MILLENNIUM WEALTH STRATEGY

The Dow Jones Average is masking market deterioration.

noreply@blogger.com (Unknown) — Fri, 28 Jan 2011 17:17:00 +0000

As the Dow Jones Industrial Average made a new 52 week high yesterday, many other market indices remain below their peaks made early in the month. Notably, the Russell 2000, small cap index, is trading 3% below it earlier peaks. The Nasdaq has also shown relative weakness of late.

These are possible signs that a correction is at hand. Good earnings results from IBM and GE have helped to drive the DJIA higher, but the small caps and techs are struggling. We are well into the earnings season, and while many companies have reported strong results, margin pressures are rising (mostly due to rising commodity prices), and this could put a damper on future earnings growth. At the same time, we are witnessing inflation fears spread in the emerging economies. The emerging countries have begun to tighten their monetary policies (both China and India of late) to rein in inflation. This in turn could slow global growth,which is one of the main drivers needed to help our own recovery. We have reduced exposure to the emerging markets across the board and remain largely in cash. We are also keeping a close eye on the VIX (Volatility index). The VIX index is trading at levels that suggest complacency. If you look at the VIX chart below you will see a triple top at 18.5. If we get a move in the VIX to 19, that would be another sign of caution. If we do get a correction we will be well positioned to buy on the pullback.

CHARTS OF INTEREST

VIX...breakout at hand?

DJIA ...new highs, will they continue?

Russell 2000 Index ( not performing as well)

Nasdaq 100 Index also showing relative weakness

Dow Jones Average is Masking Market Deterioration

noreply@blogger.com (Unknown) — Tue, 25 Jan 2011 16:08:00 +0000

Creeper rally continues

noreply@blogger.com (Unknown) — Tue, 18 Jan 2011 18:01:00 +0000

As an active portfolio manager, we employ a strategy of paring back positions when our technical indicators suggest risk is high and that the stock market may be due for a pullback. We began to see some initial signs of increased risk in mid-December as several of the investor and advisor sentiment polls began to show high levels of bullishness. By early January, as the markets continued to creep higher, we began to see other technical warning signs that suggested a high probability of a quick pullback. During that first week of January we took steps to protect our portfolios from a pullback and raised cash. As of today the markets have continued to creep higher. While it is frustrating to be sitting on cash as we watch the market trickle higher, we know it is best to remain disciplined to our strategy. Also, a look back on the the positions we sold in that first week of January finds that, as a whole, they are lower now. In other words, although market breadth has been strong, not every issue is participating in this creeper rally.

To put this current creeper rally into perspective, we must compare it historically to others like it. Jason Goepfert, from Sentiment Trader, reviewed the recent S&P 500 index momentum and here is what he found.

"The S&P 500 index has now gone 92 days without closing below its 50-day average, which has been matched only 17 other times since 1928. What's even more remarkable is that during this time, it has not even closed below its short-term 10-day average once during the past 30 days. That has never happened before, in 82 years of history."

So while it is safe to safe that we are due for a pullback, when it comes is anybody's guess. The charts are beginning to look eerily familiar to the charts of April 2010, and investors who didn't take some risk off the table then had to sit through a painful 15% correction.

(click on charts to enlarge)

Yields continue to rise, hurting bond fund investors

noreply@blogger.com (Unknown) — Mon, 13 Dec 2010 05:05:00 +0000

In my last post on October 27th, I highlighted the breakdown of the 30 year US Treasury Bond chart, and explained how we were moving exposure away from the long duration bonds into shorter duration bonds to take a defensive position.

Since that time we have had a significant run-up in longer term interest rates, and correspondingly, a significant decline in long term bond prices. For example, if you had a $100,000 invested in the Vanguard Long-Term Treasury Bond Fund on October 27th and did nothing, that $100,000 would have declined to $93,677 as of Friday December 10th.

This is just one example of where active management can play an important role in protecting gains and minimizing volatility.

US 30 YEAR TREASURY BOND FUTURE CHART (click chart to enlarge)

STOCK MARKET

We have entered the seasonal strong period (November thru April) for stocks. We have had nice steady climb for stocks in the first six weeks of this period and this also follows a strong showing in the traditionally weak months of September and October. I am currently starting to see many bullish extremes in some of the sentiment indicators which gives me some concern. On Friday we hedged our stock positions with the double inverse S&P 500 ETF (SDS). This is a short term precautionary move to protect recent profits, and if conditions improve we may unwind this hedge fairly quickly.

The S&P 500 Index broke above prior resistance levels over the last couple of days and if we can hold above here for a few more days the show of strength would be another reason to remove our hedge. A drift upward into year end is definitely a possibility as under invested and under performing fund managers look to get invested. We will continue to monitor the action closely.

SPY (S&P 500 ETF) CHART (click to enlarge)

QE2 breaks US 30 year bond uptrend

noreply@blogger.com (Unknown) — Wed, 27 Oct 2010 14:12:00 +0000

Click on chart to enlarge

The Fed meets next week and it is expected that they will announce their intentions on quantitative easing. The expectations are for another round of large scale US Treasury purchases in effort to push interest rates down and thus stimulate the economy. The Fed has also recently suggested that it may look at inflation targeting. Targeting inflation would set a explicit growth target in price levels that the Fed would attempt to achieve. The aggressive talk by Fed has halted the nearly year long rally in the long bond.

While no one can predict the outcome of this QE experiment, we must try to prepare for the possibility that it does have some positive stimulus effect on inflation and the economy. The recent break of the uptrend in long term bond prices along with other recent negative technical signals is enough to cause us to move some of our fixed income exposure away from the long end of the Treasury curve to shorter duration instruments.

