Archive for May, 2010

More On The 200-Day Moving Average

Sunday, May 9th, 2010

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In the May Investment Commentary, I wrote about the importance of the 200-day moving average and the fact that the market had gotten way ahead of itself by moving too far from the 200-day moving average.

I thought today, you might like to see that point illustrated. This chart, which I’ve shown in the past and annotated with circles around the times when the Relative Strength told us a turn in the market was coming, also shows you market movements relative to the 200-day moving average.

You can see that the market always returns to the 200-day moving average. Its a pretty big deal when it crosses the 200-day, as most times that is a signal that a major change in the complexion of the market has occurred – from bull to bear or vice versa.

In looking at the chart, you can see that we are close to touching the blue line with the current market movements. It is impossible to know if we will actually get all the way back to the line, around 1097 on the S&P 500 Index from the current 1110 level – that represents only a bit over 1% downside from here. If this bull move off the March 09 lows is to stay intact, we may have seen the low in the market since we are so close to the 200-day average.

My gut feeling is that we will get a rally on Monday based upon the IMF rescue plan for Greece that was approved this weekend – we may or may not close up, but after the big down days we’ve had, with the S&P 500 down 6.4% last week (yes, it falls within the 6% to 8% correction I thought we’d see), we are due for a bit of a rally and to make some money on the positions we added last week.


Click here to watch Easy Rider

Return of Trivia! This December 1969 movie was the explanation point on one of the biggest years in our history. Can you name some of the seminal events of 1969 that changed our country? I’ll give you the easy one: Man on the Moon. Here’s a clue for a few others: Martha’s Vineyard, Helter Skelter, Let It Be, and “I Am Not a Crook.”

Enjoy the rest of your weekend and I’ll be back with more on the markets.

Mark

May Investment Commentary

Saturday, May 8th, 2010

Below is the investment commentary that is being sent to clients with their April month-end statements. Those of you that are readers of the blog but not yet clients would not otherwise receive this, so I like to put in on the blog so you can see one of the value-added services we provide to clients.

Have a great weekend!

Invest What You See, Not The Dogma You Believe

The title of last month’s Investment Commentary was “Over-bought, Over-extended, Over-hyped” and in it I was giving you my thoughts on why the market was set to correct 6% to 8%. Little did I know that it and more would happen this past Thursday.

If you look at the chart at the end of this Investment Commentary, you will see that I have drawn two boxes on the chart of the S&P 500 Index. I drew the box at the top 10 days or so ago and discussed it on our blog (see the cover page for instructions on how to access the blog), saying that a market top is a process, and it sure looked like we were in the process of topping out. I also explained that if we broke out of the box in a downward direction, we would likley see the market correction begin.

I got a couple of emails from blog readers telling me that the market was just pausing before the next leg up and that I was not too smart for having been raising cash over the past six weeks because I was missing the greatest rally in the market since 1939. They told me that all of the analysts on the news were bullish and that I was wrong in my conclusion. By believing the dogma they heard on TV that the market rally would continue without correction, simply because a famous TV journalist said so, instead of believing what they could to see simply by looking inside the box on the chart, they made an all too common mistake. You always invest what you see, not the dogma you believe. It’s the same reason you never invest based upon your political belief – it juist never works out.

The second box on the chart is what I’ve been describing to the blog readers as the “buy zone.” My plan, which we’ve been executing, has been to redeploy the cash we’ve accumulated once the stock market made it back to that level in the market. Why is that box important? Because it represents the confluence of the 200-day moving average, the gap down during the January correction, and the cross cutting 50-day moving average through the January correction and February recovery. In the analysis of investor sentiment that we employ, moving averages are a key component to understanding where the market is going. Investor sentiment had gotten way to complacent and stock prices had moved too far away from the 200-day moving average. Whenever that happens, we always have some level of reversion to the mean – usually not all in one day, but we always have it. The further away market prices get from the 200-day moving average, the more complacent investors get and the more risk they are willing to assume in the belief that the market will go up forever.

In our 2010 Forecast, I wrote about the fact that we would likely be in a trading range this year after the huge rally off the March 2009 post-crash lows. I noted that the strategy to successfully manage a portfolio in a trading range market is to raise cash when you get to the top of the range and redeploy that cash when the market pulls back. In that way, you are protecting gains and reinvesting at lower prices. It gets hard to stick to the strategy when you hear all the hype on TV and see people increasing their stock market allocations as you get near the top of the range – while you are doing the exact opposite. However, ultimately it pays off.

