Market Timing – Weekly Stock Market Strategy – September 2011

Weekly stock market strategy updates that went out to subscribers during September 2011. To receive current weekly update sent to your email, click on the FREE TRIAL link at the top of the page.

Weekly Market Update 09/05/11

The big economic number this past week was the employment situation. The private sector added zero jobs in July. This economy is a long way from being in recovery. There are no big economic numbers in this holiday-abbreviated week. We will see if jobless claims can show a sub 400k print. That has happened only once in the last 20 something weeks.

Last week I mentioned a bear flag formation and was hoping to see some closes over 120. We did manage to get 4 closes over 120 before closing out the week at 117.85. I don’t think the bear flag formation can be dismissed yet. The shape of the flag is different but still there. We will start the week in a short-term oversold position. If the market is truly trying to shake of its bear legs we will need to see a change in the short-term direction by Wednesday. Another possibility is the market may still need to get a closer test of the early August lows. If the SPY manages more than two closes under 110, look out below.

Weekly Market Update 09/10/11

There were not many economic reports this past week. The only one worth commenting on is the Jobless Claims. Jobless Claims again came in over 400k.
In fact the 4-week moving average of claims is now over 414k and has been rising the last four weeks. This coming week has a lot more economic releases. The more significant releases will be PPI and Retail Sales on Wednesday. Thursday is CPI and the Philadelphia Fed Survey. The Fed Survey saw a huge drop last month. It will be interesting to see if that trend continues. On Friday we have Consumer Sentiment. This number also saw a rather large drop last month.

Technically the bearish flag formation I mentioned a few weeks ago is still forming and is still a real possibility. So much so that I am concerned a close below 112 on the SPY would more likely mean the beginning of a new down leg. Previously I had left open the possibility of a closer test of the early August lows. International stocks heavily represent our Quarterly ETF Portfolio, and three of the four ETF’s have taken out there August lows. The Quarterly ETF Portfolio has been the weakest link in our overall portfolio. Unfortunately the strategy calls for us to keep the positions until the end of the quarter. I will ride these positions until the end of the quarter. I would not blame you if you decided to exit these positions now. They are substantially under water and are not likely to get close to even before the first week in October.

Weekly Market Update 09/18/11

A quick summary of all the economic reports this past week. Year over year the Producer Price Index is up 6.5% and less food and energy PPI is up 2.5%. Year over year Consumer Price Index is up 3.8% and less food and fuel up 2.0%. Retail Sales have now been flat for the past two months. Both the Philadelphia Fed Survey and Empire State Manufacturing index concur that business is contracting in that region. Last but not least jobless claims came in at 428k. The 4-week average is 9k higher than it was a month ago. Consumer Sentiment stabilized after last months plunge. Overall, nothing positive came of this weeks reports.

Stocks finished the week with the second best weekly performance in a year. I am asking myself, “Is the “risk on” trade back in play?” I am reading not widely published reports that a European bank bailout will be US dollar denominated. Which really means the Fed will print more dollars to bailout Europe. I am not sure why this is not getting more coverage. If it is true it could explain the move back into some riskier assets such as stocks. Technically the move this week did nothing to negate the negative outlook we have discussed the past few weeks. The market is currently short term overbought and near the top of the recent range.

Weekly Market Update 09/25/11

Last weeks economic releases had a couple points of interest. Existing home sales were up 18.6% on year over year basis. This is about as good as news has gotten lately. However we are a long, long way from a healthy housing market. Jobless claims came in at 423k and revised the prior weeks number from 428k to 432k. The Fed announced “Operation Twist” to target longer term yields. This may not have been the QE3 that the market was hoping for. That along with more bad news out of Europe was enough to reverse last week’s nice gains. The number I am interested in seeing this week is GDP. I suspect this number will come in below consensus of 1.2% and I think there is a real possibility this number misses badly.