Comstock Partners on deleveraging and possibilty of double dip

noreply@blogger.com (Unknown) — Fri, 10 Sep 2010 21:00:00 +0000

The Significance of Consumer Deleveraging

Economy | Comstock Partners | September 10, 2010 1:00 am |

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by Comstock Partners

For some time it has been our view that the recent recession, unlike all other post-war recessions, was caused by a credit crisis, and that it would therefore be followed by a series of weak recoveries and frequent recessions until consumers successfully deleveraged their exceedingly heavy debt loads. That scenario now seems to be happening in accordance with our projections. A statistical economic recovery that was already far weaker than average has decelerated even further and the ECRI weekly leading indicator index strongly suggests that another recession may be in store.

Consumers have only begun to cut back on their severe debt burdens, and the process will take a number of years. Household debt relative to GDP soared from a range of 43% to 49% in the 20-year period between 1965 and 1985 to a peak of 97.3% in 2009. As of March 31st (the latest data point) this dropped only slightly to 92.7%. To provide some more perspective, Ned Davis Research estimates the mean to be 54.2% over the past 58 years. The percentage climbed gradually to 65% in 1998, and then really accelerated to its recent peak.

(click on chart to enlarge)

To be conservative, let’s assume that the household debt/GDP ratio falls back only to the 65% level of 1998 rather than to the lower level between 1965 and 1985 or to the long-term mean. Under that assumption household debt would have to be pared back by about $ 4 trillion (from the present total of $13.5 trillion), an amount that constitutes about 40% of current consumer expenditures. While this could be accomplished over a number of years, it can readily be seen that the deleveraging would create a highly significant drag on consumer outlays for an extended period. Since such spending accounts for some 70% of GDP, this creates a serious drag on the overall economy as well.

As we expected, consumer spending has been weak despite the massive stimulus provided by the Fed, the White House and congress. In addition, with mortgage debt accounting for a majority of total household debt, the housing market has remained under pressure as well. The statistical economic recovery to date has been far weaker than the post-war average. Over the first four quarters of the so-called recovery GDP growth has averaged only 3.0% quarterly, compared to growth of 5.9% over the last nine recoveries from recession. Furthermore growth in the last quarter was only 1.6%, far under the average of 5.9% for the 4thquarters of previous expansions.

More recently the economy has slowed even more as indicated by data released over the last few months. This development has now been recognized by most economists. The consensus of economists has now reduced their projected growth rates for three consecutive months. The Fed Beige Book released yesterday referred to "widespread signs of deceleration". ISI’s Ed Hyman stated that their weekly company surveys "suggest slowdown is broadening and intensifying". Overall the economy seems in danger of slowing down to "stall speed", airplane terminology referring to the minimum speed necessary to keep from crashing.

Over the past week or so the market has been somewhat encouraged by a few indicators that came in above expectations. However, the data was still very soft, and merely indicated that the economy may still be growing at an extremely low rate. Moreover, these indicators are coincident with the economy at a time when the leading indicators with a good record of prediction are strongly suggesting the distinct possibility of recession.

For instance, last week the ECRI Weekly Leading Indicator was down 4.11% from a year earlier. We searched the historical data to determine what happened to the economy at other times when the index was down 4.11% or more year-over-year. Over the last 42 years this has occurred seven times, and in all seven instances a recession started shortly before or shortly after the signal. We also note that all of these instances were accompanied by bear markets in stocks. Although no indicator is certain in economics or stock markets, seven for seven is nothing to sneeze at. We note that ECRI Managing Director Lakshman Achuthan has not yet officially called a recession, although he has stated that, based on his index, there was more than a 50% chance of one.

In our view the market is in a volatile trading range that is part of a topping formation much like the topping process in early 2000 and late 2007. The trading range is likely to be violated on the downside when the economic recovery fails to accelerate and companies begin to bring down their revenue and earnings guidance.

Hindenburg Omen Confirmed

noreply@blogger.com (Unknown) — Mon, 23 Aug 2010 14:46:00 +0000

Last week we received a second occurrence of the Hindenburg Omen. As I mentioned in my previous post a second occurrence of this indicator greatly increases the statistical significance of the indicator and the odds of a significant decline in stock prices.
We never rely on one indicator alone, but this event does deserve our attention, and considering we are entering the two traditionally worst performing months (September and October) for the stock market, we are paring back risk accordingly. Most of the indicators we watch are currently in neutral or negative territory which also leads us to a defensive position.

HINDENBURG OMEN

Hindenburg Omen Signal Generated

noreply@blogger.com (Unknown) — Fri, 13 Aug 2010 17:43:00 +0000

A Hindenburg Omen signal was generated on Thursday. The Hindenburg Omen often precedes a major decline (a decline of 15% or more) in the stock markets. The Omen often comes in clusters, and multiple occurrences of the Hindenburg Omen add statistical significance and reliability. If we receive a second Hindenburg Omen within 36 days, we then consider the signal confirmed and this greatly increases the odds of a big sell off.

A Hindenburg Omen occurs when:

1.That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.

2.That the smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is a function of the 2.2% of the total issues.

3.That the NYSE 10 Week moving average is rising.

4.That the McClellan Oscillator is negative on that same day.

5.That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.

When all of these conditions are met on the same day a Hindenburg Omen is given.

Past occurrences and reliability:

Robert McHugh, of Safehaven.com, has reported on the performance of confirmed Hindenburg Omens going back to 1985 and here is what he found.

