Out Till Monday.

I have a client appointment in Indianapolis today.  Next post will be on Monday!

an tSionna 4.28.10

Stocks on Tuesday sold off a little over 2%. It was the market's worst day since this rally began back in February. There was heavy volume, market breath was very poor and stocks seemed to have a steady bid of selling all day long. Tape readers would call days like Tuesday distribution days. While one or two distribution days does not make necessarily make for a market top, the action in underlying securities and the market's inability to reach any real rebound yesterday means that we need to be on our toes.

While the market may be using the news out of Greece and Europe as an excuse to sell, the real culprit likely is that we've experienced a great rally and stocks are tired. We are currently very over bought and I've outlined that on the chart above {double click it to make it larger}. I've also outlined on that chart certain support and resistance lines that we'll use as a guide for clues as to market direction.

Given the action we've witnessed this week I have moved my short term thinking to Net Market Negative. You can find my definition of that term here and what that means. Given the market's advance, I updated our game plan at the end of March in order to identify where I would do some selling in accounts given the unique risk reward characteristics of our clients and our investment systems. I have executed the first tranche of that plan this week.

Most of what we have sold this week has only affected trades initiated at the end of the 2009 or during the late January/early February market decline. I've also raised cash in certain accounts where this position has fallen below targets given the market's recent advance. I have not at this point taken any action with longer term positions. That could change if the market begins a more substantial decline.

Please understand that this only affects my short term thinking on stocks based on our historical studies of money flows. That stance could change rather quickly given market activity and it would not surprise me if stocks actually advance at least into the beginning of next week.  We after all are now up against certain historical end of month patterns which are often positive for stocks.   Longer term-that is looking out over the next 6-18 months-I think stocks are still undervalued.  Thus given what we know today about the economy, I would be inclined to put money back to work on pullbacks or if the current over bought status of most markets works itself out by stocks spending a certain amount of time going nowhere in the next few weeks.

Perhaps a better way of explaining my thinking is to say that stocks are currently showing a higher probability of some sort of correction occurring now than they did a few weeks ago.  I believe we need to respect that possibility. Thus I think the short term risk/reward scenario is more negative than it was a few weeks ago. Now there is no law that says that stocks might not turn around from here and confound investment professionals by heading higher. While stocks are currently over bought by my work they can also correct that phase by time as well as price. Indeed if the pattern of the last year holds then that is exactly what will happen. But if I'm wrong about my market timing for clients I will still have what I think is adequate exposure to a market rise given where we currently stand in the economic cycle. If I'm right and stocks enter some sort of corrective phase then I will have cash to look for opportunities down the road.

One final thought. I was taught by the consigliere that stocks will do what they have to do to prove the most amount of people wrong. I'm sensing for the first time in a while that what would cause the most pain is a decline and not an advance in price.

*Long ETFs related to the S&P 500 in client accounts. The above note and chart should be used for informational purposes and relates solely to the management of client accounts by our firm. Casual readers of this blog should consult their own investment advisor or do their own homework before acting on any information read here. This should not be construed as a guarantee that any future event shall occur. Since I only know the unique characteristics of my clients outside readers of this blog use this information at their own risk.

Barrons Market Week

This was from the cover of Barron's magazine in their Market Week Section.  I didn't see it on line so I can't link to it.

"The Lehman Gap has been filled.  The S&P 500 has recouped most of the losses from the meltdown phase of the bear market-when the failure of Lehman, the rescue of AIG and the initial defeat of a bailout bill turned a ho-hum recessionary bear market into a cataclysm.  Now what?  Sure the share of Netflix and Chipotle Mexican Grill rose more than 10% in a day on strong earnings.  But can better news from consumers drive stocks still higher?  When investor sentiment is that cheerful, look out:  Stocks may be ready to rest or retrench."

Source:  Barrons Market Week.  Page M1. April 26, 2010.

*Long ETFs related to the S&P 500 in client accounts.  Netflix and Chipotle Mexican Grill are securities within certain ETFs in which we have positions for clients but we do not directly own these securities in any client or personal account. 

an tSionna 4.26.10 {QQQQ's}

Nasdaq 100.  Over bought like every other major index chart.  When this ends is anybody's guess although there has been some underlying damage in individual stocks in many indices these past two weeks.  Stocks can stay over bought or over sold longer than most of us believe. 