As I stated last week, the markets positive performance did nothing to negate the bearish outlook for the market. This week the market took back everything it gave the previous week and then some. Unless there is some real resolution to the issues that plague Europe and, I don’t mean another bandage when an amputation is required, we could see a continuation of the sell off. The only possible positive outcome I can see is that maybe we are just retesting the August lows. I think this is a slim possibility at best. I think the Fed said it best this week when they said there is “significant downside risk.”

Market Timing – Weekly Stock Market Strategy – May 2011

Weekly stock market strategy updates that went out to subscribers during May 2011. To receive current weekly update sent to your email, click on the FREE TRIAL link at the top of the page.

Weekly Market Update 5/1/11

I have moved the intermediate-term market call to bullish. The upside breakout on Wednesday took my indicators back to bullish. I did not send out a mid-week update because I feel the risk is to high to get back in at these levels.

In case you haven’t heard Fed Chairman Bernake held an unprecedented press conference after the FOMC meeting on Wednesday. The movement in gold since the press conference is a no confidence vote for the dollar. Gold has risen almost 4% since Tuesday. This is also the primary reason behind the move in the stock market. The dollar has lost 17% since last June and the SPY is up 29% over the same time frame. If or when the Dollar decides to take a breather from this massive sell-off the stock market rally is over. The Dollar is nearing major long-term support at 72. The Dollar should get a bounce and the stock markets should see a correction.

Jobless claims again came in solidly above its 4-week moving average. This Friday brings the monthly unemployment figures. This number always has the potential to change the market trend.

Weekly Market Update 5/8/11

Fridays Employment Situation numbers showed an up tick in the headline unemployment rate. The market took the overall release as bullish taking the DJIA up triple digits in early part of the session before giving a good part of those gains back heading into the close. Personally I didn’t see anything that excited me. Some of the less reported releases were showing that the jobs that are being created are of the part-time variety. I can hardly get exited about that. Jobless claims on Thursday were worse than expected too. The 4-week moving average of Jobless Claims jumped over 20,000 from the prior week and is over 40,000 higher than a month ago. Remember I said until we have seen the 4-week moving average decline for a while the economy is not improving.

The markets spent most of the week in correction mode. There are two things that helped in initiating or perpetuating the sell-off. One is the Dollar, and the other rising margin rates on various futures contracts. The Dollar reached long-term support and was due for a bounce. Margin increases in some of the overextended futures helped insure that they would see a short-term correction. I am not so sure it was a coincidence that these two events occurred at the same time. Raising margins on Silver and Crude for example were bound to have a greater effect (cause a larger correction) if they coincided with a rising Dollar. What better timing than when the Dollar reaches a support level that is likely to cause a bounce. If you are willing to take this a step further what are the chances the Fed may have had something to due with encouraging the margin increases. If the futures corrections are large enough, the Fed just might be able to justify QE3.

A stock-bond ratio model that I follow has now turned bearish. We are currently only 25% exposed to the market and I am not changing that at this point. This may however change my desire to buy any dips at this point. I know last week the intermediate-term market call moved back to bullish. Normally I would be looking to buy dips now however, with the change in the stock-bond model I feel much better being mostly in cash.

Weekly Market Update 5/15/11

It was a relatively quiet week. All the major indexes ended the week just about where they started. The Debt ceiling is starting to make more and more headlines. It is possible that this will begin to weigh on the stock market.

Weekly Market Update 5/22/11

It was another quiet week with mild losses for the stock market. The dollar rally has slowed for the time being and the moves in stocks and commodities have paused as well. Rest assured as soon as the dollar starts to move again these other markets will too. The debt problems in Ireland and Greece are again making headlines. Albeit not to the extent they did before. The news is still really bad and you have to wonder how much longer the rest of Europe will be willing to keep bailing out the more indebted nations. Keep an eye on what happens in Europe some of the same things could be coming to a city or state near you.

