Here are two related articles.
OBAMA IS NOT TO BLAME FOR
THE CORRECTION
by Michael
A. Gayed, CFA, Chief investment strategist and co-portfolio manager at Pension Partners, LLC.“The hard selloff in equities Wednesday seems to have taken many by surprise, with various pundits arguing that the drop was directly because of Obama winning the elections...However, as followers of my writings know, deterioration has been in place within markets ever since QE3. Our ATAC models used for managing our mutual fund and separate accounts have been warning of a harsh environment for equities, keeping us in bonds despite every “nouveau bull” in the world believing stocks could not go down in the face of the "Bernanke Put"...Take a look...at the price ratio of the DB Commodities Tracking Index Fund relative to the S&P 500...price has been warning of a correction and deflation pulse for about six weeks now BEFORE the elections. So stop listening to talking heads, stop listening to pundits, and stop listening to spin. Instead, do yourself a favor, and listen to price." Full story at...
http://www.marketwatch.com/story/obama-is-not-to-blame-for-the-correction-2012-11-08?link=mw_story_kiosk
RECESSION
WARNING
from The Reformed Broker (Joshua Brown)
"Today I'd like to talk about the relationship between earnings recessions and economic recessions. Because we're beginning to have the former, which typically leads to or coincides with the latter. Don't get mad, that's what the data says.
This is important because stocks should not continue to climb under these circumstances. Note that I said should not, not will not.
from The Reformed Broker (Joshua Brown)
"Today I'd like to talk about the relationship between earnings recessions and economic recessions. Because we're beginning to have the former, which typically leads to or coincides with the latter. Don't get mad, that's what the data says.
This is important because stocks should not continue to climb under these circumstances. Note that I said should not, not will not.
Seth Klarman
of the Baupost Group would agree with me. Here's what he told his investors in
a letter the other day (via Distressed Debt Investing):
"The overall market environment seems increasingly risky to us, as securities prices are rising despite weak and generally deteriorating global fundamentals. U.S corporate earnings are expected to be lower this quarter. Higher markets in the face of eroding fundamentals can be a toxic combination. A market rising for non-fundamental reasons (i.e., QE and ECB bond repurchases) is always one that demands a healthy dose of skepticism." Full blog at ..
"The overall market environment seems increasingly risky to us, as securities prices are rising despite weak and generally deteriorating global fundamentals. U.S corporate earnings are expected to be lower this quarter. Higher markets in the face of eroding fundamentals can be a toxic combination. A market rising for non-fundamental reasons (i.e., QE and ECB bond repurchases) is always one that demands a healthy dose of skepticism." Full blog at ..
FROM FACTSET (www.factset.com/earningsinsight)
“Downward Estimate
Revisions…For the fourth quarter, 56 of the 74 companies (or 76%) that have
issued EPS guidance have guided earnings below analyst expectations. If 76% is
the final percentage for the quarter, it will mark the highest percentage of
negative guidance for a quarter since FactSet began tracking guidance in 2006.”
“Earnings Growth: The
blended earnings growth rate for Q3 2012 is -0.5%. If -0.5% is the final growth
rate for the quarter, it will mark the end of the eleven-quarter streak of
earnings growth for the index.”
I rest my case.
MARKET
RECAP
Thursday the S&P 500
fell 1.2% to 1395 (rounded) and VIX fell 3% to 18.49.
Repeating yesterday’s
comment (it’s true for today, again): Market internals (breadth and new-highs/new-lows)
remain neutral to negative.
Again, there was late-day
selling – all negative for the markets.
MARKET TECHNICALS
Thursday, the S&P 500 slightly
broke its 200-dMA by about 0.2%, but in my opinion, that fact alone is irrelevant. As I noted yesterday, the S&P 500 is now
in a downtrend. That is based on the significant
break of the lower trend line on the 3-month chart. NTSM
The NTSM analysis was SELL again Thursday.
I
always like to see continuation of signals when there has been a change in
direction since a 1-day signal might be quickly reversed. Don’t get me wrong, the market can always
reverse, but it is less likely if I see a series of signals that agree.
VIX fell today and that is
counter to the expected direction. VIX
should be going up signaling higher volatility.
One reason it isn’t, might be that the Options-boys just haven’t bought
into the idea that the Market is correcting.
They are betting on future prices and apparently they don’t expect the
prices to be too much different in 30-days.
More on the subject…
From http://en.wikipedia.org/wiki/File:Vix.png
: “The VIX is quoted in percentage
points and translates, roughly, to the expected movement in the S&P 500
index over the next 30-day period, which is then annualized.”
For the current VIX of
18.49, this represents an expected annualized change of 18-1/2% or a move of 4.3
% (up or down) over the next 30-days. That
is, index options are priced with the assumption of a 68% likelihood (one
standard deviation) that the magnitude of the S&P 500's 30-day return will
be less than 4.33% (up or down). Clear
as mud? Yes VIX was invented by a Professor.
In
the past it has sometimes taken quite a while after a top for the VIX indicator
in the NTSM system to switch to sell.
Still, I’d feel better that my call is right if my VIX indicator would
confirm the sell signal.
MY INVESTED POSITION
Based on the SELL signal, 7
November 2012, I moved out of the stock market.
Because of the extreme negativity I have noted from Hussman and others,
I am currently invested in a range of near 15% invested in stocks. I also took short positions on the morning of
the 8th that make me currently net short the S&P 500. (I am using Guggenheim (formerly RYDEX) funds
and 2x Short ETF, SDS. Those are dangerously
volatile so I don’t recommend them unless you have a BIG tolerance for risk. Also, if they are held too long they may not
perform well.
As
I have noted before, others may choose to keep more invested in stocks without
too much damage to their portfolio if the invested % is low. For example, if one were to keep 30% invested
in stocks and the market crashed by 50%, the loss to the portfolio would only
be 15%. If that is your plan, keep the
low-beta stocks (those with lower P/E ratios) such as utilities, consumer
staples, or value oriented mutual funds.
Sell technology. Keeping 30%
invested in stocks is actually a pretty good strategy since it hedges the bet
if I am wrong and the market continues up after a sell signal.
To
be clear I am not predicting a crash; but there seems to be a lot of risk
now. I’ll get back in when the NTSM
system switches to buy sometime in the future.