*Long ETFs related to the Nasdaq 100 in certain client accounts.  Long QQQQ in many client and personal accounts.

Repairing Houses This Weekend.

I'm working in the "Burbs" this weekend repairing houses with the church gang as part of an Earthday thing.  No posts until Monday!

Individuals Not Bullish

This was an interesting tidbit published yesterday by Bespoke Investment Group.

"Following last Friday's announcement by the SEC that it was charging Goldman Sachs (GS) with fraud, many have made the argument that the events would drive the individual investor away from the market. With Goldman being accused of misleading its own clients, the case seemed to provide further evidence that the deck is stacked against the individual investor. If this week's survey from the American Association of Individual Investors (AAII) is any indication, then there is truth to the argument. In the last week, bullish sentiment showed its largest single weekly decline since November, dropping from 48.5% to 38.1%. Interestingly, the large drop in individual investor sentiment comes at the same time that newsletter writers, apparently unfazed by the SEC v. Goldman suit, turned even more bullish."

My thoughts:  Most of my clients are individual investors.  I would not describe them as either very bullish or very bearish right now.  While I have noticed some people willing to take on more risk, particularly I have been asked by a few people why we have any cash in accounts right now (note:  professionals always have some cash...).  I think the majority are just content right now to surf this wave higher.  I don't get the sense for example the majority of them would fight me if I said I want to raise a substantial amount of cash in their portfolios.  When that happens I'll think we are at a major market top. 

Individuals continue to pour money at a record pace into bond mutual funds and ETFs.  With bonds likely at generational lows this is likely to not end well.  We discussed this point here when we wrote about  Mutual Fund Money Flows back in February.

Link:  Individuals Not Bullish

Market Returns Various Indices

Chart from 24/7 Wall Street from The Chart Store showing how far major indices fell, how far they've come back and how far we still are off of our 2007 highs. 

They note that the DJIA is up 70% over the last year and the NASDAQ has almost doubled. But, most market indices are still down 15% to 25% from their late 2007 highs. Some traders speculate that the market has run too far, too fast.  If employment starts to pick up, housing improves, and corporate earnings continue to rocket in the second quarter, the precedents set by 2007 tops could disappear as the market breaks through them.

Link:  Index Returns

*Long ETFs related to the Nasdaq in client and personal accounts.  Long ETFs related to the Dow Jones Industrials, S&P 500, and certain small and midcap ETFs in client accounts.

Barrons on Goldman & the Banks.

Gloomy piece published yesterday in Barrons on the financials after the Goldman Sachs indictments. 

Steriod Era Ends For Finance.  {Excerpt}

.....The mortgage bonds that aided and abetted the subprime boom have something in common with Barry Bonds. Both were artificially juiced, and the subsequent curtailment of performance-enhancing substances imply less spectacular output in the future.

That is the broader implication of the charges being brought against Goldman Sachs (ticker: GS) by the Securities and Exchange Commission. The powerful bank represents what everybody resents, from Tea Partiers on the Right to the Krugman acolytes on the Left. Even many readers of Barrons.com, which would include a broad swath of the financial community, express the desire for a mass perp walk down Wall Street to the East River......

.....Drexel Burnham Lambert stood astride Wall Street in the 1980s with its junk-bond machine powering the deals of the day. But Drexel disappeared in a flash after Michael Milken, the king of the junk-bond market, was indicted (and eventually convicted) of securities-law charges.  Salomon Brothers, which dominated the bond market from the 1970s for the subsequent two decades, wound up being subsumed into what has evolved into Citigroup (C) after the 1991 scandal of submitting false bids in a Treasury securities auction. In effect, Solly was punished for buying too many T-notes. Nevertheless, Salomon has become a footnote......

It's unlikely Goldman will slide down a similar slippery slope. So far, only civil charges have been brought against the firm by the SEC. And published reports say the Commission voted by a bare 3-2 majority, along party lines, to file the action. So, it's hardly and open-and-shut case.

David P. Goldman ....thinks the firm will wind up paying a hefty fine and possibly fire some managers to pour encourager les autres, which means, in effect, to get the other firms to toe the line by making an example of one.

It is difficult to doubt that the SEC's suit against Goldman was timed to help give a push to financial-reform legislation in Congress. Even were that not the case, the regulatory tide is turning against the unbridled policies and practices of the past. 

