It was a divided market to close the week, with the Dow lagging behind the Nasdaq. Concerns about foreclosures weighed on financial stocks. The Nasdaq was a different story. Google fueled a rally in technology stocks after posting strong earnings. On Friday shares of Google hit their highest level since January and closed up 11.4% at 601.45.

•  Fed Chairman Ben Bernanke added to expectations for another round of stimulus. Bernanke said in a speech in Boston that inflation is too low and unemployment is too high.
• A closely-watched reading of consumer confidence was a let-down.  The University of Michigan’s index suggested consumers are less likely this month to purchase big-ticket items like cars.

On Friday, the Dow closed down 31 points at 11,062. NYSE volume totaled over 1.4 billion shares. The S&P 500 finished up 2 points at 1176. The Nasdaq gained 33 points to 2468. Declining issues beat advancers 3-2 on the NYSE and by 13-12 on the Nasdaq. The 10-year Treasury note fell 15/32 to yield 2.56%.

For the week, the Dow was up 56 points, or 0.5%. The S&P 500 gained 11 points, or 1%. The Nasdaq closed up 66 points for the week, or 2.8%.  Gold closed the week up 1.5%. 

The US Dollar continued its slide through Thursday then managed to post a modest comeback Friday.  Commodities tend to move in the inverse of the dollar and we did see them trade higher the first part of the week and then pull back on Friday.

2Q Highlights

Some highlights from our quarterly newsletter.

On gold:

 "We would not advocate buying gold here.  It is a bit extended and as we stated above, getting a lot of media attention.  Those two things tend to produce rather volatile moves.  If gold does pull back as we expect it will, and you find it suited for your portfolio, that is when you should be looking at adding some to your portfolio."

 On fixed income:

"Fixed income right now is an interesting animal.  Interest rates are so low you would think that bonds can’t go any higher (bonds have an inverse relationship between price and yield:  when prices rise, yields, or rates, go down and vice verca), but they are continuing to go up.  There are a couple factors going on, two of which are 1) increased uncertainty and nervousness about the economy and 2) the government has said they are going to continue to buy bonds (which puts money into the economy).  Do we think there is a bubble in bonds – not yet.  If for nothing more than the fact that everyone keeps asking if there is a bubble in bonds.  Remember real estate a few years ago?  No one believed it was a bubble; it was the ‘new normal.’  When everyone is saying that ultra-low rates are the new normal and they will stay that way forever, that’s when I will think it is a bubble.  But not yet."

On equities:

"According to the Stock Trader’s Almanac, the 4^th quarter of a mid-term election year and the 1^st quarter of the following year have historically been quite strong.  (Of course this should be taken with a grain of salt since the month of September was the opposite of what it has been historically.)  Nevertheless, after what may be a small digestion of gains in early October, we are looking for additional upside in the November through March time frame."

Weekly Recap

 

A recap of how various indexes closed as of Friday

 

 

Index	Price	Chg	% Chg	YTD
Dow Jones Industrials	10860.26	197.84	1.86	4.14
Dow Jones Transports	4515.01	132.08	3.01	10.13
Dow Jones Utilities	399.93	6.31	1.60	0.48
S&P 500	1148.67	23.84	2.12	3.01
S&P 400 Mid-Cap	796.29	19.64	2.53	9.58
S&P 600 Small-Cap	356.92	11.54	3.34	7.30
S&P 500/Citigroup Growth	599.58	12.01	2.04	2.96
S&P 500/Citigroup Value	541.02	11.43	2.16	3.04
S&P MidCap 400/Citigroup Growth	353.96	8.78	2.54	12.65
S&P MidCap 400/Citigroup Value	281.54	6.90	2.51	6.63
S&P SmallCap 600/Citigroup Growth	252.35	7.94	3.25	8.85
S&P SmallCap 600/Citigroup Value	248.07	8.43	3.52	5.93
NASDAQ Composite	2381.22	54.14	2.33	4.94
NASDAQ 100	2023.84	41.69	2.10	8.79
MSCI EAFE	1545.07	-5.98	-0.39	-2.26
MSCI World (ex-U.S.)	1568.73	-7.10	-0.45	-1.79
MSCI Emerging Markets	85.83	-0.46	-0.53	-4.31

 

 