Confirmed Hindenburg Omens are very rare. There have been only 26 confirmed Hindenburg Omen signals over the past 22 years. This is amazing when you consider that during that time span, there were roughly 5,700 trading days. Of those 5,700 trading days where it was possible to generate a Hindenburg Omen, only 186 (3.2 percent) generated one, clustering into 26 confirmed stock market crash signals.

If we define a crash as a 15% decline, of the previous 25 confirmed Hindenburg
Omen signals, six (24.0 percent ) were followed by financial system threatening, life-as-we-know-it threatening stock market crashes. Three (12.0 percent) more were followed by stock market selling panics (10% to 14.9% declines). Four more (16.0 percent)resulted in sharp declines (8% to 9.9% drops). Six (24.0 percent) were followed by meaningful declines (5% to 7.9%), four (16.0 percent) saw mild declines (2.0% to 4.9%),and two (8.0 percent) were failures, with subsequent declines of 2.0% or less.

Put another way, there is a 24 percent probability that a stock market crash — the big one — will occur after we get a confirmed (more than one in a cluster) Hindenburg Omen. There is a 36.0 percent probability that at least a panic sell-off will occur. There is a 52 percent probability that a sharp decline greater than 8.0 % will occur, and there is a 76 percent probability that a stock market decline of at least 5 percent will occur. Only one out of roughly 12 times will this signal fail.

All the biggies over the past 21 years were identified by this signal (as defined with our five conditions). It was present and accounted for a few weeks before the stock market crash of 1987, was there three trading days before the mini crash panic of October 1989, showed up at the start of the 1990 recession, warned about trouble a few weeks prior to the L.T.C.M and Asian crises of 1998, announced that all was not right with the world after Y2K, telling us early 2000 was going to see a precipitous decline. The Hindenburg Omen gave us a three month heads-up on 9/11, and told us we would see panic selling into an October 2002 low. And now we have another confirmed Hindenburg Omen signal, here in the autumn of 2005.

We will be watching the tape closely for a second occurrence and confirmation of the Hindenburg Omen.

We are currently out of equity ETF positions and in cash. We are carrying a few small positions, mostly in high dividend paying closed end funds. We will remain defensive as we wait for more clarity on economy and market direction.

Waiting on the Fed

noreply@blogger.com (Unknown) — Tue, 10 Aug 2010 03:18:00 +0000

The S&P 500 futures contract has continued to struggle with the 1125 area since our last post. The markets are trading on extremely light summer volume, and have been locked in the range of 1100 to 1125 for over a week now. Volume has continued to decline on the current rally which began back in early July. When volume decreases on a rally it is a concern (see chart).

At approximately 2:00 PM tomorrow the Fed will make a statement following its Open Market Committee meeting. Many are looking for the Fed to possibly step up its purchases of mortgage backed securities. The Fed recently completed it mortgage backed purchase program but the continued weakness in the economy may force them to do more. If the Fed does announce some kind of monetary stimulus and the market breaks through the 1125 area on the S&P 500 futures we could get a quick move to 1150. We would look to participate in that move in the form of the equity ETFs with a tight stop loss.

We continue to believe that deflationary pressures may outweigh any moves by Fed to re-flate the economy, and therefore will be trading the upside moves cautiously. We need to see more evidence of a strengthening economy before we can buy equities with confidence. We are also keenly aware that the two historically worst performing months for the stock market are directly ahead of us (September and October), so now is not a time to be loading on the risk.

S&P 500 E-MINI FUTURES CONTRACT
(please click on chart to enlarge)

Scaling back into Friday's unemployment number

noreply@blogger.com (Unknown) — Thu, 05 Aug 2010 15:04:00 +0000

Back on July 19th we highlighted the bearish sentiment readings and said that we expected a near term bounce in the market. We took a 1/3 position in the S&P and Emerging Markets ETFs at that time. Since that time the S&P has rallied approximately 5%. So where do we stand now.

The S&P 500 has traded right up to resistance levels. As we mentioned in the July 19th post the S&P has made a series of lower tops and lower bottoms since the April highs. We are currently close to breaking that downtrend, and would need a close above 1125 on the S&P emini futures contract to break that trend.

S&P 500 Index

Many of our sentiment indicators have returned to neutral levels as opposed to the bullish levels reached in mid-July. The AAII (American Assoc of Individual Investors) bull/bear ratio, the ISE sentiment indicator, and the Rydex funds beta chase indicators are all back to neutral territory as shown below.

AAI BULL/BEAR RATIO

ISE SENTIMENT INDEX

RYDEX FUND BETA CHASE

Now let's turn to the fundamental and macro economic side. The macro economic numbers continue to come in weak. Also, the ten year treasury bond traded down to 2.95% this week. This is the lowest yield of the year. The bond market is telling us that it does not expect a recovery any time soon in the US economy.

US TEN YEAR TREASURY BOND YIELD

Another sign of economic weakness is coming from the Economic Cycle Research Institute or ECRI. The ECRI has correctly called every recession in the US for the last 45 years. ECRI's most popular indicator is the WLI, or Weekly Leading Indicator. The WLI is closely followed by economists and Wall Street strategist. The WLI is now flashing a warning signal that a double dip recession is coming. ECRI's WLI index - which has a 100% record of calling a recession when it hits negative 10% - is currently sitting at negative 10.7%.

click on image to enlarge

For more on the ERCI click here.

