Shiller "Confidence Index" from Yale

The Market

Here’s a fascinating chart from Yale by Robert Shiller, PhD.  It shows that the Confidence that there will be no stock market crash in the succeeding six months is now around 20%.  In other words, only 20% of investors are confident there won’t be a crash in the next 6-months.  I overlaid the Dow(blue) / S&P (red) above the Shiller chart and we can see that investors are almost always wrong!  Like investor sentiment, a low reading in the Confidence Index corresponds to a low point in the indices. 

That makes us bulls a little happier; but I still am concerned about Dr. Hussman’s recession forecast.  Oh well. There is no black or white in the forecast business.  Our sentiment indicator is now elevated, but the chart gives us a longer term value and indicates that the chances of a crash in the next 6-months are very low - though we could always see a correction.

Euro Crisis

The EU “good news” yesterday was about a new EU pact, not Greece debt, so the market ignored the news.  There have been some promises of an announcement soon on the Greece debt issue.  We’ll see.

NTSM System

NTSM analysis remains BUY today…

…even though some of the indicators are getting a little stretched.  That doesn’t mean we are going to get a sell signal, though it does raise the possibility.   I try not to guess the future movement of the analysis, just as I try to avoid guessing the overall market direction; but what the heck…why not?  I think we continue generally up though the market seems to want to trade back to the lower trend line – now about 1280 on the S&P 500.  I think that would be a short term move.

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

John Hussman, PhD, “…a concerted global downturn (in the world economies) remains the most likely outcome.”

It’s always good, when the market is going up, to consider the opposing view that may result in a market turn-around.  So, we have the following from John Hussman, PhD.

“Once again, we now have a set of market conditions that is associated almost exclusively with steeply negative outcomes. In this case, we're observing an "exhaustion" syndrome that has typically been followed by market losses on the order of 25% over the following 6-7 month period (not a typo). Worse, this is coupled with evidence from leading economic measures that continue to be associated with a very high risk of oncoming recession in the U.S. - despite a modest firming in various lagging and coincident economic indicators, at still-tepid levels. Compound this with unresolved credit strains and an effectively insolvent banking system in Europe, and we face a likely outcome aptly described as a Goat Rodeo….In short, market action is presently showing features associated with "exhaustion rallies", which have often been followed by deep losses over the following 6-7 month period….

Last week contained very little to alter our view that a global economic downturn is likely here …To the contrary, a concerted global downturn that includes the U.S. remains the most likely outcome.” – 30 January 2012 Weekly Market Comment, John Hussman, PhD, at http://www.hussmanfunds.com/weeklyMarketComment.html

He went on to note that the optimistic employment numbers we have seen recently may be caused by “seasonal adjustments” in the data.  That data, argues Mr. Hussman, is skewed by the poor numbers over the past several years and may be wrong. Even without the employment numbers, he remains negative on the market.

Well, rather than argue, it does look like we may have the beginnings of a pullback under way.  The bottom of the channel for the S&P 500 (remember the market goes up in a saw-tooth pattern described as a channel between the tops and bottoms of the saw-teeth) is around 1280.  We could see a pullback to the 1280 region.  If we do, I think we go up from there.

It is possible that the Greece news that came out late today may give us a boost too, so we might avoid the slight downturn for a while.

SAN FRANCISCO (MarketWatch) – “President of the European Council Herman Van Rompuy said late Monday that 25 out of 27 European Union member states will sign off on a fiscal responsibility pact. The United Kingdom and the Czech Republic are not supporting the pact, which will go into effect after 12 nations ratify it, Van Rompuy said in a press conference.”  -  Full story at…  http://www.marketwatch.com/story/european-rescue-fund-gets-support-of-25-nations-2012-01-30?dist=afterbell

We’ll see how that turns out tomorrow.  At this point I can’t even guess how the markets may react.

For now, the NTSM remained BUY today. 

