Wednesday, May 22, 2013

Federal Reserve to Continue QE…Cyclical Stocks Leading the Rally – Hogwash!

Federal Reserve Chairman Ben Bernanke's signal that monetary policy will remain loose gave stocks another lift Wednesday, paving the way for many indexes to advance to new record highs.”  Story at…

But wait! It didn't turn out that way. Stocks were up after the testimony, but stocks fell on the day. It looked like, "Buy the rumor - sell the news" to me, but the Fed minutes told a different story, at least to investors. 
"A number of participants" on the U.S. Federal Reserve's Federal Open Markets Committee this month favored slowing the Fed's efforts to maintain record-low long-term interest rates as early as summer — if the economy showed strong and sustained growth….But those officials appeared at odds over what evidence would demonstrate such gains. “ Story at…

In the 1800’s when hogs were transported on-deck at the stern of a riverboat, the water used to wash off the boat was referred to, literally, as “hogwash.”  Today, there’s some economic hogwash going on.

Over the last month, the Morgan Stanley Cyclical Index is ahead of the S&P 500 by only 2%.  Over the last 2-months, the index is underperforming the S&P 500 by nearly 1%.  The statement that cyclicals are “leading the rally” is hogwash!  

Interestingly, Yahoo charts show the cyclicals outperforming by 4% over the past month.  Sorry…those charts are wrong.  I’ve checked the numbers several ways and, further, Google charts agree with me.

I remain concerned about the LACK of outperformance by the cyclicals relative to the S&P 500, but since they are still trending up, there is presently no recession concern by investors.

In 1998, the S&P 500 was up about 10% in January and continued on a tear upward.  I didn’t have a system at the time, but the rise seemed unsustainable so I sold out of my 401k in February with better than a 10% gain for the year.  I came to regret the decision as the market continued its climb, but I hate chasing a rising market, so I remained out.  I stayed out until a correction began in July when the market peaked out 30% higher than it had been at the start of the year. 

I bought back in near the bottom on 31 August; the markets fell 20% during the correction. 

In the end, I came out even.  I tell this story just to suggest to those who may be out of the market, for whatever reason, it is usually best not to “chase” the market upward when it appears “frothy”.  We will likely get a reasonable chance to buy back in at a later date.

If the NTSM system came up buy, I’d buy back in tomorrow, but that is not likely anytime soon.  I have a hard time buying with Sentiment at extreme, bullish-levels and no “buy” confirmation from the NTSM VIX indicator. 

“The typical hedge fund generated a YTD return of 5% through May 10, compared with 15% gains for both the S&P 500 and the average large-cap core mutual fund…”
Story at…

Market internals are flattening and “breadth” (I measure as %-advancing) has been trending down for the last week.  Today the 10-dMA of breadth crashed 4% down to 51%-advancing.  I’d say a drop below 50% indicates correction likely, if not underway.  We’ve been here before though, so no guarantee.  Falling below 50%-advancing (10-dMA) near the top (almost the current condition) is a greater concern than dropping below 50%-advancing at a trough.  Other internals remain neutral so no smoking gun here; I’ll keep an eye on it and report more tomorrow after the close.

I have seen several commentators suggest that the stock market is being driven by Banks.  The Banks sell Bonds to the Fed (The Fed can’t buy them directly from the Treasury).  The banks aren’t loaning because of lack of demand, so the Banks buy stocks.  If true, this is just another reason for not allowing “Investment” Banks to be combined with “Retail” Banks.  (They were allowed to combine under the Clinton administration with strong support by the Republicans and lots of Bank money greasing the political skids on both sides of the isle.)  That’s when your local bank started trying to sell you stock market advice.

Wednesday, the S&P 500 closed Down 0.8% to 1655 (rounded). 
VIX was up only about 3% to 13.82 so the Options-boys were not worried by today’s sell off in stocks.

Wednesday, the overall NTSM analysis was HOLD at the close.

I remain about 20% invested in stocks as of 5 March (S&P 500 -1540).  My reasoning may be found at…(although that probably looks pretty lame by now.)
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.