bull market notches another record high, at 1842 for the S&P 500.
At this point, with two more days left in the trading year, the
year-to-date return for our benchmark index is the best since 1995. The model appears reluctant to
celebrate, based on a score that stays well inside its sensitivity range of 21 to 82 and
within striking distance of a sell signal. Overly positive sentiment remains a
negative for the model, as do some diagnostics of internal churning
that’s not evident by looking at the external index itself. Outwardly, the market “patient” looks
good; inwardly, not so good. So,
while enjoying the YTD return, my skepticism mounts regarding an
extension of the rally, at least until we get an overdue pullback that
could take the index down 5 to 10%.
But then… if that starts to happen, then the model is vulnerable
to a sell signal… unless, unless… the internals improve. Keep in mind that the model primarily
measures symptoms and environmental conditions, without regard to
causes. If a patient is vulnerable
(susceptible, maybe weak), then a shock to the system has significant
consequences; not so if the patient is healthy. A score of 62 tells me that the patient
is vulnerable… not weak, but vulnerable.
thinking, too many ifs, ands, and buts… me too… too confusing, especially
if we consider U.S.
and global economic, monetary, political, geopolitical, demographic,
behavioral, and socioeconomic causes that affect the stock market. That’s why I let the model sort it all
out and act accordingly. It’s far
from perfect, but then I don’t have a better alternative. And while some of us fret over the
state of affairs, let’s not forget that 2013 has been one heck of a year
for stock market returns.
Here’s wishing you a happy, healthy, and
How about celebrating by treating yourself and loved
ones by dipping into your gains from this year
And let’s not forget those less fortunate by upping
contributions to our favorite charities
BUY Model: 57.4
Cash: 0.1% Buy &
Hold: 30.2% Standard Timing:
25.7% Aggressive Timing:
31.9% S&P: 1818
rebounds; model pulls back from near-sell signal. The taper is official, starting in
January. The Fed Chairman offers
soothing words to nervous investors, especially a “promise” that interest
rates will stay near zero into 2015.
The market puts together a remarkable rally on Wednesday during
Chairman Bernanke’s Q&A, extended into Friday on the back of good
economic news. The S&P and Dow
notch new all-time highs by the end of the week, the “500” now at 1818. The model bears close watching over the
coming weeks, as market weakness could tip it into sell signal territory.
Have a very Merry Christmas and Happy Holiday week
BUY Model: 40.3
Cash: 0.1% Buy &
Hold: 27.0% Standard Timing:
22.6% Aggressive Timing:
27.2% S&P: 1775
starts the week with another record high, at 1808, then falls back to 1775
by week’s end. The model swoons 35 points to a
near-sell, within about 2 points of the 38 sell
trigger. As stated last week,
market internals have been deteriorating, now to the extent that a sell
signal is possible next weekend, especially if the market slides over
concerns that the Fed will soon reduce its market-stimulating bond
BUY Model: 75.1
Cash: 0.1% Buy &
Hold: 29.1% Standard Timing:
24.6% Aggressive Timing: 30.5% S&P: 1805
for the week saved on Friday by encouraging jobs report. Good news for the economy was good news
for the market. An improving
economy now trumps worries over the Fed’s increased probability of soon
removing the bond purchases punch bowl?
Markets end flat for the week, despite Friday’s rally; model
continues its slow downward
The “500” is
just shy of last week’s record high, yet the model sees deteriorating
internals that belie the index’s external appearance. The model is now within a range (21 to
82) that’s sensitive (either up or down) to market dynamics. The buy signal does appear safe for
now, as we’re in a favorable season into January and the model remains
well above its sell trigger.
Still, its recent troubling behavior while the market advances
bears watching over the coming weeks.
BUY Model: 83.9
Cash: 0.1% Buy & Hold: 29.1% Standard Timing: 24.6% Aggressive Timing: 30.6% S&P: 1806
S&P eke out new all-time highs in quiet, holiday week; model
continues slow-motion, modest slide.
came across a web-based tool called the FINRA
Fund Analyzer, developed by a not-for-profit organization “dedicated to
investor protection and market integrity through effective and efficient
regulation of the securities industry.”
The Analyzer compares the performances of user-selected mutual
funds and ETFs after accounting for expenses, an often overlooked item by
investors that can have a significant impact on returns over long time
periods. As an example, let’s
consider three of my core investments during a buy signal: SPY,
IBB. Starting with $100k in each fund over
10 years and a 5.5% annualized return yields the following net total
returns (after expenses) for each fund: $69,284 for SPY, $67,432 for QQQ,
and $62,810 for IBB. The compounded
expense effect reduces IBB’s return by $6474 versus SPY’s return.
if we choose a fund with higher expenses then we might expect a greater
annualized return. This is indeed
the case for our chosen funds.
Over the past ten years respective annualized returns for these
funds were 5.5%, 9.4%, and 12.5%.
Using these percents for the corresponding funds over the past ten
years and after accounting for expenses, net total returns come out to:
$69,284 for SPY, $140,707 for QQQ, and a whopping $209,515 for IBB.
worth considering fund expense ratios when comparing funds with similar
historical returns. As these costs
are compounded, the differences can be significant over time. Obviously, this consideration is less
important when historical or expected annualized returns vary
BUY Model: 87.0
Cash: 0.1% Buy &
Hold: 29.0% Standard Timing:
24.5% Aggressive Timing: 30.4% S&P: 1802
another set of records for the Dow and S&P, the former crossing
another millennial goalpost, the latter another centennial. The model is unimpressed, slipping
seems to be the financial media’s du
jour topic these days (see two previous postings). The bond market does appear to be in a bubble, thanks to the world’s central
banks. Should it suddenly burst,
meaning a rapid and dramatic rise in interest rates, we would have a
world of hurt, including the stock market. A doubling of interest rates to roughly
historical norms would double the debt service for highly indebted
companies, governments, and consumers.
Let’s hope for a slow deflation of the bubble. Still, listen not to stock market
bubble talk, for now. The fear
talk is a contrarian positive. The
stock market itself is not frothy at this time, although social media
stocks and IPOs such as Twitter appear to be. Investors, especially the retail
variety, are far from euphoric.
Euphoria would be a negative.
Money managers, the pros, are showing some caution. Again, positive from a contrarian
perspective. The model’s sentiment
indicators hover around neutral; its technical indicators don’t suggest
an intermediate or long-term overbought market, which would be another
consequence of euphoria and its attendant bubble. I would worry, however, if we have a melt-up.
market remains about the only game in town, courtesy of the Fed’s
extraordinary easy money policy. Bernankecare and the soon to ensue
probably even “better” (for assets such as real estate and stocks, but
not savings such as bonds, CDs, and money markets) Yellencare remain important props for the market. We will see market air pockets,
especially when the Fed’s bond purchases begin to taper and eventually
end; yet the Fed promises its ZIRP
(zero interest rate policy) for several years, keeping the short-end of
the curve pegged down. Down the
road there will surely be problems as the Fed unwinds its massive balance
sheet… and especially if the bond vigilantes kidnap the long end of the
interest rate curve and run it up.
And there’s always the political wild card in Washington.
I count on the model to have our backs before the next unraveling, the
end of days for this bull market… so, no worry… let’s enjoy the upcoming
holidays. Believe it or not,
Thanksgiving and Hanukkah coincide for the first time in history. Let’s celebrate the event; we have to
wait 78,000 years for the next such experience. Where will the Dow be then?
Just because something is inevitable doesn’t necessarily mean it’s imminent
BUY Model: 89.6
Cash: 0.1% Buy &
Hold: 28.5% Standard Timing:
24.0% Aggressive Timing: 29.7% S&P: 1798
Dow and “500”
notch record highs by week’s end, the latter now challenging another century
mark, at 1798. This relentless, and scary for many,
bull market is now 166% above the
2009 bear-market low, based on the S&P 500. At 56 months it’s about a year over the
average length of a cyclical bull and 22% over the average return (see chart). Only five cyclical bull markets out of
15 have exceeded this one in length; just four when looking at index
longer do we have for this run?
There’s no way of telling, really.
And as long-time readers know, the model “only” judges the start
of a new primary trend (an 8% or
more change in the index over at least 8 weeks, based on Friday closings),
answering the question “Was this past week a reversal in the primary
trend and therefore a change in the timing signal?” At this writing, with the model’s score
near 90 and well
above the sell trigger of 38, the answer is a clear “no,” meaning
that the buy signal remains in place.
And, plainly, a primary downtrend is a necessary but not sufficient
condition for the eventuality of a bear market, as is a primary uptrend
for the bull counterpart.
technical, monetary, and fundamental indicators are pretty much firing on
all cylinders, while its sentiment indicators idle in neutral. Bull markets most often end when
sentiment is extremely positive, a contrarian negative for the
model. One component of this
indicator judges the sentiment of retail investors, a group that’s
notorious for selling near cyclical bottoms (“I can’t take it anymore”)
and buying near tops (“Oh no, I’m missing out on this bull market while
my money market fund earns a pathetic pittance”). We do see signs that individual
investors are starting to pour money into the stock market, as described
by a Wall Street Journal headline
that reads “Stocks Regain Broad Appeal, Individual Investors Are
Returning to Stocks, Which Could Be Bad.”
Some sentiment indicators do look frothy (see last week’s bubble
link), but others do not. For now,
and while the model’s sentiment indicators blink amber and not red, it looks
to me that we have more to go with this bull, along with some likely politically-induced
potholes over the coming couple of months. As usual, the operating strategy during
a buy signal is to “buy the dips,” for those of us who are underinvested
relative to risk profile.
BUY Model: 89.7
Cash: 0.0% Buy &
Hold: 26.5% Standard Timing:
22.1% Aggressive Timing:
26.8% S&P: 1771
ends positive after Friday’s jobs report.
Good news is bad and bad news is good? That’s been true all year, but might be
changing as the jobs report was more positive than expected and the
market soared, in contrast to recent market behavior. Up to now the market had reacted
negatively to stronger than expected economic reports, the working
assumption being that the Fed would discontinue its über-easy money policies by unwinding the taper, thus
reducing money supply and increasing interest rates (see postings June 23
to July 7). At some point in the
economic cycle, however, increasingly strong growth trumps rising
interest rates, giving the stock market renewed energy for additional
gains. Are we approaching that
point? Maybe, but probably not
yet, at least in terms of a believable and sustainable surge for the
current bull market. My
caveats? For one, the headwinds
political dynamics as we turn the corner into the new year. For others, continued business
uncertainty over new regulations, effects of the health care law, and
weak economic and jobs growth, all related to the issue of economic freedom (April 28). And last month it was stronger than expected jobs growth, but not strong jobs growth. At this point in a
post-recession-recovery cycle we should be generating twice the number of
monthly new jobs than we have, based on historical data.
the model positive, a fitful bull market in place, and portfolios doing
very well, why worry? Those of us who do worry could hedge our portfolios
by being underinvested, for now, while the model remains on a buy
signal. Those of us less worried,
but currently underinvested, might use pullbacks to either strengthen or
fully invest stock portfolios. If
during the coming year we have a blowoff top, then concerns over a bubble stock market might be warranted. The model does include a couple of the
troubling economic indicators mentioned in the linked article, although
these indicators are not at extremes, at least as the model uses them. Still, we and the model will cross that
bridge when the time comes.