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

Quick post on the Navigate the Stock Market Indicators

Sentiment is currently issuing a hold signal, but it is creeping upward.  The 5-day, %-bulls indicator is 0.59%.  That indicator would switch to sell at 67%.  We were as high as 62% back on the 6^th of January, so just because it is moving up doesn’t mean it will continue up.

Volume has dropped to a hold since more volume has been flowing to the sell side recently.

On the positive side of the ledger, Price action has been more to the upside recently and the VIX continues to fall.

So overall we have a mixed bag; but the Navigate the Stock Market analysis remains BUY.

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.

Jamie Dimon, CEO JPMorgan Chase - Direct impact of Greek default is almost zero to US Banks

Regarding Greece default Jamie Dimon, CEO of JP Morgan Chase bank said, “It's a serious thing, but the total debt of Greece, if I remember correctly, it's like $400 billion… the (direct) impact on US banks if it (default) happens is almost zero.” Video at

http://video.cnbc.com/gallery/?video=3000069611

So the main issue to the US is not Greece per se, but rather, what happens to the other troubled countries in Europe and then the follow-on impacts to the Euro-economy.

A friend and I were discussing this question the other night:  “Why is the market doing so well considering the Euro-risks?”  One answer may be the one Mr. Dimon gave above.  As reported by the Wall St Journal (WSJ), another is that the European Central Bank (ECB) is loaning money ($632-billion dollars so far) to back-stop the Euro-banks.  As a result, yields on debt are dropping across Europe.  The yield on Italian 2-year debt is now 3.9%.  It was 7.8% last November.  Falling European yields takes a lot of pressure off the sovereign debt issue and gives stock markets world-wide some reason for optimism.  Regarding Greece – as we have seen from many sources – it is expected to default.

Before we got too complacent, there is the other side as outlined by Deutsche Bank CEO, Josef Ackerman, who says…people underestimate the collateral damages (of Greek default) that include the payment system within the central bank and exposure to Greek companies, not just a sovereign consequence.”   He paints a dark picture.   Video at…

http://video.cnbc.com/gallery/?video=3000069600

I think the Market likes Jamie Dimon’s version rather than Mr. Ackerman's. 

The Navigate the Stock Market system doesn’t try to predict which of those bankers is right.  Predicting the future is a fools game; NTSM follows the market action for its BUY or SELL recommendations.

Today the NTSM remained BUY. 

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.

I’ll be busy for a while so I probably won’t post Friday’s analysis until Sunday.

2012 Earnings Disappointing?

The Motley Fool wrote, “…earnings are dragging down the Dow”
“Apple appears to be an outlier.  Corporate earnings have been keeping the stock market afloat, but have been a mixed bag this earnings season…

…Last quarter, corporate earnings saw their slowest earnings growth in nearly two years. The S&P 500 grew earnings by only 6%. That figure hasn't improved this earnings season, as heading into the week the current quarter was showing earnings growth of 5.7%, a slight dip from the previous quarter.”  Full story at…

http://www.fool.com/investing/general/2012/01/25/why-the-dows-sinking-today.aspx

Perhaps, but as long as the economy continues to look good, the S&P 500 should show reasonable returns since I think investors will be willing to pay more for stocks.  The “P” in the “P/E” ratio should end higher for the year, even if earnings growth isn’t spectacular.  That assumes we avoid Euro-disaster and US recession.

So far this year the Wilshire 4500 {the “S”-fund in the federal employee 401-k (TSP)} has outperformed the S&P 500 (“C”-fund) by about 2.5%.  We’re not getting rich in the S-fund, but we could see a higher spread in the future…or not.  As I’ve noted before there are good arguments either way.  For now, I’ll stick with the S-fund.  Since the TSP only allows 3-moves per month it is best to make this sort of move on the last day or near the last day of the month.  {Editorial note: The Government Employee deferred stock investment system is probably not covered under Section 401-k of the IRS code, but since non-government folks are familiar with the term, I’ll keep using it.}

I cut my trading portfolio today since we are due for a pullback in the 5% range.  That would be quite normal and of no concern.  I am not making a prediction that will happen; I just decided to take profits in my 2xNaz position since a 5% pullback would wipe out my profits.  I made 9% on the trade; not great considering the risk, but not bad for 3-months.  I am now all cash in the trading portfolio.  (Some of my “trade” after the October low was in the QQQ, but I decided to treat the QQQ portion as a longer-term holding rather than as part of the trading portfolio.)

