Dewey Wins!

Wednesday’s Wall Street Journal’s front page headline was “House Balks at Cliff Deal”.  Ooops!  They settled the cliff-deal when the House voted in favor of it.  Dewey didn’t win either.

THE CLIFF RESOLUTION (CNBC)

“...critical issues, including reduction of the deficit, remain unresolved. Meanwhile, the economy doesn't have much growth to give. Mark Vitner, senior economist at Wells Fargo, predicts it will expand just 1.5 percent in 2013, down from a lackluster 2.2 percent in 2012...Ben Schwartz, chief market strategist for Lightspeed Financial, said unemployment was still likely to edge up and retail sales growth was likely to be weaker than last year...‘Regardless of a deal getting done, people on Wall Street are not going to run around giving high fives,’ Schwartz said. ‘The federal government is obviously dysfunctional, to say the least.’”
http://www.cnbc.com/id/100348219

This was a do very little, tax-deal that kicked the can down the road and simply delayed resolution of sequestration and spending cuts until 1 March.  Holy, debt-ceiling Batman…what a mess.  We’ll go thru this whole thing again, and believe it or not, all parties seem even angrier than before the vote.

REMINDER – MARKET HISTORY (Hussman)

“Among cyclical bull markets in secular bear periods, the current advance – at about 45 months in length – is second in length only to the 2002-2007 bull market advance …On average, these advances have been followed by market declines of about 39%…Cyclical bear markets in secular bear periods have typically wiped out not just half of the preceding bull market gain – which is average – but close to 80% of the preceding bull market gain. It’s not clear what portion will be surrendered in the present cycle, or necessarily when, but I have every expectation of observing the normal range of full-cycle opportunities as we move forward from here.”  – John Hussman, PhD, Weekley Market Commentary, Brief Holiday Update
http://www.hussmanfunds.com/

MORE MARKET HISTORY (dShort Advisors)

“...today's P/E10 relates to the past, our chart includes horizontal bands to divide the monthly valuations into quintiles — five groups, each with 20% of the total. Ratios in the top 20% suggest a highly overvalued market, the bottom 20% a highly undervalued market... By this historic measure, the market is expensive, with the ratio approximately 29% above its average (arithmetic mean) of 16.5 (16.46 to two decimal places). Last month it was 27% above.

...(The) latest P/E10 ratio is approximately at the 82nd percentile of the 1583 data points in this series.

“A more cautionary observation is that when the P/E10 has fallen from the top to the second quintile, it has eventually declined to the first quintile and bottomed in single digits. Based on the latest 10-year earnings average, to reach a P/E10 in the high single digits would require an S&P 500 price decline below 540. Of course, a happier alternative would be for corporate earnings to continue their strong and prolonged surge. If the 2009 trough was not a P/E10 bottom, when might we see it occur? These secular declines have ranged in length from over 19 years to as few as three. The current decline is now in its 12th year.”  Full story,  dShort Advisors at…

http://advisorperspectives.com/dshort/updates/PE-Ratios-and-Market-Valuation.php

MORE SCARY OBSERVATIONS

The P/E10 is now only 13% below its value at the START of the 1966-1982 secular-bear market.  We can easily see from the charts that in the past, secular bear markets have frequently ended after 3-major declines.  (We’ve had two so far.)  As Doug Short noted, bear markets usually end when the P/E10 is in single digits – at least S&P 540!  OMG!

We must admit that a debt crisis (triggered in Japan, Europe, or the US) leading to recession could send us there.

MARKET RECAP

Wednesday the S&P 500 was up over 2.5% to 1462 (rounded).  VIX was DOWN an astonishing 18.5% to 14.68.  The astonishing part is that the VIX was down over 20% Monday.

NTSM – NOW BUY (but wait, there’s more)

The NTSM analysis switched to BUY Wednesday as VIX crashed back below 15 and Volume and Price jumped on Wednesday’s big move up.

This creates a bit of a conundrum.  Price, Volume, and VIX are all positive.  Sentiment is still a screaming negative.  Sentiment was still 67%-Bulls over a 5-day moving average (that's a negative for the market) as of Monday the 31^st.

This sort of disagreement (extreme-negative sentiment, and bullish Volume and VIX) occurred in April 2011 about 2-weeks before the top; Sentiment was correct then.  That’s the only similar example I could find going back to 2009.

I will be patient and wait for further confirmation of the buy signal.  The cliff has made a mess of the NTSM numbers and created a lot of confusion – just ask the Wall Street Journal.

Chart wise, the S&P 500 is close to its prior high of 1466 and just may drift down from here if it can’t get higher.  My earlier prediction was that we would see a relief rally and then some selling.  We’ll see.

MY INVESTED POSITION

Based on the SELL signal, 7 November 2012, I moved out of the stock market at 1377 on the S&P 500.  Because of the negativity I have noted from Hussman and others, I am currently invested in a range of near 15% invested in stocks.   

While I don’t like missing the rally over the past couple of trading sessions, there was no way it could be predicted, so I am OK with better safe than sorry.  I posted some scary stuff above about Market History; remember, we can't know the timing of the next crash, if there is one, so it's best not to be too scared to be in the market, i.e., if the numbers look good I'll get back in.