BUY Model: 90.7
Cash: 0.0% Buy &
Hold: 25.8% Standard Timing:
21.4% Aggressive Timing: 25.8% S&P: 1762
S&P mark new all-time records midweek, before easing back; the “500”
scales to 1772, ending the
week at 1762. The S&P remains slightly
overbought, but in clear short-, intermediate-, and long-term
uptrends. Its resilience in the
face of Washington’s
recent brinksmanship was surprising, given that a similar political
environment in 2011 greased a disturbing 15% correction. This time the market yawned with a mild
pullback. In both cases the
current model gave switchback (incorrect) sell signals over less than a
handful of weeks.
say, but I’ll say it anyway, we never know ahead of time whether a sell
signal will mark the beginning of a serious, moderate, minor, or absent
decline. Second guessing a sell
signal, however, is generally not a good idea. When the model gives a wrong sell
signal it usually switches back to a buy within weeks; when it’s right,
it can be seriously (mostly) right, as in its sell signals within the
bear markets in 2000-2002 and 2007-2009.
Capital preservation during extended declines is the hallmark of a
good timing model; so is getting back in when it’s time, more or
less. An effective timing model
doesn’t have to get it exactly
right at major turning points; it “just” has to buy low and sell high on
average, while avoiding major loses and regretting small gains.
likely that we will face another political confrontation toward the end
of this year and the beginning of the next. And this time we just might encounter
more serious market turbulence and another sell signal. Meanwhile, let’s take advantage of an
uptrending market, especially during this favorable market season.
BUY Model: 90.0
Cash: 0.0% Buy &
Hold: 25.6% Standard Timing:
21.2% Aggressive Timing: 25.6% S&P: 1760
jumps to another record high, settling at 1760 by week’s end; model solidifies further. The Dow remains a fraction below its
early August high and the Nasdaq has been on fire. Since the bear-market low in 2009, the
Dow, S&P, and Nasdaq are respectively up 138%, 160%, and 211%, not
counting dividends. Clearly the
Nasdaq is on a tear. Yet… the
index still remains 22% below its
all-time high in 2000, after 13 years.
Its bear-market low in 2002 took the index down an astounding 78%, a
consequence of the dot-com bubble, from which it has yet to recover. Fearful investors that remained out of
this index since its low would have given up a 211% return as of
this writing. The model picked up 151% of that
It’s been a
struggle for the Nasdaq to regain its high, to be sure. But then consider Japan’s Nikkei. This once “invincible” index peaked its
Mt Everest in 1989. And then… an 82% devastation
over the next eight years. And it
still remains 64% below its peak, 24 years later! It will easily surpass the Dow’s
25-year recovery time from the Great Depression. Yet, its gain from the low currently
stands at 97%. Buy and hold
over the “long term?” It’s all
During a buy
signal I’m always partially invested in QQQ,
an exchange-traded fund that tracks the Nasdaq-100 Index, which comprises
100 of the Nasdaq’s largest non-financial companies. This is an excellent ETF for investing
in tech companies. Its focus is large
growth; a list of 7 of its top 10 companies reads like a Who’s Who in
tech: Apple, Google, Microsoft,
Amazon, Cisco, Intel, and Facebook.
Technology is one of my investment themes, including biotechnology
and, of course, our benchmark index, the “500” (SPY). These three ETFs represent my core (not
all) investments during a buy signal.
Recently I’ve added industrials (XLI)
to this core, to take advantage of our growing manufacturing renaissance
from low energy costs and the increasing use of technology-enabled
production, such as 3-D printing and robotics. See also the September 30
tech posting from last year. I
do sell these, however, when the model turns negative. And that’s a real possibility as we
turn the corner from this year to the next, when a bipartisan contentious Washington
once more becomes front and center for the stock market.
BUY Model: 83.4
Cash: 0.0% Buy &
Hold: 24.5% Standard Timing:
20.1% Aggressive Timing: 24.0% S&P: 1744
This posting is one
day late because of a problem with the hosting service. Sorry for the inconvenience.
surges as Washington
negotiates three-month cease fire.
The S&P 500 scaled a new all-time high by week’s end, at 1744. Yet, here we go again: Another panel
and another promise to solve today's problems tomorrow, or whenever. And we have new short-term
deadlines: the bipartisan panel’s
non-binding budget roadmap on December 13, which should include greatly
needed entitlement and tax reforms; expiration of the CR on January 15, a
deadline for partially funding the government; a new “debt ceiling” on
February 7. Given the polarization
on both sides of the aisle, it
will probably be déjà vu all
over again (thanks Yogi). Far too
much uncertainty remains as we careen from crisis to crisis. Still, the stock market should be good
through the end of the year; so let’s enjoy it while we can. Well, maybe not, depending on how job
numbers, corporate earnings, GDP, the wobbly healthcare rollout, and
geopolitical events play out over the remainder of the year. But then again, the Fed has our
back. Most likely the taper will
be delayed even further, maybe forever according to some pundits, partly
as a reaction to the economic damage wrought by the recent political
fiasco. The stock and bond markets
will like that, as they have since 2009.
the model is back on track, popping 22 points, mostly from a
strengthening of its currently dominant technical indicators. There’s little
chance now of a sell signal anytime soon.
The operating assumption during a buy signal is in play: buy the
dips if the portfolio remains underinvested relative to its risk profile.
October 19 just passed, the 26-year anniversary of the
biggest one-day percentage drop in U.S. stock market
history. The Dow Industrials
plunged almost 23% that day. In
one day! Today, that would be the
equivalent of a devastating 3480 points for the Dow. And we now fret over daily triple-digit
losses? Those of us in the market
at the time remember that day well.
The model was not live then.
In fact, that panic, my terror, was the key motivation for
developing the model. The current
model would have been out of the market one week prior to that crash,
based on back testing. And almost
as important… it would have put us back in the market at the end of
November, one week before the start of a new bull market for the S&P
500. Getting back in near a bear
market bottom is essential as well; far too many investors fearfully stay
out of the market far too long following a bear market.
Could it happen again?
Sure it could, especially given the number of large institutional
investors who use high-frequency trading.
And now we have heightened fears over cyber-terrorism and hacking
attacks as causes of steep market declines. Regulatory changes put in place since
the flash crash in 2010, a black swan
to be sure, would delay but not prevent future occurrences. Besides, sellers can move to other
electronic networks as well.
A significant market decline that turns into a crash is
facilitated by herd behavior and by the conclusion in behavioral finance that fear (loss) is a much stronger emotion than greed (gain). The model, by the way, directly
includes two behavioral components regarding fear and euphoria. Moreover, some of its technical
indicators reflect herd behavior and other behavioral characteristics.
do? Diversification into other
asset classes besides stocks can help, such as gold, bonds, and money
markets. Diversification and the model. I
hope expect that the model
would be on a sell signal should we have a crash in our future. Excepting a flash crash caused by a
non-financial event such as cyber-terrorism, I do believe that the odds
would favor a prior sell signal, especially if the crash comes sometime
after the start of a bear market, as it did in 1987.
BUY Model: 60.8
Cash: 0.0% Buy &
Hold: 21.5% Standard Timing:
17.2% Aggressive Timing: 19.6% S&P: 1703
volatility is back. Four percent pullback
bottom on Tuesday reflected anxiety over the government’s partial
shutdown and especially the looming debt ceiling’s “final” breach,
presumably on October 17. Then a
whiff of talks on Wednesday and actual conversations with the President
into Friday that hinted negotiations
sent the market into a near-euphoric recovery to end the week 13 points ahead
for the “500.” What appeared
midweek to be pretty much a revisited sell signal reverted to a slight
gain for the model by week’s end.
Still, the pullback was surprisingly mild, again suggesting that
the market anticipates a deal… and soon.
Keep in mind
that the model only updates on the weekend, partly relying on indicators
using data that are available weekly (such as investor sentiment, weekly
advance and declines, new highs and lows, up and down volume), monthly
(such as the Fed’s recession probability and liquid assets in mutual
funds), and aperiodic (such as a change in Fed policy regarding reserve
requirements, discount and margin rates).
Some indicators rely on daily market data as well, such as the
VIX, closing values for major indexes, and dividend yields. When I say that a particular move in
the S&P 500 might change the model’s signal, as stated in last week’s
posting, I’m speculating daily values and holding weekly, monthly, and
aperiodic values at their current levels.
Why did I develop a weekly rather than daily model? Less data to deal with, greater
stability (many less switch signals), and no sacrifice in
And so the
drama continues in Washington
as the market reacts to daily prospects for a resolution. D
is coming Thursday, the day the government’s borrowing authority
would need an extension, according to Treasury. Let’s hope that talks by then morph into actual negotiations that result in passed
legislation by both chambers, even if only a postponement to give
dealmaking more time. Unthinkable
otherwise. Then we can get back to business as usual, whatever that
means, and complicated enough as it is.
Still, it appears far from over at this writing. A good political source for breaking
news is the web site Politico
and its Twitter
feed. And re-read the second
paragraph in the preceding post and hang on for what could be an upcoming
BUY Model: 57.2
Cash: 0.0% Buy &
Hold: 20.5% Standard Timing:
16.3% Aggressive Timing:
18.3% S&P: 1690
Market and model yawn over the continuing shutdown and
staredown in Washington. The looming debt ceiling fight just
might turn yawns into screams if the summer of 2011 is any indication. At that time the S&P 500 swooned 15% and US
credit was downgraded. And now we
have a stubborn President and Senate that will not negotiate with a
stubborn House that insists on doing so.
Negotiation is how it works,
especially when government is divided. According to the Wall Street Journal, legislative changes in
return for debt ceiling increases are enacted about half the time, with
60% of these “dirty” increases at the hands of Democrats, 15% by
Republicans, and the remaining 25% during divided Congresses. It appears that, negotiations, if any,
will now deal simultaneously with the marriage of the CR and debt
ceiling. (See preceding post.) Two
different peas in the same pod.
Will the market burn while Washington fiddles? So far, the market’s benign behavior
and the model’s switch to a buy signal are suggesting that the standoff
will be resolved with little damage.
The next several weeks should tell the story. The bold ones with underinvested
portfolios during a buy signal will welcome pullbacks as opportunities to
buy more; the cautious ones with underinvested portfolios will wait out
any storm that develops. In either
case the working assumption is that the model will remain on its buy
signal, a fragile prospect should the market get spooked. The “500” now stands at 1690. A drop of just 20 points (1.2%) by week’s end
could very well whipsaw the model into another sell signal. Once again, Washington, the market, and the model
have our undivided attention.
