January 2nd, 2013

Shaking Off the Fear

If you’re an individual investor, one of the most important articles of last week besides the focus on the “Fiscal Cliff” debacle was an article in the December 29 Washington Post entitled “Bull market roars past many U.S. investors“.  The gist of the story was that “Americans have missed out on almost $200 billion of stock gains as they drained money from the market in the past four years, haunted by the financial crisis……Individuals are withdrawing money as political leaders struggle to avert budget cuts that threaten to throw the economy into a new slump.”

According to the Post, much of the damage to investors is “self-inflicted” because of fear and anxiety brought on by market volatility and memories of past “crashes”.  However, U.S. growth has improved and earnings tied to the economic are expanding.  Those improvements have been reflected in stock prices.  Of the 500 stocks comprising the S&P 500 Index, 481 are higher now than they were in March 2009 or when they entered the gauge.  Some of the statistics supporting these conclusions are:

  • Investors are lowering the proportion of stocks they own in retirement funds during a bull market for the first time in 20 years.
  • The proportion of stocks in the assets in 401(k) and IRA (excluding money market funds) fell to 72 percent from 72.5 percent in 2009.
  • The percentage of households owning stock mutual funds has dropped every year since 2008 to 46.4 percent in 2011, the second-lowest since 1997. [Of course, this could also result from the wide choice, availability and acceptance of competitive ETFs]
  • New money has gone to the relative safety of fixed-income investments as corporate bonds and Treasuries have received nearly $1 trillion since March 2009.

Housing is making a comeback and housing stocks were among the leaders last year, banks are on the mend and financial stocks were also among the best performers and 2013 auto sales are projected to approach 1.5 million. Is it time then for individual investors to begin fearing declines in the value of their fixed income investments as interest rates reverse (regardless of Bernanke’s protestations to the contrary) and start moving money back into stocks?

Meanwhile, institutional investors (the group I call the “herd”) hasn’t fared that well in the market either.  According to in December 26 Wall Street Journal article entitled “2012 Was Good for Stocks, Bad for Stock Pundits“,

  • At the end of 2011, Mr. Cramer warned investors to avoid bank stocks. Oops. They were one of the best-performing sectors in 2012. He urged investors to avoid real estate, but housing prices are up more than 2% from a year ago…..and the stocks of home builders, as measured by the S&P Homebuilders exchange-traded fund, are up 53.6%.
  • Of the 65 market “gurus” tracked during the last few years by CXO Advisory Group, the median accuracy for market calls is 47%. If that sounds low, or you wonder about the quality of the pundit, consider that the list includes such well-known names as Bill Fleckenstein (37%), Jeremy Grantham (48%), Bill Gross (46%) and Louis Navellier (60%).

So how do I deal with the noise coming from the “talking heads” and the uncertain produced by the market?  I maintain my equanimity in the face of volatility by relying on how market participants have behaved during similar situations in the market’s history.  I rely on my Market Momentum Meter to give me some indication of what market participants believe will happen, on average, in the near-term as reflected in their collective buying and selling decisions.  It’s measure by whether they are pushing prices up or down and the momentum behind those decisions.

The Market Momentum Meter turned a bright Green on January 31, 2012 when the Index was 1312.41, or 10.25% under today’s close of 1462.42.  It wasn’t Green for only 10 trading days during the year (the longest period was 7 days around the November correction low:

Like a parent who never quite trusts riding in a car that his kid is driving, I didn’t fully trust my own creation.  It took me a few months after that Green signal at the end of January to increase the money I had in stocks.  As hard as I tried to totally drown out the noise (news) about Euro debt and currency problems and, more recently, the fiscal cliff debates, I never could bring myself to be fully invested and, like corporate America, always had a significant amount of cash on the sidelines.  And then in after the November elections, as the Market reacted to the realization of a second Obama term and continued Congressional stalemate, it looked for a couple of weeks like we might see a repeat of the 2011 market implosion.  Fortunately, I waited this one out and saw money begin flowing back into stocks as prices quickly recovered.

Like many other market participants, I need additional “guarantees”.  Even though the Meter says that these sorts of market conditions in the past have lead to higher prices and that it’s all clear to be fully invested with relatively low risk, I still want to see the Index continue its assault on the all-time highs by first crossing above where it stalled out last September.  When that happens (which could be next week), I’ll feel more comfortable putting rest of cash to work.

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December 16th, 2011

World Stock Markets are Correlated

If thanks are in order then it’s from me to all of you.  It’s because of you that I take the time to be analytic, to look at the forest instead of at the trees, to look in places and directions that are different than those we regularly hear and read about in the business media.  For example, when attempting to divine our market’s future we often see with blinders on.  We look at individual stocks, we look at the S&P 500 and we look at our economy but we don’t often to look at what might be happening to other markets around the world, something that’s relatively easy to do these days because of ETFs.  I scanned those ETFs and was surprised by what I found.

