Monday, April 30, 2012

Guesstimating the Markets {Part III-2009 Redux}


Today is the second scenario I'll offer up on what I think could happen during the rest of 2012.  I'll offer this with the same caveats I discussed last week: 

1. These scenarios are based on what we know today. An unexpected event could throw this whole exercise down the drain.

2. Markets will become slaves to the election in November the closer we get to that event.

3. Do not go trade or invest based on what you see here! Remember the consigliere's maxim, "markets will do what they have to do to prove the most amount of people wrong"!

4. Treat these scenarios as generalities. I have no way of knowing whether the end points will play out the way I am envisioning here and offer these up as a start point for more specific analysis. As an example just because in the chart above we show stocks topping out in May or June does not mean even if we are right on direction we'll get it correct on time.

Scenario #2 {Please note chart change to a weekly view for scale and also note that this chart above is not drawn to scale.}

Markets have several opportunities to break during the rest of the year.  Each time this looks like it will occur, buyers step in and take the markets in a series of stair-step moves to a series of higher highs and higher lows.  The reason for this is that the economy continues to expand at a faster rate than analysts are expecting.  In this scenario President Obama is re-elected but still faces a Republican dominated house and a narrow majority by either party in the Senate thus ensuring that most of his economic agenda will not be passed in a 2nd term.  Markets respond favorably to this event as well as higher than expected S&P 500 earnings by year's end.  in this scenario, economic growth is also expected to increase in 2013.  S&P 500 finishes 2012 between 1600-1800.

I assess the probability of these scenario occurring in some general form similar to what I show above as 15-25%.  This is currently likely the least expected market outcome that most investors & market pundits expect to occur in 2012.

*Long ETFs related to the S&P 500 in client and personal accounts.

On Washington

Washington Post's Robert Samuelson on What Washington Really Does.

I liked this part:  ....."The larger lesson is that, contrary to conventional wisdom, American politics have not become insensitive to the “the people.” In many ways, just the opposite is true. Politicians are too responsive to popular will. The real Washington is in the business of pleasing as many people as possible for as long as possible. There are now vast constituencies dependent on the largesse of the federal government. This is the main cause of huge “structural” budget deficits, meaning that they aren’t simply a hangover from the Great Recession."....





Friday, April 27, 2012

Guesstimating the Markets {Part II}


Today I'll offer up the first market scenario that I have developed.  This BTW is how I rely on the playbook and one of the methods that helps me develop a game plan for clients. Now I don't claim to have any special powers in prognostication about where stocks might be in December but I will rely on over 20 years of experience and study which gives me some feel as to what I think is likely to occur.  The chart above and the other ones I'll show in the rest of this series are different scenarios that I think have the possibility of occurring. A few more things.

1.  These scenarios are based on what we know today. An unexpected event could throw this whole exercise down the drain.

2.  Markets will become slaves to the election in November the closer we get to that event.
3. Do not go trade or invest based on what you see here! Remember the consigliere's maxim, "markets will do what they have to do to prove the most amount of people wrong"!

4.  Treat these scenarios as generalities.  I have no way of knowing whether the end points will play out the way I am envisioning here and offer these up as a start point for more specific analysis.  As an example just because in the chart above we show stocks topping out in May or June does not mean even if we are right on direction we'll get it correct on time.

Scenario #1:
Markets make marginal new highs between now and early summer.  The Summer doldrums set in, a slight slowdown in economic growth occurs and issues in Europe preclude stocks going much higher than the 1420-1430 range on the S&P 500.  After a brief period of chop stocks decline 6-10%.  A rally is capped until markets sort out among themselves who will be the winners in November.  At that point markets resume their rally and end the year somewhere  between 1450-1500.  This scenario gives President Obama 50% odds of being re-elected.

I assess the probability of these scenario occurring in some general form similar to what I show above as 30-50%.

*Long ETFs related to the S&P 500 in client and personal accounts.

Thursday, April 26, 2012

Great Quote!


A fellow named J. C. Parets over at a blog named allstarcharts.com/ had a great comment this afternoon, "The greatest trick the Bull Market ever pulled was convincing the world it didn’t exist." 

JC is correct.  The market is up over 100% since its March 2009 lows climbing the greatest "Wall of Worry" I've seen in my career.  See the weekly chart above.

*Long ETFs related to the S&P 500 in client and personal accounts.

Guesstimating the Markets {Part I}

Last year on June 23rd I published a post that I called If I Had To Guess.  In that post I did a directional guess on where I thought stocks might trade between that date and sometime in October {which was as far out as I could take that chart at the time}.  Below is a reprint of that chart. 