S&P GICS SECTOR INDICES PERFORMANCE **

Indices	Price	Chg	% Chg	YTD
Consumer Discretionary	265.64	6.73	2.60	13.00
Consumer Staples	289.95	3.58	1.25	5.71
Energy	414.52	8.87	2.19	-3.59
Financials	196.72	5.29	2.76	1.52
Health Care	355.89	4.81	1.37	-1.75
Industrials	272.75	7.44	2.80	12.25
Information Technology	370.13	7.75	2.14	-0.16
Materials	206.01	4.90	2.44	3.10
Telecom	121.43	1.06	0.88	5.92
Utilities	159.99	2.49	1.58	1.27

 

 

 

Instrument	Price	Chg	% Chg	YTD
Crude Oil (Front Month Future)	$76.56	1.38	1.84	-3.53
Gold (Front Month Future)	$1,295.60	1.00	0.08	18.19
Copper (Front Month Future)	$362.45	3.95	1.10	8.93
U.S. Dollar/Japanese Yen (Spot)	¥84.29	-0.09	0.11	10.36
Euro/U.S. Dollar (Spot)	$1.35	0.02	1.33	-5.80

 

 

 

 

 

TIME Magazine Article on the US Economy

Really interesting TIME magazine article here

Some highlights:

-IF AMERICA'S ECONOMIC LANDSCAPE seems suddenly alien and hostile to many citizens, there is good reason: they have never seen anything like it. Nothing in memory has prepared consumers for such turbulent, epochal change, the sort of upheaval that happens once in 50 years. That may explain why so many voter polls, taken as the economy shudders toward the November election, reveal such ragged emotional edges, so much fear and misgiving. Even the economists do not have a name for the present condition, though one has described it as "suspended animation" and "never-never land."

-In a normal rebound, Americans would be witnessing a flurry of hiring, new investment and lending, and buoyant growth. But the U.S. economy remains almost comatose a full year and a half after the recession officially ended. Unemployment is still high; real wages are declining.

-The current slump already ranks as the longest period of sustained weakness since the Great Depression.

-That was the last time the economy staggered under as many "structural" burdens, as opposed to the familiar "cyclical" problems that create temporary recessions once or twice a decade. The structural faults, many of them legacies of the 1980s, represent once-in-a-lifetime dislocations that will take years to work out. Among them: the job drought, the debt hangover, the defense-industry contraction, the savings and loan collapse, the real estate depression, the health-care cost explosion and the runawayfederal deficit. "This is a sick economy that won't respond to traditional remedies," said Norman Robertson, chief economist at Pittsburgh's Mellon Bank. "There's going to be a lot of trauma before it's over."

-America's structural burdens have hit home most profoundly in terms of jobs. The U.S. workplace is "in a profound, historic state of turmoil that for millions of individuals is approaching panic," according to labor consultant Dan Lacey, publisher of the newsletter Workplace Trends. Official statistics fail to reveal the extent of the pain.

 

-A comprehensive tally would include workers who are employed well below their skill level, those who cannot find more than a part-time job, people earning poverty-level wages, workers who have been jobless for more than four weeks at a time and all those who have grown discouraged and quit looking.

 

-One major obstacle to efficiency remains: a runaway U.S. health-care system, whose costs are rising at the rate of more than 9% a year and today stand at $2,500 a person, more than twice the level of most of the world's industrialized economies.

 

-…needs time to work itself out: the debt hangover. The initial stages were painful, wiping out both borrowers and lenders. Bank regulators clamped down on lenders, while borrowers either swore off the credit habit or were deemed bad risks. The result was a credit crunch that has severely hurt businesses, especially small ones. Among the 8 million such companies in the U.S., failures are running at the rate of 240 a day. One of the faces behind the numbers is Joseph Burton, whose plight embodies many of the woes now afflicting small business.

 

-The consumer-debt hangover will be far easier to solve than the government's. …the government is limited in how much it can stimulate the downtrodden economy with the usual recession cure of a quick jolt of spending. Yet a growing number of economists are contending that shrinking the federal deficit is a worthy goal that should be temporarily suspended until the economy is back on track. While the national debt will hamper the economy over the long run, its net effects on growth over the short run are insignificant compared with such problems as unemployment, declining wages and worker dislocation.

 

Most interesting thing about this article is that it is from September 28, 1992.

 

Turning More Bearish

I mentioned earlier this week that my first point of concern on the S&P 500 was 1060:  today we took that out with impunity.  In doing more analysis on the S&P and other areas of the market, which I will discuss more this weekend, I am leaning more toward the bearish camp than I originally thought taking out 1060 would have me be.  At this point, suffice it to say that you need to have a defensive plan and make sure you run those plays.