Bottom Line:

With the S&P 500 Index sitting right at resistance, and the economic fundamentals continuing to flash warning signals, we will remove the exposure to equities which we added back in mid-July. Should Friday's unemployment numbers surprise to the upside, we will look to see if the S&P can close above the 1125 resistance area. If so we would look to put some equity risk back into the portfolio. But with a neutral technical backdrop and the continued emergence of downright scary macro economic data we would prefer to err on the side of caution at this time. We continue to worry more about return of capital as opposed to a return on capital.

Stock Price Correlation and the current market enviroment

noreply@blogger.com (Unknown) — Tue, 27 Jul 2010 04:25:00 +0000

A must read that was posted on SeekingAlpha.com earlier today.

A Stock Picker's Market? Not So Much!
July 25, 2010
by David Moenning

One of my biggest pet peeves when listening to the talking heads on T.V. (meaning that I’ve accidentally unmuted CNBC or Bloomberg) is when a guest comes on and talks about this being a “stock picker’s market.”

First of all, for the most part, these guys and gals all run mutual funds and are basically paid to pick stocks. As such, it would seem to always be a stock picker’s market for this crowd. Second, and much more importantly, nothing could be farther from the truth right now as this is most definitely NOT a stock picker’s market! No, research shows that “timing” trumps “selection” these days – and by a very, very wide margin.

In essence, a stock picker’s market would be defined as one where the correlation among stocks is quite low, meaning that there is a wide disparity between the performance of stocks and the overall market. When the correlation is low, a manager can add significant value to a portfolio by selecting companies that outperform the S&P 500.

However, when correlations among stocks are high, a chimpanzee throwing darts at the stock pages of the WSJ (assuming they still print those pages) is just as likely to outperform the market as all the PhD’s and mutual fund stock pickers in the world. In short, when correlations are high, all stocks tend move in the same direction of the market and “selection” doesn’t add as much value.

Stock Correlations at Record Highs

According to the folks at Ned Davis Research, the average correlation among stocks in the S&P 500 over the past 40 years has been approximately 0.45 (a reading of 1.0 would mean that stocks are perfectly correlated to the movements of the S&P 500). And based a quick glance of the data, anything above 0.56 has been considered high in the past while anything below 0.34 was low – and indeed a stock picker’s market.

The problem is today’s correlation reading of stocks to the S&P 500 is 0.82!

Why the exclamation point, you ask? The 0.82 reading is fairly amazing since there has only been one reading higher since 1972 – and that occurred during the ‘Crash of ‘87’ where the computers took anything and everything down about 30% in a matter of a couple days.

Over the nearly 40 years of data, there have only been a total of three readings over 0.80 (including the current reading) and only five reading over 0.67! Thus, the current correlation of stocks to the market is indeed quite rare.

It is also interesting to note that the current reading is ABOVE that seen during the Credit Crisis Bear Market of 2007-09. During this time, the correlations rose from an average reading in the vicinity of 0.56ish to a smidge over 0.80. However, it is important to recognize that both the recession and the bear market are now over. And history shows that after a big bear market, correlations tend to fall, not rise.

Why Are Correlations So High?

There may be several explanations for the correlations being so high these days. First, we’ve just experienced a meaningful correction, during which all stocks were hit fairly hard. Yet, while corrections of -15% or so are fairly normal, correlations of stocks to the S&P over 0.80 are most definitely not. This tells us that something else is going on here.

We believe there are three reasons behind the current high correlations among stocks: The advent of High-Frequency-Trading, the growth of ETF’s, and the globalization of the securities markets. And from where we sit, it would appear that the combination of these three have led to this becoming a singular “stock market” as opposed to a “market of stocks.”

First and foremost, we need to recognize that computerized program trading volumes make up a significant share of NYSE volume. Program trading volumes on the NYSE have been on the rise since 2000 and now account for nearly 40% of the daily activity. In addition, we’ve seen studies showing that High-Frequency-Trading (HFT) now totals close to 70% of daily volumes on all exchanges (note that program trades are likely included in the HFT totals).

Now toss in the explosion in growth of ETF’s, which have become the hedge funds favorite way to play, and it is easy to see that the fast-money crowd is not betting on earnings of a company or sector these days; no, they are
making a directional bets on the overall market on a daily basis – and what easier way to do that than with a nice, easy to use, leveraged ETF?
This “risk on, risk off” type of environment is expanding around the globe as well. NDR tells us that correlations have also increased among the world markets with 44 of the 45 world market correlations rising significantly.

How Should We Proceed?

So, how does one manage money in this highly correlated world? First of all, toss that book on MPT (MPT = modern portfolio theory, which, by the way, was written in 1952) aside. Diversifying across asset classes that are highly correlated tends to be a little like owning 8 buckets of white paint.

Next, unless you are willing to buy only when there is “blood in the streets” you can also forget about the old mutual fund favorite: buy-and-hold. It’s been quite some time since that has worked well for investors. Our point here is that if you are willing to blindly buy in 2002 or early 2003, and in the dark days of February 2009, then a buy-and-hope approach may work great. But for anyone buying since 1998, it hasn’t been such a winning idea.

It seems to us that in an environment where the macro backdrop is a secular bear market and asset classes are highly correlated, good old fashioned tactical asset allocation (something we used to call “market timing” before the mutual fund industry discredited the concept) is the way to go. In short, we believe this remains a buy-and-sell type of market.

The bottom line is we believe that putting risk on and taking risk off is the way to play the mini bulls and mini bears that will likely dominate the scene for the next several years.