In an article in today’s Reuters, “Stock markets have become so highly correlated to one another that it can feel like a one decision world: in or out.  The massive and global nature of the series of related financial crises since 2007 have robbed diversification of much of its value. Nearly every asset class is now closely correlated.”  The article quotes a study by Societe Generale that “a massive increase in correlation, from about a .5 correlation in the early 1980s to nearly .9 percent in recent months.”

The same seems to be happening to the returns generated by the “Herd”, the hedge funds who get paid huge fees to generate better than average returns on the large sums of money they manage.  According to Reuters, “these correlations in the 1990s were at about the .6 level, now they are topping the .9 mark, begging the question of why investors are paying expensive managers.”

We can’t explain the new correlation or, for that matter, care to know the cause.  The point is that “Diversification was the low hanging fruit of wealth management” and due to the increase in international trade, it’s no longer available.  We can see it in the ETFs of stock markets around the world; I could have picked more from the 30 some ETFs but you get the picture (click on image to enlarge):

  • Brazil: a possible double-head reversal top
  • Hong Kong; a surrogate for various Asian markets, including China
  • EAFE: 22 developed countries in Europe, Australasia, and Far East other than US and Canada
  • S&P 500: an argument can be made for forcing a reversal top, in this case an emerging head and shoulder formation, on the S&P 500 Index

We’ve spent a lot of time and emotional energy trying to figure out in which direction the market will break out of the trading range. We waiver back and forth depending on the news out of Europe. We turn optimistic when we finally start getting a little bit of positive news on our economy (like “things aren’t getting worse” or “things are slowly getting better”). Bottom line ….

  1.  in today’s market, diversification gives way to market timing and
  2. we might fair no better than other world markets and have to endure a further 20-25% decline before we’ll see a bull market trend begin.

Like it or not, truly, today We are the World.

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November 30th, 2011

Impact of Coordinated Central Bank Action

“These are the times that truly try investors’ confidence.”  Just when you thought the market was going to perform in a relatively predictable way, out from somewhere in left field jump the Fed, 5 European and the Chinese central bankers promising what appears to be a coordinated “global Q(uantitative)E(asing)?”.  Quoting from the CNBC newswire,

“The world’s major central banks made it easier Wednesday for banks to get dollars if they need them, a coordinated move to ease the strains on the global financial system. Stock markets rose sharply on the move.”

Yes, the market’s initial reaction was a greater than 2.5-3.0% jump in market futures but, as some more level-headed analysts see it, is this not also a sign of the bankers’ frustration and desperation at the inflexibility and inability of legislators to act to cut spending and deficits.  Bottom line, things actually may be worse than we thought.  Remember the market’s reaction when the Fed launched QE I and QE II.  It skyrocketed 30% over the succeeding 8 months but we’re still laboring under 9+% unemployment and the market failed to sustain the gain and is still stuck in a trading range with yesterday’s close 13.94% higher than it was prior the QE I and actually below the level prior to QE II.

Let’s take a look at the chart as of last nights close:

S&P 500: 11/29/2011

If professionals can’t see what lies in the future and complain about not knowing whether to buy long or sell short, then clearly individual investors like you and me are having a very difficult time of it.  There’s only two ways to go: 1) stay long, collect your dividends, weather the storm and hope for the best, or 2) insulate your money as best as you can by either moving into cash or being portfolio protection in the way of hedges like index put options of leveraged short ETFs.

In other case,  the best to close your eyes and ears from the daily news (some call it noise) and stay focused on the long-term.  I’m looking at the trendline around 1220-1225 which has acted as an impenetrable resistance level several times.  The second event I’m watching is the the 200-dma inevitably crossing below the 300-dma, something that can’t be prevented without the market moving above 1260-1275 for several weeks.  The Market Momentum Indicator with which my subscribers are very familiar is based on 4 moving averages plus the position of the Index itself relative to those four.  As I outlined in my report to subscribers this past weekend,

Without some sort of dramatically positive surprise, the moving averages will move into a precise bearish alignment (arranged from slowest to fastest). May 29, 2009 was the last time we saw a perfect bear market alignment as the market was exiting from the Financial Crisis Crash. That period of perfect bear market alignment began just over four years ago on November 7, 2007 as the market was entering the start of the Financial Crisis Crash.

Was today’s announcement that “dramatically positive surprise” or is the market about to enter a period similar to November 2007?  No one knows with confidence so, for right now, rightly or wrongly I’m not willing to gamble and am basically watching from the sidelines.