Down Friday - Down Monday

According to Stock Trader's Almanac, a down Friday followed by a Monday has a tendency to be a precursor to a move down.  Today's lower close followed a lower close on Friday.  While I can't say if this will play out negatively nor have I made any major allocation changes, I have moved to a more hedged approach in most models.

Interesting Article on 401(k)'s

A recent Miami Herald article quoted Fidelity data citing that the average 401(k) account balance today is $66,900.  Also noted in the article was that "in 1983, 62 percent of workers had only company-funded pensions, while 12 percent had 401(k)s, the Center for Retirement Research at Boston College said. In 2007, those numbers were 17 percent and 63 percent, respectively."  "The life expectancy of a 65-year-old U.S. male is 82, and 85 for a 65-year-old female, according to the Social Security Administration."

Those still in the accumulation phase of their careers should have a game plan for those next 10, 15, 20 years until retirement to ensure you have enough to live that life you want.  Unfortunately the plan, mentioned in the article, being proposed in Congress to make mandatory annuities in retirement plans is not going to provide anything other than sub-par returns which equates to a mediocre life in retirement at best.  Having a plan to take advantage of the up periods and avoiding losing big chunks of assets in the down periods is the way to have a significant nest egg for retirement.

Summer Doldrums Continue

After this past week we have back to back weekly losses in the equities markets.   If you want to blame something, the big disappointment this week was the spike in claims for unemployment benefits.

On the other hand, we saw bonds continue to rally.  Even though all the experts keep saying interest rates, which move in the inverse to bond prices, can not go any lower, they do as people bid up the price of bonds.

While we have seen some indications of strength in some areas, in general we are moderately cautious on equities at the moment, especially domestic equities.  We are entering the weakest period of the year historically:  the months of September and October.  Keep this in mind when reviewing your equity allocations.

 After the "death-cross" earlier this summer, the S&P 500 briefly reclaimed its 200 day MA only to fall back below the 200 and 50 day MA.  Watch the 1060 area for support, if that is given the 1000 - 1010 range is next.  After that...???

Up? or Down?

According to CNBC the stock market could go up or down by the end of the year.  Wow, I'm glad they told me that.

As CNBC says:

FAST - that's probably true

ACCURATE - well, it will go up or it will go down so one of those will be accurate

ACTIONABLE - someone please tell me how you can create an actionable plan based on this

You have 90% of the investing public out there listening to CNBC giving you this kind of "actionable" information.  No wonder so many people really don't have a plan.  Because we cannot predict the future and tell where the market will be in 4 months, we have a documented, systematic plan at Rivah Capital that is dynamic in that it will adjust to market conditions.  

I have stated a number of times that I do believe we are 10 years into a 13 - 17 year secular bear market but that does not make me a permabear.  There will be times when we want to be in stocks and times we want to be out and our strategy allows us to do that.  And if we are on the wrong side, we cut our losses and get on the right side. 

Ask yourselves, do you have a plan?

--
Jason M. Martin, CFA

Stock Market Myths

A pretty good list from the WSJ

1 "This is a good time to invest in the stock market."

Really? Ask your broker when he warned clients that it was a bad time to invest. October 2007? February 2000? A broken watch tells the right time twice a day, but that's no reason to wear one. Or as someone once said, asking a broker if this is a good time to invest in the stock market is like asking a barber if you need a haircut. "Certainly, sir -- step this way!"

2 "Stocks on average make you about 10% a year."

Stop right there. This is based on some past history -- stretching back to the 1800s -- and it's full of holes.

About three of those percentage points were only from inflation. The other 7% may not be reliable either. The data from the 19th century are suspect; the global picture from the 20th century is complex. Experts suggest 5% may be more typical. And stocks only produce average returns if you buy them at average valuations. If you buy them when they're expensive, you do a lot worse.

3 "Our economists are forecasting..."

Hold it. Ask your broker if the firm's economist predicted the most recent recession -- and if so, when.

The record for economic forecasts is not impressive. Even into 2008 many economists were still denying that a recession was on the way. The usual shtick is to predict "a slowdown, but not a recession." That way they have an escape clause, no matter what happens. Warren Buffett once said forecasters made fortune tellers look good.

4 "Investing in the stock market lets you participate in the growth of the economy."

Tell that to the Japanese. Since 1989 their economy has grown by more than a quarter, but the stock market is down more than three quarters. Or tell that to anyone who invested in Wall Street a decade ago. And such instances aren't as rare as you've been told. In 1969, the U.S. gross domestic product was about $1 trillion, and the Dow Jones Industrial Average was at about 1000. Thirteen years later, the U.S. economy had grown to $3.3 trillion. The Dow? About 1000.

