Recession? Nah…investors are snapping up Cyclical Stocks

Today was not a happy day for many who were shorting the market (betting it would go down) after the Federal Reserve announcement.  Even Bernanke had previously commented on the “diminishing returns” of QE.  Like many others, I thought the market would react with a “so what” if they announced another QE3, or even sell off on the news, but I didn’t take a position.  

I stopped short-term trading last year; I made money last year, but I actually made more using the NTMS analysis in this blog than I did trading.  The other problem was that I was trading in a non-deferred account and it was an accounting nightmare.  I’m glad I stopped.  As one trader wrote today (regarding his short position), “I will try not to think about the massive losses I have so far.”

What I will do is look for an opportunity to put more into stocks.  Market internals are still mixed so I may have to wait awhile longer.  I am not missing this rally, since I am invested at a reasonable allocation for my age, although 50% in stocks is below my usual.  Regardless, every investor needs to sleep at night.  One well known guide is to subtract your age from 100 and invest that percentage into the stock market.  With bond yields as low as they are (and falling), that may be too conservative.  I expect that even more folks may be forced into the stock market based on the Fed action.  Indeed, that is the Fed's goal.

MARKET RECAP                                                                               

Friday the S&P 500 finished UP 0.4% to 1466 (rounded).  VIX rose 3.3% to 14.51.

NTSM

The NTSM analysis remained BUY Friday.

The VIX indicator is neutral.  It has only signaled buy once this month, on 7 Sept. So while the markets have been showing great exuberance, the longer trends in the options markets have not been as bullish.  That makes me cautious since the VIX indicator is the most reliable in the NTSM system.  

The Morgan Stanley Cyclical Index is going up a lot faster than the S&P 500 which leads us to conclude that the market is not very concerned about recession now.  In other words, investors are betting against recession since they are buying stocks that do poorly in recession and well when the economy is growing.

MY INVESTED POSITION

Based on the BUY signal, 6 July, I moved back into the market on 9 July (after the weekend) at S&P 500 1352. 

I currently have a 50% stock allocation overall.  For my age, that is what most advisors recommend as a fully invested position, however, I am normally much more aggressive.  I have less invested in stocks now because there’s a lot of risk.