The purple lines and way points indicate the approximate values where the S&P 500 actually traded last year.  The last point marked as 1. on the chart shows the approximate value where the market ended 2011.  It is not drawn to scale as the chart itself did not go out that far back then.  Tomorrow and the next several days I will post some new ideas in a series of scenarios about where the market might go in 2012.  


*Long ETFs related to the S&P 500 in client and personal accounts.

Wednesday, April 25, 2012

Climbing The Wall Of Worry


Every week the folks over at Bespokeinvest.com poll their subscribers on whether the S&P 500 will be higher or lower than its current level one month from now.  While it is too soon to know how the most recent weeks will turn out.  We can see from their sample of this year that the bearish crowd in red has prevailed for most of the year.  What isn't shown is that the three weeks shown where the bulls won out, the market was actually lower, or on pace to be lower a month later!  Also the three weeks in February where investors skewed more heavily bearish, stocks were actually higher one month later!

Bull market has a better chance of moving higher as long as this sort of skepticism prevails.


Long ETFs related to the S&P 500 in client and personal accounts. 

Also go check out Bespoke  sometime.  These fellows do excellent work!

Tuesday, April 24, 2012

Apple By The Numbers9to5mac.com  gives a brief overview of Apple's quarter.  The numbers seem good and as of this writing the stock is moving higher in the after market trading session.

*Long AAPL in certain client accounts. Both AAPL and T are representative components of many of the ETFs we own in both client and personal accounts.


Apple {Is The Bloom Off The Rose?}

I don't for the most part buy individual stocks anymore for either myself or my clients.  Anything I do with these is now limited to the occasional what I consider as a deep-value play, that is something so beaten down and so cheap that the risk reward skews very deeply in my favor.  As such I don't really follow Apple Computer {AAPL}on a day to day basis.  Its short term ups and downs really don't interet me that much.  However Apple is a major component of many indicies that I own for clients.  For example it is nearly 18% of the Powershares QQQ {QQQ} which tracks the Nasdaq 100.  So I find myself out of necessity doing longer term valuation, money flow and fundamental analysis on the company. 

Without getting into the nuts and bolts of what that entails I find longer term value in AAPL.  That being said there has probably been as much negative news about AAPL generated in the financial press{both on line and on television} than I can remember in several years.  In my little informal survey there's more being generated now than even after Steve Jobs died. 

AAPL reports earnings today.  I have no idea where they will come in, whether they will beat "Street" expectations or if they will make some new grand announcement.  For all I know AAPL will blow away the numbers and shoot higher by tomorrow.  But concern has been mounting amongst investors. This morning that concern for the earnings report is pressuring the shares on the open due to  some news out of AT&T {T}.  T reported earnings before the open today and the company said that it activated 4.3 million iPhones in the quarter, down from 7.6 million in last quarter.  Now as far as I know few are looking at the obvious which is that the 4th quarter included the launch of the then new iPhone 4S.  Lower first quarter numbers then might not be a big issue.  But IMHOP APPL has a bigger problem in that at least in the short term the bloom is off the rose.

I am an early adapter to both the Iphone  & Ipad.  I did so because not only are they easy to use but I recognized the trans formative nature of these two little gadgets.  This is an important distinction because I am almost never an early adaptor to anything and I am certainly not a guy that has to have the hot new gadget or toy.  But there was  a "Wow!" factor to both products when they were introduced.  The newer versions, not so much.  My Iphone 4S is essentially a more refined version of the 3 that I bought a few years ago.  Siri was the big new thing in the last phone.  For me Siri works only about half the time.  I bought both the Ipad 3 and the 4 when they came out.  I've looked at the new tablet at least twice.  The new retina display screen while nice, is not the game changer that is making me look at the product and thinking that I have to upgrade right away.  I'm thinking of skipping this cycle and seeing what they show us in about a year.  

Now look, I'm not saying that AAPL is doomed or that there is a problem with its products.  They're going to sell many new tablets and Iphones.  The quality of these is remarkable.  I use mine all the time.  The ability for technological and innovative change these things have the capacity to unleash is mind boggling.  Yes I still think that longer term AAPL, as both a company and a stock, has the potential to do just fine.  But you can't always follow "Wow!" with more "Wow!".  In the least it eventually doesn't happen back to back and right away.  I think that is where AAPL is right now.  Oh and did I mention that the stock is up nearly 45% since December?  

My guess is that AAPL reports a pretty good quarter today and the stock has a pretty good day tomorrow.  My other guess is that the stock is going to need some time and space now to digest that big move its just completed.  Probability suggests that AAPL is going to need to build a base now for a bit.  It needs time for the earnings to catch up with the move.  The next big move I think will likely come when the "Wow!" factor returns.  In that regard the Iphone 5 is rumoured to have a release date sometime in the fall and Aaple TV is supposedly right around the corner.

