Tuesday, May 7, 2013

Buy Cyclicals?

"‘As the economy starts to pick up in reaction to all this stimulus and this anti-austerity that's sweeping the world now, those cyclical stocks will really get a second wind,’ said Anthony Chan of Chase Wealth Management.”  Story at…

While cyclical stocks, as measured by the Morgan Stanley Cyclical Index, have outperformed the S&P 500 by about 1% over the past 10-days and less over the past 20-days, cyclicals have underperformed over longer periods, i.e. they have not kept up with advances made by the S&P 500.  Further, I have found that longer term analysis is more predictive of the future, probably because investors tend to look several quarters into the future so the longer look-back period is helpful when comparing market sectors.  (Markets bottom before a recession is over and make tops before a recession begins so a longer term perspective can sometimes be helpful.)  The underperformance of the cyclical stocks over the longer term is a concern, but since the cyclicals are still advancing, cyclical stocks are probably a good way to chase this aging bull-market for those who wish to play that game. 

For me, I choose not to play.  I remain uncomfortable with this rally.

“In past 20 years, yes 20 years, there have only been 6 rallies with more percentage gain than this one without a 5% correction, and they all started after nasty corrections that lasted months or years, and were either of long durations (like the biggest rally of them all, from Dec 8 1994 to Dec 15 1995…or after big drops, like in march 2009.” – Trader board comment

This has been an historic rally, with extreme bullish-sentiment and the S&P 500 is now 11% above the 200-dMA.  The markets may breakdown soon; but I have been wrong a lot recently.

Tuesday, the S&P 500 was up 0.5% to 1,626 (rounded), another new high for the S&P 500.

VIX was also up over 1.3% to 12.83.  So perhaps the options boys are beginning to have some minor doubts too.                

Tuesday, the NTSM analysis was again HOLD at the close.  

SENTIMENT is Sell due to its extreme bullish level of 66%-bulls as of Monday’s close.  (That means that twice as much money is now bet long vs. short in the Guggenheim/Rydex funds I track.)  The VOLUME indicator (a variant of on-balance-volume) is positive.  PRICE and VIX are neutral.       

I remain about 20% invested in stocks as of 5 March (S&P 500 -1540).  My reasoning may be found at…
The NTSM system sold at 1575 on 16 April.  (This is just another reminder that I should follow the NTSM analysis and not act emotionally – I am under-performing my own system by about 2%!)

I have no problems leaving 20% or 30% invested.  If the market is cut in half (worst case) I’d only lose 10%-15% of my investments.  It also hedges the bet if I am wrong since I will have some invested if the market goes up.  No system is perfect.