Archive for February, 2012

Dow Breaks Through 13,000

Wednesday, February 29th, 2012

S&P 500 Index Annotated

Yesterday, the Dow closed above 13,000 for the first time since the stock market crashed at the end of 2008.

There are lots of varying opinions on what is happening – whether we are at a top and set to correct (I’ve heard predictions between 3% and 9%) or whether this is the beginning of a new bull market that will be driven by peak corporate earnings and P/E expansions.

As I always do, I like to see what the market is telling me and act accordingly. To that end, I’ve included a chart that should be vaguely familiar to readers of this blog. I’ve annotated it to show various stages, levels, indicators and turning points.

I’ve started the graph last September (on the left) to show you the progression from the bottom of the correction to today. You will see that I’ve drawn some green circles/elipses around strong up-trends in the market. You will note that the MACD indicator below also has green circles drawn on it – the MACD is my favorite trend indicator as it tells me that a move has sustainability as long as the black line remains above the blue line.

If you look to the right side of the graph, you will see that where we are now in this part of the advance higher is not showing the same sort of trend – I’ve drawn a red box around it on the MACD graph. In fact, it is drifting sideways, fairly trendless and in fact is starting to drift down. That concerns me.

You will notice a number of red boxes on the graph, none of which I would describe a particularly healthy indicators of where the market is at the current time. Of note, look at the historgram at the top of the page. You will see that we have started to see some black bars appearing above the gold ones. This means that we now have more companies trading above their 200-day moving average than above their 50-day moving average.

By the shape of the histogram, you can see that the black bars are fairly flat (meaning that the companies trading above their 200-day moving average have remained flat) while the gold bars have started to trend down (meaning that stock prices for those companies have fallen but remain above the 200-day moving average yet they have dropped below the 50-day moving average. That concerns me.

The other red boxes show you various overbought readings or below average trading volume readings while the market advance has moved up to a 100% recovery from the selloff as measured from the 2011 high. All of that concerns me.

But that does not mean we are due for a major correction in and of itself. Overbought situations, particularly in a trendless market, can move sideways for an extended period of time while investors either determine that:

1. there is some economic or geopolitical issue that would work to either derail the economic recovery or shake consumer and/or investor confidence and likely send the market lower – or

2. that economic fundamentals are strong enough to provide for growing corporate earnings and P/E expansions to send the market higher.

The economic news continues to improve in the US – today, the Chicago PMI came in above expectations, yesterday the the Dallas numbers were better, Consumer Confidence readings are better, bank lending is expanding – all signs that the double dip recession that cause the market to correct into the September time frame were wrong just as we wrote about at the time here on the blog.

But, given the indicators in the red boxes, and my adage that you invest what you see not what you believe to be true, here in the short-term, I think getting cautious is warranted.

Here is our plan:

1. We are going to raise cash out of the pure beta section of client portfolios, booking profits on the SPY ETF we purchased earlier in the year. The goal will be to redeploy that cash into either SPY again if the market pulls back or to add to current positions that have not rallied as much as some other positions.

2. We are going to increase the stop loss orders we have for companies that have performed significantly greater than the market overall year-to-date in order to protect the gains we have.

Given the strength in the US economy as noted by the improving economic indicators, the easing in monetary policy in the developing world, and the slow progress forward in Europe, I don’t anticipate a major move lower. However, I see in the indicators I trust weakness in equities so i don’t want to be caught in a corner not having taken the appropriate action.

If we see that the market can move above the 1370 resistance level of lat year’s high and successfully complete the Rule of Three (see earlier blog posts) then we will move that SPY back into the market for a fully invested position once again.

Mark

NASDAQ At 11 Year High

Friday, February 3rd, 2012

nasdaq

I forgot to mention in the earlier post that the NASDAQ hit an 11-year high today.

You can see its nowhere near its previous peak, but we have certainly come a long way from the depths of the crash low three years ago.

Mark

Markets Keep Rollin’ Along

Friday, February 3rd, 2012

Putting Cash To Work

Last week I wrote to you that we had broken through overhead resistance and that we would be investing when the over-bought readings on the indicators cleared.

On the chart above, you’ll see two small red boxes – the upper one on the Relative Strength Index graph shows you that it dipped below overbought a couple days ago. The other one on the price graph shows you where we put that money to work.

We are now close to fully invested in client accounts after booking some healthy profits from some of the trailing stop losses that had hit.

Instead of chasing the shares of things we own that are up significantly, we added to shares of companies that are trailing the broader market or that have losses year-to-date.

For the companies that we were stopped out of – some are down farther but some have gone higher. Its just one of the risks of using stop losses to protect gains – sometimes stocks pull back temporarily and then go higher, sometimes they just keep falling. Our plan is to buy back the companies we sold on any pull back in the market subject to their then-current fundamental outlook.

As far as the current rally goes, the good news keeps coming on the economic front – today it was a surprisingly positive unemployment report.

The mind-set in this rally is one where good news is bought and bad news is largely ignored or used as a buy-the-dips opportunity – that is a sign of a strong trend.

I was watching CNBC last night and one of the commentators was discussing how the ownership of common stocks overall is at one of the lowest levels in several years. Their theory is that we are seeing individual investors, pension funds, hedge funds, mutual funds – you name it – making a shift out of bonds and cash into equity securities and that this cashflow into the market will continue to push the market higher.

This makes perfect sense. So, I checked out some data and their theory on low levels of ownership seems valid – there has been a massive flow of money out of equity securities into fixed income securities since the market turmoil of 2008.

A lot of investors sold during the crash and never bought back in, having lost faith in the market after a second crash in a five year period. Those folks missed the huge recovery we’ve seen off the lows and are wanting to recoup some of their lost wealth in a good stock market.

Many individuals and institutions are underweight stocks compared to their target asset allocation – plus many have started to target high-dividend-yield common stocks as income investments instead of bonds.

There are many solid blue chip companies paying dividends with yields that are greater than bond and CD yields – some people are being tempted to move money into equities for the first time in a long time.

Our own Dividend Income Portfolio that numerous clients are invested in has a current yield of 6.46%. Its very popular with retired people who take use the cash flow to supplement their other sources of income, for endowments that like to use it to cover their distribution obligations, and others who just feel more comfortable in an income strategy than a growth strategy.

For now, we are comfortable with our 1370 target for the S&P 500 but will be evaluating it as we move toward it. That level is the market high from 2011, so given the current investor sentiment, it wouldn’t surprise me to see it.

However, there are some exogenous events out there that scare me that don’t have any direct correlation on current corporate earnings growth but that could derail things (I received a breaking news text last night from the Washington Post speculating on the Defense Secretary’s statement that he wouldn’t be surprised to see Israel attack Iran this Spring).

As a consequence of that, we are still using our trailing stops to protect outsized gains in companies. As stated earlier, its not a perfect strategy, but no one ever went broke booking a 12% when the market is up 4%.

Enjoy the weekend and I am soon off to attend the NAACP Freedom Fund banquet at the I-Hotel.


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