5 "If you want to earn higher returns, you have to take more risk."

This must come as a surprise to Mr. Buffett, who prefers investing in boring companies and boring industries. Over the last quarter century, the FactSet Research utilities index has even outperformed the exciting, "risky" Nasdaq Composite index. The only way to earn higher returns is to buy stocks cheap in relation to their future cash flows. As for "risk," your broker probably thinks that's "volatility," which typically just means price ups and downs. But you and your Aunt Sally know that risk is really the possibility of losing principal.

6 "The market's really cheap right now. The P/E is only about 13."

The widely quoted price/earnings (PE) ratio, which compares share prices to annual after-tax earnings, can be misleading. That's because earnings are so volatile -- they're elevated in a boom, and depressed in a bust.

Ask your broker about other valuation metrics, like the dividend yield, which looks at the dividends you get for each dollar of investment; or the cyclically adjusted PE ratio, which compares share prices to earnings over the past 10 years; or "Tobin's q," which compares share prices to the actual replacement cost of company assets. No metric is perfect, but these three have good track records. Right now all three say the stock market's pretty expensive, not cheap.

7 "You can't time the market."

This hoary old chestnut keeps the clients fully invested. Certainly it's a fool's errand to try to catch the market's twists and turns. But that doesn't mean you have to suspend judgment about overall valuations.

If you invest in shares when they're cheap compared to cash flows and assets -- typically this happens when everyone else is gloomy -- you will usually do very well.

If you invest when shares are very expensive -- such as when everyone else is absurdly bullish -- you will probably do badly.

8 "We recommend a diversified portfolio of mutual funds."

If your broker means you should diversify across things like cash, bonds, stocks, alternative strategies, commodities and precious metals, then that's good advice.

But too many brokers mean mutual funds with different names and "styles" like large-cap value, small-cap growth, midcap blend, international small-cap value, and so on. These are marketing gimmicks. There is, for example, no such thing as "midcap blend." These funds are typically 100% invested all the time, and all in stocks. In this global economy even "international" offers less diversification than it did, because everything's getting tied together.

9 "This is a stock picker's market."

What? Every market seems to be defined as a "stock picker's market," yet for most people the lion's share of investment returns -- for good or ill -- has typically come from the asset classes (see No. 8, above) they've chosen rather than the individual investments. And even if this does turn out to be a stock picker's market, what makes you think your broker is the stock picker in question?

10 "Stocks outperform over the long term."

Define the long term? If you can be down for 10 or more years, exactly how much help is that? As John Maynard Keynes, the economist, once said: "In the long run we are all dead."

Full article

New FinReg Legislation

A nice graph by Dr. Mark Perry, professor of Finance and Economics at the University of Michigan showing how the financial regulation that was recently signed into law compared in terms of pages to other major financial regulation through the years.

One of major causes of the recent financial crises was the repeal of the Glass-Steagall Act of 1933 that was a main part of the Gramm-Leach-Bliley Act of 1999.  I was a proponent of the repeal of the time, thinking people had learned enough from what happened in the Great Crash of 1929 to not do such stupid things again.  I was clearly wrong in thinking that.

Anyway, the law creating Glass-Steagall was 37 pages and that law worked wonderfully for over 60 years.  To repeal it took 145 pages.  To partially put it back takes 2319 pages.  Yes there are other items in there but to be 16 times the size in order to undo the damage done by the 1999 Act seems a bit much.

Now the real question is, of all the people that signed this bill into law, how many actually read this in its entirety and how many understand what is in it.  I fear that number is a relatively small percentage.  Only time will tell what was really in and what impacts there may be such a tome.

Back in Emerging Markets

We had some shorter term technical indicators turn positive this week so we started looking at putting a little money back to work.  Since our longer term indicators are still negative, we want to focus on those areas that have held up well and are showing strength.  This is not the time where you can simply throw a dart at a list of stocks and expect it to go up.  You need to be careful, know your stop loss point and make sure to make appropriate bet sizes.

That being said, the emerging markets space is looking positive and a place we added money to late last week.  In this space there are definitely places you want to be and places where you would better off avoiding.

Consider:  iShares MSCI Thailand Investable Index (THD) - THD is trading well above its 50 and 200 day moving average, has reached a new high for the year and is showing strong relative performance versus most other markets.  ETFs that are making new highs for the year while most others are not would be the areas that you want to consider here and THD meets all our criteria of a strong performer.