During Thursday’s big drop and Friday’s further weakness, we were buyers during the times when the market moved into the buy zone. If the market rallies, we will feel good that we bought several million dollars of stock at those times. If the market falls through the buy zone to below the 200-day moving average, we will also feel good that we still have a signficant level of cash on hand that we can deploy in the next buy zone, which we will determine when we see it.

Statement Format Changes

We are in the process of updating our statement format to hopefully give you some additional insight into how we manage your portfolio.

We previously told you about our investment themes for 2010, just as we have for many years prior. Unfortunately, it was difficult for you to see those themes in action because our reports were not structured to communicate that information. That has changed! You will see following this Investment Commentary an Investment Theme Glossary that provides a very short explanation of each of our current themes. When you get to your holdings, you will see that the assets you own are now listed by the Asset Class (Equity/Fixed Income/Cash Equivalent), then by the Investment Type (Stock/Bond/ETF/Fund), and finally by the theme in which we believe the asset adds value to your portfolio.

This is the initial unveiling of this format, so if its not completely perfect, just give us a bit of time. We will be working out the kinks in coming statement cycles. Sorry 401k and Simple Plan clients, this change won’t be of any use to you.

As always, we thank you for your business! If you ever have questions, please do not hesitate to contact us as we always like your feedback.

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Early Sell Off – Buying Opportunity

Friday, May 7th, 2010

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Just a quick update on this morning’s activity. We had an early sell off that sent it into our buy zone (see the red tail on the candlestick that extended into the purple box on the chart) that I discussed in an earlier post. I used the opportunity to pick up some Altria with > 6.75% yield.

The volatility will be our friend over the next several days, more than likely, so I will keep you informed as we take advantage of it or as things change to impact the market.

Mark

Stock Market Coughs Up A Lung

Thursday, May 6th, 2010

S&P 500 Index

Look at that chart. I haven’t seen anything like that since the October 1987 – which was 3X bigger – and it all happened in about 20 minutes. Whew.

The S&P 500 dropped all the way back to the January lows and recovered to the January highs – but still down 3.5% for the day. The most likely cause is computer trading that got out of hand. Floor traders in New York can’t move that fast – so it had to be a sell program kicking into high gear.

There are stories out there of sell orders entered wrong with billions of shares selling instead of millions of shares, but that can’t explain it all. Computer based trading kicks in to buy and sell based upon whatever parameters the investment manager desires. At 1:40pm, something happened to cause a cascade of selling for about 10 minutes that morphed into a cascade of buying for about 10 minutes. Logically, some program hit a buy signal that pushed the market down some, which triggered other sell programs. Finally, when the market hit the January lows, buy programs kicked in and pushed us up.

However, things are not good in Europe. The fear has hit that the problems in Greece – not just the financial problems but the social unrest – are set to spread to the other high debt European nations (Italy, Spain, Portugal, Ireland and the UK). Speculation is rampant that this is the beginning of the end for the Euro as the Germans and other fiscally prudent northern European nations will not want to subsidize the laid back lifestyle in southern Europe.

Unfortunately, all of these countries are interrelated in their borrowing and lending positions. Below is a graphic from the NY Times that shows you how interconnected all of these countries are – and you can then infer that if one of the dominoes is knocked over all of them will eventually fall.

Thanks to the Cara Community for this graph

Thanks to the Cara Community for this graph

This is a big story, but at least right now I don’t think this is enough to derail the world’s economic recovery. Greece is only 2.5% of Europe’s GDP and their entire debt problem is roughly equal to the AIG rescue. If Spain or Italy were to fall, that would be a much bigger issue, but at this point there is only speculation.

Given this, we used today’s plunge to put to work some of the cash we’ve generated in recent weeks. I’ve had the mid point of the January selloff as a buy point, so when we got there today in the panic fall (see the purple box on the chart below) we acted.

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We were able to pick up some great companies today, using a portion of the cash we have on hand: TROW, TIF, HSC, EWA, ABV, JPM, CMI, ITW, TD. We have plenty of cash available to buy these and others if the market pulls back more. Why are we buyers? Four Words: Don’t Fight The Fed. The Fed will inject liquidity into the system and keep rates low for as long as it takes to bring our economy around and drag the rest of the world with us. Those low rates and high liquidity will continue to drive stock prices up over time (all things being equal – i.e., no world wide debt crashes).

We will wait to see what tomorrow brings – there is the April jobs report coming up first thing tomorrow. Expectations are for a big gain that will drop the unemployment number from 9.7%. If that happens, look for the market to move higher at least initially on a relief rally. If that doesn’t happen, then you could likely see another move down, back toward the purple box buy zone where we will put additional cash to work.