Stay tuned.......

*Long AAPL in certain client accounts.  Both AAPL and T are representative components of many of the ETFs we own in both client and personal accounts.   

On the lighter side of things check out this AAPL commercial spoof where Samuel L. Jackson replaces Siri on the Iphone.  {Warning! Strong Language!  Not suitable for children and is definitely not something you're going to see me post as a video on this blog!}

an tSionna {4.23.12} Nasdaq Version


Chart of the Nasdaq composite index.  Nasdaq stocks are large components of many of the ETFs we own for clients and personal accounts.  As a reminder you can double-click on the chart above to make it larger.

Monday, April 23, 2012

Jeff Saut: Great Piece of Investment Advice

Why the Absolute Price of a Stock is Meaningless.  Chief thought and quote, "You should sell when you wish you had sold sooner, never when you think the top has arrived."



an tSionna {04.23.12}


Chart of the S&P 500 ETF SPY.  We are becoming over sold but not quite there yet.  Also closing in on some pretty well defined short term levels of support.

*Long ETFs related to the S&P 500 in client and personal accounts.

Friday, April 20, 2012

Levon Helm

Levon" Helm American rock n roll legend best known as the drummer vocalist for The Band passed away yesterday.  Helm was influenced by all the music percolating in the deep south in the 40's and 50's that eventually fused into what many of us grew up knowing as Rock & Roll. 

Some of the Band's well known recordings were "Up on Cripple Creek", "Ophelia" and "The Night They Drove Old Dixie Down".   Helm passed away yesterday from cancer 147 years and 10 days removed from Robert E. Lee's surrender at Appomattox Couort House.  Here's the Band performing "The Night They Drove Old Dixie Down".  Godspeed Levon.

For Your Consideration {04.20.12}

-Bespoke charts showing that market PEs across different sectors on a trailing basis have essentially remained unchanged over the past year.  This even after the rally we've seen this year.  This is largely because earnings have continued to increase.  See charts here.  Also see from Seeking Alpha Are- US Stocks Cheap Based On 12 Month Forward PE's

-Monthly Returns During Election Years.

-Epic Chinese Power Struggle-Market Watch

-http://Retail Stock Ownership At Lowest Llevel Since 1998. Seeking Alpha  {You know my opinion on this.}

-Opinion Journal's Peggy Noonan America's Crisis Of Character

Thursday, April 19, 2012

Market Confusion

Confused about the stock Market? You are not alone.  Great article from over at A Dash of Insight.  "Notable quote:

"Even the pros are struggling to get a handle on this market. Readers know that I love Art Cashin. A good friend gave me an autographed copy of his book. I have been reading his daily wisdom since I started in the business in 1987. He really does have the pulse of the NYSE floor. When Art says that the normal yardsticks are not working, we should all pay attention."

an tSionna {04.19.12} Gains Come In Spurts.


One of the things we've discussed a few times in the past year is the fact that money has continued to leave equity mutual funds and most of it finds its way into bond funds. {Most recent comment on that is here.} Now some of that money may be going into ETFs, but for the most part it's left the market.  If it's leaving because people have had it with the markets or because they've decided to do different things with the money that's an investment decision.  I've long thought that the greatest competition the markets may have the rest of this decade is people in their early 50's to mid-60's  looking at the Florida, Texas and Arizona markets and deciding that they'd rather take the money they could put in stocks and buy a retirement place while prices are cheap. 

But I also know that a lot of that money is parked in cash waiting for the moment when it's right to get in.  Put away the argument that this cash has missed a pretty good move, the bigger point to be made is that stocks when they move, move in chunks.  They seem to break out power forward for a few months and then consolidate.  That's been the pattern since the late 90's.  Unless you have a system that signals you to go all in or all out and you consistently stick to that system then money that sits on the sidelines probably never gets in. 

Earnings

According to CNBC so far 77% of companies reporting are beating earnings estimates.

Wednesday, April 18, 2012

Dick Clark:


For now Dick Clark, so long and God Speed!

Gasoline


You wouldn't quite know it yet in the Chicago area as we always seem to have the highest priced gasoline in the country.  However in the rest of the USA the price seems to be moderating a bit.  A potential wind at consumers back perhaps and also part of the reason that retail sales maybe have been better recently.  I suspect weather and lower heating costs may have also played a part in this.

Link:  Gasbuddy.com

Tuesday, April 17, 2012

Tax Day: Who Pays What.

Today is tax day or in my case, tax extension day.  In honor of the event let's take a look at who pays income taxes and how much?  The data is offered as data and not the starting point for somebody's ideological or political agenda.