Avoid:  Market Vectors Egypt Index (EGPT) - EGPT on the other hand has continued to show weakness and rather than new highs, it is putting in lower lows.  It is trading below its 50 day moving average, is clearly in a downtrend and is very weak compared to its peers.  EGPT has very little going for it at this point and would be something to avoid here until it improves.

Bullish Week on the Street

After a weak showing two weeks ago, the bulls came charging back this week.  Earnings were by and large strong and news out of Europe was that fiscal conditions in many European banks weren’t as bad as most people were expecting. This resulted in a buying binge on Wall Street that posted a weekly gain of 3.24% in the Dow, 3.55% in the S&P 500 and 4.15% in the NASDAQ Composite.


As you know, we have been neutral to slightly bearish toward equities lately.  So does this alter that view any?  Not really.  Our shorter term indicators have started flipping positive but our longer term indicators are still favoring bonds and cash over equities.


We believe we are in a structural bear market that, based on history, will last another 4 - 8 years.  That doesn't mean we won't see rallies between now and then but we expect that we could see the lows of 2009 tested again.  We also believe that we will see 2010 end flat to slightly lower.  For 2011 we are leaning a little more to the bearish side but that is based on historical patterns and not because we are seeing anything concrete to confirm that opinion.  


We are trend followers here and trade with the longer term trends for the most part.  A one-day rally or even a one-week rally doesn't influence our opinion.  Focusing on the intermediate to longer time frames keeps us in winning positions longer and gets us out of losing ones quickly enough to not do significant damage.  


Now, if Mr. Market shows us that we are wrong, we will change our opinion.  At this point we haven't seen anything to indicate that type of longer term change.    

S&P 500: Rally Mode or Dead Cat Bounce?

The markets had a nice rally this past week with the S&P 500 up 5.4%, it's best week since mid-July 2009, the Dow was up 5.3% and the NASDAQ rose 5%.  This comes as everyone is talking about the "dark cross" or the "death cross" where the 50 day moving average crosses below the 200 day moving average.

As you can see in the graph, the S&P is below the 50 and the 200 day moving average, the 50 day moving average is below the 200 day and the 200 day has turned down.  We mentioned this last week as something we were watching. 

Looking back, the "dark cross" has occurred 30 times since 1950.  The interesting thing is that 73% of the time if you simply had held the S&P 500 until it went back about the 50 day moving average you would have had a profit.  However, the other 27% which have resulted in losses, those losses have been relatively large.  The 2000 - 2003 cross saw the S&P fall -33% and the 2007 - 2009 cross saw it drop -40%.  How will this cross play out?  Will it be in the 73% of other crosses that saw a gain?  Or will it be another large loss like the remaining 27%?  Obviously only time will tell but you should be keeping all these facts in mind as you are running your investing plays. 

As we stated last week, we are waiting to see how things resolve themselves.  This past week we saw the S&P move back closer to its 50 day moving average which puts things in a nice position.  If it can continue higher, reclaiming both its 50 and 200 day MA, we would consider that a positive sign and become more bullish on equities.  If however it fails around its 50 day, that would be a continuation of the bearish trend.  We will wait, patiently, building a shopping list of things that have held up well, to buy should we get a go-ahead signal.  If not, we will stay nicely in cash and fixed income, or in a hedged position. 

Second Quarter Musings

The second quarter has come and gone it was not a pretty sight by most standards.  We might sound like a broken record at this point but we haven’t seen any signs of things changing. We still believe we are about 2/3 the way through a secular bear market that began in 2000 and will most likely continue until 2014 – 2016. This doesn’t mean the market will go down for the next few years, although it could, but we’ll probably see 2 steps forward, two steps back movement with possibly a downward bias.

We did see some indicators turn positive in mid-June so we upped our equity allocation.  We didn't "feel" like that was going to be a winning move:  too many dark clouds were overhead.  But we follow our indicators as they have us  on the right side more often than not.  And when they are wrong, they reverse back relatively quickly.  This was one of those times as last week our two shorter term indicators turned back to negative, and we adjusted accordingly by reducing our equity positions. 

Another interesting development is the possibility of the so-called “Dark Cross” in the market. The dark cross is when the 50 day Moving Average crosses below the 200 day Moving Average. Even more concerning is that when the 200 day MA is trending down.  The last time this happened was in December 2007, shortly before the crash of 2008.  The S&P 500 has its 50 day MA right at its 200 day MA and the 200 day is just beginning to turn down so it will be intereting to watch how that plays out. 