An entitlement-driven disaster looms
for America, yet Washington
persists with its game of Russian roulette.
BUY Model: 58.5
Cash: 0.0% Buy &
Hold: 20.5% Standard Timing:
16.4% Aggressive Timing: 18.4% S&P: 1692
Markets ease back about 1% for the week, as anxiety builds over
theatrics standoff in Washington;
model shaves 19 points. Based
on last Monday’s favorable (lower) close, the mistaken sell signal gave
up 3%, 3%, and 5% index points, respectively, for the Dow, S&P, and
It appears all but certain that the government will
partially shut down Tuesday, October 1, as the stare-down continues over
the Continuing Resolution (CR in Washington-speak) to fund
the government by the midnight Monday/Tuesday deadline. There have been 17 shutdowns since
1976; the last one in December to January 1995-1996 lasted 21 days. This will exact economic harm,
especially to those Federal employees and civilian contractors who are
furloughed from nonessential agencies and services. But not as much potential harm as a
failure to extend the looming debt
limit. Uncle Sam will have
maxed out its credit card by about mid October, which if breached will
have credit rating implications for the Federal government (interest
rates and related expenses for everyone would rise) and, more ominously,
potential default implications, the latter far less likely because
interest payments on the Federal debt will surely continue, unless we
have the unlikely event that the standoff goes on for a very long time. Even then, interest payments would
likely carry on, at the expense of other expenditures. In any case, the economy would be
injured short term and the stock market would follow suit. Over the longer term, if governmental
expenses are intelligently reduced as part of a bargain, including some
known fixes to the Health Care Law and especially the unsustainable
(according to the Office of Management and Budget or OMB) entitlements
(for Medicare, Medicaid, and Social Security), the private economy should
eventually benefit from lower (or at least not higher) taxes and interest
rates (due to less borrowing needs by the government).
And so we have brinksmanship, given that the President
and Senate leadership refuse to bargain over the debt limit (a historical
first) and the apparent hard position by the House’s justifiable (based
on history and economics) insistence that CR and debt limit extensions
must include (pick one or more) a delay in Obamacare, selective tax
reforms (such as the repeal of the medical devices tax), and maybe the
approval of the Keystone XL pipeline extension. These issues will be resolved, possibly
either by deadlines or within a short time thereafter. Which means that portfolios following
the buy signal and that remain underinvested might use volatile pullbacks
to add to stock positions. I do
expect that rallies will follow when agreements are near or reached. Alternatively, very risk averse
portfolios might sit tight until the dust settles from the current
dustup, then follow by committing more funds to stocks, should the model
remain on its (tenuous?) buy signal.
BUY Model: 76.7
Cash: 0.0% Buy &
Hold: 21.8% Standard Timing:
17.0% Aggressive Timing: 18.9% S&P: 1710
Effective at the close on Monday, the model’s
standard portfolio will mimic the S&P 500 Index. The aggressive
portfolio will be 150% long, basis the S&P 500; its fortunes will
magnify the weekly behavior of this index by 50%. The simplest way to implement these positions
is to invest in either mutual funds or exchange traded funds (ETFs) that
track this index. See the Easy Portfolio
Implementations table in the FAQ for details. As usual, the operating strategy during
a buy signal is to buy the dips, for portfolios that remain
under-invested relative to risk profile.
Look for meaningful pullbacks over the next several weeks, given a
moderately overbought market and politicized rancor in Washington over issues that will
likely impact the market and economy.
The five-week sell signal looks to be a regret trade (5% given up) for the
standard timing strategy and a losing
trade (6%) for the
aggressive variation. A down day on
Monday would improve these percents; an up day would not.
The S&P 500 soared to a new all-time high through
mid-week before pulling back one percent from its high by the end of the
week. With Syria simmering on the back
burner, attention turned once again to the prospects of the Federal
Reserve tapering back its
easy-money purchasing program.
Monday’s market jumped on the presumed good news that Larry
Summers took himself out of the running as the next Fed Chairman. It was widely believed that he would
have implemented a more aggressive tapering. On Wednesday the Federal Open Market
Committee announced that it would not
taper (for now), a decision that roundly surprised investors and
propelled the market further. So,
the obsession with the Fed’s easy-money policy continues, despite past,
present, and foreseeable sluggish economic and jobs growth. Don’t
fight the Fed as the saying goes and who could argue with that as the
unprecedented loose monetary policy since the financial crisis has been a
key driver of the present bull market (profits have been pretty good as
well, although that market prop is weakening).
As for the model, it looks like a mistaken trade…
unless by some miracle we have a major decline of about 4% on
Monday. Losing trades are common
enough, as stated on these pages and seen in Reality
Check. For the most
part these misguided trades have not had serious consequences in the
past, given that the model has clearly outperformed theoretical buy and
holders, with greater overall return and much less risk to boot over its
live 24-year existence.
and tapering off the table (sort of, for now), the market’s attention is
now focused on the drama in Washington
over funding the government, defunding Obamacare, and extending the debt
ceiling. It looks to me-- with so
many unresolved, important, and contentious issues within the context of
a weak economy-- that we’re in for a very volatile fall season. The model just might follow suit, as it
reacts to market gyrations and while its score remains within its sensitivity range of 21 to
82, a range within which it can
change rapidly, as it did for this buy signal and the preceding sell
signal. As the market whipsaws, so
might the model, impacting its portfolios, and my own. I’m counting that the model gets it
right… or at least not very wrong.
SELL Model: 46.2
Cash: 0.0% Buy &
Hold: 20.2% Standard Timing:
17.0% Aggressive Timing:
20.5% S&P: 1688
Relief rally continues into second week, as Syria gets
a (permanent?) time out, the upcoming taper
is now believed (hoped? maybe?) benign, and some better economic news
comes out of Europe and China. The model’s needle moves little as it
remains unimpressed with the rally.
The sell signal has now given up 42 S&P points (2.5%) over 4
weeks, a disappointment to be sure.
The timing model theorizes at this time that we have a 54%
probability of a primary downtrend
(8% or more
decline over at least 8 weeks based on Friday closings). The pullback reached 4.6% three weeks
ago and now stands 1.3% below its peak 6 weeks ago. In short, the primary downtrend remains
unconfirmed. Yes, the model might
have it wrong this time (see August 18 posting for more details), but
then it’s not over until the “fat lady sings” (next buy signal). Patience can have its rewards, as in
the 2008 sell signal (26% loss avoided)… or not, as in the 2010 sell
signal (8% gain given up).
SELL Model: 40.7
Cash: 0.0% Buy &
Hold: 17.8% Standard Timing:
17.0% Aggressive Timing: 22.9% S&P: 1655
Market nearly regains last week’s losses as the S&P
500 settles at 1655;
model jumps 18 points as
its technicals gain some strength.
The market rallied during the week as worries over military
actions in Syria
receded: international support for assistance and intervention melted
away, the President sought Congressional approval for a military response
and then walked back the “red line” statement (but not his intentions
over addressing the need for a military strike as a moral and strategic
imperative). On Friday morning the
market responded positively to a tepid jobs report that eased concerns
over the Fed’s tapering plans (see
June 23 to July 7 postings). Then…
Putin’s remark regarding Russia’s
response to a US
military strike roiled the market, with the Dow fluctuating 220 points
before ending the day with a small loss.
Over this weekend the European Union supported a “clear and
strong” response, with France
stating that they would join any military action. And does the alliance for a strike wait
for the UN report on the chemical attack, whenever that might be? So, we have a fluid situation here,
front and center from the market’s perspective, especially as we await a
Congressional vote over authorization (or not) for a military
SELL Model: 22.7
Cash: 0.0% Buy &
Hold: 16.2% Standard Timing:
17.0% Aggressive Timing: 24.6% S&P: 1633
S&P 500 sinks nearly 2% to 1633 as model plunges 20 points into deeper sell
territory. Pullback from the 1710 all-time high four weeks ago
now stands at 4.5%. August ended
true to form as a seasonally weak month, with the Dow trimming 4.4%, its biggest
monthly decline since May last year.
The S&P lost 3.1% for the month, while the Nasdaq fared better at 1%. And now we have September, a month that
averages negative returns; a month that declines 60% of the time. And then there’s October, the most
volatile month of the year, but also a month that marks significant
The market remains vulnerable, given not only the sell
signal, but also dicey seasonal months in play, concerns over the Fed’s
tapering program, upcoming political wrangling over the debt ceiling and
federal budget, persistently weak global job and economic growth
(especially worrisome and critical in the not-so-small-anymore emerging
markets, a potential 1998-style crisis), sluggish real (after inflation)
earnings growth, and spiking oil from tensions over Syria (think worst
case $150 oil as in 2008, assuming a military strike against Syria and
pushback that disrupts oil supplies through the Suez Canal and/or Strait
of Hormuz… not likely, but…). I’m
reminded of the following quote:
Everyone has a plan until you punch
them in the face. Then they don't have a plan anymore.
Does your plan have its guard up should a devastating left hook come your way over the
next couple of months? Iron Mike’s
left hook was his classic punch, but we wouldn’t want to be in his way
when he threw the right uppercut, right overhand, or right cross. And oooh those wicked body blows.
SELL Model: 43.3
Cash: 0.0% Buy &
Hold: 18.3% Standard Timing:
17.0% Aggressive Timing:
22.4% S&P: 1663
For the week: Dow 0.5% down, S&P 0.5% up, Nasdaq 1.5% solid
gain. Down day on Monday shaves 0.7% off standard
buy signal’s YTD gain, while buy and hold eases ahead for the year. Timing model perks up 6 points, as it
remains highly sensitive to its indicators.
A pure implementation of the standard strategy during a sell signal is to shift all stock funds into a money
market fund, as done in the table above.
A partial standard strategy execution would
be to “lighten up” on stock funds for now, shifting part of the stock
portfolio to a money market fund, while waiting for either the next buy
signal or continued market weakness to “take additional stocks off the
table.” To mimic the aggressive strategy shift all stock funds to a mutual fund
that shorts (places a bet against) the S&P 500, such as Rydex Inverse
S&P 500 (RYURX) or ProFunds
Bear (BRPIX). Or shift the entire portfolio to the ETF SH,
which also shorts the index 100% (-1x) on a daily basis. In other words, given a 2% loss for the
S&P 500 by the end of the trading day, the short should give a 2% gain. The other edge works against us: a 2% index gain
would be a 2% loss in our investment. Caution: The pure aggressive strategy is very
risky and should be practiced, if at all, with a small portion of the
overall portfolio, as I do.
See a more detailed discussion of the aggressive option in the FAQ.
As for myself, 82% of my portfolio now marks time in a
money market fund a la standard
strategy, 12% is short the “500” and a Euro stock index, 3% is in gold,
and the final 3% is in a very thinly traded specialty closed-end stock
fund that stays as it is through thick and thin (I own 6x more shares in
this fund than the average daily volume).