December 21st, 2010

Racing Against The Hedge Funds

I was interested to read that hedge funds have found the past year as trying as I did. The headline on Marketwatch.com was In risk-on, risk-off year, hedge funds come up short” and the lead paragraph stated that

“Several of the largest hedge funds lagged the return on equities and bonds this year as big market swings combined with massive monetary stimulus to disrupt trading strategies.?”

An index of managers compiled by Chicago-based Hedge Fund Research Inc. rose 7.11% this year, through the end of November and early December as compared with a 7.88% gain in the S&P 500 Index. Those hedge funds that only invest in equities returned even less at 6.89%. The article went on to point out the returns up to the beginning of December for some of the larger and better-known all equity head funds:

  • Viking Global Equities was up less than 3%
  • Paulson & Co.’s Advantage fund climbed 1.8% this year
  • Paulson & Co.’s Advantage Plus fund, which uses a small amount of leverage, gained 3.68%.
  • Brevan Howard Fund, a giant global macro hedge fund, returned 1%.
  • Moore Global, another global macro fund, was up 2.5%
  • King Street Capital, a big credit-focused fund, advanced less than 5%.
  • Och-Ziff Capital Management’s Master fund,gained 7.63%.
  • Oculus fund was up just over 6%.
  • Tudor BVI Global advanced 5.4%.
  • York Investment was up 5.8%.

One of the factors contributing to the less than stellar performance of many hedge funds this year were this year’s violent market swings. However, this news came as a relief to me because my portfolio has outperformed the market and, apparently all these highly compensated hedge funds.

The following chart shows two indexes: the S&P 500 in red and the model portfolio my subscribers see in my Instant Alerts service:

Both indexes start at 1.0 with the launch of the service last March 17. As of last Friday (I issue a weekly Recap Report each Sunday), the portfolio was up 8.8% as compared with a 7.3% increase in the S&P 500. It was tough going until just after Labor Day when I reversed direction and started buying. You read about it here on September 2, when I wrote:

“I know I’m going to be criticized yet again for being too optimistic or pallyannaish but I’m looking forward to the possibility …. now perhaps 60/40% …. that the market also will hit and cross above the major, long-term descending trendline that stretches all the way back to October 2007.”

And two weeks later:

“…. the market timing indicator gave an “all-in”, 100% invested signal back on September 2 with the index crossing above the 50-dma ….. I’ve struggled against skeptics …. one of my harshest critics, continually asks me to explain to her why the market should advance in the face of continued bad economic news …… The only way I can respond is to say “stay tuned, the media will tell you why something happened after it happens … and then will call it news”…… the problem isn’t knowing which stocks to buy as much as knowing how much to invest and when. There are more great stocks out there to buy (like there were in March-May 2009) than money to buy them. What is in short supply is guts to do it.”

Finally, at the end of September, when asked why I buy stocks making new highs, I wrote:

“When the stock market is moving from a trough or consolidation into an uptrend and I have cash to invest, one of my primary means of employing that cash is to buy stocks making all-time new highs.”

That’s looking backwards; the question everyone wants answers to is what the future holds. I recently pointed to several areas where I’ve bought stock:

  1. Tech stocks will probably continue to be strong in the first half. See “Inverted Head-and-Shoulder Potential on NASDAQ Composite“; the NASDAQ composite is up 12.8% since that post.
  2. There’s “The Resurrection of Financials“. Have you seen what XLF has been doing over the past several days?
  3. Finally, how about “Steels: Your Second Chance“. The five steel stocks in that post are up an average of 4.84% over three trading days and none are down.

There will be new opportunities as the New Year rolls in so stay tuned and subscribe.

July 7th, 2010

New Bull Run or Sellers’ Remorse Correction

A readers asked a very pertinent question: “Do you think time may be right for an update on MTI?” The answer is an emphatic yes, especially after today’s 3.3% gain in the S&P back up to 1060, an important level for multiple reasons.

Before translating this to the MTI, the Market Timing Indicator, let me point out what’s important for me on the charts. Last Friday, the S&P did experience a “Black Cross”, when the 50-dma crossed under the 200-dma. As I pointed out to my subscribers, not all Black Crosses are equal and this one was one was among the bearish ones. What makes it a signal to go all cash is that the moving average cross is aggravated by the fact that the Index itself was below the 300-dma. A combination of these two factors, according to 50 years of history has proven to be a time when it was more prudent for investors to be in cash than invested (click image to enlarge):

But today’s nice gain brought out all the “talking heads” asking the same question, “Does this signal the bottom?”. Doug Kass thought so and bet his impartiality and credibility last Friday (probably if he didn’t he would have lost his gig at Cramer’s TheStreet.com). I don’t think so:

  • The “Black Cross” hasn’t yet been reversed
  • The increase could be nothing more than a “seller’s remorse” correction back to the neckline/lower boundary breakout level (depending on whether you see a head+shoulder top or an ascending-widening-wedge). I was relieved that Carter Worth agreed with me on that.
  • This combination of Index and moving averages has occurred only 14 times over the past 50 years. Eight times, or 57%, it devolved into a worse situation (the 100-dma following the 50-dma and it, too, crossing under the 200-dma), 6 times the Index next crossed back above the 300-dma.
  • Even if the Index closes back above the 300-dma tomorrow, the Black Cross hasn’t been reversed and the all-cash signal remains in place. It would take a move above the descending 50-dma at around 1080-1100 for the red light to turn yellow.