Needless to say, we are not positive for the equity markets right now.  We would be considering the iShares Barclays Aggregate Bond Index (AGG) and would be avoiding the SPDRs (SPY) but you could really subsitite most equity index ETFs in the avoid category. 

Down Friday – Down Monday

While the market ended up for the week, we made note of a little reported item: a down Friday followed by a down Monday. Friday June 4th the market closed down and then Monday June 7th it closed down again. Historically, this has been an indicator of a top of a run rather than a bottom. We were also not impressed by the low volume on the days where the market rallied.

We see both of these as concerning and continue to make plays accordingly. We raised a little more cash over the week: these were positions that hit our sell stop price and we did not reinvest in other securities. We are not overly bearish at this point but, other than brief rallies, are not seeing anything that would move us back to the bullish camp.

This week we are going to look at two energy commodity based ETFs. These are for informational purposes only. Commodities should not be used as buy and hold investments. Please consider them carefully before purchasing.

Consider: United States Natural Gas Fund, LP (UNG) – while not the most attractive chart with the 50 day Moving Average below the 200 day MA, the 50 day MA recently turned up and UNG is trading well above that line. It also ranks near the top of all commodity ETFs at this time. We would consider this in the low $8.00 range, with a stop loss of $6.50, which breaks recent and all support. Short term target would be $11.00.

 

Avoid: United States Oil Fund, LP (USO) – USO is trading well below its 50 and 200 day MA. USO also ranks low in relative strength to other commodity ETFs. With all the coverage of the tens of thousands of oil spilling into the Gulf daily, you may be thinking this has to be bullish for oil prices. In the long term, maybe. However, there is a huge amount of oil that has already been extracted and is floating around various oceans waiting to be refined. In the near term, there is more oil available than capacity to refine it, which is anything but bullish. We would not be buyers of USO.

Dow Below 10,000 - In Correction Terrority

The market continued its slide this week as we saw the S&P 500 fall -2.22% for the week and the month of June.  Two months into the second quarter it is down -8.61% and year to date down -3.69%.  We had surprisingly weak job numbers and news that Hungary could be the next Greece in the Euro-drama story.  Nothing new, just a continuation of the theme we have been seeing.  We are continuing to watch positions and as stop loss points are hit we use that as an opportunity to raise cash.

This week we will look at a couple of fixed income ETFs.  In times of turmoil, capital migrates to bonds, but not all bonds are created equally.

Consider:  Vanguard Long Term Bond (BLV) - while off its recent high, BLV ranks high in the fixed income universe and is trading above its trend lines providing a nice alternative to consider over equities.  We would consider BLV with a stop loss around $76.50.

Avoid:  SPDR Barclays Capital Short Term International Treasury Bond (BWZ) - BWZ ranks near the bottom of fixed income ETFs and is trading well below its 50 and 200 day moving average.  We may see a little consolidation here but there isn't much reason to be holding the ETF.  We would be avoiding BWZ.

What Now?

The -8.2% decline in May 2010 turned out to be the second worst May monthly decline since 1950, surpassed only by May 1962 (escalation in Vietnam and soon-to-be Cuban Missile Crisis).  Though it was not quite bad enough to go down as a top 20 worst performing month for the S&P overall.  So what might we expect for June?


We have moved rather swiftly down and that is putting us into a technically oversold area.  An oversold condition can resolve itself one of two ways:  it can snap back up with a big rally or it can trade sideways for a bit and let the moving averages catch up with it.  In the latter case it can become no longer oversold without having to move back up significantly.  With several of our major indicators indicating weakness we would expect to see the second case and then more possible downside moves after the consolidation period.


This would mean a much more selective approach, especially when picking equity positions.  We are focusing on more sector positions than broad equity ETFs.  


Consider:  iShares Dow Jones US Real Estate (IYR).  IYR has held up well in the latest correction and is one of the top spots in relative strength of our asset class comparisons.  We would consider this with $44 as the point where it breaks its 200 day moving average and turns negative.  FULL DISCLOSURE:  We own IYR in some of our accounts.


Avoid:  Utilities Select Sector SPDR (XLU).  XLU on the other hand, ranks at the bottom of our relative strength comparisons and is well below its moving averages.  Its 50 day has moved below its 200 day which is not a positive sign.  We would look to be avoiding XLU.  


We own IYR in some of our accounts.

Equities or Fixed Income Part Deux?

On May 2 I posted that you should consider using the QQQQ and consider avoiding IEF as the former (equities) was acting stronger and the latter (fixed income) was acting weaker. What a difference a few weeks make. Unlike some other financial news outlets, when we are wrong, we put it at the top, first thing. There is nothing wrong with being wrong when investing; the problem occurs by not admitting you are wrong. If something you do isn't working, or things go the opposite of what you thought they would, admit it and adjust accordingly.