SELL Model: 37.5
Cash: 0.0% Buy &
Hold: 17.7% Standard Timing:
17.7% Aggressive Timing: 24.8% S&P: 1656
The model has
issued a sell signal (barely), its first in three years, effective at the
close on Monday, August 19.
Accordingly, the model’s standard timing portfolio switches 100%
into a money market fund based on T-Bills and the aggressive timing
portfolio shorts the S&P 500 by 100%.
Over the three-year buy signal,
tentative index gains (not counting dividends) for the Dow, S&P, and
Nasdaq are respectively 43%, 49%, and 57%. Based on
the “500” with reinvested dividends, buy &
hold and the standard timing strategy show tentative total returns of 60% (of which 11 percentage points accounts for
dividends), while the aggressive strategy extends
the gain to 70% (dividends not earned for this strategy). Final numbers will be based on Monday’s
The model’s dramatic decline
from last week was driven by a significant deterioration in its technical
indicators. On the surface, the
S&P 500, at 1656, is just 3.1% below its all-time high of 1710 just two weeks ago. Not a big deal, although the “Talking Heads”
would have you believe it is.
Beneath the surface, however, there’s turbulence as measured by
relationships among weekly new highs and lows, up and down volumes, and
advances versus declines. In
addition, the model’s death cross issued another
sell signal (see June 16 posting).
The model’s monetary and sentiment indicators weakened from
positive to neutral, while fundamental indicators remain positive. The “patient” looks ok on the outside,
but internal diagnostics tell a different story.
At this point the model is
very sensitivity to its technical metrics, meaning that a strong rally
with solid internals over the coming weeks could tip the model into a
switchback buy signal. This is
exactly what happened with the live model in 2010: an unprofitable
three-week switchback from buy to sell to buy. The current model, in its tested
history, gave an eleven-week successful sell in 2010, followed by losing
and unstable four- and three-week switchbacks, and then the three-year
buy signal that just ended. In
that year the live model underperformed buy and hold (6% v 15%), but the current model would
have matched the 15%.
The point? The model has made few mistakes and
when it does they’re usually short lived.
Moreover, important and timely sell signals avoided most of the
steep losses in the 2000-2002 and 2007-2009 wicked (50% plus) multiple bear markets (see
Reality Check). Keep in mind that the model now says
that it detects a turning (inflection) point that will tumble the market
at least 8% over
eight weeks or more (now possibly entering its third week). The model does not detect or predict upcoming bear markets, although for a 20% or more bear market to occur an
obvious and necessary condition is an initial decline of 8%.
I would be more confident of an upcoming bear market if investors
were wildly optimistic, resulting in a very negative contrary sentiment
indicator for the model. Instead,
the model’s sentiment indicators are benign. And more confident still if the model’s
score had dropped significantly below its 38 sell trigger, as it did in the
last two bear markets. Still, we
might have a triple top (in 2000, 2007, and 2013) within the current secular
flat market, followed by another cyclical
At the very least the
current sell signal locks in nice year-to-date returns, while possibly
giving up some gains should the market continue its advance. I for one am not second guessing the
model… and intend to sell into an (hopefully) up day on Monday.
BUY Model: 77.8
Cash: 0.0% Buy &
Hold: 20.2% Standard Timing:
20.2% Aggressive Timing: 28.9% S&P: 1691
No record high this past week, as
the “500” eases back 1% to 1691. The model extends its decline into the
third week, its score now near the top end of its 21 to 82
sensitivity range. This means that the model is now more
sensitive to downward changes, especially within the middle portion of
this range, roughly the mid 40s to upper 50s. Still, at about 78, it remains well above its 38 sell trigger. As mentioned
last week, we’re in a seasonally weak period over the next couple of
months, so increasing turbulence into October would not be
surprising. How the model responds
BUY Model: 88.6
Cash: 0.0% Buy &
Hold: 21.4% Standard Timing:
21.4% Aggressive Timing: 30.9% S&P: 1710
Another week and more all-time
highs for the Dow and S&P. At
its week-ending and record-setting 1710
the “500” cracks another century mark and is now 153% above its 2009 bear-market low, besting
the Dow by 14 percentage points over this bull-market’s four-year
span. The model eases back for the
second straight week, as cautious declines in its technical indicators
show some turbulence underneath the surface. The start of a pause or moderate
pullback in the 3-5% neighborhood would not be surprising over the next several weeks,
particularly given that August and especially September are weak seasonal
BUY Model: 90.4
Cash: 0.0% Buy &
Hold: 20.1% Standard Timing:
20.1% Aggressive Timing:
28.9% S&P: 1692
Market treads water, but not
before eking out new record highs for the Dow and S&P early in the
week, the latter at 1696;
model eases back a couple of points, while the index lands at 1692, where it started the
week. Over the current three-year
buy signal the Dow, S&P, and Nasdaq show respective price gains
(without reinvested dividends) of 48%, 52%, and 57%.
Over this same time span, with reinvested dividends, buy &
hold and the standard timing strategy mark total returns of 63% (of which 11 percentage points accounts for
dividends), while the aggressive strategy clocks
in at 82%.
BUY Model: 92.3
Cash: 0.0% Buy &
Hold: 20.1% Standard Timing:
20.1% Aggressive Timing: 28.9% S&P: 1692
Quiet week yields more record
highs for the Dow and S&P, the latter settling at 1692. The model’s monetary and technical
indicators look much better than a couple of weeks ago. Relative strength is now positive and
the model confirms its version of the bullish golden cross, the opposite of the bearish death cross (see June 16 posting).
Moreover, the model’s standardized deviation above the moving
trend, while elevated, is not near extreme levels, suggesting that the
current up-move may have more to go before the next meaningful pullback
(see May 12 posting).
BUY Model: 88.3
Cash: 0.0% Buy &
Hold: 19.2% Standard Timing:
19.2% Aggressive Timing: 27.6% S&P: 1680
Fed Chairman Bernanke issues
mid-week soothing words regarding the Taper;
market surges to new records. What
a difference three weeks makes.
The pullback was limited to just under a 6% loss and a small window of advantage; the
model neared a sell signal and is now back on solid footing. Both the Dow and S&P 500 set new
all-time records at the week’s close, the latter at 1680 and 148% above the March, 2009 bear-market low. The Nasdaq is outperforming our other
two indexes since 2009, yet remains about 29% under its year 2000 bubble-market
Although the market appears
overbought, it looks like the current rally might have legs. The typical response to a new record
shortly after a pullback is an extension of that high.
BUY Model: 71.2
Cash: 0.0% Buy &
Hold: 15.7% Standard Timing:
15.7% Aggressive Timing: 22.2% S&P: 1632
The market and model respond to
the Goldilocks economy…
Once upon a time, there was a little girl named Goldilocks.
She went for a walk in the forest. Pretty soon, she came upon
a house. She knocked and, when no one answered, she walked right
in. At the table in the kitchen,
there were three bowls of porridge. Goldilocks was hungry. She
tasted the porridge from the first bowl.
"This porridge is too
hot!" she exclaimed.
So, she tasted the porridge from
the second bowl.
"This porridge is too
cold," she said
So, she tasted the last bowl of
"Ahhh, this porridge is just
right," she said happily and she ate it all up.
The Story of Goldilocks and the Three Bears
Fear subsides as Friday’s jobs report is “just
right.” Not too strong to
accelerate the Fed’s tapering
plan (see two previous postings) and not too weak to harm the
economy. At this point in past
economic recoveries jobs were added at about twice the current rate. Moreover, the jobs report included a
surge in part-time workers (consequence of the employer health-care
mandate, now postponed for a year?).
The generally quoted unemployment rate stayed at a still high 7.6%
(normal is about 5%), but the comprehensive U6
measure of joblessness (loosely the unemployed, discouraged, and
underemployed) increased from 13.8% to 14.3% of the workforce. So, definitely not a strong jobs
report, but better than expected.
Another consequence: Interest rates surged again as bond prices
tumbled. As in 1994, bond funds
are not a good place to allocate money, likely for some time to come.
The market responded to this “sweet spot” by sending
the “500” to 1632 at the
week’s close, just 2.2% below its May 21 all-time high. And the model stabilized a bit higher,
based on improvements in its technical indicators. The buy signal remains active as we
enter July, the only solidly favorable month while the Halloween Indicator is on a sell
signal (see posting April 7).
BUY Model: 65.8
Cash: 0.0% Buy &
Hold: 13.9% Standard Timing:
13.9% Aggressive Timing: 19.3% S&P: 1606
And so we had another “white knuckle” week as Federal
Open Market Committee (FOMC or Bernanke & Co.) comments appear to
drive this market. And adding to
the convulsion was the President’s interpreted remark during an interview
that the Fed Chairman’s tenure is tenuous at best, or putting it more
bluntly, “You’re fired!” And who would he have in mind as a
replacement? Why the even more
accommodative Janet Yellen, described by one pundit as “Bernanke on
steroids.” Is this
continued-easy-money prospect enough to keep the market afloat? It’s worked so far. So
Another downdraft on Monday to 1573 for the S&P marked a 5.8% pullback low, followed by stabilization to 1606 by week’s end. The model’s technical indicators
fluctuated around some key trigger points before settling the model some
21 points higher. Still, the model
remains within its sensitivity range (21 to 82) and can change rapidly from
The worry du jour is the
Fed’s program for unwinding its easy-money policy and a subsequent
(possibly dramatic) jump in interest rates. Actually, the model considers early
tightenings as positive events!
Essentially, it means that the economy is coming back, signaling
upcoming profit and job growth that’s favorable to the market.
Eventually, of course, too many increases ends the party, although its
timing depends on many other influences as well. And, as often stated in these pages,
the market’s behavior is determined by a number of factors, not primarily
interest rates. The model judges interest rate changes in this
comprehensive context… and draws its conclusion. Bottom line? While the model is positive, market
pullbacks based on interest rate fears likely present buying
opportunities for under-invested portfolios, providing that the economy is in fact improving, as the FOMC
Concerns by the Bond
Vigilantes has forced interest rates up, in particular the closely
10-year Treasury Yield. Now, with
Europe in recession and China
and the US
wobbling economically, the thought of additional interest rate increases does send tremors through the
investment landscape. Looking at
all the “ifs, thens, elses, and buts” is
a great recipe for emotional confusion, which is why I developed the
model in the first place. So…
let’s see what the model says, one week at a time. It’s got my attention.