Sentiment indicators approachng buy points...but

noreply@blogger.com (Unknown) — Tue, 20 Jul 2010 05:16:00 +0000

THE BULL CASE

One group of technical indicators to which we assign a great deal of importance, are the market sentiment indicators. Historically, when the sentiment indicators show significant pessimism by market participants, it has created a good buying opportunity.
Some of the sentiment indicators we watch are the option market put/call ratios, the Rydex fund family bull fund vs. bear fund flows, corporate insider buying, market newsletter writer sentiment, and also individual investor and consumer sentiment polls. I have added some charts of these sentiment indicators below. As you can see many are close to, if not beyond, the green lines which represent extreme pessimism and thus a possible good market entry point. The sentiment indicators can change very quickly and therefore are not reliable as long term buy or sell signals. But, the sentiment indicators can be good entry point indicators and we use them in tandem with other technical indicators to dictate short term strategy. The sentiment situation is about all we have currently to make the bull case.

INVESTORS INTELLIGENCE BULL/BEAR RATIO

S&P 100 (OEX) PUT - CALL RATIO

ISE SENTIMENT INDEX

RYDEX BULL VS BEAR FUND RSI

THE BEAR CASE

Moving to the bear case, over the last few weeks we have received a string of continuous poor economic data. Much of this macro data suggest an economic slowdown is underway. Let's take a look at some of the recent economic data points.

June ISM, 56.2 , expectations were 59, prior month was 59.7
June Auto Sales, 3.7 mill, expectations were 4 mill, the prior month was 3.9 mill
June Pending Home Sales, -30% , expectations were -10.5%, prior month was +6%
June Factory Orders, -1.4%, expectations were -0.6%, prior month was +1.0%
June Retail Sales, -0.5% , expectations were -0.2, prior month -1.1%
Philly Fed Manufacturing, 5.1, expectations 10.1, prior month 8.0
NY Fed Manufacturing, 5.08, expectations 18, prior month 19.51

We can plainly see a sharp slowdown in the economy in the May/June period.

Another point for the bearish case comes in the fact that the S&P 500 continues to trade below its 200 day moving. We also recently received a sell signal known as a "death cross". This occurs when the 50 day moving average crosses below the 200 day moving average. (See chart below, orange line= 50 day ma, blue line= 200 day ma). We have looked back at the reliability of the death cross signal and although in recent years it has had some failures, but over the long haul it does carry some statistical significance. Had you heeded the death cross signal in early 2008 , you would have avoided a 60% decline in the market.

S&P 500 WITH DEATH CROSS

HOW DOES IT PLAY OUT

The sentiment is so bad that we will probably get another bounce in the market, near term. We may take a small position in the equity ETF's if the market can show some strength over the next few days.

The fact the economy has begun to slow again, along with the failure of the S&P to climb and hold above its 200 moving average does not bode well for any lasting rally. Another noticeable pattern has been the series of lower highs and lower lows in the S&P 500 since the April highs. We would need to trade and hold above the 1120 area to break this pattern. Overall the economic and longer term technical indicators lead us to believe that any rally may be short lived, and we will remain nimble in this difficult tape.

S&P 500 breaks support

noreply@blogger.com (Unknown) — Thu, 01 Jul 2010 19:04:00 +0000

As of the close on Tuesday , the S&P 500 broke key support at 1040. We have reduced equity exposure accordingly and have returned to a defensive stance. The market is very oversold on a short term basis so a near term bounce would not be out of the question. We could see a bounce on Friday if the employment number is not as bad as many analyst and traders predict it to be. We will be looking to trim back exposure to equities further on a bounce in market as the breaking of the 1040 level leaves the S&P 500 vernerable to trading down to it's next level of key support at 950.

Markets trade back to Critical Support

noreply@blogger.com (Unknown) — Tue, 29 Jun 2010 14:10:00 +0000

Euro worries, a China economic slowdown ,and falling US consumer confidence have driven the stock market back to levels of critical support. As I write the Dow Jones Industrial Average is down 261 points at 9876 and the S&P 500 is trading at 1041. We are closely watching the 1040 level on the S&P 500 index and any significant break of those levels will move us back to a defensive position. The market has been extremely choppy and volume has been very light the last few months. Currently our momentum and other technical indicators favor exposure to equities. Many of these indicators turned up on the recent move off the lows. We were seeing some positive internal readings of momentum and participation in the various indexes we follow. A break of old lows would make many of those readings suspect. The rule of trading is to be disciplined and not let emotions dictate your investment decisions. While it would have been very easy to exit our positions over the last few days, we will follow the technical indicators and put emotion aside.

S&P 500 at critical support

NYSE Bullish Percent remains positive for now

Weekly Distribution for all Stocks turning up

Sentiment slightly favors the bulls

Correction May be Over

noreply@blogger.com (Unknown) — Mon, 07 Jun 2010 19:00:00 +0000

The correction that begun in early May has led to 14.5% correction in the S&P 500 index. During this time we experienced the flash crash on May 6th (the DJIA falling 1000 points in a single day before a quick rebound) and have witnessed severe volatility since. While many of our short term indicators hit oversold extremes in late May we did not experience much of a rebound. We took a 33% position in equity ETF's on May 20th when the oversold indicators were at extremes. We reduced that equity exposure to 12% on June 7th as the extreme oversold condition had been relieved and the market still was not exhibiting any signs of a bottom formation. We have since retested the lows in the S&P 500 at the 1040 level, and held. This was the third time we have tested that level, and it has become a level of critical support. The fact that we have held this level in spite of recent bad news on employment, the Gulf oil spill, retail sales, and European sovereign debt woes, suggest that the correction may have run its course. The sentiment indicators are not a favorable as they were just 2 weeks ago, but still show significant pessimism, which is bullish. We are raising our equity exposure back up to 40%. The longer term technical indicators we follow never hit levels that signal total capitulation, but they often do not reach those extremes in bull market corrections. We continue to play this move as a correction in the cyclical bull market that began in March 2009. If the S&P 500 were to break the 1040 support level , we would look to return to a fully defensive position.