In its place, Goldman sees commercial banks being turned into a virtual public utility, which implies constrained lending and investment policies by these increasingly regulated institutions. And they are bracing for increased supervision by regulators.  One result, he says, given the capital requirements ahead, is that banks have been continuing to hoard cash because of prospective legislation. As a result, he says banks' loan books remain stagnant.  Instead, David continues, banks are loading up on Treasuries, which costs next to nothing to hold because of zero capital requirements.

"Foreign banks (which might also be branches of U.S. banks) are financing the federal deficit. The savings rate is just 3% which means that there can't be a huge flow into real-money investors. Entrepreneurs can't get money anywhere and there's no money available for illiquid stuff like private equity. Looks like Europe or Japan to me -- especially if we throw in the demographic profile."

Banks restrained by capital needs or regulators aren't in a position to fund an economic recovery. That's taken away the juice from the economy, which will mean fewer dingers for consumers and entrepreneurs dependent on bank credit.

Comment:  I think financials are still cheap given what they've been through this past year.  I also think that the Goldman indictment could put a damper on their price appreciation for a while.  I think longer term that financials will not be given the same multiples they've enjoyed in the past two decades but for now they still have a ways to catch up given how depressed their earnings have been.  While I think they may be slower growers in the months ahead I think there is still value in these names.  Not every firm has Goldman's issues right now.  The multiple issue is likely an issue to be addressed as financials become more fairly valued.

Link: Steroid Era Ends For Finance

*Long ETFs related to financial securities in client and personal accounts.  While Lumen Capital Management does not own shares in Goldman Sachs it is a component of some of the ETFs that we own for clients.

Bear Market Rallies

Last week the folks at Chart of the Day took a look at stock market rallies after bear markets when stocks have declined greater than 30%.

"{Last Week's} chart illustrates rallies that followed massive bear markets. For today's chart, a 'massive' bear market is defined as a decline of greater than 50%. Since the Dow's inception in 1896, there have been only three bear markets whereby the Dow declined more than 50% (early 1930s, late 1930s until early 1940s, and during the very recent financial crisis). Today's chart also adds the rally that followed the dot-com bust during which the Nasdaq declined 78%. One point of interest is that the current Dow rally has followed a path that is fairly similar to that of the Nasdaq rally that began in late 2002. It is also worth noting that each rally lasted from about 300 to 370 trading days and then moved into a trading range/choppy phase that lasted for a year or more. In the end, the current post-massive bear market rally is by no means atypical."

Link: Bear Market Rallies.

*Long ETFs related to the S&P 500 in client accounts.  Long ETFs related to the Nasdaq in client accounts and the Nasdaq 100 {QQQQ} in client and personal accounts.

An tSionna {Down Day}

Well we finally experienced  that large down day I was referring to back at the end of March.  {See here:  An-tSionna 3.29.10.}   We'll have to see if this is a short term blip or something that is a bit longer lasting at this point.  Hard to say which way the market will go right now.  We're extremely over bought at this point but there seems to be an awful lot of money that now wants to own stocks.  Please go back and re-read that 3.29 post about being defensive as my thinking then regarding the game plan still applies.

*Long ETFs related to the S&P 500 in client accounts.

An tSionna {Goldman Sachs}

This is why I think it's tough to own stocks over 100 dollars in individual accounts.  That's 13% of pain for one position.  Hard to game this right now.  We'll have to see how Asia treats this on Sunday.  Hard to believe this isn't part of a coordinated effort on the government's part in lockstep with financial regulation. 

Ouch-Finanicals!!!

Financials take it on the chin on the Goldman news.

Ouch!!!!

*Long KBE in certain client accounts.

Out Today.

I'm out today & tomorrow visiting clients.  I will resume posting on Monday.

Trend Following Beats Market Timing!

Trend following is one of the important parts of our playbook.  We derive much of how we follow trends by our analysis of money flows.  Thus I was interested in this column put out by the folks over at Dorsey, Wright.  Excerpt, my highlights:

Mark Hulbert has been tracking advisory newsletters for more than 20 years. Lots of these newsletters are active market timers, so in a recent column, he asked an obvious question:  The first question: How many stock market timers, of the several hundred monitored by the Hulbert Financial Digest, called the bottom of the bear market a year ago? And a follow-up: Of those that did, how many also called the top of the bull market in March 2000 — or, for that matter, the major market turning points in October 2002 and October 2007?......Although there are pundits who claim to have called the bottom to the day, Mr. Hulbert allowed a far more generous window for labeling a market timing call as correct.