BUY Model: 44.9
Cash: 0.0% Buy &
Hold: 12.8% Standard Timing:
12.8% Aggressive Timing: 17.8% S&P: 1592
There was no place to hide other than money markets and
short positions this past week: stocks, bonds, commodities, and gold all
took hits. At just under 45
the model is on the cusp of a sell signal, just 7 points above its 38 sell trigger. The dramatic drop in the model
reflected a panicky week in the market, a violent 4% two-day swoon but just a 2% overall weekly decline at
the 1592 close for the S&P
500. The early part of the week
looked good, but then a mini-panic erupted over Chinese economic worries
and the prospect that the Federal Reserve will begin its “tapering”
program sooner than expected. The
Fed mapped out a strategy for unwinding (tapering) the unprecedented $85
billion-a-month bond-buying program meant to spur the economy (for sure
it floated the stock market with a flood of new money). Can it engineer a “soft landing” during
the Great Unwinding, and put a lid on interest rates while preserving
flexibility and managing market expectations? Apparently the market thought not this
past week, as its judgment of the economy’s health and the consequences
of tapering differed from that of the Fed. And beyond that what will happen when
the Fed starts selling its unparalleled, gargantuan portfolio? Or… maybe this is all speculation and
the market needed a healthy pause before continuing its bull run? After all, profits look good, housing
is coming back, and interest rates still remain ridiculously low for
now. But then economic growth is
anemic, unemployment is high, and uncertainty grows over the economic
impact of upcoming regulations and implementations of the health care law. But then there’s …?
The pullback low to 1588 from the 1669
May all-time high for the “500” now stands at just under 5%, a familiar neighborhood
for such events. An “official”
correction of 10%
or more is still a ways off. For
perspective, the current bull is up 135% since the bear-market bottom in 2009. Over this four-year span there have
been just six pullbacks between 5% and 10% and two corrections over 10% (but less than 20%). At this point the model is highly
sensitized, especially to its technical indicators. A sell signal this coming week would
indicate that the model judges an upcoming correction, or worse. If it hangs on to its nearly three-year
buy signal, this could be a good opening for the brave to commit more
funds to this market.
BUY Model: 79.5
Cash: 0.0% Buy &
Hold: 15.2% Standard Timing:
15.2% Aggressive Timing:
21.6% S&P: 1627
continues as market and model settle lower. This week’s mid-week pullback to 1612 on the “500” marked a 3.4% decline from the May
all-time high, opening another opportunity for underinvested portfolios
to increase stock holdings, consistent with risk “comfort.” At the week’s close of 1627 the index sits 2.5% under its high.
model trimmed 16
points over three weeks, although it remains comfortably above its sell
trigger. Still, it’s dropped into
the top end of its sensitivity range (21 to 82), meaning it can change rapidly within this range. Its monetary
indicators have shifted from positive to neutral, while its sentiment indicators show
heightened fear in the market, a contrarian positive for the model. Fundamental
indicators regarding valuations such as price to earnings remain
positive. The model’s technical indicators are another
story, the interesting center of current action, as they show shifting
and subtle dynamics. One of the
model’s important technical indicators, its version of the so-called death cross, just turned negative as a faster trend metric crossed
a slower one to the downside. At
the same time, a contrarian technical indicator that considers the number
of new 52-week lows on the New York Stock Exchange turned from negative
to positive (lows jumped a lot this past week, a catharsis of
sorts). If the new-lows indicator
had stayed negative, we would be 20 points lower from here, at about 60, a spot very, very
sensitive to changes from that point.
So, we have a “fluid” situation in the making. The model and market bear heightened
scrutiny over the coming weeks.
BUY Model: 86.1 Cash: 0.0% Buy & Hold: 16.3% Standard Timing: 16.3% Aggressive Timing: 23.5% S&P: 1643
is back in wild week. The S&P
500 marked a record 1669 on
May 21 and pulled back to 1609
at the June 5 close this past week, a drop of 3.6% from its all-time
high. At the week’s close of 1643 it’s now just 1.5% under the recent
high. A pullback had been widely
expected and we got a shallow one within a very narrow window, for
now. Technically, we remain within
a pullback which may not be over.
Otherwise, more will come.
Underinvested portfolios should consider committing more funds to
the market during these pullbacks… or now for that matter, as this strong
bull has resisted deep pullbacks since the near 10% correction about one year
ago, bouncing within a tight, rising channel, clearly seen in the Bollinger Bands for our benchmark index. The model remains on a strong buy,
despite some deterioration in its technical and monetary indicators.
BUY Model: 89.9
Cash: 0.0% Buy &
Hold: 15.4% Standard Timing:
15.4% Aggressive Timing: 22.1% S&P: 1631
No commentary… traveling.
BUY Model: 95.6
Cash: 0.0% Buy &
Hold: 16.7% Standard Timing:
16.7% Aggressive Timing:
24.2% S&P: 1650
No commentary… traveling.
BUY Model: 96.7
Cash: 0.0% Buy &
Hold: 17.9% Standard Timing:
17.9% Aggressive Timing: 26.2% S&P: 1667
week and more records for the Dow and S&P, now respectively at 15354
and 1667. Small pullbacks are met shortly
thereafter with more buying, the hallmark of a strong bull market having
far too many disbelieving investors who now want to either catch the
“train” or buy more “tickets.”
Still, sentiment indicators in the model are only mildly positive,
far from the excesses that characterize a frothy and toppy market. From that contrarian standpoint alone
we have further to go in this bull market. Yet, the model’s overbought indicators
are blinking amber for now, although overbought conditions can persist
for some time, until the next pullback.
market keeps on scaling a very high “wall of worry.” The model remains unworried, until
maybe too many of the remaining skeptics join the climb. If a buying panic ensues then expect a
subsequent and meaningful pullback (5 to 10%), correction (10% or more), or even cyclical bear market (20% or more). Or the onset of a decline might be a reaction
to unexpected and seriously negative geopolitical or economic events,
derailing the slow economic recovery, possibly raising the specter of
recession, significantly lowering corporate profits, and causing still
higher unemployment. Meanwhile,
those of us who are comfortably committed to this market should enjoy the
climb or ride, as I mix my metaphors.
I will be traveling over the next couple of weeks.
Updates will be by smartphone and in a simpler format
Will resume regular postings on June 9.
BUY Model: 96.9
Cash: 0.0% Buy &
Hold: 15.5% Standard Timing:
15.5% Aggressive Timing: 22.4% S&P: 1634
a seemingly unstoppable market as both the Dow Industrials and the
S&P 500 set new all-time records, again, the latter ending the week
at nearly 1634, its present
all-time high. The Dow scaled the
15k millennial for the first time this past week, the “500” the century
1600 the previous week. From a
technical standpoint (the model’s technical indicators and other such
indicators) breaking through these milestones is meaningless; from a
psychological (behavioral) perspective, it gets investors’ attention and
is reflected in the model’s sentiment indicators. Should sentiment get overly
enthusiastic and even extreme, it’s a negative for the model, based on
this contrarian perspective.
(Overly negative sentiment is a positive response within the
model.) For now, we’re not near
the excessively positive, so likely the event will bring more investors
into the market over the near (weeks) to intermediate (months) term.
very short term (days to weeks) the market is looking a bit overbought
and vulnerable to a standard pullback in the 3 to 7% range. An indicator within the model that
measures standardized deviation from a moving trend (an exponentially
smoothed standard score or deviate for you quants out there) shows that
levels above its current high value are uncommon, occurring only about 5%
of the time. Bollinger Bands are another way to look at this. Note how the ETF proxy for the “500” (SPY)
in the chart tends to (but not always) bounce off the top (overbought) line. The lower (oversold) line suggests
buying opportunities. With the
model solidly positive, most pullbacks within a bull market represent
windows of opportunities for increasing equities, for underinvested
portfolios that are comfortable with added risk.
BUY Model: 96.6
Cash: 0.0% Buy &
Hold: 14.1% Standard Timing:
14.1% Aggressive Timing: 20.3% S&P: 1614
“500” powers through a new century mark, extending its historic high to 1614. This cyclical bull market is now 139% above the bear market low
in 2009. It appears unstoppable,
despite all the worries. Good news
is good; bad news is good; better than expected news is good. These are the attitudes of a bull
market that’s in forward gear. Its
surge on Friday was fueled by a jobs report that came in better than
expected. Yes, better than
expected, but weak by historical standards when four years after the end
of a recession, even with the welcome upward revisions in prior
months. Barely enough new jobs to
keep up with population growth.
Half the number of new jobs seen in a robust economy. And far too many part-time jobs, as
average hours worked declined. And
smaller average wages, as lower paying jobs dominated. The negatives get trumped by good
corporate profits, low inflation (not by past methods of measurement), improved
housing, stock market gains (self-reinforcing, until not), friendly world
central banks that provide the monetary juice, and
hope. The primary negative is high
unemployment and its economic, social, and political consequences. But
how long can this bull charge forward if the negatives don’t get resolved
before long? Is the market
currently in an unstable equilibrium, waiting for that moment, that
event, that will trigger its collapse, a new bear market? I don’t have the answers. I’ll act accordingly based on the
week’s post I noted that empirical research suggests that political violence is associated
with poor economic freedom. Can compromised economic freedom
eventually lead to economic instability, with its attendant job losses,
and then to political instability and even violence, and in turn further
affect the instability of financial markets, in a chain-reacting feedback
loop with negative reinforcement?
May Day demonstrations within the current jobs environment is a
reminder of that possibility. A
couple of headlines this past week:
17 arrested as Seattle May Day protests turn
May Day In Europe: Thousands Protest Against Austerity
first time we’ve seen this, to be sure.
I’ll leave you with this (the entire article is a worthwhile
read), from the thoughtful global intelligence folks at Stratfor.
crisis of unemployment is a political crisis, and that political crisis
will undermine all of the institutions Europe
has worked so hard to craft. For 17 years Europe
thrived, but that was during one of the most prosperous times in history.
It has now encountered one of the nightmares of all countries and an old
and deep European nightmare: unemployment on a massive scale. The test of
Europe is not sovereign debt. It is
whether it can avoid old and bad habits rooted in unemployment.
Europe, Unemployment and Instability, Stratfor Global Intelligence, March 5, 2013
BUY Model: 95.6
Cash: 0.0% Buy &
Hold: 11.7% Standard Timing:
11.7% Aggressive Timing: 16.7% S&P: 1582
bounces back, with the “500” marking 1582. Volatility will not be going away;
underinvested portfolios might use pullbacks as opportunities to add
my concerns in earlier postings regarding the long-term trend for the
stock market, which is surely affected by the state of economic freedom, which is…
… an economic
system based on private property and free markets. Governments can promote economic
freedom by providing a legal structure and a law-enforcement system that
protect the property rights of owners and enforce contracts in an
evenhanded manner. However, economic freedom also requires governments to
refrain from taking people’s property and from interfering with personal
choice, voluntary exchange, and the freedom to enter and compete in labor
and product markets. When governments substitute taxes, government
expenditures, and regulations for personal choice, voluntary exchange,
and market coordination, they reduce economic freedom. Restrictions that
limit entry into occupations and business activities also reduce economic
same article others propose that…
markets lead to monopolies, chronic economic crises, income inequality,
and increasing degradation of the poor, and that centralized political
control of people’s economic lives avoids these problems of the
marketplace. They deem economic life simply too important to be left up
to the decentralized decisions of individuals.
