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.