Weekly Market Update 5/29/11

There was not much excitement in the markets this past week. The economic reports are still painting a less than rosy picture. Unemployment claims were still solidly over 400k. GDP has gone from a respectable 3.1% in Q4 of 2010 to 1.8% in Q1 of 2011. More evidence the economy is far from recovery. This patient is on life support. Friday we have the monthly Employment Situation. I would be surprised if we saw anything positive come out of that report.

I have been working on a theory as to why I think a Third round of quantitative easing , or QE3, is a forgone conclusion. The U.S. has to much debt. $14 Trillion is the number that is often mentioned in the press but this number does not include unfunded liabilities. I have seen estimates that our national debt with unfunded liabilities is as high as $144 Trillions. That is $1.2 Million per taxpayer. Does anyone think we have a chance in hell of paying that off? The Fed knows this, and they are taking advantage of the fact that the US Dollar is the world’s reserve currency. When they print more Dollar bills they are exporting inflation. If you think the world hates us now, wait until they figure this one out. The problem is the Fed has been catching some heat for QE1 and QE2 so they have announced that this operation will end June 30. A few events happening at the same time have caused the Dollar to rally.

Those items are:
The Dollar reached long-term support.
The Euro is in more trouble than the Dollar.
A major retracement in some commodities.
Our economy is not yet in recovery mode.
Currently politicians and voters do not have the cajones to make the tough decisions.

I believe that the bounce in the Dollar and decline in commodities will make it easier for the Fed to justify QE3. However, there will need to be some economic reason that will be used as the primary reason for needing another round of quantitative easing. I could be wrong on this part but a new bear market would do the trick. If the market corrects by 20%, the Fed would feel compelled to do something to support the market. Bernanke himself has said the rising stock market is evidence his policies are working. Therefore a sizeable market correction would give him justification for QE3.

The Euro is in even worst shape than the Dollar. That is good for Bernanke and the Fed. I don’t see how the Euro can survive. France and Germany as well as the European banks will tire of extending counties like Greece, Ireland, Portugal, Italy and Spain more money. I would be surprised if the Euro can last two more years. Remember the motto of the current administration, “Never let a serious crisis go to waste.”

As soon as we see some major economic event, the kind of event that could justify QE3, I think it will then be time to put the “Risk Trade” back on. Until then I think it is probably best to sit on the sidelines and keep our powder dry.

Interest Rate Market Timing Model Still on Sell

This week I am going to add an interest rate model to our market timing arsenal. This particular market timing model looks at the yield differential between ten-year notes and 13-week T-bills. I am not an economist but it appears the market performs better when the differential is declining. Most likely this would be caused when the t-bill rate is increasing relative to yield on ten-year notes. This might happen if the economy was running on all cylinders, and the Fed was raising interest rates in order to slow down the economy. The opposite might be occurring if the differential were rising. The economy could be in the doldrums and the Fed is easing interest rates in an effort to jump-start the economy.

I looked at differential at the end of each month. It is more the trend in the differential that we are interested in, so I do not feel it is necessary to look at the differential on a daily basis. I placed both a 9-period and a 26-period moving average on a chart of the interest rate differential. I would sell the SPY and go into cash if 9-period moving average moved above the 26-period moving average. I would go long the SPY when the 9-period moving average moved below the 26-period moving average. This market timing system only gave three round turn signals in the last ten years. $10000 invested in SPY on 7/31/2000 (the date of the first buy signal) and held until 7/31/2009 would be worth $6349.01. The interest rate model taking only long signal (because I can’t go short in my 401k) would have grown from $10000 on 7/31/2000 to $13,024.27 on 10/31/2007. This is the date of the last sell signal and does not include dividends while in the market or interest earned while out of the market. This means a buy and hold investor, even after the nice up move from the March lows, would still be looking at a drawdown on his or her account of at least 51%.

