whether or not the economy is
faltering. Adding to worries are
Greek and French elections today, which could lead to even more instability
should there be leadership changes.
The model shaved 9 points from last
week’s score, as relative strength and trend indicators weakened. A continued short-term pullback up to 10% or so would
not be surprising. Moreover,
market insecurity and instability will likely continue until after the US
election, at which time economic policies will be more certain. The Supreme Court decision on the
health care bill by the end of June will be another certainty/uncertainty
waypoint. Portfolios that are overinvested relative to risk
could lighten up, given the 10% year-to-date gain and the 28% to-date gain
over this buy signal, with reinvested dividends; underinvested portfolios relative to risk might see an
opportunity during a pullback to add to stock holdings, while the model
remains on its buy signal.
98.3 Cash: 0.0% Buy & Hold: 12.4% Standard Timing: 12.4% Aggressive Timing: 17.8%
Our benchmark index jumps 2% to 1403, as the market continues its
climb up the wall of worry, not liking the jobless claims, last quarter’s
GDP number, and the continuing European situation. Still, it seems that the market ignored
the bad news in favor of the good.
What fanned the market's rise?
How about more solid earnings, increased consumer spending,
improved housing data and consumer sentiment, and the underwhelming GDP
number as encouragement for those who believe that the Fed will ease some
more. And what about France
v Germany? Germany
insists on more austerity; France might shift more to
the socialist side of the political ledger. Is France in denial? Other countries besides Greece are pushing back on the austerity
required by Germany: Spain
(as its debt is downgraded, again) and the Dutch. Keep an eye out on a grumbling
(crumbling?) European coalition as more fodder for roiling the
markets. Still, European bad news
is recognized and likely already built in to prices? What could really affect the markets is
a very surprising fat-tail event
such as the sudden exit of Greece
or even worse the implosion of the Eurozone. Very unlikely events, to be sure, which
is why we call them Black Swans.
I’m still traveling in some remote
areas over the coming week. The
next weekly update might be late.
97.6 Cash: 0.0% Buy & Hold: 10.3% Standard Timing: 10.3% Aggressive Timing: 14.7%
Volatility continued this past week, although this time
the market advanced, to 1379
based on our benchmark index. The
model is steady and strong.
Operating strategy during a buy signal remains the same: buy the
dips, for portfolios that are underinvested, consistent with attitudes
of the week. (This
article by Professor Odlyzko is a very worthwhile historical read.)
A superpower with crippling
debt, exorbitant taxes, glaring inequality, wages far exceeding those of
competitors, high and persistent unemployment, lack of basic workplace
skills, malnutrition, a rapidly growing rival across the ocean to the
West, heated debates about the role of government in the economy, and
widespread pessimism about the future. Could that be any country but the U.S. today, with China as the looming threat?
Toss in costly military misadventures in the Middle East, Greece
unable to pay its debts, a sclerotic domestic legal system clogging up
the economy, and the rising competitor flouting copyright and other
property rights and relying on slave labor, and the case seems clinched.
Yet this is also an accurate description of Britain
around 1850, with the United
States as the transatlantic rival.
Surprisingly, what followed was an explosive acceleration of the
Industrial Revolution that saw the UK sprint ahead of others during
the “Great Victorian Boom” of the third quarter of the 19th century.
How about the coming US manufacturing boom, as automated flexible
manufacturing technologies powered by cheap energy tilts the global
playing field towards the US? Green
is great, with the focus on intelligent conservation, rather than
renewable resources that can’t possibly provide the necessary juice, not
to mention their much higher cost.
Green energy just does not create enough energy, in our
lifetimes. Let’s use the energy
resources we have now, in abundance. We’re an energy superpower, on
paper. And we can export these
energy products as well, refined or not.
And how about jobs? And how
about more tax revenues for states and Washington, through growth not higher
tax rates? And how about cutting
the umbilical cord to unstable, unfriendly, energy-rich countries of the
world that threaten our economic wellbeing and increase our propensity
for military interventions? We
just need the right governmental policies and leadership to make this
happen, sooner rather than later.
Yes, environmental issues can be worked out, if not radicalized.
Domestic industrial ETFs include the following: XLI,
VIS. For a more complete list check out the
ETF Database: Industrials.
I’m traveling in some remote areas
over the coming two weeks. Weekly
updates might be late.
97.2 Cash: 0.0% Buy & Hold: 9.6% Standard Timing: 9.6% Aggressive Timing: 13.6%
Volatility is back as we get three strong down days and
two strong up days this past week.
The major indexes lost in the neighborhood of 2% for the
week, the worst weekly loss this year, although a ho-hummer based on the
historical record; weekly losses less than 2.5% occur about one-third of
weeks. Losses of about 5% take place
about four times per year, on average, without entering a bear
market. The S&P pulled back
about 4% from its
April 2 1419 high, settling
about 3% below this
high by the end of the week, at 1370. A pullback in the 5 to 10% range would
not be surprising in here, given how far we’ve come this year. We might even get a fast moderate
correction in the 10-15% range, an event that concerns us about every other
year, on average. Last year we had
a deep, nearly 20% correction; the year before we had a severe 16%
correction. Portfolios that have
missed the train might consider jumping on as it slows, while the model
Still, caution is warranted with respect to “fully”
invested positions, as stated in some previous posts: All bets are off if the European crisis
deepens; it’s looking bad for Spain, as the realities of austerity kick
in the smoldering fires of social unrest spawn outbreaks, and the
“Masters of the Universe“ (bond traders) get increasingly nervous. “Déjà vu all over again” in this
evolving Greek tragedy?
the economy, and the market.
Well, this is
one controversial topic, with opposing philosophies offering “solutions” to
our social and economic problems.
That’s why we have two political parties, no? In theory, informed citizens, more or
less, decide through our voting rights the social and economic direction
of the country, with the occasional judicial “corrections.” My perspective, in this post and some
subsequent posts, will focus on the economy and the market, rather than
social issues such as morality and religion, although social issues,
ethics, and the economy are interlinked in many cases, as in national
health care, entitlements, immigration, taxation “fairness” and safety
nets… and so some degree of social commentary is unavoidable and will be
addressed in future posts. By the
way, historically, economics and political philosophy were part of the
same field, political economy,
a child of moral philosophy or ethics.