Today the NTSM remained BUY. 

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.

Greece will default…

NEW YORK (CNNMoney) – “Greece will eventually default on its debts, even if the nation reaches a deal with the private sector to restructure its debts, according to a panel of experts.”  Full story at…

http://money.cnn.com/2012/01/24/markets/greece_default_sandp/index.htm?iid=HP_Highlight

“So what?” says the market.  Perhaps pundits are overstating the Euro-crisis?  I don’t know and at this point I won’t guess.  I have posted a number of articles that indicate a Greek default is a major calamity, but the market isn’t treating it that way now.  Time will tell…

It looks like Apple will take over the world because its stock will soon become so big that it will be the only stock in the S&P 500; S&P has a plan to change the name to the

S&P ONE. 

We finally had a down day, but just barely; the S&P 500 fell about 1-point.  As of yesterday, there had been only 1-down day in the last 2-weeks.

Today the NTSM switched back to BUY. 

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

I am 90% long in the trading portfolio. 

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.

World and US Recession Risks

LONDON (MarketWatch) — The chief of the International Monetary Fund, Frenchwoman, Christine Lagard,  “…warned on Monday that the global economy could slide into a “1930s moment” unless Europe deals with its debt crisis and other economic powerhouses such as the U.S. and China fulfill their responsibilities.…Lagarde urged the euro zone to…adopt some form of fiscal risk-sharing, such as the creation of euro-area bonds or a debt redemption fund. “Political agreement on a joint bond to underpin risk sharing would help convince markets of the future viability of European economic and monetary union.”

<My comment: So far, that doesn’t seem likely since it is really aimed at Germany (the strong) paying to prop up other Eurozone “partners” (the weak).>

In her speech, the IMF head said that in the US, “The key policy priorities must be to relieve the burden of household debt and to deal decisively with the issue of public debt.” Full story at... 

http://www.marketwatch.com/story/imf-chief-urges-action-to-avoid-1930s-moment-2012-01-23

While things seem to be getting slowly worse in Europe, the US seems better off, given that earnings have been OK so far and the market has been on a tear upward.

Even John Hussman noted that “Leading economic evidence continues to teeter at levels that have always and only been breached in recessions, but the sharp deterioration we initially observed late last year has been followed by modest stabilization - though still near the area that has historically marked the entry to economic contraction….The interpretation best supported by the data is that recession risk remains very high based on the leading evidence and the typical outcomes that have resulted, but that the rate of deterioration has eased significantly, and it is simply unclear whether this is a temporary pause or a reversal.”  – Weekly Market Comment, John Hussman, PhD, at... http://www.hussmanfunds.com/weeklyMarketComment.html

That’s positively bullish when compared to past posts, but in fairness, I am a huge fan of Dr. Hussman because of his analytic approach and we must continue to be vigilant regarding US recession.

As I’ve noted before, cyclical stocks should underperform if a recession is coming. When I look at the spread between the S&P 500 and the Morgan Stanley Cyclical Index (^CYC), I note that the ^CYC has been out-performing the S&P 500 since the 1099 October low and that out-performance has accelerated since December.  Right now, the market is betting that we won’t have a recession in the US and that is the only opinion that counts when it comes to investing.

Today the NTSM remained HOLD, and that was again caused by market action that has been straight up this month. 

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

I am 90% long in the trading portfolio. 

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.

IBM, Microsoft and Intel all on a tear? Party like it’s 1995!