Yet indices of economic freedom suggest that…
studies based on these rankings have found higher living standards,
economic growth, income equality, less corruption and less political
violence to be correlated with higher scores on the country rankings.
In a recent
The United States,
long considered the standard bearer for economic freedom among large
industrial nations, has experienced a substantial decline in economic
freedom during the past decade. From 1980 to 2000, the United States was generally rated the
third freest economy in the world, ranking behind only Hong Kong and Singapore...
The chain-linked ranking of the United States has fallen
precipitously from second in 2000 to eighth in 2005 and 19th in 2010… In
this year’s index, Hong Kong retains the
highest rating for economic freedom, 8.90 out of 10. The other top 10
nations are: Singapore,
8.69; New Zealand,
8.24; Australia, 7.97;
Canada, 7.97; Bahrain, 7.94; Mauritius,
7.90; Finland, 7.88;
is surely needed, given the negative excesses of “free” markets, but are
we tilting too far toward policies that overly restrict economic freedom
and promote long-term slow growth and high unemployment (a la Eurozone), thereby bending
the USA market’s secular trend downward? And note the reference to “political violence” in the empirical
studies quote. In a future posting
I’ll follow that up with its relationship to financial instability and
subsequent investment consequences.
BUY Model: 94.4
Cash: 0.0% Buy &
Hold: 9.8% Standard Timing:
9.8% Aggressive Timing: 13.8% S&P: 1555
is back, as the stock market has the worst weekly decline of the year,
even after Friday’s rally. The
“500” settles at 1555, after a
closing low of 1542 the
previous day, 3.2% below the closing 1593
historic high the week before.
This placed the pullback within the 3 to 7% frequent slides during bull markets. The pullback was due (see March 17
posting) and may very well continue.
Underinvested portfolios should use these pullbacks to add to stock
holdings, while the model is this positive… and consistent with a
willingness to take on more risk.
was up 5.6% this past week (see
last week’s posting). Traders
should keep an eye on this one, especially when the model gives the next
sell signal. If the model believes
we’re entering a primary downtrend and possible bear market, Europe will follow, given its problematic politics,
economic state, and outlook.
BUY Model: 96.9
Cash: 0.0% Buy &
Hold: 12.1% Standard Timing:
12.1% Aggressive Timing: 17.5% S&P: 1589
vaults up the “wall of worry,” thrashing the previous S&P 500
all-time high and marking a new milestone at 1593, before easing back on Friday to 1589. And there is plenty of worry: the jobs
market, the economy, China, Europe, North Korea, upcoming weak seasonal
period, … but, BUT… we have the mighty Fed on our side, not to mention
the Bank of Japan and other central banks vigorously manning the monetary
pumps. New money finds its way
into the stock market and other assets such as real estate and art, the
rest sitting in bank vaults as reserves (not much is being lent
out). Well, we can worry another
day about the consequences of extraordinary monetary policy and
historically low and distorted interest rates. For now, the stock market and model
like it, so let’s stay at the party.
scalping of bank accounts in Cyprus by that country’s
central bank and the European Central Bank (ECB), a violation of
heretofore sacrosanct secured savings, was back-burned this past week,
but consider the following:
debacle has taught us yet again that EMU [Economic and Monetary Union]
has gone off the rails, is a danger to stability, and should be
dismantled before it destroys Europe’s
The denouement will arrive when the democracies of
southern Europe conclude that recovery
is a false promise and that the only way to end mass unemployment is to
break free of EMU’s contractionary regime.
It will be decided by Italy,
Ambrose Evans-Pritchard, The Telegraph, 27 March 2013
... we’re not
seeing a major risk to the U.S.
financial system or the U.S.
economy [from the events in Cyprus].
Chairman Bernanke’s Press
Conference, March 20, 2013
At this juncture . . . the impact
on the broader economy and financial markets of the problems in the
subprime markets seems likely to be contained.
Chairman Bernanke, March, 2007
wrong in 2007, dramatically confirmed six months later with the Lehman
collapse and subsequent financial crisis.
In 2013 or beyond will we have contagion, if the Eurozone “solves”
sovereign problems by risking bank
runs in other troubled member countries?
It starts small, as do all pandemics. A slow motion crash? Consider the sequence of troubled
Ireland > Greece >Portugal>Spain>Italy>Cyprus>Slovenia?>Luxembourg?... > France?... >Germany? (USA?)
And check out this fantastic Eurozone crisis interactive timeline from theGuardian.
the beginning of the end for the Euro?
It will have consequences everywhere. We’ll worry about that another
time. Meanwhile, let’s enjoy the
currently festive stock market.
adventurous might consider a small position in EPV,
a bet that European markets unravel. It’s risky. Timing is everything. I’ll wait on this one until the model
gives the next sell signal.
BUY Model: 95.2
Cash: 0.0% Buy &
Hold: 9.6% Standard Timing:
9.6% Aggressive Timing: 13.6% S&P: 1553
ekes out a new record of 1570,
before easing back 1%
and closing the week at 1553. Volatility is modestly up and the
financial buzz du jour is “Will
we have another Spring Swoon?” Consider the past three years based on
daily closings for the S&P 500.
- 2010: April 23-July 2.
Index corrects 16%. The live model at the time issued
a late sell signal at the bottom, correcting itself three weeks
later by switching back to a buy.
The model now in use issued a back-tested sell signal May 9
and a buy signal July 25. The
S&P gained 15% that year, the
live model based on standard timing was up nearly 6%
and the current model gained a tested 15%.
- 2011: April 29-October 3.
Index nearly enters cyclical bear market with 19% loss.
The live model stuck it out (ouch!),
gaining the same 2% for the year as
the index. The current model
lost almost 2% for the year, based on
a two-week sell-buy switchback in August. This year needs more work in
- 2012: April 2-June 4. Index almost corrects just under 10%. Both the live
model at the time and the current model ignored the near-correction,
staying on a buy signal.
Everyone gains 16% for the
these results we can take away that the model has issues with fast
corrections and those near the model’s sell design boundaries of a 8% or more loss over 8 weeks
or more. The results in 2012 and
earlier years suggest that when the market is correcting fast with a 10% or more loss and the
model stays on a buy signal it’s best to grit it out. In 2011 I would like to have seen a
sell somewhere near the end of April and a buy around the beginning of
October. So far, the revised model
has not found an answer for this tough year, which at the time included
the debt ceiling drama and the unraveling of Europe.
heard of the seasonal strategy “Sell in May and go away,” also known as
the Halloween Indicator? Google it.
This strategy sells at the beginning of May and buys at the
beginning of November. Over the
period 1970-2012 this seasonal strategy collects a 10.4% annualized return, including reinvested dividends and money
market (T-Bill) returns during the “off” season, compared to 9.9% for simply buying and
holding. Half a percent per year
might not seem like much, but over the course of 42 years we’re talking a
22% greater portfolio, thanks to the magic of compounding. Moreover, volatility (risk) is lower
with the seasonal strategy, compared to buying and holding, because the
portfolio is out of the stock market half the year. Over this same period the standard
timing strategy gains 17% per year and the aggressive version 23%. Starting with $10,000, portfolios under
each strategy end with $574k for buy and hold, $702k using the Halloween
Indicator, $7.6 million for the standard timing strategy, and $80 million
using the aggressive variation.
Back testing showed that incorporating any one of various
seasonality indicators into the model degraded the model’s overall
performance. Bottom line? Let’s follow the model.
during a buy signal, underinvested portfolios should add stocks during
significant pullbacks, consistent with appetite for risk.
See the FAQ for a new graph on
secular and cyclical markets and a simplified table for
implementing the standard and aggressive timing strategies.
BUY Model: 96.4
Cash: 0.0% Buy &
Hold: 10.6% Standard Timing:
10.6% Aggressive Timing:
15.3% S&P: 1569
years, five months, and 20 days.
That’s how long it took the S&P 500 to scale and barely exceed
its previous record high in 2007.
Two wicked bear markets followed that high into the March low in
2009, sandwiching a short 24% bull market, dropping the index a devastating (for buy
and holders) 57%
from that 2007 high. Five years,
five months, and 20 days. That’s
how long it took patient buy and holders (if they in fact exist) to get
back even. Five years, five
months, and 20 days.
Now, at 1569, the new all-time closing
high extends the current cyclical bull market to 4 years and 20
days. Gains: 132% for the index; 143% with reinvested
now? Can we expect a continuation of this bull run? No one knows, but here are some
thoughts. The average length of an
S&P 500 cyclical bull market is 44 months, ranging from 2 months to
147 months. The current bull is
about 49 months, slightly above the average, but well below the
maximum. Still, only 4 of the past
15 bull markets have exceeded 49 months, so the current bull is in
minority company should it continue.
Its gain as of now is 132%, short of the 144% average and well below the super bull max 582% that ended in the year
2000 debacle. One-third of past
bull markets since 1929 have exceeded the current gain. Again, the current bull does not have a
favorable probability. But then…
the Fed remains friendly (“Don’t fight the Fed”) and many disbelievers
linger on the sideline, with plenty of cash to fuel the next leg up.
late in the game? Most likely. But we have yet to see capitulation by the
bears (panic buying that signals we’re near the end), although this event
is not a necessary condition for the eventual end of a bull market. What
we have yet to see is a major and sustained reallocation of funds from
bonds and money markets to stocks. Until this happens and before the fuel
that stokes the bull runs out (cash stores get depleted) we likely have
more to go with this bull. But… given my sense of the long-term trend
(see previous posting), I’m not expecting anything near the maximum
lengths and returns mentioned. Not more than another year I don’t think,
which would put it in the vicinity of the bulls that
ended in 1987 and 2007.
said all that, long-time readers know that the model has a more narrow
view of these considerations. It
judges that the primary trend remains positive and that we should stay
invested. When the market does
enter a new cyclical bear, the primary trend will turn negative and the
hopefully likely will confirm the turn by issuing a sell
signal. Meanwhile, pullbacks will
come, offering renewed opportunities for underinvested portfolios to
deploy more cash to stocks.
BUY Model: 96.0
Cash: 0.0% Buy &
Hold: 9.7% Standard Timing:
9.7% Aggressive Timing: 14.0% S&P: 1557
market downturn for the week is accompanied by a modest increase in
volatility, as the “500” settled at 1557,
now 8 points below its all-time record.
The House approved a stop-gap measure to avoid a government
shutdown this coming Wednesday.
That together with a calmer Cypriot banking drama and reassuring
words from Chairman Bernanke sparked an end-of-week rally on Wall Street,
thereby avoiding steeper losses for the week. Still, the longer term outlook for the
market’s secular trend does not look comforting to me. See my February 17 posting below and
the always entertaining take by Grant Williams’ Hmmm… newsletter on March 18 regarding the shaky outlook for unemployment, Europe
by country, and Cypriot implications.