Subsequently, political economy branched into economics and political
science. The divorce remains
We’re now into the swing (and punches) of the
presidential election cycle. Which
party does the market favor? While
many believe that the business climate and economic progress are more
favorable with Republicans in power, the historical record is confused at
best, depending on many factors, including the political balance and
dynamics within the three branches of government, ensuing legislation and
rulings, the point in the business cycle, and worldwide macroeconomic and
demographic conditions. Just
looking at the Presidential Cycle without the confounding elements
mentioned, Fisher Investments determined the following:
* Third and fourth years of a
presidential term are positive for the stock market, based on average
* A switch in presidency from
one party to the next is positive for the upcoming year, regardless of
* A re-elected Democrat is
positive for the next year, whereas a re-elected Republican is negative,
So, it looks just based on these stats that next year
should be positive.
From a recent Barron’s article that predicts GOP control of
Congress, even if the President is reelected [my insertion]:
GOP control of
Congress will likely mean that most individual tax rates will stay where
they are, and that Congress and the president may be able to agree on
some serious spending cuts and major corporate-tax reforms. Steep
reductions in defense spending probably will be curtailed, making this an
auspicious time to invest in the sector. Regulations and policies
inhibiting the production of domestic oil and gas will be relaxed. And
the 2010 health-care bill passed by the Democratic controlled Congress
will be repealed [no veto by Obama if he’s still
president? Or maybe the Supreme Court takes care of this?].
With Barack Obama's threatened increase in taxes—especially the
significant hikes in the capital-gains rates for high earners—no longer
in play, the pace of investment and job-creation should pick up,
accelerating the rebound in stock and real-estate prices that the
administration and the Federal Reserve have been desperately trying to
engineer since 2008.
The New York Times offers its own research:
presidential election campaign heats up, two measures of the economic
success of President Obama’s administration provide drastically different
views of how he has done.
His stock market
record is among the best of all the administrations that have held office
over the last century. But in terms of economic growth, the record is
among the poorest.
… since the
presidential inauguration on Jan. 20, 2009, the stock market has risen at
an annual rate of 16.4 percent, even after adjusting for inflation. That
is better than all but four previous administrations.
share prices seem to have had a better record as election forecasters.
Nine previous administrations have produced double-digit percentage gains
over the comparable period, and the incumbent party won in seven of the
subsequent elections, the exceptions being Democratic defeats in 1952 and
President Obama may be able to take heart from the
somewhat similar experience of President Wilson, who was able to claim
credit for the recovery and pass off the blame for the recession as he
won re-election in 1916.
Not surprising: two different viewpoints based on two
polar-opposite media regarding editorial opinions.
Surely getting government debt and deficits under
control (over time, not immediately), simplifying (small) business
regulations, enforcing the rule of law through financial regulations that
curb excesses and “too big to fail,” without unnecessarily hampering market
efficiencies based on anti-business populist sentiment, passing
meaningful tax reform and common-sense health care and energy policies,
and fostering legislation that encourages investment in ongoing
businesses, startups, infrastructure, and education are all good for the
health of the country’s economy and its citizens. The government needs to implement
policies that favor national savings to facilitate seed capital and
investments over policies that encourage the excessive debt and
over-consumption that fueled the false prosperity of the last two
decades. More stimulus money
should have been used for infrastructure instead of misplaced programs
like “cash for clunkers,” which increased consumer debt, robbed future
demand and retired many perfectly serviceable vehicles… while providing
insignificant benefits to the carbon footprint and a net-net zero for the
auto makers and dealers.
The bipartisan Presidential Debt Commission’s
recommendations outlined policies that address these issues, as does the
Ryan Plan. It would appear that
the most progress is made when at least some consensus is reached, as in
the Reagan years with a Democratic Congress and the Clinton years with a Republican
Congress. Those Presidents knew how to horse trade. The recent lame-duck Congress did
practice partisanship and gridlock, as passionate politicians rooted in
the poles of their respective ideologies failed to reach consensus. Research shows that during “normal”
times this is not necessarily a bad thing, as government effectively gets
out of the way of businesses doing what they do best, under the rule of law: the reasonably
efficient allocation of resources, economic growth and prosperity through
innovation and productivity, and the creation of jobs, jobs, jobs,
particularly from startups. Think future IBMs, Apples, Microsofts,
Walmarts, Amgens, Amazons, Googles, eBays and Facebooks in currently
incipient or non-existent technological, manufacturing, service, retail,
scientific, communications, medical, and energy sectors, not to mention
the zillions of new startups and small businesses we never hear about;
don’t think proliferating and gargantuan government agencies with a
fraction of the GDP multiplier effect associated with the private sector.
The 2010 Republican tsunami was surely a response to
the poor economy and jobs market… but its scope and intensity also
suggest a likely pushback to a sense that the current (and previous)
administration and Congress went too far in political direction, on
non-transparent and arrogant legislative procedures and executive orders,
the size and influence of government, and fiscal irresponsibility. The
Federal Government’s spending now accounts for about 45% of our GDP and
rising based on current projections (it had been in the 30s for the last
four decades). Will taxpayers
continue to fund these excesses and expansions? It appears not. Will the bond market vigilantes? They’re waiting in the wings.
We will need some consensus to at least start the
process of solving our vexing problems.
Although my own views favor many Conservative over Progressive
solutions, no one philosophy has a lock on the best implementations to
solving all problems. The genius
of our Founding Fathers was the creation of a system with the intent of
reaching compromises and balances that at least partially benefit just
about everyone, including minority views, although slow and often
frustrating. By the way, Canada
was on the financial ropes in the 1990s, yet subsequently scored a
knockout when its center-left government implemented a number of the
Conservative policies suggested above;
the current center-right British administration is in the process
of doing the same.
At any rate, regardless of your views or mine on
political issues, the upcoming year in this Presidential Cycle looks OK
for the market. Having said that, I listen to what the model tells
me. The model is apolitical,
unemotional, neither politically correct nor politically incorrect, but…
it’s not clueless regarding political events. Its indicators do react indirectly to
political policies that affect the economy and market. For example, interest rates have become
politicized to the extent that the Fed has become politicized: Not only
do artificially low interest rates help the economy (in the short term,
at the expense of fixed-income savers) but also lower the government’s
debt service, as in paying off our mortgage with a low rate. Several of the model’s monetary
indicators monitor interest rates.