Tax Year 2009

Percentiles Ranked by AGI:  {Note: AGI is Adjusted Gross Income, Note: AGI is Adjusted Gross Income.  Source: Internal Revenue Service}


Percentage of Federal Personal Income Tax Paid



-Top 1% of all taxpayers had an AGI threshold of $343,927 and paid 36.73% of all Federal personal income taxes.

-Top 5% had an AGI threshold of $154,643 and paid 58.66% of all Federal personal income taxes.

-Top 10% had an AGI threshold of $112,124.  They paid 70.47% of all Federal personal income taxes.

-Top 25% had an AGI threshold of $66,193.  They paid 87.30% of all Federal personal income taxes.

-Top 50% had an AGI threshold of $32,396.  They paid 97.75% of all Federal personal income taxes.

-Bottom 50% had an AGI threshold of  less than $32,396.  They paid 2.25% of all Federal personal income taxes.

an tSionna {04.17.12} Apple


I've received a lot of questions about Apple recently {AAPL} so I thought I'd publish a chart on what I'm seeing.  Weight of the evidence and best guess suggest a period of consolidation.  If you want a way to bring this down to earth from an analytical perspective, take out the 0.  That is take a 0 off the last digit.  A stock trading between 50-60 doesn't seem as scary as one trading between 500-600 but the percentages will remain the same.

*Long AAPL in certain client accounts.  AAPL is a significant percentage of the assets of certain ETFs we own for client accounts.

Monday, April 16, 2012

an tSionna {04.16.12} Energy


Here's that chart of energy I promised you.  I'm showing you a chart of the Ishares Dow Jones US Oil Equipment ETF {IEZ} because it has some of the big boys in oil equipment.  For example, according to Morningstar, Schlumberger {SLB} is close to 19% of this index and Halliburton {HAL} is another 9%.  With stocks up around 9% for the year, you can see how this has significantly underperformed in 2012.  In fact what you can't see in this chart is that this ETF and the major stocks in its index are all trading at levels last seen in December 2010.  Will have to do some work on the group this week as some of these names are beginning to look cheap.  I understand the issues with oil and natural gas but I'm wondering how much of this is discounted by now in the stocks.

*Long IEZ in many client accounts.  Long HAL as a legacy position in certain client accounts.

Friday, April 13, 2012

Born Free


Nice commercial play on "Boomer" nostalgia.  My kids are all too young to remember Elsa the lion cub but I'll bet Land Rover's target audience is not!

One Final Thing-Energy

We flagged back in Mid-March that energy stocks had become a red flag, diverging from the market uptrend then in place.  Energy is one of the worst performing sectors so far in 2012.  A lot of that has to do with the collapsing price of natural gas.  The ETFs though are beginning to look washed out.  We'll publish a chart of this sometime next week.    There is a fascinating story about energy now in the US largely masked from the average person by the rising price of gasoline.  We'll try to flesh this story out in near future but in the meantime keep your eyes on these companies in the weeks ahead!

*Long energy ETFs client accounts.  Long certain energy stocks in legacy accounts. 

PreMarks-Friday the 13th Edition

Markets are set to open to the downside, capping the worst week for stocks in 2012.  Disappointing Chinese GDP numbers are mostly being blamed for the sour action but I still think that what we are trying to do is work the markets off of an intermediate and longer term over bought condition. 

We raised our shortest term view to NET MARKET POSITIVE while leaving the intermediate view at NET MARKET NEUTRAL in order to reflect what we were doing in the actual world of money management.  I would also note that nearly 80% of the money that we invested earlier this week was for new clients or assets that have been added to accounts so far in 2012. 

Stocks in general are up 2-3% since that post and that colors me less bullish in the very short term although I will not change our view quite yet as we are not yet over bought via our shortest term measurements.  What I think stocks are in the process of doing is carving out a range where they are going to trade for the next few weeks or months.  We will need further information during earnings season to determine yet whether there is some sort of top in for a longer period or if this is just the pause that refreshes.  What we are beginning to get a sense of though is that there is now a definite band of resistance about 2-4% points higher in most major indices and stocks and that could prove to be a hard barrier on the upside in the near future. We will look for earnings season to provide some clarity as to this future direction in the next few weeks.  

Irrespective of the short and intermediate viewpoints I still think stocks have the potential to advance by the end of the year.  We'll pick that point up next week in the Q&A.  After that I'm going to expand the series to discuss the advantages of ETFs and how we use them in our portfolio strategies.  

Thursday, April 12, 2012

For Your Consideration {04.12.12}

From A Dash of Insight:  Being a trader vs. being an investor.  Chief quote:  "Understanding your objectives and time frame is essential to market success. We often have completely different postures for our investment and trading programs. If you do not distinguish between trading and investing, it is easy to get caught in a Twilight Zone where you are always doing the wrong thing!"