No market timing system is perfect and this one is not either. Of the three buy signals given since 2000 only two were winners. This system is still on the sideline so it has not caught any of the move from the March lows. This is why I prefer to track multiple market timing models at the same time and diversify my investments among the various timing models.

Market Timing with Moving Average Envelopes

I was reading Barron’s last week. One of the articles I read made reference to a simple system for timing the market. This market timing system was simply a 200 day moving average with a 5% band above and below the moving average. A buy signal occurs when the market closes above the upper band. The lower band is used to exit long positions.

The system generated two signals over the last two years. It generated a sell signal on January 4, 2008 and kept us out of market until a buy signal was generated July 15, 2009. This is just one more simple system that will keep you out of the market during severe market declines.

This is just one more system that we will be tracking at BuyandHoldisDead.com. Sign-up now for your frequent free weekly updates.

Stock Market Timing vs Buy and Hold II

There has been a lot of press lately about the buy and hold philosophy. Based on the name of my site I think you know where I stand. It is also more than a bit ironic that I would quote Ben Graham, but some quotes are timeless. I do believe in the underlying principles outlined in his classic Security Analysis. Somewhere along the line value investing got confused with buy and hold. The confusion probably started when Wall Street still needed to sell stocks when they were not a bargain by any stretch of the imagination. That is probably when people started referring to Warren Buffet as a buy and hold investor. Wrong, he is a value investor that is well aware of the tax ramifications of an actively managed taxable account. Value investing is best suited for your taxable brokerage accounts. Most investors probably lack the time and or dedication that are required to research enough stocks so you can have a well-diversified portfolio. The vast majority of individuals have the bulk of their investments in some type of tax deferred retirement account. That is why my focus here is on market timing in your tax deferred accounts.

All that being said, I have been getting a kick out of the arguments made by long-term buy and holders.

Some of the major defenses of buy and hold have a hint of market timing to them. If you are buying cheap and selling dear is that not a form of market timing. Your indicator du jour might be a P/E ratio instead of a moving average but you are still making a prediction about the future price of an individual stock. The funny thing is you would be hard pressed to find a long term buy and holder that thinks he or she is timing the market. I would venture to guess that they would loathe the thought of trying to time the market.

I also see a lot of people saying that because there is so much talk about buy and hold being dead that is the exact reason it is probably not dead. There may be some truth to this in that it is best to probably zig if everyone else is zagging. However that in it self a form of market timing based on sentiment. I wouldn’t buy something just because it is out of favor. For me I need to see positive fundamentals and good price behavior. I am sure at some point in time, on its way to zero, the sentiment for Enron may have made it look like a good contrary investment.

Professional fund managers can’t seem to beat the market. Well this is true but in their defense how many mutual funds are allowed to be 100% in cash. I would venture to guess not too many. It is not their job to time the market their job is to pick the stocks that will perform best relative to the market. However if the market goes down it will tend to take most stocks with it. Lets not forget the fees associated with investing in mutual funds. From the starting gate mutual funds start out in the whole relative to the overall stock market.

Market Timing is voodoo. I get a kick out of the fact that just because someone wins a noble prize in economics, their theories become widely accepted. Then everyone using that noble prize theory somehow thinks they are smarter than the market. Maybe people feel better if they lose money investing along side a bunch of PhD’s. I for one do not think I am smarter than the market but I will let the market show me the path of least resistance. If and when market timing becomes widely accepted the market will probably be a very different animal.

I am sure there might be something I missed here but I hope you get my point. There are times when the risks associated with being in the market are out weighed by any short-term benefits of being in the market. I think this is one of those times. State budgets across the country are bleeding red. They will have to raise taxes or layoff state workers, neither of which will stimulate the economy. I could see the writing on the wall when the housing market collapsed where I live. I can’t for the life of me understand how so many economist and market analyst couldn’t see this coming. Then they were in a state of denial for the first six months of the downturn. Please don’t expect them to know when this will end either. I don’t claim to know when it will end, but I will say I don’t think it is over yet.