And its technical indicators that measure trends, volatility, and
market internals such as volumes, advances and declines, and new lows and
new highs themselves react to economic events that are affected by
More to come… this is quite a decade and quite a
year. The upcoming national
election will likely set the tone for years. Keep the faith.
98.6 Cash: 0.0% Buy & Hold: 11.8% Standard Timing: 11.8% Aggressive Timing: 17.1%
S&P scales bull market to 1419, then pulls back to 1398
by end of week, as jobs data unexpectedly come in weak and the eurozone
crisis rears its head once again.
We might get a pullback this coming week, while investors digest
Good Friday’s bad news, opening the door for adding to positions,
assuming underinvested portfolios with additional appetite for risk,
while the model remains on a buy signal.
Eurozone and the market.
Eurozone leaders going back to 2009 emphasized and reemphasized that Greece
would not default or restructure its debt... nor would it leave the
Eurozone. The recent deal gave
private bond investors a nearly 50% haircut on their holdings, a
restructuring that effectively amounts to an orderly default. And this so-called new debt has traded
at about a 70% discount, meaning the haircut is closer to 85%. The real question? Will there be
contagion? EU leaders are saying
there's no risk to other countries.
Wrong again? Decades of
overspending and borrowing to finance social programs and pensions now
require severely painful austerity measures imposed by the EU. Moreover, Greece's low-growth prospects
point to continued recession, indeed a looming depression, and a future
inability to repay its debt. At
some point, Europe (Germany & the North Countries) might say
“enough,” as the Greek public blames the Germans and Austrians, social
unrest grows even further, and they want out of the EU, in what would be
a very difficult exit that would surely impact stock markets, although
likely not for long.
is unraveling by not meeting its budget deficit targets, unemployment is
near 25%, and GDP is in contraction.
Its bond sale went badly last week, meaning either still higher
interest rates to finance government or a shortfall in financing with not
enough players to buy the needed debt.
even worse. Italy, while better off than Spain & Portugal, still needs
help. And these are far bigger
economies than Greece. To get deficits under control by
reducing their debt-to-GDP ratios, these countries have two options: Grow
GDP faster than the growth in debt or reduce debt, or a combination of
the two. The former option is not likely in the foreseeable future and
reducing debt without aggressive growth policies only increases the
chances of a deeper recession... the sovereign debt crisis is far from
So, why should our markets worry? Given the high correlation among global
markets, problems in Europe (or China
especially, but also India,
become our problems, as our problems become theirs. US banks, by some measures, have around
30% exposure to Europe. If Europe
unravels, we feel the pain as well.
As clearly documented in the celebrated book This Time is Different: Eight Centuries of Financial
Folly, Reinhart and Rogoff show that “excessive debt
accumulation, whether it be by the government, banks, corporations, or
consumers, often poses greater systemic risks than it seems during a
boom.” And systemic risk can lead
to fat-tail financial
crises. We saw the consequences in
our housing bubble. We’re now seeing
the consequences in Europe. And currently in the US, look no further than California: It has chosen to let a
number of cities enter bankruptcy, meaning a severe disruption of
services such as health, police and fire... not to mention reduced wages
and workforce. The recession,
along with excessive entitlement benefits, over-regulation, inflexible
work rules, over-spending, and high taxes, have brought a once dynamic
and innovative economy to its knees in the public sector. It ran deficits even in good times and
well before the 2007-2009 recession.
And the exodus of workers and companies continues as the state
imposes and proposes even higher taxes.
This time it’s not
different. For a detailed read see
California's Greek Tragedy.
Still, the private
economy of California is a dynamo, its GDP ranking first among states
by a wide margin, followed by Texas and New York. Taking population into account, the
state ranked 11th on per capita GDP in 2010, dropping two
slots since 2007. Guess what
“state” was numero uno in
of Columbia, with more than twice the per capita GDP than #2
Delaware and #3 Alaska. It looks like the power center of the
Federal Government is the place to be.
On a national canvas excessive debt over extended periods
eventually deals a blow to the economy as either the business cycle
weakens or we have a financial crisis unrelated to debt… and consequently
impacts the stock market.
Unfortunately, the current trajectory of debt and deficits for the
point to potential future problems.
And far too many people are in denial, or don’t believe it. They need to set their gazes across the
pond. True, we’re not Greece,
we still have a flexible economy and huge growth capabilities, but we do
need to make structural changes in our budgets, tax codes, regulations,
and national health care. More to
dealt reasonably well with the 2008-2009 crisis. The future? We’ll see…
98.9 Cash: 0.0% Buy & Hold: 12.6% Standard Timing: 12.6% Aggressive Timing: 18.4%
The first quarter ends on a positive note, with the Dow
up 8%, the S&P 12%, and the Nasdaq 19%. These are the largest percentage
first-quarter increases for the Dow and S&P in 14 years, during the
super bull of the 1990s; 21 years for the Nasdaq. The S&P extends its
current bull market to 1417 or
easing back to 1408. It’s now 10% below its all-time
high. As usual during a buy
signal, the operating strategy is to buy the dips, for underinvested
portfolios with tolerances for additional risk.
economy and the market.
The market is
widely viewed as an anticipatory, although imperfect, mechanism for the
economy, based on investors’ perceptions and outlook regarding trends in
jobs, housing, oil and gas prices, inflation, monetary policy and
interest rates, the health of financial institutions, levels of private
and public debt, government deficits, national growth here and abroad,
consumer confidence and consumption, global corporate earnings,
technological innovation, tax policies, health care legislation, and
geopolitics. And I’ve probably
left out some factors. One thing
is clear: all taken together it’s unclear, muddled. Let’s look briefly at some positives
added more than 200,000 jobs, on average, over the last six months,
showing gains across industries and demographic groups; the headline
unemployment rate is down to 8.3%; weekly jobless claims are at the
lowest level in four years. Housing
starts have turned up and mortgage interest rates are low. Banks are lending more and consumers
are spending, as household debt grows.