Maybe this recovery isn't as bad as many suggests.  See Econbrowser.com


From Smartmoney.com:  The coming US manufacturing boom.  Chief take away quote: "Investors who have favored emerging markets like China in recent years should pay attention to another growing manufacturing center. It boasts plenty of skilled workers; cheap and abundant energy; stable institutions; and a large middle class that likes to shop.  It is the U.S., where a long industrial decline might be in reverse."

How strong the winds inside a tornado must be in order to hurl a semi-trailer.  Worth a click here over at Wired.com  just to watch the video of the recent tornadoes near Dallas throwing objects around like some spoiled child! 

Wednesday, April 11, 2012

A Follow Up

Today's purchases reflects the most buying I have done in the markets since late last year!

an tSionna {04.11.12}


Here's where we stand based on yesterday's close.  Markets are currently up around 1% as I'm writing this.  In our Q&A {Part II} we thought markets had a vulnerability down to a level as represented in the green box in the chart above.  That equates roughly to 1320-1360 on the S&P 500.  I didn't think we would get there as quick as we did!  That move in such a short period of time has put a few things back to levels we find attractive albeit mostly for new money that clients have given us this year where therefore these clients are under invested.   Where we will end up over the next few weeks is any body's guess but we'll take our clues by how markets react to the broken trend line pictured in the chart above and how markets react to what is clearly defined resistance now at the market highs from last month.

To reflect what we have been doing recently for clients we will move our shortest term rating back to NET MARKET POSITIVE while leaving the intermediate term rating at NET MARKET NEUTRAL.  This again reflects that for the most part what we are investing today is new money.  These are accounts where we are under invested relative to our investment strategies and to the unique risk return aspects of these individual clients who have signed up with us in the past few months or clients who have given us new money in 2012.  The markets have given us little opportunity to put this money to work this year for these clients and we will use this pullback to our advantage to add some exposure to assets we think have reached attractive levels.  You can go here  for a definition of what these terms mean.

One final note.  I'm hoping to get back to the Q& A to finish up what I think could happen to the markets going forward this year tomorrow.  But the rest of the week is lining up to be somewhat hectic so the rest of this might get pushed forward to next week.

*Long ETFs related to the S&P 500 in client and personal accounts.

Tuesday, April 10, 2012

Waiting......

"It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon."
           From Reminiscences of a Stock Operator,  Edwin Lefevre {1923}, a thinly disguised biography of Jesse Livermore.

Correction So Far.

S&P 500 is down about 60 points or just a bit over 4% from its high on April 2nd.
Nasdaq started rolling over at the end of March.  It has shed 127 points or also about 4% since then.

*Long ETFs related to the S&P 500 in client and personal accounts.  Long certain Nasdaq related ETFs in certain client accounts.

Market Corrects.



People all of a sudden are a bit more nervous!
This is a 60 minute chart going back to early March.

*Long ETFs related to the S&P 500 in client and personal accounts.

Q&A & an tSionna Banded Together!




Two charts that reference the statistical period of weakness that we typically experience between April and sometime in the fall {Say mid-August to mid-October}.  There is no hard and fast rule when this period begins and when it ends.  Nor do we mean by statistical weakness that stocks must go down.  I think a better way to understand this period is to say that this seasonal period is a time when equities tend to struggle.  Often stocks will simply be mired in a trading range.  Stocks usually have one rally between Memorial Day and sometime after the 4th of July before finally settling into the summer doldrums.

Now there is no law that says this pattern has to hold.  In fact we highlight in the monthly chart above the years when this has not worked.  But this pattern can be verified by looking at chart patterns going back since the 1920's and therefore we have to use it in our probability calculations about market activity in the coming months.  Probability indicates that there will be one very good buying opportunity in the weeks and months ahead.  We also discussed a few days ago here why we think these patterns occur and work.

*Long ETFs related to the S&P 500 in client and personal accounts.

Monday, April 09, 2012

Q&A {Part IV}

The markets seem to have had a harder time of it lately.  Your thoughts?

Well as I noted on Friday and as of this writing, futures are indicating disappointment with last week's job's report which came in lighter than expected.  Now for all we know by today that will have been explained away and markets will have turned around.  I mentioned last week, the persistent bid that has hid just underneath stocks this year so it could be that those buyers materialize if the market opens down hard today.  For us though it comes back to seeing what the playbook says and then executing our game plan. 