… {Hulbert's} analysis actually relied on a far more relaxed definition: Instead of moving 100% from cash to stocks in the case of a bottom, or 100% the other way in the case of a top, {he} allowed exposure changes of just ten percentage points to qualify.  Furthermore, rather than requiring the change in exposure to occur on the exact day of the market’s top or bottom, {he} looked at a month-long trading window that began before the market’s juncture and extending a couple of weeks thereafter.

That’s a pretty liberal definition: the market timer gets a four-week window and only has to change allocations by 10% to be considered to have “called” the turn. And here’s the bottom line:  Even with these relaxed criteria, however, none of the market timers that the Hulbert Financial Digest has tracked over the last decade were able to call the market tops and bottoms since March 2000.

Yep, zero.....It’s not that advisors aren’t trying; it’s just that no one can do it successfully, even with a one-month window and a very modest change in allocations. Obviously, there is lots of hindsight bias going on where advisors claim to have detected market turning points, but when Mr. Hulbert goes back to look at the actual newsletters, not one got it right!....

Link:  Trend following beats market timing!

Like the fellows at Dorsey, Wright (who by-the-way gave us some of our first lessons in money flow analysis) I don't know where the market will be on a going forward basis.  We can us money flow analysis to give us a list of criteria and probabilities.  From these lists we have developed the playbook and from that we build our current game plan.  We do however also try to follow trends as they present themselves  and try to stay with that for as long as possible.  

Job Loss

From The Street.com via Calculated risk.com

Link:   Job Loss  {Subscription may be required}.

This recession has been deeper and more prolonged than any since World War II.

an tSionna 4.12.10

Weekly chart of the S&P 500 dating back to the summer of 2007.  While we've come a long way since the dark days of last spring we still are far under water from where we traded late in 2007.  We're still down nearly 25% from those levels!

*Long ETFs related to the S&P 500 in client accounts.

Nasdaq

Chart of the Day takes a look at the NASDAQ:

"For some perspective on the current state of the stock market, today's chart presents the long-term trend of the Nasdaq. Today's chart illustrates the degree by which the tech-laden Nasdaq plunged during the dot-com bust (2000-2002). The Nasdaq then rebounded sharply into 2004 whereby it continued its uptrend (albeit at a relatively modest pace) during the real estate boom. Beginning in late 2007, the trend turned sharply to the downside as fears of an outright collapse of the financial sector took hold. As it became apparent that the financial sector would survive, stock prices rebounded sharply with the Nasdaq currently trading fairly close to what was once pre-crisis support (green line). It is worth noting, however, that the post-crisis rally has been slowing over time and is currently approaching resistance (red line)."

Link:  Chart of the Day:  NASDAQ

*Long ETFS related to the Nasdaq composite in certain client accounts.  Long ETFS related to the NASDAQ 100 in certain client and personal accounts.

an tSionna 4.08.10 {Shhhhhh-Gold Is Breaking Out!}

Its been a while since we've taken a look at a chart of the gold ETF {GLD}.  As you can see it's quietly staged a breakout this week.  It's also not over sold except in our shortest time frame by our work.  Gold might pull back a bit now given this recent move. It's up about 4% in about a trading week.   In fact as I write this, the gold futures are trading down.  However, this type of chart suggests that gold and the GLD still has the potential to move to the upside.  Again just looking at probabilities.  GLD could defy what we think will happen and trade right back down so do your own homework if you are not a client of our firm.  Not to be construed as a recommendation to buy or sell this or any other security!

*Long GLD in certain client accounts.

42 Days!

According to Bespoke Investment Group it has now been 42 days since the S&P 500 has had a pullback (one-day or multi-day) of 1%. Since 1990, there have been 10 other periods where the index went 40 days or more without a 1% pullback. The table {above}highlights these occurrences.