Consumer confidence is up and sales at U.S. retailers rose at the
fastest pace in five months in February, as spending increased at auto
dealerships, gas stations and clothing stores. The rate of increase in manufacturing
output has doubled over the past six months. GDP is increasing at a 3% rate, above
forecasts. Global banking systems
and the Fed continue the injection of liquidity, which augurs well for
stock markets and commodities. The
“official” inflation rate remains tame, at about 3%. Financial institutions are healthier
according to recent stress tests. First-quarter profits for the Standard & Poor's
500 were up 13%. And we’re in
a bull market that keeps printing new highs.
What’s not to
beginning of the last decade unemployment was half what it is today, at
about 4%, which is considered “full” employment. To get back to this rate we would have
to add jobs at a much faster pace.
According to John Mauldin, we need to create 125 thousand new jobs
a month just to keep up with population growth. If we keep up the current pace of job
growth (not easy), we could get back to full employment in four to five
years, a not so short time frame.
Housing prices continue their decline, although at a slower rate. Prices are at levels last seen nine
years ago, according to the Case-Shiller Home Price Index. And Gen Y young adults (the under 30
“millenials”) are not likely to take up the slack, as they pay off
college debts and view homes as poor investments.
Yes, banks are lending more and retail sales are up,
but so is consumer debt, which takes a bigger slice of the pie than
corporate debt. For better long
term economic health, it's better to de-emphasize consumption and
substitute capital investment by corporations and government expenditures
for infrastructure and education.
Best for credit to flow from those who consume to those who
produce. This doesn't happen when it's more profitable for a bank to loan
to consumers than to businesses. Balance is needed, of course, but
generally capital invested in business promotes jobs, giving workers real
money with which to consume, rather than consuming through borrowed
money. Moreover, if debt gets out
of hand again, consumers will get in trouble when interest rates inevitably
rise after Bernanke (“Helicopter Ben”) lands his money-dropping
after-tax income, the fuel for consumer spending other than borrowing,
has barely risen in the past six months.
Energy prices will likely remain high for the near
term. The summer driving season and
more expensive summer gasoline blends are coming. And according to a recent International Energy
Agency Report current global oil demand exceeds global supplies by
about 600 thousand barrels per day, putting pressure on prices. Note also that releasing oil from the
Strategic Petroleum Reserve is more of a political than economic
move. Last year’s release affected
prices for a couple of days; one month later prices were up about
10%. To add insult to injury the
oil was likely replaced at a higher cost. Let’s save that act for its
intent, a true crisis, such as the fat-tail event war in the Middle East.
As more supply comes on line over the coming year(s), however,
prices should moderate. I have a
small position in DBO to account for higher oil prices and as a hedge
to a serious oil crisis. (Also see last week’s post.)
Unofficial inflation rates are higher than those
reported, as the government has refigured its calculation to look better
than it actually is, quality improvements as part of the rationale. For example, we might pay more for a
particular vehicle, but accounting for better quality might render the
cost less when calculated for inflation purposes. It’s still an increase in out-of-pocket
cost, no? If calculated by former CPI formulas the inflation rate would be
closer to 10%, not 3%. And the
very easy monetary policy of the past few years could inflame the
official rate sometime in the not-too-distant future (as the economy
picks up). ETF flows suggest
near-term inflation worries.
I have a small position in GLD
as a classic inflation and geopolitical crisis hedge. Treasury Inflation Protected Securities
(TIPS) would be another; see TIP,
for example. By many accounts
Treasury bonds are in a bubble due to extremely low interest rates and
the risk-off trade. I also own a small position in TBT
to account for an unwinding of the bubble, as interest rates increase
from an improving economy, additional inflation, and greater confidence
in equities and other asset classes (risk-on
Lower GDP growth in
the 2% neighborhood is anticipated, as cuts in spending by the federal
government and by state and local governments continue their drag on
economic growth, and tax increases and spending cuts loom at year-end
unless Congress and the president find a face-saving or deficit-reducing
compromise before then. Moreover,
the European crisis is far from over, adding another potential drag on
global growth and our exports. And
financial institutions remain “too big to fail,” suggesting that the next
financial crisis will require bailouts (again), giving credence to the
criticism that what we have is socialism for the few and capitalism for
the rest of us.
And then there’s the specter of government debt and
obligations, along with the inevitable continued unwinding (deleveraging)
of the Great Debt Supercycle. And
the uncertainty over political elections (and directions) here and in Europe. And
needed tax policy changes. And the cost, controversy and
uncertainty over how to deliver national health care. These are complex and controversial
topics that I’ll take up in future posts under the eurozone and political
So, are we confused yet? It looks like the negatives outweigh
the positives. Who knows how these issues will play out over, say, the
next year or two. No wonder the
market is so turbulent, although it has continued up that “wall of
worry.” Rather than stressing out trying to figure this stuff out I
mostly rely on the model to guide my macro investments. And it’s not like the model ignores
these issues. Its technical
indicators react to the market’s consensus and detects excesses, its
sentiment indicators measure emotion from a contrarian perspective, its
monetary indicators assess monetary policy and interest rates, and its
fundamental indicators address aggregate corporate valuations. The model stirs this potentially toxic
brew and makes its judgment. It
tastes pretty good for now. That will do for me.
Four pdf files have been added to the downloads screen: data and
graphs for tested and live time series.
See menu at left or bottom of page.
98.8 Cash: 0.0% Buy & Hold: 11.6% Standard Timing: 11.6% Aggressive Timing: 17.0%
S&P 500 extends bull market to 1408 on Monday, 108% above the 677 bear market low in March, 2009, then
eases back to a 1397 Friday
close. Year-to-date gains look
good as the model remains solidly bullish.
economy and the market: Energy prices.
So, what’s it
costing you to fill up your gas tank these days? High oil prices in general and gas
prices in particular raise the issue of damaging the economy (and by
extension the stock market and our investments in private, public, and
retirement accounts), threatening US and world growth. Why so high recently? The short answer: It’s a closing gap between demand and
available supply, coupled with geopolitical fears that promote
speculation. Consider the
increasing demand by emerging nations such as China & India; Japan's
shift from nuclear to oil (and liquefied natural gas) fuels; instability
in oil producing nations such as Sudan, South Sudan, Yemen, Iran, Libya,
and Nigeria; and the Iranian threat to disrupt oil shipments through the
Straits of Hormuz.