The game plan is best defined as a tactical and strategic allocation of client assets based on what the playbook tells us has historically occurred. It gives us a direction for our various investment strategies and is further refined to the specific risk/reward parameters of our various client groups. There are times that the game plan is implemented across the board in all client accounts.  Other times it is specific to one of our investment strategies.   As I indicated last week I think that stocks are vulnerable here to a 4-7% correction.  What our plans are at this juncture is to identify specific levels in our portfolios where we might raise a bit more cash.  There are also some specific rotational strategies in client portfolios that we might take advantage of if the opportunity arises.

Can you give some examples?

We generally don't discuss individual securities as it relates to specific client accounts or strategies on this blog.  Anybody who wants to know what some of these might be can contact us or better yet, hire us if they are not already clients!  In terms of raising cash we have certain limits set in regards to the markets and our securities.  If the market's trade to these levels we will review what we see and could possibly raise some more cash.  I can also tell you that we have identified a few of the ETFs we currently own where we feel clients might be better served by switching to a different ETF of the same investment class.  We are in the process of implementing one of those switches now.  We believe that the markets are presenting us with the opportunity to sell out of the current fund and will perhaps give us an opportunity to purchase the targeted fund at lower prices in the coming weeks and months.

Why would you do this?

We monitor an extensive base of ETFs and we believe that this new targeted fund offers a better fit for our client portfolios and strategies due to its lower fee structure and its higher degree of diversification.

Anything else you would like to discuss?

Yes.  I think the markets have the potential to be higher by the year's end and I'll go over why I think that later in the week.  Tomorrow and Wednesday we'll take a look at what the charts are telling us.

*Long ETFs related to the S&P 500 in client and personal accounts.

Friday, April 06, 2012

An Interruption

We interrupt our series of interviews by noting that the jobs report number issued by the Government this morning was basically punk.  Futures for Monday are showing right now basically a 1-2% decline across the board.  Now Monday is a long way from today especially when it comes to financial markets.  But the news so far does not auger well for Monday'w open.

Q&A {Part III}

Today is part III of our Q and A. 

You place a lot of emphasis on market seasonality.  Why is that?

We have touched on this in past client letters here   here  and here.  Basically  there  are seasonal variations or patterns that come into play in most years. The study of these bullish and bearish phases means that I accept as a given that stocks at some point this year will experience a sell off between 8-20%. This is simply the normal course of how markets behave in most years. It is part of the seasonal variation of how in a normal investment year stocks will cycle between bullish and bearish phases as measured by money flows.  While market declines can come at any time, statistically stocks are most prone to major sell offs in between the months of March and October.

As I've said in the past {see link above} one of the reasons I think this pattern works is the philosophy behind how most of what we refer to as institutional money is invested. Institutional money is a generic term for large institutions such as pension plans and large asset managers such as mutual funds. It is managed on a relative basis usually tied to a specific benchmark and is also managed so as to not give up the assets. By relative basis I mean as an example in a market that loses ten percent, institutional accounts that go down only 8% are said to have outperformed their peer group. That influences how their portfolios are set up. Institutions generally start a year with similar economic and valuation expectations for stocks.

Institutions have a very strong incentive to be heavily invested in the early months of a new year. They are afraid to fall too far behind their benchmarks. Their thinking is similar to that of a baseball manager at the beginning of a long season. The manager knows you don't win a pennant in April but you can lose one during that time. As the year progresses and in particular if stocks have advanced in the first few months, equities begin to look less attractive on year end expectations. Stocks will either need unexpected positive news {i.e. better than expected earnings news or higher economic forecasts for example} or prices will begin to stall out.  One of my concerns right now is that the markets have had such a strong move that much of the economic expectations are already priced into stocks.  If companies don't excessively move the needle higher on earnings and sales going forward than investors, especially those with a shorter term horizon,  may begin to lock in their profits.  

Stocks will fall of their own weight unless there are marginal new bidders for their shares. Summer is typically a down period for Wall Street as the news flow often dries up {unless it’s bad news. It is amazing how many international crises begin in the late spring/summer period. Both World Wars, the Korean War, 9/11, the First Gulf War and the 2008 banking crisis are examples of this.}

Summer is also when analysts begin to fine tune their expectations for stock prices as clarity begins to enter the picture about year-end economic activity. Stocks will also begin to discount any lower revisions or negative economic news during this period of seasonal weakness. Once this discounting process is completed stocks will usually then begin to rally sometime in autumn. The cynical amongst us also know that the only print that matters for most money managers is the one shown when the market closes on December 31st. To put it simply Wall Street wants to get paid. So there is a strong incentive to boost share prices during the 4th quarter of the year.

So where are we in this yearly investment cycle? 