So what happened over the past three weeks. First, international equities dropped out of favored status. Then, this week domestic equities fell out of favored status. Finally, equities have lost in relative strengths when compared to bonds. All together this means fixed income is an area to consider and for your equities you need to selective as we may see further weakness in that area. One thing to note, the correction earlier this year did not give us these levels of indications. This is why we feel there are increased risks at this point.

Finally, we have a subscriber service where we email out our portfolio as we adjust. I'm going to give a quick glimpse here as to how we are adjusting based on the above. We are reducing equity exposure to about 40% with the rest split between cash and investment grade bonds. We have one more bogey for equities and should that fail we will move down to between 0 and 25% equity exposure. If you are interested in learning more about the subscriber service, contact me and I can give you more information.

The Buck is Back

One rather significant event of the week was the Euro and, since the dollar index consists of over 50% comparison to the Euro, the US Dollar. The Euro broke a strong level of support at 125 and reached a level it hasn't see in over 4 years.

This may not be news to you and it may appear that the dollar/euro moved has become extended and a bit overcrowded. This may be true but this will not be a short term move. The dollar tends to trend in 6 - 10 year ranges. Over the past 20 years the dollar bottomed in 1992, followed by a 10 year up move that peaked in 2002, and bottomed again in March 2008 following 6 years of falling. It appears we are 2 years into a longer term up moved in the dollar.

How to play this dollar move?

Consider: PowerShares DB US Dollar Index Bullish Fund (UUP) This ETF tracks the US Dollar index and is a perfect way to play an up move in the dollar without having to trade in the currency market. As you can see from the chart, UUP does appear to be a bit extended here. Since we early on in a long term up move in the dollar, we see this as a longer term position. But, given the recent run up, we would consider buying a partial position here and then adding to it on a pullback to the mid $23 range.

Note: in the spirit of complete disclosure, we do not have a position in UUP but we do own another long dollar fund.

Avoid: CurrencyShares Euro Trust (FXE) As we stated above the Euro has broken all previous support at 125 and FXE, which tracks the Euro currency, is in a similar situation. There is no near term support in sight so any bounces from here will most likely be short lived. We would avoid FXE for the foreseeable future.

Flash Crash of 2010

The big news of the week is the “flash crash” that occurred Thursday between 2:40 and 3:00. There have been a number of rumors as to what the cause actually was from a fat finger of billion rather than million to computerized High Frequency Trading (HFT) programs. Of course Congress is demanding to know caused it. The official word is that there were no erroneous trades of that size, though it doesn’t mean it didn’t happen though I doubt it. I’m not saying that HFT didn’t impact it.

There are a lot more trading programs out there that run large numbers of trades in the time it takes us to think about the symbol to pull up a quote. But does that make it bad? It also has contributed to some of the volatility. But does that make it inherently bad? Has not the ability to place trades from out Blackberry or iPhone increased the speed with which you and I can place trades? This would also increase volatility but is it bad?

I heard a ten-minute recording of the floor of the S&P 500 futures pit. The S&P 500 futures are some of the most liquid securities out there and normally trade with a $0.10 bid/offer spread. During that time they had a $10.00 bid/offer spread or 100 times normal. What this boils down to is that there were a whole lot more people selling than there were buying. This is indicative of the fear that is still out there.

I have said we are 10 years into a secular bear market. These historically have run for about 16 years so we still have some time for it to run its course. This doesn’t mean we won’t have bull runs but you need to be cognizant of the environment.

Consider: It’s probably hard to want to consider an investment in the stock market right now but we do see domestic equities as a favored area of the market at this point. One ETF to consider is the Vanguard Extended Market VPER (VXF). This ETF covers small and mid cap stocks which are two strong areas of the domestic equity group. Short term support would be around 42 and below 37 we would be a seller. Good upside with a 54 target.

Avoid: iShares Europe 350 (IEV). IEV covers large the large cap European market. The European Union of course has been all over the news lately with troubles in Greece. But Greece is only the beginning of the problem countries known affectionately as the PIIGS: Portugal, Ireland, Italy, Greece and Spain. IEV broke its long-term support this week and is not clearly in a negative trend.

TSC is Bearish on Gold - or is it Bullish?

Regular readers of this blog and my newsletter are aware of my criticisms of a lot of the investment "advice" out there. Today I ran across a couple of articles from TheStreet.com that really exemplify why I have those criticisms.