Intermediate and longer term solutions include:
continued conservation and greater efficiencies on the demand side; on
the supply side, the additional expansion of energies such as wind,
solar, biomass/biofuels, nuclear, and, yes, domestic and Canadian
supplies of oil and natural gas from both private and Federal sources.
Oil is not going away in our lifetimes, so why not enthusiastically encourage
supply from our friendly neighbor and our extensive domestic reserves,
while at the same time increasing national security, providing a
significant number of high-paying jobs, and stimulating the national
economy with money flows that would otherwise mostly go to either
unfriendly or unstable countries. Exporting supplies and refined products
would help the economy as well. The US is energy rich and should
gradually achieve energy independence given the recent discoveries of
huge shale gas and oil fields, coupled with the political leadership and
commitment to exploit these resources, with reasonable safety
precautions. Moreover, there’s
another potential and significant benefit for the US economy: Low-cost
energy relative to the rest of the world coupled with manufacturing
innovations in flexible-automation should shift the dynamic of
manufacturing locations from countries with cheap labor to countries with
cheap energy. Additionally,
this would lead to improvements in our trade deficit, since energy
imports account for roughly half of this deficit. Check out a preview of an upcoming energy report.
Yes, we should rightly be concerned about the
environmental consequences of fossil fuels. True, a proven, potential and realistic
downside of using carbon-based fuels is damage to the environment,
although these problems can be mitigated (not eliminated) by careful, not
obsessive, regulations and safeguards. For example, the problem with
contaminated ground water when fracking natural gas appears to be not the
fracking process itself but the integrity of the wells, a problem that's
solvable. Likewise with the new
procedures and regulations in place since the recent Gulf oil spill, as
long as they’re supervised and enforced. And is the man-made climate
change fear overhyped? Take a read
from a recent letter put out by some prominent scientists. Is the climate-change orthodoxy wrong
and self-serving? Orthodoxy and
rigidity in research universities and institutions are surprisingly
common, which I have often seen (and practiced myself) over thirty-six
years as a professor and researcher.
And there are unintended consequences from using renewable energy.
Do we need to demonize fossils by renewables
proponents? Do we need to demonize
renewables by fossils advocates?
Can we have an objective, honest dialog? In the final analysis it’s a tradeoff
between damage to the environment and damage to the economy, and by
extension the well being of our citizens, both our medical health and our
economic health… Jobs or the environment?
Balance is needed, but what’s the right balance?
It’s argued by environmentalists and the green lobby
that a focus on renewable energies such as biomass, solar, and wind are
the wave of the future: inexhaustible energy and jobs to provide it, with
no environment v jobs tradeoff.
Moreover, it’s a solution to the inevitability of “peak oil,” that
is, an exhaustion of this resource.
That very well may be, but when is the “future?” Certainly not over the next ten
years. Thirty years?
Fifty years? Peak oil
theorists have been wrong for decades that we would run out of oil in the
near future (see Daniel Yergin’s book)… and wrong even more so now with the latest
discoveries and advanced extraction technologies. By some estimates we have a 200-year supply of the natural gas resource. And can these renewable options replace
the huge generating capacity of carbon-based fuels? Apparently not anytime soon, not even
close. In 2009 renewable sources
accounted for about 8% of our energy needs. Wind about 1%; biofuels less than
2%; solar far less than one
percent. Hydropower, wood, and
biofuels accounted for about 80% of the overall renewable eight percent. And then there’s cost, a complex
calculation that can include factors such as investment, fuel costs,
subsidies, taxes, disposal, CO2 capture, and time frame. Cost estimates for electricity from various
technologies, different methodologies, and several sources look good for
natural gas and land-based wind.
Cheap and recently plentiful natural gas is already causing a
building boom in generating plants that otherwise might turn to nuclear
or coal. And there appears to be a
greater commitment to converting our trucking fleet from diesel to
liquefied natural gas. Let the market decide. It’s much better at allocating
resources than government technocrats.
Capital will flow to the most efficient resources, over time, and
within the context of more streamlined permitting processes and
regulatory certainty and enforcement.
And it will cost less to fill our gas tanks… or to charge our
By the way, the model does not account for energy, oil
or gas prices directly; their consequences are felt by some of the
model’s technical and sentiment indicators. I will, however, explore a more direct
relationship for the model’s 2013 revision. And energy is one of my long-term
investment themes. I currently own
an oil ETF (DBO) and energy equipment and services ETFs (XLE
& VDE). I’m also in the S&P 500 ETF (SPY),
which seeks to replicate the performance of the model’s benchmark index
and includes about 12% energy
investments in its makeup.
99.1 Cash: 0.0% Buy & Hold: 12.2%
Standard Timing: 12.2% Aggressive Timing: 17.9%
Bull market extends to S&P 1404, crossing the 1400 milestone for the first time since
May, 2008. Still, the index
remains 10% below its all-time high of 1565 in October, 2007 and just 8% under the twin and slightly lower
peak of 1518 in March, 2000, a
long and volatile twelve-year span that included a bear-market low of 677 in March, 2009, a devastating
57% below the
peak over a 17 month time span that experienced the brunt of the financial
crisis. The Nasdaq Composite
finished above the 3000 level for the first time since December
2000. At that time it was on its
way down from its historic peak.
Now, twelve years later, it's on its way back up that mountain,
although still a whopping 40% below its bubble-summit.
current bull market.
First, some relevant stats. We’re now 36 months and 107% into a cyclical bull market,
following the twin cyclical bears that stole 57% from S&P
500 portfolios over the period October, 2007 to March, 2009 (there was an
intervening cyclical bull lasting two months). The age of a median bull market based
on the S&P 500 is 44
months, a metric that says half the bull market lengths were above it and
half were below it. The range is 2 to 147 months, the latter an outlier and reflection of the
mega-bull that ran from December,
1987 to March, 2000, with a gargantuan 582% gain. The median gain stands at 101%. Runner up was the 85-month, 263% bull from
1949 into 1956. Since 1929 there
have been 16 bear markets and the current 16th bull
market. Of these, half were longer
than the current bull and 44% had larger gains.
