Tuesday, March 11, 2014

Tragically, the Federal Reserve has done…[it]…again – starving investors of safe returns, and promoting a reach for yield into increasingly elevated and speculative assets. Thinking about the crisis only from the perspective of housing, investors and policy-makers have allowed the same process to play out more broadly in the equity market. On a quantitative basis, the overvaluation of the equity market is greater percentage-wise, and greater dollar-wise, than the overvaluation of housing in 2006-2007. We fully expect that from present valuations, U.S. stocks will produce zero or negative returns on every horizon shorter than 7 years. There is no antidote or alchemy that will allow a buy-and-hold approach to squeeze water from this stone. There is no painless monetary fix that will shift the allocation of capital toward productive investment and away from distortive speculation. Instead, one must wait for the rain. Impatient, crowd-following investors are all too willing to wastefully scatter seeds onto this parched desert, thinking that this is their only chance to sow. To wait patiently in the expectation of fertile soil and rain is not an act of pessimism, but an act of optimism and informed experience.” – John Hussman, Phd, 10 March 2014, Weekly Market Comment, Hussman Funds at…

MAXIMUM STOCK MARKET OPTIMISM (Michael Lombardi at Profit Confidential)
“I believe we are getting close to the point of maximum optimism. This happens when no matter whether the news is bad or ugly it's just taken as good news and investors rush to buy stocks and stock advisors call for even higher stock prices as the real economic situation is ignored. This is very typical of a bear market as it sucks more investors in, taking any news as a reason to buy stocks. Eventually, the bear just takes the investor's money. Be very careful, dear investor.”  Commentary at…

Tuesday, the S&P 500 fell about 0.5% to 1868 (rounded). 
VIX rose about 4% to 14.80        
The yield on the 10-year Treasury Note fell slightly to 2.77%. 

The 10-day moving average of stocks advancing dropped again to 53% at the close.  (A number above 50% for the 10-day average is generally good news for the market.)   New-highs outpaced new-lows Tuesday.  The spread (new-highs minus new-lows was +74.  (It was +63 Monday). The 10-day moving average of change in the spread was minus-3. In other words, over the last 10-days, on average, the spread has decreased by 3 each day. The 10-dMA of up-volume continues to fall.  Only 10-dMA of breadth (%-advancing) is positive.  Breadth is always the slowest internal to react.  The internals remain neutral on the market, but are hinting at a downturn.

Market Internals are a decent trend-following analysis of current market action, but should not be used alone for short term trading. They are usually right, but they are often late.  They are most useful when they diverge from the Index.  In 2013, using these internals alone would have made a 16% return vs. 30% for the S&P 500 (in on Positive out on Negative – no shorting).  Of course, few trend-following systems will do well in an extreme low-volatility, straight-up year like 2013.

The NTSM system remained HOLD today, Tuesday. The most recent Buy signal was 28 Feb, although I’ve adjusted the Buy override (5-10-20 Timer + Market Internals).  With the adjustments included, the Buy would have been 13 Feb. 

I am about 50% invested in stocks because I upped my stock holdings by 10% on 12 Feb and another 10% on 28 Feb.  That’s fully invested for me at least as far as long term money goes.  This is a suitable stock allocation for a balanced portfolio for someone my age.  Since bonds are yielding very little now, I will consider adding more to stocks later if there is a buying opportunity.