Hitting extremes on oversold readings

noreply@blogger.com (Unknown) — Tue, 25 May 2010 16:09:00 +0000

Some of the technical indicators we follow at are now hitting rarely seen oversold levels. Accordingly, we have begun to put some of our cash hoard to work . We have taken a 33% postion in the US stock index ETF's up from 100% cash. Our main concern remains the stability of the European banks, and we continue to follow the situation closely. Currently the fears of European contaigon look overblown, but fear has a way of spreading quickly as we saw in the financial meltdown of 2008 that begun with the fall of Lehman and Bear Stearns. We will keep this in mind and if the technical levels of support are breached we will look to reduce exposure. We are currently looking for the 1040 area on the S&P 500 to hold (the Febuary lows). If we break those levels on a closing basis we may look to lighten exposure , but currently the rewards outweigh the risks of not having some exposure to this market at these oversold extremes.

Mini Crashes and Rebounds

noreply@blogger.com (Unknown) — Thu, 13 May 2010 17:23:00 +0000

We have had a sharp snap back rally from the mini-crash of last week. The question now is, "Do we jump back into the market or wait for a retest?" Much of the data suggest we wait for a pullback before jumping in. Jason Goepfert , who pens for the Sentiment Trader, points out that after the majority of recent steep declines or mini crashes the recovery from the lows was usually turned back at the 62% retracement level. Currently we have rallied 62% from the lows of last week. The charts below show several other mini crash events of the last twenty years. Every rebound was repelled at the 62% retracement level. The recent bounce was so swift most were unable to take advantage of it and get invested at lower prices. If you are looking to put money to work in this market just be aware that the probabilities of a pullback here are higher than usual. We most likely will not get back to the lows but better prices may be achieved with patience.

APRIL 1987

OCTOBER 1989

AUGUST 1999

APRIL 2000

NOW

Willem Buiter, Citi Chief Economist, on Soverign Debt problems

noreply@blogger.com (Unknown) — Wed, 12 May 2010 04:20:00 +0000

Here are some snippets from an interview with Willem Buiter, chief economist for Citigroup, on the sorverign debt crisis. The video (below) of the full presentation is worth watching.

We are seeing what used to be emerging-market crisis in the advanced industrial countries.

There are a few exceptions, countries that are in reasonable financial shape, but they're few and far between. They're the usuals -- you know, the Scandinavians, the Nordics, sort of slightly boring, but solid, right? There is New Zealand and Australia. And that's it.

There are a couple of countries that think they're in good shape fiscally, but only are so in comparison to their awful neighbors. By historical or by absolute standards, they too are in bad shape. Canada, as an example, compared to the U.S., in fine shape. But by any other standard, any country who has 80 percent of GDP general government debt ratio, you know, should not be thumping its chest too vigorously. Likewise Germany. If Germany weren't in the euro area today, it wouldn't be able to get in, because it violates both the debt and the deficit criteria.

So today's best of breed, as they say in the thing, you know, would have only been a possible entry for the "ugliest dog in the world" contest only a couple of years ago. We really are in trouble.

The immediate crisis, of course, has struck Greece, and that's appropriate, because Greece is a class of its own as regards to awfulness of its fiscal financial situation. (Scattered laughter.) It has the second-highest -- possibly the highest, because we can't yet be completely sure about the data, but certainly the second-highest debt-to-GDP ratio, and a massive, recently revised up to 13.6 percent of GDP for 2009, general government deficit, much of which actually is structural.

The U.K. and the U.S. are in bad fiscal shape, and, in fact, they are -- the headline deficit numbers aren't that much smaller in the -- than in Greece. And in fact, the U.K., on the commission's projections, is like they have a higher deficit than Greece or Ireland next year.

But a lot of that is cyclical. In Greece, the cycle is only just beginning. We're expecting another six-(percent)-plus decline in GDP as the fiscal screws are tightened.

As for the United States, Buiter cautions about the risks of U.S. inaction on fiscal discipline in the next few years. He said:

"If, over the next two or three years, all that happens by way of fiscal tightening in the U.S. is the expiry of the Bush tax cuts on the upper quartile of the income distribution, then three years from now the U.S. will have lost its triple-A rating."

FULL INTERVIEW

Correction Underway

noreply@blogger.com (Unknown) — Thu, 06 May 2010 03:57:00 +0000

European debt fears, China monetary restraints, and other issues have finally led to a break in the low volatility run up of the last few months. I have been waiting for this pullback for several weeks. Sentiment levels had reached extremes seen at many other short term tops and the relative strength indicators had also reached levels of elevated risk. The pullback of the last few days has caused the VIX, or fear index, to rise 50% , over 7 trading days. Typically when the VIX has spiked like this ( we are currently 30% above the 30 day moving average..see chart) it has topped.

(click on chart to enlarge)

I am looking to put money that I have pulled to sidelines back to work on this correction. The longer term breadth data along with the new high/new low data and other measures of market health suggest that this down move should only be a correction in an ongoing cyclical bull move. At today's low in the S&P 500 index we had already corrected 5% from the highs. I think we will bounce around and ultimately pullback a little further in the coming week(s) and I will be looking to scale back into positions as we do.