Is the current bull “long in the tooth?” Not based on the historical record, as
it’s in the middle of the pack when looking at length and return. To reach the previous all-time high
this bull would have to run it up 131% from its present 107%, or another 11% from its
latest close. Should investors who missed the bull be jumping in
now? Should those of us who
benefitted be “taking money off the table?” Let’s look at some additional thoughts
Fear and greed, our emotions, cause far too many
investors to mistime the
market. Multiple studies by
Morningstar, TrimTabs, and Investment Company Institute clearly show that
the largest net funds flows into stock funds occur near market tops, as
investors who had been out of the market feel comfortable enough to get
back in (greed and regret); conversely, the largest net outflows are near
market bottoms, when investors are most fearful. Many investors are essentially buying
high and selling low, the reverse of what should be, exhibiting the human
tendency for risk aversion when fearful, and less so when not. Many, many investors have missed out on
the current bull market. And it’s
not surprising that investors have not participated out of fear, given
the “lost decade” from 2000-2009, a cumulative 9% loss over
ten years with reinvested dividends (24% without dividends), and volatility
not experienced since the 1930s.
This is why we need a good timing model that, in theory
at least, tones down the emotions by basing investment exposure on
historically proven analytical results over long time periods. During extended bull markets a good
timing system will capture most, but not all, of the gains; over extended
bear markets it will avoid most, but not all, of the losses. In our case, the “proof is in the pudding,” as the model returned a cumulative
actual (live) 58% for the standard strategy and 84% for the
aggressive variation during the 2000s, versus a cumulative 9% loss for
buying and holding during the entire decade. And the cited loss would be a kind statistic
if we were to account for the buying high and selling low phenomenon
cited in the previous paragraph.
If we’re currently out of the market should we buy
in? Yes, at least some, with the
model on a buy signal. Should we
get out if we’ve been in? No, at least not entirely, with the model on a
buy signal. To what extent we’re
in or out depends on our need for return and tolerance for risk, which
itself is influenced by our personality traits, whether we’re in, near,
or far from retirement, and our sources of other income and
lifestyle. As for me: I’m retired,
the portfolio is a major source of funds, I don’t especially live on the
cheap, and I have a decent tolerance for risk with a reasonable dosage of
caution. I’m currently 55% in
equities, 5% in commodities, and 10% in bonds, with the remainder in
cash. All investments are in ETFs.
Investing in stocks is certainly not for the “faint of
heart.” We have to accept the bad
(risk, fear) along with the good (return, self interest). The model helps me with the fear part
and has ensured pretty good returns.
That’s why we use measures that adjust returns for risk, risk-adjusted returns, to better
compare different time periods and alternative investment classes… and to
account for our propensity to avoid risk.
By the way, the fourth year of a bull market has
generated an average 19% return.
And last year we came within a hair of a bear market, which means
that some of us could arguably say
that the current bull market is younger than the official consensus? This bull market will end, of course,
although in the near future it will probably need a serious turn for the
worse regarding the economy, the eurozone, and political policies. These topics are the subjects of future
postings. Bull markets climb the
proverbial “wall of worry.” When
the wall comes tumbling down from over-optimism is when we actually do need to worry. And remember that the model does not
seek to detect bull or bear markets; rather its mission in life is to
identify whether the just-ended week is an inflection point, a turn in the primary trend. Bull
markets do include 85% of the
primary uptrends in the model’s
historical data base. The model
keeps a finger on the pulse of the market patient, so hopefully it will
detect when it's time to bail. And
all bets are off if we have a completely unknown negative Black Swan.
99.0 Cash: 0.0% Buy & Hold: 9.4% Standard Timing: 9.4% Aggressive Timing: 13.8%
A bit of
volatility came back into the market this past week, as the S&P
pulled back about 2% from its recent high, then clawed back to 1371, just above even by the end
of the week, and just 3 points below last week’s bull-market high. The model remains unperturbed, happy
with its gains so far this year.
Do we continue along our merry way? Or are we in denial that this party
will end soon?
To address these
questions I’ll give you my thoughts over the next several weeks on each
of the following (interrelated) issues, one or more postings per topic.
- On the current bull
market. Is it long in the tooth, or
how long and how high can we go, now that it’s three years old? Is it too late to get in? Should we be thinking of
- On the economy and the
market. What concerns should we
have regarding jobs, housing, oil/gas prices/Iran, inflation, monetary
policy/interest rates, debt supercycle/deleveraging, earnings,
domestic & global growth?
- On the Eurozone. Too many promises, too much debt, too
little growth, too late? Is Greece
fixable? Are other peripheral
countries next? Effect on
global economy? Domestic
economy? Are we looking at
ourselves in the future? Is this time different?
- On politics. Is market performance determined by which
party is in power? Which
party wins an election? Is gridlock bad for the market? How about policies regarding debt
and deficits, entitlements, the military, regulations, taxation,
jobs, health care, education, infrastructure, energy?
Ok, this is
much more than a handful for these postings, overly-ambitious, the
subjects of books and long articles.
But I will try to keep it short and relevant with respect to the
market, more like executive summaries.
Some of the points will be based on analyses and the historical
record; others on opinion. Be
warned: As with any writer or
commentator, interpretations of “reality” are filtered and distorted
through personal prisms, our experiences, beliefs, and emotions... and
what we choose to leave in or out from the narration. Still, the model
remains my compass, impassionate, imperfect, a reliable old friend, the
best I have.