Typically, we will want to see where the market is on trading day 3 after a day like today. So, Tuesday of next week will be the day where we want to do an assessment of how our buy zone trades worked today and whether its time to put some additional funds to work if we aren’t in the buy zone.

The big winner in all this? Gold. Look a the chart below:

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Gold is a hedge against uncertainty and against inflation. What you are seeing now is that gold is a hedge against uncertainty. There is talk that gold will be the alternative to the dollar that the Euro was to have been. That remains to be seen – let’s give the Euro nine months to determine whether it will live or die – but gold did make a new high in terms of the Euro today. It seems that all the middle east countries that wanted to trade oil in Euros instead of Dollars, and had accumulated a pile of Euros for that purpose, have been dumping them and buying gold.

Long live King Dollar? Eh… Its just the best of the worst at this point. Its day will come – just not now. The fiscal issues in the US are at least as bad as those in Greece, and Much Much Much bigger. Plus, we now have a dependent class much like the European dependency so their protests will mirror and surpass those in Athens. Just not now.

Eventually, the economies of Asia and Latin America (can you really believe we think this given our experience with the 70’s and 80’s?) as well as western economies that have sound economic fundamentals (Canada, Australia, Norway, South Korea) with their negligible to easily manageable debt to GDP ratios will far surpass those with high debt to GDP. Over time, all successful investment portfolios will mirror low debt to GDP economies.

For now? Invest what you see not the dogma you believe. The graphs above show us what to do – so we are doing it.

As things change, and developments occur, we will keep you informed. If we have another big plunge or big rally, I’ll let you know what’s up and how our strategy is impacted. Until then, relax and watch the following video that wraps up my Fall of Saigon discussions of the past month.


Click here for Marvin Gaye

Enjoy the night and there will no doubt be more excitement tomorrow.

Mark

S&P 500 Index Is Up – But That’s Deceiving

Tuesday, May 4th, 2010

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I had a couple of emails from readers asking why I’ve been so worried since everything is up this year. That caught me by surprise since what I see is most things are down this year in spite of the fact that the broad index is up.

In the chart above, I’ve plotted the year-to-date returns for the various market sectors within the S&P 500, and you can see that the only sectors that are up are Financials, Consumer Discretionary and Industrials. Everything else is down, and some are down big. It is not a healthy market when things are so mixed.

We are sticking to our plan and will be adding to positions when the time seems right. In the meantime, its important to remember that the broad market averages can be deceiving.

Mark

Stock Market Tops are a Process

Tuesday, May 4th, 2010

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I know I’ve been boring you with my posts about the fact that the market indicators we follow show that the stock market had gotten a bit ahead of itself. Markets can tend to move in a direction longer than logic dictates as long as momentum is behind them. But, eventually, the direction changes and the momentum follows.

On the chart above, I’ve drawn a box around the the last month in the market. You can see that we’ve had a pretty contained market with some sharp moves up and down within the range. This is either a topping process or a consolidation. Topping indicates that the market will break out of the range to the downside but consolidation indicates the market will break out of the range to the upside. The direction generally depends upon sentiment, valuation, and news.

In our current case, the the indicators I follow show that we will likely break to the downside as the oscillator is trending down. [If you click on the chart above, it will take you to a live version of the chart and you can see that we have broken out of the range to the downside since I drew the original chart above earlier this morning.]

Our plan is to be a buyer when the market pulls back . We anticipate a 6% or so pullback from the peak, so we have started to scale into some positions (particularly Canadian positions since Canada has the best economy in the G7) and will be adding some others.

Don’t look for a pullback to the March 09 lows – that’s not even reasonable to consider, but if you look at the chart of the entire bear market below, you can see that the 50% retrancement level is a possibility. We bumped up against he 68.2% level but could not muster the gusto to break through. That would be somewhere around 1115 on the S&P 500 index.

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Corporate earnings have been strong, driven by easy monetary policy. The Fed has started to lessen the easy monetary policy (ending purchases of mortgages, talk of reducing its balance sheet size) but as long as the Fed Funds Rate is near 0% and commercial loan growth is tepid, that liquidity will make its way into marketable securities and keep the bullish move since the March 09 lows in tact – albeit with increased volatility as investors worry that the next step in lessening an easy monetary policy is increasing the Fed Funds Rate.

Stay tuned as we are in for some hand wringing and changing of tunes by the talking heads on TV – from a buy equities at any price mindset to we’re headed back down to test the lows mindset.

As I’ve written before, you have to invest what you see, and we’ve seen a correction coming for several weeks now and will be using the cash we’ve accumulated to take advantage of it.

Mark