One sentiment indicator that had become worrisome was the Investor's Intelligence percentage of bears. The number of bears in this survey had recently hit a five year low at 15% and as of last week was still hovering at 18%. On this pullback, I would like to see this reading spike back into the mid-twenties to 30% as a sign fear has returned. On a sentiment basis this would create a more favorable entry level.

Shiller P/E Ratio shows stocks expensive

noreply@blogger.com (Unknown) — Thu, 22 Apr 2010 03:58:00 +0000

The Shiller P/E, a price earnings valuation measure based on 10 year trailing earnings and created by Yale professor Robert Shiller, is now at readings that show stocks to be pricey.

According to the Shiller P/E ratio, the S&P 500 is now 35% overvalued.

David Rosenberg, chief economist with Gluskin Sheff, elaborated in today's morning update,

"The April data was just updated and showed the inflation-adjusted normalized P/E, on 10-year trailing profits, expanded to over 22x from 21x in March.
This is not nosebleed territory, but it is expensive; the historical average is 16.4x. So, this implies that the market is currently 34.7% overvalued benchmarked against the historical norm. It would be nice to say that a higher-than-normal P/E is justified by low inflation and low interest rates. But frankly, real bond yields are not that far from their long-run averages; however, equity valuation is, and something is going to give at some point.
Valuation metrics are not meant to be timing devices. Assets, securities, and currencies can stay overvalued for extended periods of time, but inevitably Bob Farrell’s rule number one on the concept of “mean reversion” will come into play. The operative strategy is to buy low and sell high, not the opposite; and to be paid to take on risk as opposed to be paying for taking on the risk. "

Many Indicators hitting extremes

noreply@blogger.com (Unknown) — Thu, 15 Apr 2010 13:43:00 +0000

Many of the shorter term sentiment indicators we follow are hitting extremes. As this momentum driven rally continues to push higher, many traders and investors are finally jumping on the bandwagon. Although it may be very tempting to jump in here, we would avoid adding new positions to your portfolio at these levels.

See chart above From Dorsey Wright:
Looking at the All Equity Fund Overbought / Oversold (OBOS) below, one can see that the average trading band for equity funds is now pushing closer to the 150% overbought territory. In the context of overbought and oversold extreme readings, this current level would rank up there among the most overbought readings in the last 6 years. Extreme readings here are simply a caution to those investors who are seeking to add full positions to their equity investment allocation at this time. The potential for the market prices to pull back down toward the middle of the trading bands has grown here and you can think about adding partial positions and then the remainder when the NAV has a chance to cool down.

From Jason Goepfort: * The number and variety of extremes are too numerous to mention, and we had to leave many out. Like the 2nd-biggest surge in Nasdaq 100 speculative bets by Rydex traders (the biggest was right at the January peak). And the renewed bullishness of individual investors.

Market Seasonality

noreply@blogger.com (Unknown) — Thu, 08 Apr 2010 05:33:00 +0000

Should you sell in May and go away?

We often hear the expression,”Sell in May, and go away.”, but why is this adage so popular and what do the numbers tell us about its worthiness. Yale Hirsch, the publisher of Stock Trader’s Almanac, has done intensive studies on market seasonality. He has found many periods throughout each year where market strength and market weakness occurs much more frequently than a random model would suggest. One of the better known seasonal patterns is that the market performs much better during the period from November through April than the period from May through October. This does not discount that there can be strong periods between May 1st and October 30th. In fact, the 2009 return of the Dow Jones Industrial Average (DJIA) for this period was 18.9%. If you had sold on May 1st of 2009, you would have missed some juicy gains. But, if we go back to 2008, the May through October period resulted in 27.3% decline for the DJIA. Overall for the two year period you end up with a net 13% loss. Over the long run a sell in May and go away strategy has put up some pretty impressive results. Yale Hirsch performed a study going back to 1950. Hirsch looked at the return generated by an initial $10,000 investment during each period, May 1st through October 31st or Nov 1st through Aril 30th. If you look at the table below you will see that the $10,000 invested in the November through April period returned $464,736 or an average annual return of 6.75%. The $10,000 invested only in the period from May 1st to October 31st returned a loss of ($1991), or an annualized return of -0.37%.

(please click on data graphic to enlarge)

Although this strategy is very unpractical for most investor situations, there are several ways to use this knowledge in portfolio strategy. If you have achieved some strong gains in the November to April period it may be a good time to book some profits as we head into May. For those who contribute to an investment plan on a monthly basis, it may pay to hold off purchases until the September and October months which are toward the end of the weak period. These months are also considered two of the weakest months of the year. Purchases made in September and October could be made at cheaper levels than earlier in the weak period. For those who trade options, the weak period of May through October could be a good time to write calls against your positions. This will provide you with some additional income and some downside protection.

Sentiment- More Warning Signs Appear

noreply@blogger.com (Unknown) — Mon, 29 Mar 2010 02:51:00 +0000

I am beginning to see some more warning signs in the daily sentiment data. Both the ISE Equity and CBOE pull/call data have reached levels that can be a precursor to a short term market reversal.

The red arrows on the S&P 500 chart below correspond with the low put-call readings in the CBOE data above.

The 10 day moving average of the ISE call/put data (orange line below) is also at high levels; although not as extreme as the CBOE data.

In addition, Ned Davis, of Ned Davis Research, reported on Wednesday of this week that his firm's so-called "Crowd Sentiment Poll," which is a composite of a number of separate sentiment indicators, had just risen into the "Extreme Optimism" zone. This indicator has risen sharply from the "Extreme Pessimism" zone, just 7 weeks ago.