99.0 Cash: 0.0% Buy & Hold: 9.3% Standard Timing: 9.3% Aggressive Timing: 13.6%
extends bull run to 1374,
before pulling back to 1370 on
Friday. The model remains
exceedingly bullish. To summarize
its indicators: technicals such as risk-adjusted trend, momentum,
advances v declines, percent lows, new highs v new lows, up v down
volume, and the VIX (a measure of volatility) are all very positive;
monetary indicators regarding interest rates, their spread relationships
(differences among various types of rates), and money supply are also
very bullish; sentiment measures are neutral, with a balance between
bulls and bears and neutral cash holdings by mutual funds (although
investors themselves are holding a lot of cash, a bullish contrarian
sign); and fundamentals such as dividends relative to treasury bills and
prices v earnings and dividends show strong readings.
none of the model’s four broad components (technical, monetary, sentiment,
fundamental) are maxed out. And,
yet, the model’s reading at 99 (out of 100) appears to be just about at
its absolute high. So, why the
apparent inconsistency? The
model’s mathematical behavior is not linear,
but rather non-linear and
what’s called asymptotic (its
score is a curve that slowly approaches but never touches 100, with the
mirror image to zero also the same).
The model’s changes are very small near each extreme (100 and 0),
but changes are sensitive within the range 20 to 80. If you feast on numbers (you “quants”
out there), take a look at the downloadable data and note
that, within the sensitivity range mentioned, the model’s score can
change dramatically, increasing the likelihood of a switch signal.
insights regarding the model, we can say that it’s not likely to change
its tune anytime soon.
Underinvested portfolios willing to take on additional risk should
feel relatively confident in deploying additional funds to the market,
given an intermediate time horizon (in the short term the market appears
overbought and possibly due for a minor pullback).
98.9 Cash: 0.0% Buy & Hold: 9.0% Standard Timing: 9.0% Aggressive Timing: 13.1%
almost a year, a volatile, frustrating year for the bulls; a year that
included a near-bear market last October.
Yet, the S&P 500 finally reconfirmed, just barely, the
cyclical bull market that peaked last April. At 1366
our benchmark index has doubled, at 102% above its
start, the bear-market low of 677
in March, 2009. A cause for
celebration? Yes, although let’s
not uncork too many champagne bottles.
The index remains 13% below its 1565 secular, all-time high in
October 2007, nearly 4 ½ years ago.
This bull market is 36 months old, about 8 months younger than the
median bull market, and at the median gain.
So, what does
the model say? The model says
nothing about bull markets, not directly anyway. Its concern is: “Does the evidence this past week
suggest that we remain in the current primary
trend, an 8% or more change over at least eight weeks based on Friday
closings? Or does it look like the primary trend has reversed, a
so-called inflection point?” Based on its current score, the model
estimates a 99% probability that the primary uptrend remains in
place. And note that primary
uptrends are more likely during bull markets than during bear markets,
85% to 15%. These are odds that have served me well over twenty-two years
of actual use.
98.9 Cash: 0.0% Buy & Hold: 8.5% Standard Timing: 8.5% Aggressive Timing: 12.6%
continues as the S&P 500 settles at 1361, just short of the 1364
cyclical bull high from last April, a goal already achieved by the Dow
and Nasdaq. So, given all the
negativity and reasons why the market will not do well, why are we in
rally mode? First, outcomes to the
concerns in the January 29 posting may not be as unfavorable as
expected. Second, the US economy
appears to be slowly mending: consumer credit is expanding; housing and
jobs numbers are improving; corporate profits remain strong; capital
goods orders have jumped to pre-recession levels; interest rates remain
low; growing investor confidence might encourage an expansion of
price/earnings multiples, currently below historical averages; a decade
of poor performance has reset valuations at affordable levels; companies and portfolios are stuffed with
cash and need more confidence to deploy it; money flows into US stock
mutual funds are growing, including redeployments from Europe to the
US. Moreover, the model remains
extremely positive, suggesting a healthy market that’s in an
uptrend. And all of this given the
business uncertainty over the impact and cost of a looming health care
program, possible new taxes, the lack of energy legislation regarding the
expansion of domestic oil and its implications for energy prices and
national security, and what looks like overdone Federal regulations,
current and upcoming. The US
economy is indeed resilient. As
usual there will be pullbacks and corrections based on unfavorable news
and fears. Underinvested
portfolios should use these to commit more funds to the market, consistent
with risk profiles, and while the model is on a buy signal.
98.2 Cash: 0.0% Buy & Hold: 7.0% Standard Timing: 7.0% Aggressive Timing: 10.3%
Weekly gains evaporate on
Friday as the Greek crisis rears its head once more and the country
unravels both economically and socially.
The prognosis looks bleak.
Is the market pricing in the risk of a Greek default and possible
eventual exit from the eurozone?
If we have an exit, will there be time for an orderly
transition? The market and model
remain sanguine. See the revised FAQ on fat tails, endogenous risk, efficient
markets, and relevant books as good reads.
97.2 Cash: 0.0% Buy & Hold: 7.2% Standard Timing: 7.2% Aggressive Timing: 10.5%
Rally continues as the Dow & Nasdaq extend their bull
market peaks from last April and the S&P at 1345 jumps to within about 1% of its 1364 cyclical bull, also last April. The Nasdaq now stands at an
eleven-year high, yes impressive, but for perspective it remains 42% below its
secular (and bubble) peak in March, 2000.
No complaining, though, as it has gained an impressive 160% since its October,
2002 low. Respective gains for
the Dow and S&P sit at 96% and 99% since that low. The actual (live) standard and
aggressive timing strategies over the same time period (October, 2002 to
now) show gains of 103% and 92%, respectively, with about half the risk of the
S&P. The standard strategy
over this time horizon slightly bests buy and hold, but more than doubles
the risk-adjusted return. Why is
this important? Because risk
(fear) affects real-world investing, which when coupled with the desire
for return (greed) or regret missing rising markets, clearly shows
through Morning Star studies that investors significantly underperform
the buy-and-hold strategy: selling when fear is high (near bottoms) and
buying when greed or regret is high (near tops). In other words, buying and holding is
rarely practiced, as it requires disciplined and unemotional investing
that goes out the window when fear and greed interplay. The benefit of a
reliable timing model, assuming its signals are followed, is unemotional
Another key advantage of a
good timing model is the avoidance of severe declines that devastate
portfolios, so-called capital-preservation strategies. Consider the bull-market peak for the
S&P 500 in March, 2000. From
that high until now, twelve years,
an S&P portfolio advanced just
consequence of a “lost decade” with four bear markets. The live standard strategy gained 82% over this
time period, while the live aggressive strategy popped 106%. Reread the last sentence: 10 v 82 v 106%. During extended bull markets with
little or no intervening bear markets, as in the 1980s and 1990s, even
good timing strategies tend to lag buy and hold, the consequence of some
mistimed switch signals; not so when capital preservation becomes critical. And, as a bonus, we don’t experience
fear when we’re on the sidelines in declining markets. Yes, we do experience fear at a scary
buy signal or regret if we’re late buying a bottom or early selling a
top. Imperfection is part of
modeling, part of any good timing strategy. What counts are the ending dollar
amounts of portfolios when comparing alternative investment strategies.