The S&P 500 is up 8.75% over the last 42 days. As shown, the number of days without the 1% pullback ranges from 40 to 70, and the price gain ranges from 4% to 9%. So while there have been longer periods of time without a 1% pullback, the current gain of 8.75% without a 1% decline is at the top end of the range over the last 20 years. Interestingly, once the streaks ended, the decline of 1% or more never got worse than -2.53% before another gain of 1% or more occurred.

Comment:  Everybody uses the 2004 analogy for how the market ought to trade this year.  I'm not sure that's the correct pattern to study but if it is then I notice that two of these occurences happened in that year!

*Long ETFs related to the S&P 500 in personal and client accounts.

Link:  42 Days & Counting

Barrons: Time To Mark Time.

An excerpt from Barrons last weekend.  I like the way Mr. Santoli thinks.  Highlights with a comment at the end.

Time to Mark Time

By Michael Santoli 

....With each little downside wiggle being treated as a gift rather than a warning, the five-week, 6% climb in the Standard & Poor's 500 has been at a rather gentle slope, and has defied the popular (yet still valid) calls for a rest or retrenchment. Friday's March employment data showing a moderate gain in net new jobs, arriving with the stock market closed, did little to upset the recent trend.....

.....For all the familiar talk that this crisis-and-recovery period is unique and untethered from past cycles, we're at a point where the bull market in "unprecedentedness" that began in 2008 is rolling over. Consider this take on the economic and bond-market setup prior to the jobs data: "Many investors focused just on the slowness of job growth and had ignored other economic data, including the drop in initial unemployment claims, the rise in temporary hiring and increases in indexes of the service and manufacturing sectors of the economy." This comes from the New York Times' write-up on the March employment report -- March of 2004, that is.

Indeed, 2004 remains a favored touchstone for market observers as a guide to the current period, both of them post-recession vigils for an easy Fed to become less easy, as questions loom over the forward course of a gaudy year-old market rally.

It's easy, and therefore common, to cite the near-75% gain in the S&P 500 since the March 2009 low and marvel at its magnitude.......{Yet} no market that has lost $4.4 trillion in value since October 2007, as measured by the comprehensive Wilshire 5000, can be said to be anywhere near an all-time high.This is the proper context for the 74% gain in the S&P, which has merely recouped 57% of the bear-market losses, reattaining a level first reached in 1998 and still below where the market collapsed after Lehman failed.

As Mike O'Rourke of brokerage BTIG has noted, on Monday, Sept. 29, 2008, as the first TARP vote failed in Congress, the S&P 500 fell to 1106 from a Friday close of 1213. So this leg of the rally to 1178 since hitting 1100 near Thanksgiving has merely recouped three-quarters of what was lost in a single, sickening day.

Valuation might as well be religion, for how many devotional sects exist. The Wall Street standard of looking at a forward multiple on current-year forecast S&P operating earnings of $77 produces a middling P/E of 15 -- a good deal below, incidentally, where it stood at the same point in 2004. And for those who scoff at the probability of profits gaining 25% from '09 levels to reach that $77, David Bianco of Bank of America Merrill Lynch calculates that the current members of the S&P 500 earned $85 both in 2006 and 2007.  Laszlo Birinyi of Birinyi Associates, who has been and remains unapologetically bullish with a 1325 S&P target, notes this would translate to a multiple of 17 on the 2010 consensus, which he calls "neither cheap nor extraordinary."

More conservative measures-such as the P/E on average annual earnings of the past decade and the P/E on the median S&P stock, kept by Ned Davis Research-make the market look worrisomely more expensive, which should retard multi-year returns.

Put it all in a blender and it still seems the market is ripe for some give-back or time-marking action, yet nothing that would likely cost the bulls the benefit of the doubt over the longer term. Kind of like 2004.

Link:  Time to Mark Time?

Comment:  I think the market is caught at an interesting junction right now.  It is very over bought by our work, yet on a fundamental basis you know that I think we could trade between 1,250 & 1,350 on the S&P 500 sometime in the next 9-18 months.  Part of the reason that I think the market has been moving higher is that investors sense that the $77 consensus earnings number on the S&P 500 is currently too low.  I think that consensus estimate is going to move much closer to $80 as the year progressess absent some kind of currently unforseen event.   Corporate earnings season begins next week and we're likely to start to get a better read on whether my analysis is correct or not.  So far companies have been saying good things and almost the whole world has been up against easy 12 month comps.  We'll have to see how that plays out going forward. 