BUY Model: 96.8
Cash: 0.0% Buy &
Hold: 9.9% Standard Timing:
9.9% Aggressive Timing: 14.4% S&P: 1561
extend record run; S&P comes within 2 points of its all-time high,
before easing back to 1561,
just 4 points under its peak six years ago. The model remains very bullish,
although one of its sentiment indicators shows a bit too much enthusiasm
in what is nearing an overbought market based on one of my technical
indicators (similar to Bollinger Bands). Its value is close to an upper band,
outside of which only 5% of historical values exceeded this limit. The S&P 500 index often pulls back
in the neighborhood of this upper band, although not for long within a
continuing primary uptrend.
Moreover, the VIX, a measure that reflects market fear and another
of the model’s components, is very low, with only 2.5% of historical
values below its current value of 11.3.
This metric will rise during a pullback, and it looks like it’s
more probable that values will go higher than lower from here. To summarize, the primary uptrend is
intact at this point, but I’m expecting a pullback over the next several
weeks. Underinvested portfolios
should use the frequent 3-7% pullbacks to add to holdings, consistent
with appetite for risk, and while the model remains on its buy
may hold center stage over the coming couple of weeks, as the March 27
deadline nears for the “continuing resolution,” the stopgap spending
authorization that keeps the government running. And can we get a modified and smarter
sequester agreement as cuts roll out?
And then we can look forward to a revisit of the debt limit drama
by May. These budget and economic
uncertainties, should they continue, could make for a choppy market this
Spring. Regardless, the market
does appear to be in “Spring forward” mode. And it will likely go higher still if
some sort of reasonable political “bargain” is reached.
BUY Model: 97.4
Cash: 0.0% Buy &
Hold: 9.2% Standard Timing:
9.2% Aggressive Timing: 13.4% S&P: 1551
rally vaults the Dow Jones Industrials to an all-time high. At 14,397
it’s perched 120% above its March, 2009 low, a four year odyssey that far
too many disbelieved. Our
benchmark index, the S&P 500, is not far behind. At 1551
it’s just 14 points below its 2007 historic high and 129% above its 2009 bear-market low. It’s a far different story for the
Nasdaq Composite. It remains 36%
under its all-time high in 2000, 13 years and counting, a consequence of
the dot.com bubble explosion. And
yet, it’s up 191% from that devastating low. The model’s focus is the S&P, but
its performance is also highly correlated with the other two major
indexes. To track and invest in
these indexes I use the ETFs DIA for the Dow, SPY for the “500” and QQQ for the Nasdaq 100.
During a buy signal I’m always invested in the latter two. The ETF that tracks the Nasdaq
Composite itself is ONEQ, but it’s lightly traded compared to the more popular
QQQ, which represents the top 100 companies in the Nasdaq.
Dow Theorists licked their chops over the simultaneous highs in the Dow Industrials and
Dow Transports this past week. My
January 20 posting mentioned that a new indicator in the current model
now includes my version of the Dow
Theory. My work shows that a
bullish reading of this theory is positively correlated with the
performance of the S&P 500, the model’s focus index. And more importantly, it’s highly
correlated with the primary trends
(at least a 8% change in the index over a minimum of eight weeks based on
Friday closings) used by the model.
These relationships, however, are in isolation, one on one. When the model’s other components are
thrown into the mix, the association swings from positive to negative. In other words, near inflection points (the primary
trend changes from up to down or vice versa), the model’s Dow Theory
component acts as a very effective oversold/overbought contrary indicator. To illustrate this point in the current
model’s tested performance, let’s look at the last time the Industrials
and Transports confirmed each other’s highs: July, 2007, a cautionary
event, a yellow flag waved to the model from its Dow indicator. What happened thereafter? The rally continued for 3 months...
then a demoralizing loss of 56% into the double bear market bottom in
March, 2009. The tested
performance of the current model showed a 5% decline during this
2007-2009 time period, about one-eleventh the loss compared to those who
held on to their S&P portfolio.
Once more this shows the capital preservation benefit of a
good timing system. Moreover,
devastating losses of this magnitude scare many investors for years to
come, thereby missing out on the bull-market rally that always follows a
bear market. Investors who use an
effective timing system (mostly) overcome their fears by entering the
market at the next buy signal, a twin advantage of a good timing
system: Avoid a good portion of a
major decline and gain the lion’s share of a significant advance. The timing doesn’t have to be perfect
to be effective, to be of value.
You’ve been in the market during the model’s current buy signal,
no? Since the buy signal in July,
2010 the Dow index is up 37%, the S&P 39%, and the Nasdaq 41%. Add another 6 percentage points or so
to the S&P with reinvested dividends, somewhat more for the Dow, less
for the Nasdaq.
BUY Model: 96.5
Cash: 0.0% Buy &
Hold: 6.9% Standard Timing:
6.9% Aggressive Timing: 9.8% S&P: 1518
is a done deal (for now) and the market and model yawn, as the “500”
eases forward to 1518 and the
model loses a point. Does the new
“crisis” affect the market and model?
Not in the near term (weeks), possibly in the intermediate to
longer term (months to years). Washington
policies and legislation regarding the national budget (expenses and
revenues), debt and deficit trajectories do influence the economy (GDP),
which in turn impacts earnings, and subsequently the stock market. The stock market itself is a mechanism
for clearing demand (buyers) and supply (sellers), whose decisions are
influenced by actual, perceived, and expected market technicals (such as trends, momentum, lows v highs, advances
v declines, …), fundamentals
(price to earnings, dividends to price, dividends v treasury yields, …), monetary policies (Fed rates,
liquidity, money supply, bond rates, …), and sentiment (metrics that measure fear and greed). And so the model reacts as well, since
its components reflect these influences through mathematical/statistical
calculations. More broadly, the
four components (technical, fundamental, monetary, sentiment) are
correlated to cyclical and secular markets, the former months to years and the latter years to
decades. The model itself is
designed to detect the primary
trends that operate within these cyclical markets, with a time frame
of weeks to months and sometimes years.
Washington (Europe as well) gets serious about pro-growth policies and a
fix to its balance sheet over time, current debt, deficit, and GDP
projections are consistent with a flat to down secular trend over coming years. We do
prefer an uptrending secular for easier gains; still, we can exploit the waves that cycle
about any long-term trend, whether up, flat, or down: jump on for most of
the cyclical ride up (the cyclical bull market), hop off for most of the
cyclical ride down (the cyclical bear market). Listen to the model as it imperfectly,
yet effectively, calls the stops, when to get on and off the ride.
BUY Model: 97.6
Cash: 0.0% Buy &
Hold: 6.6% Standard Timing:
6.6% Aggressive Timing: 9.5% S&P: 1516
S&P 500 marks another cyclical high of 1531 on Monday, pulls back 2% to 1502 by Thursday on news that the Fed is considering turning
down the (money flow) spigot, and partly recovers on Friday, easing back
to 1516 for the week. There will be some negative stock market reactions when the Fed
does start a program that slowly (hopefully) drains the money sloshing
around, thereby raising interest rates. Over time, however, market-based
interest rates not distorted by the Fed will be healthy for the economy
and not a negative for either the stock market or the model, although
likely promoting a long-term secular bear market in bond prices (see last
week’s next to last paragraph).
And keep in mind that pullbacks present investment opportunities
for underinvested portfolios willing to take on more volatility, as long
as the model remains on its buy signal.
market and model are little changed as we head into the sequester this coming Friday,
March 1. This Washington-speak
term refers to the automatic across-the-board (indiscriminate) cuts to
some 1200 Federal agencies and the Defense Department, equally shared,
spaced over the next seven months… a result of the deficit-reduction deal
struck back in 2011 should alternative and targeted budget cuts fail to
reach a legislative consensus by this time. Surely smarter budget cuts could be
agreed upon and implemented, except the President now wants additional
taxes on wealthy earners over those already implemented… and so we have
another political impasse. Can’t
we agree to start work on meaningful long-term deficit reduction coupled
with a much needed overhaul of the tax code, rather than brinksmanship
and political posturing? Where’s
the leadership to facilitate the process?
Are we off and running to the 2014 election?
the cuts represent a modest less than 3% of the federal budget, but
because some large federal programs are exempt (Social Security,
Medicare, Medicaid, military pay), many departments will have
substantially higher cuts, some north of 10%. Moreover, civilian jobs will be
affected from reduced business to subcontractors, especially the
military. Still, the market is
hardly reacting to the uncertain economic consequences from this imminent
event. Why? Maybe it (a) sees the deficit reduction
as a good thing, (b) anticipates that compromises will be reached before
the full effect is felt, or (c) likes both together. The next “deadline” is March 27, as
funding ends for many federal programs.
The drama continues…
Model: 97.8 Cash: 0.0% Buy & Hold: 6.9% Standard Timing: 6.9% Aggressive Timing: 10.0%
week, another new cyclical high, now at 1521 for the “500.” It
was a quiet week. Calm before a
breakout toward the all-time record?
Or an upcoming pullback or even 10% or more correction?
The model judges neither future event, although its state can
suggest one or the other. Its
current high score simply tells us that as of last Friday the primary uptrend (8% or more increase over at least
eight weeks) dating back to September 2011 remains in place.
cyclical bull has had its doubters… many, many doubters, since its
inception in 2009, 125% ago. My take is that many bearish analysts,
money managers, and commentators are looking at the secular
rather than cyclical event,
thereby missing the substantial cyclical surge over the past four
years. I do lean toward the
secular bear camp, for now, believing the long-term flat trend since 2000
will continue for at least another few years, based on the extensive
headwinds and crosswinds generated by our fiscal Federal and state debts,
unfunded pensions, persistent sluggish growth, relentless high
unemployment with a greater structural component than previously (as
education and skills lag job requirements), a very damaged although
slowly recovering housing sector, a tax code in need of serious
health-care and regulatory expenses and uncertainties, market distortions
caused by Fed easing actions, and Washington policies that support or at
least fail to legislatively address these shortcomings. And let’s not even get into Europe, a financial act of smoke and mirrors. The optimist in me tells me that these
issues will have enough of a resolution (in time) to put us back to 3-4%
GDP growth vs the current 1-2%, as long as we don’t get too
“Europeanized” regarding the balance (or imbalance) between private and
public sectors. Strong growth in a
(relatively) free market system under the rule of law solves a lot of
problems (and hides them as well).
And yet… there are those who believe that the secular downtrend
ended at the 2009 bottom and we’re now in the fourth year of a new
secular bull market that could run some twenty years. That’s possible, of course. See for example the analysis at dshort.com.
my longer term somewhat pessimistic view over the next several
years. And as stated in the FAQ: “While we prefer secular uptrends for
better and more reliable market performance, returns are also available
during secular flat to down trends, as the index cycles above and below
the secular trend. The model has
done a reasonable job of riding a good portion of the upward waves
(cyclical bulls) and not sticking long with the downward waves (cyclical
bears).” For now, who can
doubt that we have been in a cyclical bull that should not have been
ignored since 2009? The model
mostly got it right.
a cyclical bull given the subpar state of the economy? Yes, profits have been good, as the
private sector has squeezed out waste and restructured operations with a
leaner workforce. Still, in one
word, the primary answer is: the Fed.