95.7 Cash: 0.0% Buy & Hold: 4.8% Standard Timing: 4.8% Aggressive Timing: 7.1%
S&P and Nasdaq eke out
gains for the week, their fourth straight weekly advances; the Dow breaks
its three-week winning streak with a slight loss. The model continues to assert the
strength of the current primary uptrend.
The usual strategy while the model is on a buy signal is to buy
the inevitable dips, for underinvested portfolios that can deal with
market volatility. Speaking of
volatility, the market has been quiet this new year, so far, even as it
shows encouraging gains year to date.
Risk in the form of
volatility, an erratic market, will
be back, as conditions remain that caused last year’s swings: In the
US, high unemployment, mired housing, sluggish growth, political
uncertainty; the European crisis, with its over-the-top sovereign debt
and bank insolvencies not supported by economic growth, and officials
that fail to take dramatic steps that will mitigate, but not avoid,
negative consequences; and suspicions that emerging economies (in
particular the BraziRussialndiaChinas) may not pick up global
economic slack. And globally:
Continued deleveraging as governments, corporations, and individuals
reduce the extreme debt hangover of the past decade, thus further
hampering growth, especially in the absence of structural reforms regarding
taxation, wages, benefits, and regulation. Actual or perceived progress or the
lack thereof regarding these issues will cause market swings. They will be resolved, eventually, to
be replaced by others, hopefully less dramatic than the current. The best case scenario for now is that
we muddle-through; the worst outcome is that we slip into another severe
recession. Worse yet? A negative black-swan event.
As we know, there’s always risk
in the market. To mostly avoid it
invites portfolios that will significantly underperform over long time
periods. Fear after the 1987 crash
is what motivated me to develop the model. It’s served me well since its
implementation in late 1989. I always
have a stake in stocks while it’s on a buy signal; I’m always out or
somewhat short the stock market when it’s on a sell signal. As stated before, I’m currently
cautious because of my concerns over extreme tail risk. Many of you have asked about my current
positions, so here goes: 40%
equities (S&P 500, Nasdaq 100, biotech, high dividends ETFs), 10%
commodities (gold, oil, energy services ETFs), 10% bonds (corporate and
Treasury ETFs), 40% cash (under the money market and T-Bills electronic
mattresses). Loose buy targets
under “normal” circumstances are 50% equities, 20% commodities, and 15%
each bonds and cash.
95.1 Cash: 0.0% Buy & Hold: 4.7% Standard Timing: 4.7% Aggressive Timing: 6.9%
Market advances third week
straight, as the S&P marks 1315,
nearly 20% above the 1099 October pullback low and
just 3.5% below the 1364 cyclical high from last
March. Still, the index sits 16% below the 1565 all-time high in 2007. The mood seems to have brightened some
on Wall Street: Economic and
earnings reports are looking ok on balance and, for a change, we had a
quiet week from Europe, although the current “fix” is far from solving
the crisis… more on that in a future posting.
The web-page revisions for the
2012 model are ready. Click menu
items at left or at the bottom of the page for specifics. A question on external events and black
swans has been added to the FAQ.
The data file in the Downloads page is also updated. Use this file to (1) view the model’s
optimized timing decisions over the 1970-2011 time span, (2) view the
live models timing decisions over the years 1990-2011, and, for you
propeller heads out there, (3) add indicators along with the given model
scores to develop your own model
variation... and please let me
know if you show improved results over mine for a portfolio that runs
from 1970 to 2011.
92.3 Cash: 0.0% Buy & Hold: 2.6% Standard Timing: 2.6% Aggressive Timing: 3.8%
Despite the usual global woes,
our benchmark index advances to 1289,
extending the primary uptrend
from last August and landing just 5% below the cyclical bull market
dating back to March last year.
Recall from the model’s description that primary trends are defined as 8% or more changes over at
least eight weeks based on Friday closings. Their confirmations through any given just-completed year
are important for accurate model updates, a process just completed for
this year’s model.
The model that will be used for
the remainder of this year is now operational. Its score for the current environment
is a bit lower than its predecessor.
It’s tuned to be slightly more sensitive as well, averaging 1.4
switches per year vs 1.1 previously, while improving overall risk and
risk-adjusted return. It stays
invested 68% of the time, less than last year’s 70%. And it adds two new predictors, one
based on a bond interest relationship and another regarding the relative
strength of the S&P 500. The
web page revisions for the new year should be ready by the next posting.
90.5 Cash: 0.0% Buy & Hold: 1.6% Standard Timing: 1.6% Aggressive Timing: 2.4%
Good start for the year, as
the S&P 500 gains 1.6% to 1278. Look for a Friday close above 1285 as a reconfirmation of the
model’s primary uptrend that
began last August and a possible breakout above 1364 over the next several weeks or months, corroborating an
extension of the cyclical bull market that began in March, 2009. But… expect continued volatility, as
the issues that were responsible for last year’s turbulence are not going
away anytime soon.
Still working on the revised
model for this year. Hope to have
it ready for the January 15 posting.
Note the new archive section below for past postings.
95.1 Cash: 0.0% Buy & Hold: 0.0% Standard Timing: 0.0% Aggressive Timing: 0.0%
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
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…
Wishes for a Healthy, Prosperous, and Happy New Year
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
dividends and their reinvestment, 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 30 to 50% of S&P 500
total returns, depending on the chosen time period. 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.
Copyright © 2012 Richard Mojena. All rights
reserved. All materials contained on this site are protected by United States
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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
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download or print one machine readable copy and one print copy per page
from this site for your personal, noncommercial use only.
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!