We are on the verge of entering this more seasonally weak period.  Again I would stress that there has been this strong underlying bid for financial assets all year.  It could be that the seasonal pattern this year looks similar to 2009 when there was never really an opportunity to use pull backs to your advantage.  Stocks that summer I think never saw more than a 4% pull back.  2009 also saw markets recovering from the worst of the 2007-08 bear market and they were  more undervalued then than they are now.  It is also possible that economic growth will be better than most economists are expecting.  That has been the case so far this year.  As an example of perhaps a better economy, take autos.  Car sales are a pretty good barometer for how the consumer is feeling as they represent a large discretionary purchase that can be usually be put off for a significant period of time.  Car companies are seeing very strong US sales.  People are less likely buy cars when they are worried about their own personal finances.  

We see a lot of headlines about the high price of gasoline.  Your thoughts?

The price of gasoline has experienced a large runup this year.  But domestic consumption is actually declining to the point where we are actually net exporters of gas.  I think this has a lot to do with cars that are getting better gas mileage and the fact that people, particularly those that live in large urban areas may be driving less.  Also the mild winter may take some of the sting out of these increases.  I went almost two weeks in March where the heat never ran in my house.  March is usually the fourth highest month of natural gas useage for me.  My heating bill was nearly $150 dollars less in March than last year.  That pays for a lot of that gas increase.  Also this may be on the verge of stabilizing.  To that regard I'd note that energy stocks have not really participated in the rally this year.  We discussed this back in mid-March.

Thursday, April 05, 2012

Q&A {Part II}

Today is day two of our Q&A series.  Yesterday we discussed the changes to our market ratings back in March.  Today we will go over what prompted us to make those changes. 

Let's circle back to one thing from yesterday.  Do your market changes imply that equities will decline?

No that is not what I am saying.  As I noted yesterday if you took our changes as some sort of timing service than you would have lost out on a pretty good move in March.  I have no idea where stocks will be a month, six months or even a year from now.  Nobody else does either.  If they say they do then they are lying.  I use an approach that weighs all the evidence we see and then assigns a probability value to a certain event or series of events.   First let's define what I mean by probability.  There are books written on probability theory and financial analysis but here we will simply define probability as the chance that something will happen. We take these probable outcomes and apply it to our client's investment strategies.

Every investor should have a long term investment strategy. For my clients this comes by understanding their unique risk/reward criteria and then incorporating that into one of our different investment disciplines. Each of these strategies is based on something I call the playbook. The playbook is situational analysis based on historical market results. We study money flows along with the disciplines of fundamental and valuation analysis to see how markets have responded to similar historical events. The playbook gives us different scenarios regarding current market activity and it comes from understanding probabilities in the following disciplines.

Fundamental analysis:  Here I balance out various factors such as economic growth, government policy, corporate and sector analysis to derive where we are in the investment cycle.  Currently I think we need to weigh an economy that is definitely improving with some of the fiscal drags that are still weighing it down.  The housing crisis, European debt issues and high unemployment are three issues that come to mind.  Currently I still believe that the economy has the potential to grow between 2-3% this year.  It is unclear to me at this time how much of this is now factored into the move we've seen this year which leads to the 2nd leg of our analysis....

Valuation:  In our 1st Quarter letter to clients I discussed a valuation analysis that put year end 2012 valuation potential for the markets between 1350 and 1450 on the S&P 500.  I believe that economic growth in the 2-3% range this year supports that range and I will discuss sometime next week why I think markets have the potential to trade higher than that by the end of the year.  But I am also aware that the S&P 500 ended the 1st quarter within 1% of our midpoint analysis and is about 3 percentage points below our 1450 range.  On top of that I have to factor in the 25% rally we've seen since last fall and you begin to get the feeling that maybe we've come to far to fast.

Money Flows:  All of our indicators in all of our time frames are flashing overbought and have done so for months.  Some of the other indicators such as percentage of stocks trading over their 40 and 200 day moving averages are at levels that have historically signalled overbought levels.  When I add all of this up it simply signals that more caution is advised.  Put it this way.  Last summer when we were gingerly sticking a toe back in the markets we encountered a lot of disbelief about that stance. In the short run {meaning in a few weeks to a few months} those who may have questioned that stance were correct.  However it is some of these positions that we have been scaling out of the markets in the past few months, many of these sales are for nice profits.  The fact that there is the same ambivalence now to selling as there was then to buying is to me a tell on investor sentiment which I think now is perhaps leaning too bullish.   When I add all these factors together, I get a market where the weight of the evidence says more caution is advised.

So are you saying the market is overvalued and headed for a correction?