Many of the talking heads were forced to find some explanation, any explanation, for the day’s strong move. There were explanations of strong Euro, weaker dollar, stronger than expected earnings reports starting next week, short covering. Right or wrong, I stuck with my discipline and was a seller into the close of today’s move up.

What I found most interesting is that many blamed computers for today’s run. While I was an early advocate of chart reading and technical analysis (I’m not going to divulge how long ago that was but, trust me, some of you were probably just in elementary school), it appears that now all the hedge funds and institutions have taught their computers how to read charts and generating huge volumes and increased volatility.

The computers are now stuck in equilibrium struggle. But once directional momentum begins, we’re going to see a quick and huge run as all the computers read the same chart patterns and start spitting out similar orders. Over the past several years those were sell orders; soon we’re going to see, I believe, a deluge of buy orders. That will be unbelievable if we’re patient and put up with the frustrating wait.

June 18th, 2008

Hedge Fund Liquidations, the Final Straw?

When it comes to the stock market, patience is a virtue. Sometimes, watching this market is like watching honey drip out of a bottle, you know it’s going to happen soon but it just takes so long to get there.

I feel like a broken record having to repeat the same story over and over again and am fearful that all of you are going to get tired of hearing it and will switch channels to some other blog offering a large dose of hope. For example, I love to skim the Newsflashr-Business Blog site to see: 1) whether Stock Chartist has moved up in their rankings (it has!) and 2) what other bloggers happen to be writing about. Of course, you have to take everything you read there (except for this blog) with some skepticism but, all in all, if you read on a regular basis you’ll certainly get a sense of the market’s general tone.

Something you don’t see much about those is the risk of investors deciding to pull their money out of hedge funds around June 30 and causing extensive liquidations and, in turn, stock market declines. If that happens, it could be the nail in the coffin of this market. I feel that we’re setting up for that with the market’s weak action since mid-May when the S&P-500 crossed the 180-day moving average for 2 days and reversed direction and started heading south. Here’s the picture as of today’s anemic action:

This isn’t a picture that should surprise any regular reader. As a matter of fact, just over 2 weeks ago on June 2 in a piece entitled “Dusting of Bear Market Crash Call” I summarized the consistency in my calls since February 15 for caution from what appeared to me to be a very bearish market. Some have written in disputing my call and saying that the market was poised for a bounce. Look on the above chart and you’ll see that the market today was almost exactly at the same level as February 15 …. no, it hasn’t gone down but neither has it gone up.

If the index remains below all the moving averages to the end of June, there’s a strong likelihood that the 60-day average will cross under the 90-day again (as it was prior to May 15) and all the moving averages will have turned and started to head down again. All that would be extremely bearish, would push the Index back down to January and March lows and force a test of that support trendline. My guess is that if liquidations are strong it will lead to the support failing.

And while all this is happening, I hesitate pulling out of my positions because they’re working so well. As mentioned in previous postings, I’m a momentum player and look for those stocks moving out of consolidations, moving into new high territory or having clear positive relative strength. I gave you many of those names in earlier postings.

The economic and political background to the market also looks ominous. Housing and Finance are still on their backs, inflation is on the rise, unemployment is increasing, consumer sentiment is declining and the biggest imponderable still hovers overhead … the high cost of energy. How can the market survive all of this at these current levels. I think not. If what I describe above is realized, I’ll have to join the liquidation parade and cash in my chips and wait to play another day.

Addendum: A reader brought to my attention the RBS report wherein a “strategist” wrote:

The worst of the stock and credit market declines that began last year is yet to come as inflation accelerates and economic growth falters, according to a Royal Bank of Scotland Group Plc strategist.

Central bankers are “in a dangerous corner” where the chance of a “major policy error has just super-spiked,” wrote Bob Janjuah, 42, a London-based credit strategist at the U.K.’s second-largest bank. Any stock rally in the next month “will be the significant opportunity this year to get short stocks,” he said in a note dated June 11.

The Standard & Poor’s 500 Index may plummet 22 percent to 1,050 from current levels, said Janjuah, whose prediction is lower than any from any U.S. equity strategists surveyed by Bloomberg.

For Bloomberg version of report click here.