*Long ETFs related to the S&P 500 in client & personal accounts.

Overbought!

According to Bespoke this morning - 77.4% of S&P 500 stocks are currently overbought‏!

Nonfarm Payrolls.

Chart of the Day weighs in on Friday's jobs report:

{Last Friday}, the Labor Department reported that nonfarm payrolls (jobs) increased by 162,000 in March -- the largest increase in three years. Today's chart puts that decline into perspective by comparing job losses following the beginning of the current economic recession (solid red line) to that of the last recession (dashed gold line) and the average recession from 1950-1999 (dashed blue line). As today's chart illustrates, the current job market has suffered losses that are more than triple as much as what occurs at the lows of the average recession/job loss cycle. It is also worth noting that previous job market declines did not tend to end abruptly but rather flattened out before moving back into an expansionary phase. Today's relatively positive jobs report provides an early indication that the current job market is moving from a phase of stabilization to that of expansion.

Link:  Jobs.

County Kerry, on Easter

Dingle Peninsula, County Kerry, Ireland

Easter Sunday, 2008

Easter Sunday

Happy Easter!!!

Beannachtaí na Cásca

Good Friday

Slane Hill, Ireland, 2008

ETFs: Thinking Post Health-Care

Two posts got me thinking over the weekend about the post health-care world.

The first is part of the same article we excerpted yesterday about municipal bonds. I didn't include this last part in that post because I did not think it was germane to an article about municipal bonds. However this thought is pertinent to those of us who have money tied up in stocks.

From The Barrons article on municipals:

"But long munis may ultimately be the only beneficiary from health-care reform. The stock market could well suffer in the long run. "When combined with potentially higher interest rates, inflation, and regulatory costs, a higher tax burden seems likely to stand as yet another headwind for [price-earnings] multiple expansion," write Strategas Research Partners in a note to clients.

Tax hikes during rallies in long-term, secular bull markets have proved particularly pernicious, Strategas also observes. In 1997, Japan hiked its value-added tax and aborted the recovery in the Nikkei. In 1936-37 in the U.S., the Roosevelt Administration imposed payroll and corporate tax hikes. Both of those increases were enacted as the "bill" for previous fiscal expansion came due."

{Link: Barrons: Health-care Winners. }

The other article was something I read over at Seeking-Alpha regarding taxation on dividends. Here are several excerpts:

"I am writing this article to convey my worries about the new paradigm shift that I see clearly arriving at our doorstep....{T}his new paradigm shift is basically that {the author} believe{s} that many high income investors will eventually switch out of dividend paying stocks and move into high growth, zero to low dividend players that have little or no debt on their balance sheets. ...

....In some states like California total tax rates {could} hit 50-60%. So the story going forward is very simple, those who are in these tax brackets will want to reduce their reportable income dramatically and the last thing they want is to own stocks that will just force them to pay higher taxes. Thus, there will be a shift to high growth, zero to low dividend payout stocks with little or no debt on their balance sheets..... Stocks with high dividend payout ratios usually have little growth associated with them. Thus, if you take away the benefit of the high dividend, you have very little reason to be in them.....{W}ith Capital Gains taxes going from 15% to 28% soon I would expect that most investors who have been in these stocks will sell over the next 8 months and move on to the new paradigm I outlined of high growth and low dividend payout stocks. This will be done mainly to pay the lower 15% capital gains rate."

{Link: Dividend Investors Beware}

First off I will say that I'm not so sure that I think investors are going to by and large make that shift. Individuals have been diversifying away from individual stocks for something like 20 years. Mutual funds, pensions and other institutional investors dominate the stock market now and they only rarely seem to think about tax consequences to their ultimate stakeholders. Individuals attracted to those stocks usually need income anyway and the tax consequences of their actions is usually not their primary concern.

As far as capital gains goes given what we've seen over the past decade it seems likely to me that unless Congress changes the law, individuals doing prudent tax loss harvesting can in many cases mitigate the effects of capital gains for sometime to come.

But these columns got me thinking about ETFs. In general ETFS are more tax efficient than mutual funds because they pay out much less in capital gains. Individuals holding them for years pay no taxes until they sell. I think tax considerations will increasingly become another arrow in the ETF quiver. Look for these characteristics to be trumpeted by the industry as the changes government is forcing on us become more apparent.