Not necessarily.  As I said before I think stocks still have the potential to move higher later in the year but I also think we are in a period now where stocks will have to prove themselves and are now entering a "show me" phase.  We're likely to get a clue on where we may be going in the next few months by what kind of earnings reports and guidance that corporations start to give as they report their first quarter earnings.  Also remember that stocks can correct by price {a market decline}, time {a churning phase where neither the buyers or sellers seem to have the advantage until price discovery catches up with economic and corporate realities} or both.

If there is a correction how deep could it be?

Well that's a question to which nobody can actually know an answer.  Sometimes corrections feed on themselves and markets overshoot to the downside.  However, probability and historical evidence suggest that stocks could be vulnerable to a 4-7% correction.  If that would occur then from their most recent highs stocks look to be vulnerable down to between 1320-1360 on the S&P 500.  Now I am not saying that is going to occur.  For one thing there has been a persistent bid under the markets for months.  I think there's the possibility that all these trillions of dollars sitting in money market accounts earning nothing just might be enticed to come even a little bit back into the markets if we would get some kind of correction.  So while I think it is possible to trade down to those levels it also might not happen.  There is also short term support at both the 1360 and 1320 levels by our work.     

One final note, we are closed tomorrow in observance of Good Friday.  

*Long ETFs related to the S&P 500 in client and personal accounts.

Wednesday, April 04, 2012

Q&A {Part I}

Back on March 6 in order to reflect what we had been doing for client accounts we lowered our market ratings to NET MARKET SELL on a short term basis and the intermediate rating to NET MARKET NEUTRAL.  You can go here  for a definition of what this terminology means. I had a lot of questions about this change, particularly in an environment where stocks have done so well.  I promised to do a Q & A regarding these changes.  Unfortunately life in the way of work, client meetings  and a root canal conspired to keep me from getting this done.  Better late than never I say so today through early next week I'm going to try to answer some of the questions that have been raised in an Q & A forum. 

What do these rating changes mean?

Our changes in ratings reflect what we have been doing in client accounts on a net basis. These are not market timing calls. These moves largely reflect the very overbought nature of the markets and the fact that we have had such a strong move since last fall.  I still believe that stocks have the potential to move higher between now and the end of the year but it seems that some sort of pause is in order.  We are guided by what the game plan and the playbook tell us.  Both of these are telling us that a more defensive posture is warranted at this time.

How have markets done since you changed your rating?

Since we have made these changes on March 6 the S&P 500 is up more than 5% and the Nasdaq composite has advanced close to 7%.  Although as of this writing futures indicate a much lower opening for stocks.  {Please note that we are long ETFs related to the S&P 500 in client and personal accounts and ETFs related to the Nasdaq in client accounts.}

So in essence you have been wrong in a market call? 

That would be correct if these rating changes reflected some sort of market timing mechanism.  Remember these reflect what we have been doing in client accounts.  Equities represent risk in the sense that they can decline in value.  Now we can remove much of the issue of single stock risk by focusing primarily on Exchange Traded Funds {ETFs} but ETFs do not shelter accounts from market risk.   You can mitigate that risk by hedging accounts or by raising cash.  Raising cash for most of our clients is the most prudent risk management tool we have.  We began the year pretty fully invested and held that position for most of the winter.  At the beginning of March we began to see some signs that the market was reaching levels on our money flow basis and by valuation that probability indicated a more cautious position.  As such on a net basis we have been sellers in order to bring down the risk levels on accounts.

Can you give an example of what you mean by bringing down risk levels?

In our more aggressive strategies we went into the beginning of the year on average on a net basis with cash positions between 5-10%.  We have raised cash on a net basis in these accounts on  average to between 8-12%.  We have therefore participated in the move in March but have chosen to do so with less risk exposure. 

Tomorrow we will continue this series by taking a look at what our indicators have been saying.

Tuesday, April 03, 2012

an tSionna {04.03.12}


Current update on the Nasdaq 100.  Nice channel!

*Long ETFs related to the S&P 500 in client and personal accounts.

Monday, April 02, 2012

Earnings PE


Chart of the Day  looks at the stock market's PE multiple:

"Today's chart illustrates how the recent rise in earnings as well as recent stock market action has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s), surged even higher during the dot-com bust (early 2000s), and spiked to extraordinary levels during the financial crisis (late 2000s). As a result of the continued surge in corporate earnings the PE ratio remains at a level not often seen since 1990 despite what has been a significant upward trend in stock prices so far this calendar year"

My comment:  This rise in earnings and the current low valuations of stocks overall explains why even though I think it is possible that we will see a correction at some point and while I think short term stocks are fairly valued, I think markets have the potential to be 5-10% higher by year's end.  Note that while there is potential for gains into the end of the year, there is no guarantee that will occur!


*Long ETFs related to the S&P 500 in client and personal accounts.