The MWA Active Equity Strategy is currently 50% invested and 50% in cash. Although the current market rally could carry further; sentiment, relative strength, and other technical indicators suggest that the risk of pullback is high. I will look to put some cash to work on a market pullback, or if the technical data return to more favorable levels.

The MWA Long-Short Strategy is currently hedging it's long stock positions with inverse ETF products.

The MWA Fixed- Income Strategy is currently evenly distributed among the core fixed income ETFs. Ten year rates moved up sharply last week and I am closely monitoring the intermediate and longer term duration markets. If rates on the 10 year US Treasury should go above the 4.00-4.25% zone, a more defensive posture would be in order.

US Treasury 10 Year Yield

Oil Stocks Lagging the Market

noreply@blogger.com (Unknown) — Fri, 26 Mar 2010 17:39:00 +0000

Although the stock market is making new highs daily, and crude oil continues to trade near the top of its recent range and near the 52 week high, I have been noticing many oil stocks that are displaying relative weakness. One would expect, under normal circumstances, that when crude oil and the stock indexes are strong, the oil stocks would also be showing strength. In fact on relative strength basis we have recently seen a break down of the Dorsey Wright relative strength indicator which compares the strength of the oil sector to the overall market. Dorsey Wright goes on to say ,
"This is perhaps more notable in the sense that it is the first RS (relative strength) sell signal from the oil index since we began tracking it (more than 10 years ago)."
The oil sector relative strength signal had been on a buy signal since 8/13/2002 and here are the comparable returns

Return 8/13/2002 through 2/24/2010
DWA OIL Index 197.14%
S&P 500 Equal Weight Index 69.38%

As you can see the oil sector outperformed the S&P by almost a 3:1 ratio when on the relative strength buy signal. The fact that oil index relative strength is now on a sell signal does not mean that you should go out and sell all of your oil stocks. It does suggest that going forward the oil sector may under-perform the overall market, so you may want to move some weighting away from this sector.

Below are the charts for the S&P 500 Spyder, US Crude Oil Future, and several major oil companies. The recent divergence is very apparent. Many charts of the major oils are breaking their intermediate term trend lines, while crude and the S&P remain in uptrends.

(click on charts to enlarge)

US CRUDE OIL

S&P 500 SPYDER

EXXON MOBIL ...... NYSE-XOM

TOTAL PETROLEUM........ NYSE - TOT

DEVON ENERGY........ NYSE- DVN

Stock market rally should be rented not owned

noreply@blogger.com (Unknown) — Wed, 17 Mar 2010 14:38:00 +0000

Some interesting points this morning on the market rally and the economic recovery from David Rosenberg, the former chief economist for Merrill Lynch who is now with Gluskin Sheff.

Remember, the equity market at any given moment of time is one part reality and three parts perception. Our friend, Brian Belski at Oppenheimer was on CNBC the other day and claimed that this was turning into a normal economic recovery. And that is what many market participants seem to believe until they don’t believe it any more. Their resolve has been impressive. But if this were a normal cycle, then:

•
Employment would already be at a new high, not 8.4 million shy of the old peak.
•
The level of real GDP would already be at a new cycle high, not almost 2% below the old peak.
•
Consumer confidence would be closer to 100 than 50.
•
Bank credit would be expanding at a 14% annual rate, not contracting by that pace.
•
The Fed would certainly not have a $2.3 trillion balance sheet
•
And, the government deficit would not be running in excess of 10% of GDP or twice the ratio that FDR ever dared to run in the 1930s.

If this were a normal cycle, then there would be a ‘clean’ 5-6 months’ supply of homes on the market, not the 21 months overhanging as is the case now when all the shadow inventory is included from the foreclosure pipeline.

If this were a normal cycle, then the funds rate would not be near zero and one in six Americans would not be either unemployed or underemployed.

If this were a normal cycle, then mortgage applications for new home purchases would not be down 13.9% year-over-year (just reported for the week of March 12) on top of the already depressing 29.4% detonating trend of a year ago.

But the perception that this is turning out to be a normal sustainable expansion is strong and pervasive, although the reality is that this is just a brief statistical bounce aided and abetted by unprecedented government bailouts and intervention.
While we are inundated with that old refrain about “not fighting the tape”, in our view, this is just a glib excuse to stay long the market because of the herd effect, and to be honest, we heard that same trite rhetoric over and over again back in the spring and summer of 2007.
This is not the time to live in the moment but to plan for the future. It is a time to reflect not what the talking heads have to say on bubble-vision but on what history teaches us in the aftermath of a busted asset and credit cycle. The Nikkei enjoyed 260,000 rally points during its post-bubble era and yet the market is still down 70% from the peak; the rallies were to be rented, not owned.

The Dow in the 1930s saw no fewer than 30,000 rally points that would get investors periodically juiced up that the post-bubble economy was heading back on track from the New Deal stimulus. But go back and you will see that the next bull market did not begin until 1954 even if the ultimate lows in the Dow were turned in 22 years earlier. It was a multi-year tumultuous period that was racked by volatility and manic market performance. The key to success over the long haul was to immunize the portfolio from the massive ups-and-downs, ensure that you were getting paid to take on risk as opposed to paying for taking on risk, and a pervasive focus on capital preservation, dividend yield and dividend growth among blue-chip stable cash flow companies, and income-generating securities, including corporate bonds for those entities that had the capacity to survive.