Its unprecedented easing actions have flooded the market with
historically low interest rates and liquidity, distorting the natural
tendencies of the bond market to raise rates, participants to judge risk,
and tilting the playing field to stocks over bonds (the “risk-on” trade)
to boost returns. Even so, oh so
many investors and money managers were in “risk-off” mode, putting their
assets into money funds (under electronic mattresses) and “safe” bond investments,
which by the way have done very well from a total return standpoint (bond
prices rise when interest rates decline).
As an aside, Fed policies are responsible for two other
consequences: long-term savers (such as many retirees) have been crushed as
fixed incomes all but disappeared; and the government pays back its debt
at much lower interest rates.
Hmmm… But wait what happens to the Federal deficit when rates
eventually rise, and they will, unless new legislation and growth
current cyclical bull have more stamina?
Probably, given that a Great
Rotation might be in the works, from bonds to stocks based on current
money flows, thereby increasing the likelihood that the present cyclical
bull has more life, especially if the Fed keeps goosing it along. It will end, of course, maybe when the
Fed starts unwinding its positions and/or the bond market loses
confidence and decides to speedily raise interest rates. When the time does come, I’ll rely on
the model to tell me that the primary trend has reversed.
Model: 95.2 Cash: 0.0% Buy & Hold: 6.7% Standard Timing: 6.7% Aggressive Timing: 9.8%
weeks, five new bull market highs for the S&P 500. At 1518
the index is just 47
points below its all time record of 1565
in 2007. The US markets struggled early in
the week as European worries crept back in. Still, we continued scaling up the
proverbial wall of worry.
Volatility has been low and the market is somewhat overbought, so
a pullback on the order of 3-7% over the next several weeks would not be
surprising. With the model this
positive, underinvested portfolios should consider committing more funds
during these normal events.
Model: 97.3 Cash: 0.0% Buy & Hold: 6.3% Standard Timing: 6.3% Aggressive Timing: 9.2%
S&P 500 marks another cyclical high, four weeks running. At 1513
it’s now just 3%
below the all-time high of 1565
in 2007. Will the index move on to
new secular highs, suggesting a secular bear market bottom in 2009 and
the start of a new secular bull, now in its 4th year? Or are we looking at a triple top
(2000, 2007, 2013) within a continuing flat secular trend, now entering
its 14th year? Time will tell…
site is now completely updated for the 2013 timing model. Stats and commentary are current, with
a bit more elaboration on the annual process for changing the model,
diversification, and how I use the model.
In the FAQ the description of secular markets is revised and what
motivated me to develop the model is described. See links in the menu left, above, or
Model: 97.3 Cash: 0.0% Buy & Hold: 5.6% Standard Timing: 5.6% Aggressive Timing: 8.1%
weeks, three new cyclical highs for the S&P 500. At 1503
the index is now just 4% below its all-time (secular) high of 1565 in 2007. The Dow Industrials is just 2% below its all-time high
in the same year. The Nasdaq
Composite is a very different story.
It still remains way below its historic peak in 2000, 38% below to be exact, a
consequence of the burst dot.com bubble.
Thirteen years and counting. The “500” and Dow are probably looking
at no more than a not-so-short six
years, as it appears to me that they are bent on scaling new all-time
highs over the coming weeks or months.
model is oblivious to such sentiment, its primary focus the answer to “Do
we remain in a primary uptrend?”
The answer is yes, from the
score above, with a 97% theoretical likelihood. Theoretical because theory (the mathematical model) is
far from an exact representation of reality
(the S&P 500’s behavior), as maps are not precise representations of territories. The model just has to be good enough
to usefully act on the reality.
Since the buy signal two and one-half years ago, the Dow, S&P,
and Nasdaq show respective gains of 32, 35 and 37%, without reinvested
dividends. Throw in reinvested
dividends and add about another 7
percentage points, to 42%, for our benchmark
The Downloads page
is ready with the updated Excel workbook of tested and live data and pdf
files and graphs of same.
revised web pages for the Timing Model, Reality Check, and FAQ should be
ready in early February.
Model: 97.0 Cash: 0.0% Buy & Hold: 4.3% Standard Timing: 4.3% Aggressive Timing: 6.3%
another extension of the cyclical bull.
This is the bull market that was born in March 2009, at the
depressingly low weight of 677,
now robust at 1486, a weight
gain of 120% over nearly four
years… the bull market few believed in and far too many hated to join…
the bull market that left many behind.
And now? Lately, money has
been pouring into stocks… partly out of long Treasuries. Back to the risk-on trade? Time will tell and events will
determine. As for the model? It was on board live at that 2009 March low, having issued a buy signal the
preceding October. And except for
a mistaken three-week sell signal in July, 2010, it’s been in for the
uphill ride the entire time.
of the model, its 2013 version is now up and
running. As many of you know, I
revise the model each year about this time, as data for the preceding
year are incorporated into the model’s genetics. During this process, new and revised
(components that make up the model) are researched and vetted, as I seek
improvements in the model’s performance.
Think of this as developing a product with a number of
ingredients, the particular mix and strength of these ingredients
affecting the efficacy of the product, say, a drug or a food. Each new ingredient in combination with
existing ingredients is laboriously tested, as in a chemical or
biological lab. Is the new
ingredient (predictor) effective as it interacts with others in the mix? Can I change the nature of that
particular ingredient to create a better product? Over the years I’ve tested hundreds of
predictors. Effectiveness in this
case is the ending value of a portfolio that begins in 1970 and ends the
year just completed. After too
many trials to count, I select the mix of predictors and sell/buy
boundaries that optimize (maximize) the portfolio, providing the
resulting model is reasonably stable with respect to the number of switch
signals and robust regarding small changes in its parameters (numeric
constants used in the model). Moreover,
for all you researchers out there, each predictor must be statistically
model selected for 2013 is much
like its 2012 predecessor, but with improved historical
performance and a slight increase in its willingness to issue a switch
signal. One predictor was dropped
and two new ones were added. And
an existing predictor was revised (its own particular characteristic was
changed). For you quants out
there, its exponentially smoothed moving average was changed from 26 to
39 weeks. One of the new
predictors is my version of Dow Theory; the other is my adaption of the Recession Probabilities published by the St Louis Fed.
The model now includes 16 predictors based on 26 weekly data points. Each predictor is a
mathematical/statistical manipulation or transformation of one or more
data points. So, for example, if
chili powder is one of the ingredients (predictors) in chili (the model),
what constitutes chili powder includes its own set of fundamental
ingredients (data points).
model’s statistical function in life is to estimate the probability that
the just completed week is part of a primary
uptrend, an increase of at least 8% in the S&P 500 index over a minimum of eight weeks
based on Friday closings. The
score at the top of the page says that this probability is currently
about 97%. Note at the bottom of the table above
that the model’s new sell/buy boundaries are 38/73. The model this
past week is comfortably above these boundaries, and so remains on a
stable buy signal. The model is
most sensitive between 21 and 82; that is, within this range it
can rapidly move up or down, sometimes dramatically so. Should the score drop to 38 or below, the model would issue a sell signal. Once
the model is on a sell signal, it would take a score of 73 or above for a switch to buy.
revised web pages in early February that reflect last year’s live results
and the current model’s historical performance.
Model: 96.0 Cash: 0.0% Buy & Hold: 3.3% Standard Timing: 3.3% Aggressive Timing: 4.8%
bull eases forward to new “500” high of 1472, as investors consider upcoming “cliffs” and the start
of earnings reports.
economic cliffs over the coming couple of months? How about political
wrangling over (a) the upcoming debt ceiling v dollar for dollar spending
cuts for amounts by which the ceiling is raised, (b) automatic and
drastic across-the-board sequester cuts to federal budgets, (c) tax rates
v loop holes v revenue in a much needed overhaul of the tax code, and (d)
entitlement reforms regarding Medicare, Medicaid, and Social
Security. The goal? Reduce long-term deficits to manageable
levels while encouraging economic growth; that is, financially operate
within our means while enjoying prosperity. The problem? The devil is in the
details in how to manage each of the four potential cliffs. And we know how the hardening of
political philosophical differences gridlock Washington legislation. Will we see courageous compromises and
the leadership to make these happen?
Hang on for more volatility in the stock market. The current quiet period will not
likely last very long. Still, we
somehow and usually manage to do ok.
Let’s see what the model thinks as we negotiate the terrain.
still working on the revised model for 2013. It should be operational by the January
Model: 95.6 Cash: 0.0% Buy & Hold: 2.9% Standard Timing: 2.9% Aggressive Timing: 4.2%
“resolution” sparks market and model surge, as the S&P 500 tacks 4.6% for the week and the
model jumps 33 points into the upper 90s. And the “500” just ekes out a new cyclical bull market high at 1466, fractionally besting the
peak from last September. This
reconfirms and extends the cyclical bull market that began in March,
2009, 117% ago from 677. Yet, we likely remain in a flat to down
secular (long-term) trend, now
in its 13th year, with two double tops at a 1565 S&P 500 all-time high in 2007 and a then 1527 high in 2000. We now sit just 6% below the 2007 high. Did the secular trend end in 2009, at
the start of the current cyclical bull?
We will not know for some time, although the continuation of a
flat/down secular trend is likely as the economy
(individuals, private and public sectors) unwinds debt from the debt
super-cycle of the past 20 years or so.
And many economists are predicting much lower economic growth over
the coming decade, as much as half or less, compared to the previous
normal. From the model’s standpoint, it matters little, as its
focus is detecting changes of 8% or more over at least two months, at their start. While we prefer secular uptrends for
better and more reliable market performance, returns are also available
during secular flat to down trends, as the cyclical index undulates above
and below the secular trend. The
model has done a reasonable job of riding a good portion of the upward
waves and not sticking long with the downward waves. See its live performance in Reality Check.
This past year was a good year, with gains of 15.9% for the buy & hold and standard timing strategies
and 20.2% for aggressive timing.
Note that the aggressive return is not 50% higher (23.8%) than the standard
return, as we might expect given that the aggressive strategy has a 1.5
times invested weekly multiplier… that’s the consequences of no dividends
and the effects of volatility, as cautioned in the timing model
page. The Dow came in at 10.2% and the Nasdaq at 17.5%. Cash in the form of 90-day Treasury
Bills was definitely not king, at 0.1% for the
year, thanks to the Feds.
Long-term Treasury Bonds disappointed at 3.6%, especially given their 30% return
the previous year. Gold flatlined
for the year.
The economic, taxation and fiscal issues and political
battles are far from over… and coming up soon over the next couple of
months. Expect continued
working on the revised model for 2013.
It should be operational by the January 20 posting.
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.
The difference over long time horizons can be significant, as
reinvested dividends make up about 30% to 50% of total S&P 500
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 © 2013 Richard Mojena. All rights reserved.
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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!