Friday, May 10, 2013

Still a Bear, but…

David Darst, the Morgan Stanley chief investment strategist, has six boxes on his bear market checklist, and none of them are filled in yet.
"…he certainly sees danger that conditions could change, particularly in the case of policy mistakes. But the current trajectory is higher."

Bear Market Checklist:
1. Is the Federal Reserve tightening monetary policy?
2. Are stock price valuations stretched?
3. Is investor euphoria present?
4. Are bond spreads widening?
5. Is there a recession looming?
6. Are transportation stocks, small caps and bank stocks retreating?

"Right now we are 0-for-6 in the bear market checklist," Darst said.  Story at…

I can make a case that 2 of the 6 should be checked: first, valuations.

STOCKS (AND EVERYTHING) ARE OVERVALUED (Rex Nutting blog at MarketWatch)
The Shiller PE: “[It] is now 23.2, vs. the pre-bubble average of about 15. It’s been higher on only three occasions in the past 93 years: Just before the 1929 crash, just before the 2000 crash, and just before the 2008 crash.”

David Levy, chairman of the Jerome Levy Forecasting Center:
“From surging bank stock prices to rising Manhattan coop values, all present bull markets are zero-interest-rate bull markets,” Levy wrote recently. These bull markets are occurring in an environment of high private-sector debts and limited growth potential, and therefore are “intrinsically speculative, limited in their potential, fragile and ultimately capable of severe declines.”
… No one’s sure when the reckoning will take place, but it’s likely to be ugly when it does.”  Story at

Sentiment has been extreme recently and is now elevated; but that’s only 2 of the 6, so no bear market yet.  I still expect a correction (10-20%) relatively soon. The S&P 500 is 11% over its 200-dMA so a correction can be expected at any time.

Friday, the S&P 500 was up 0.4% to 1,634 (rounded
VIX fell 4% to 12.59.       

Market internals remain positive, but their momentum is slowing down.  Internals may signal a turn down, but not quite yet.  I must admit that when I suggested on 19 April  that the market would reverse to the upside (see ), I didn’t expect a 3-week move up.  On the other hand, the market has only covered 5% in that period so I don’t feel that I have missed to big a move…at least so far.

Friday, the overall NTSM analysis was again HOLD at the close. 

Indicators are positioned as follows:
VOLUME is positive based on the market’s sustained rise and subsequent up volume.  SENTIMENT has pulled back to neutral, but it remains elevated at 61%-bulls.  VIX is neutral, but it is leaning to the sell side.  PRICE is almost a sell now, because the up moves have been smaller than the down moves.

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.