On Sunday evening the following was posted: [video] Short Gold, Prices Will Hit $800 at TheStreet.com (Sun, May 2, 10:15PM EDT)

So, on Sunday at 10:00 PM they posted an article that gold was going to go down over $300. Fine. I may not agree with that but they have a reason for it.

Monday gold started the day just under $1180 and then promptly began to rise. At 10:12 AM they posted this: [video][video] Gold Prices Will Hit $1,200, Then Sell-Off TheStreet.com TV (Mon 10:12AM EDT)

So now, based on their articles, gold will go up and then go down. Interesting.

As gold continues to move up to almost $1190 Monday morning we get this from TSC: [video] Gold Prices To Reach $1,400 at TheStreet.com(Mon 12:17PM EDT)

So in a matter of 14 hours the articles on TheStreet.com went from totally bearish on gold saying it will go down over 30% to totally bullish and will go up 20%.

My question is, how does this help you invest? How could you have used this complete flip-flop to make money? Financial news is there to make money for themselves, mostly from advertising, not to make you money. Be aware of that when considering something based on what you hear or see on a major financial news channel.

Equities or Fixed Income?

This week I am introducing a new feature: one ETF worth considering and one I think you should be avoiding. I'll cover a wide range of ETFs including broad market, sector, country, currency and commodity, usually comparing two within the same theme.

This week I decided to address the broad market. We've seen an increase in volatility the past couple weeks and with increased volatility comes increased fear.

Consider: PowerShares QQQ (QQQQ) The QQQQ is one of the stronger market ETFs right now and has held up relatively well over the past two weeks. The first area of concern is 48.75, then 47.50. At 45 we concerned going forward. Know your risk level and evaluate accordingly.

Avoid: iShares Barclays 7-10 Year Treasury Bond Fund (IEF) The Treasury Bond market has been and continues to be weak. While in times of volatility money tends to flow to bonds, at this time there is no indication of Treasuries taking a position of leadership.

First Five Days

There is an old adage on Wall Street that states "so goes the week, so goes the month, so goes the year" referring to January. Stock Traders Almanac identified that of the past 36 years, when the first 5 trading days of January were positive, the year was positive 31 of those years for an 86.1% accuracy ratio. The first five days of 2010 were up a net 2.7% so this is encouraging that the current bull run should continue.

However, in midterm election years the First Five Days predictor has only a 60% accuracy ratio. Something to keep in mind.

Quote of the Day

I almost laughed out loud when I read this today

Now, let me get this straight…We are going to pass a health care plan written by a committee whose chairman says he doesn’t understand it, passed by a Congress that hasn’t read it but exempts themselves from it, to be signed by a President that also hasn’t read it and who smokes, with funding by a Treasury chief who didn’t pay his taxes…all to be overseen by a surgeon who is obese and financed by a country that’s nearly broke.

What could possibly go wrong? Anonymous

Hat tip: Dennis Gartman

Your Share of the National Debt

In the first 7 days of 2010, each taxpayer's share of the national debt increased $1375 to $112, 661. Consider that for a moment; in order to pay off the national debt, each taxpayer has to cough up $112,661. That in itself is obscene. Let's now look at that first part again: that each taxpayer's share of the debt increased $1375 in the first week of the year. If the average taxpayer makes $50,000 a year, they earned gross $959 in that same week. So your share of the debt increased at 143% of what you have earned this year. How can we possibly pay off the debt when it is growing faster than what we earn?

I'm not making any partisan political statement here as both parties have been major contributors to the current debt. I am making a statement about what it becoming a serious financial condition. The 2008 crash was a result of too much debt that froze up. There were other contributors, greedy home builders, home speculators, politicians, lenders and banks, but in the end there was too much debt used to prop up an industry so that you had a house of cards. When the first cards began to fall, when money began to freeze up and that debt couldn't be continued, the whole thing collapsed.

What could happen to the economy, the country in general, if the government can't borrow any more money? China is basically propping us up by purchasing all our debt; what would happen if they stop? Something is going to give and I am more and more concerned that it will not end well.

Double Your Money in a Money Market

Happy New Year! It's been a bit since my last post but I was spending a lot time with family and friends for the holidays and didn't have a lot time for posts.

I probably caught your eye with that headline and it's true, you can double your money in a money market account - with today's rates it will take a mere 139 years. That's right, being invested in a money market earning 0.5% interest annually it would take 139 years to double your money. If you are looking to grow your money for retirement, having it invested in a money market fund is not the way to do it long term.