IBM was up 4.4% today; Microsoft was up 5.7%, while Intel added 2.9%. All reported earnings yesterday after the bell.  That really took the sting out of yesterday’s Google disappointment.  This helps distance us from the European recession worries; we still must remain very concerned over Default of the PIIGS. (Portugal, Italy, Ireland, Greece and Spain.)    

Dalai Lama when asked what surprised him most about humanity answered "Man,"

because he sacrifices his health in order to make money. Then he sacrifices his money to recuperate his health, and then he is so anxious about the future that he does not enjoy the present, the result being he does not live in the present or the future. He lives as if he is never going to die, and then dies having never lived. - I guess we better spend some of those stock-market earnings!

NTSM UPDATE

Today the NTSM remained HOLD, and that was again caused by market action that has been straight up this month.  Repeating yesterday’s comment: I expect 2-months of strong bullish action after a correction cycle completes, so with luck, we may manage a few more weeks of strong positive results in the markets. 

Bad news might trump the technical analysis so we’ll have to keep our eyes on Europe. 

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

I am 90% long in the trading portfolio.  I decided to let the trade ride longer because coming off the bottom last fall we could have further to go.

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.

World Bank: World is on the cusp of a new global recession.

Plenty of issues to worry about…

NEW YORK (CNNMoney)  – “The World Bank Wednesday slashed its 2012 growth forecasts for both emerging and developing economies from its estimates of only six months ago, and warned the world is on the cusp of a new global recession that could be as bad as the crisis four years ago…A meltdown in financial markets triggered by the sovereign debt problems in Europe poses the greatest immediate risk, according to the report….The report says developed economies are expected to experience anemic growth of only 1.4%, down from the earlier estimate of relatively solid 2.7% growth.” Full Story - http://money.cnn.com/2012/01/18/news/economy/world_bank_recession/index.htm?iid=HP_LN

…and more from CNNMoney – “The IMF said it is looking to raise up to $500-billion in additional lending resources, including a 200 billion commitment that euro area governments announced last year. The new target is based on the IMF's estimate of $1 trillion in potential global financing needs in the coming years. The IMF said it is in preliminary stages of exploring funding options and consulting with the IMF's membership, of which the United States is the largest contributor.” Full story - http://money.cnn.com/2012/01/18/markets/markets_newyork/index.htm?iid=HP_LN

So we may yet finance the European crisis. 

EARNINGS TODAY

Google fell 10% after hours when they reported net income up 7% over last year, but that was less than expected.  However, all is not lost in technology since Microsoft reported good numbers and were up almost 2.5% after hours.

NTSM UPDATE

Today the NTSM analysis dropped to HOLD, but that was caused by market action that has been straight up this month.  Actually, that’s OK at this point, because the S&P 500 is coming off a significant correction last summer/fall.  I expect 2-months of strong bullish action after a correction cycle completes, so with luck, we may manage a few more weeks of strong positive results in the markets.  Bad news might trump the technical analysis so we’ll have to keep our eyes on Europe. 

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

I am 90% long in the trading portfolio.  I may take profits on the trade soon to cut some risk. 

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.

Dennis Gartman says, up we go…

Suffolk’s own Dennis Gartman, and frequent guest on CNBC, was summarized in an interview with Kitco News.com on 13 January.  He predicted Dow 16,500.  That’s up 33% from here.  Assuming a similar gain on the S&P 500, that would put the S&P 500 around…ta dah…1700.  That would be a new high for the markets.

I love Dennis, but this bear market isn’t going away that soon.  I would be amazed if it broke 1575 on the S&P 500 in the next 5-years.

Full story at http://www.kitco.com/reports/KitcoNews20120113DeC_interview.html

WHAT DOES HISTORY SAY?

Here’s what I have said in the recent past…

9 Jan Blog Comment: “In the 1966 Bear market, both peaks and troughs seemed to cycle roughly every 4-years, so perhaps this year (2012) will fool all of the pundits (including my previous commentary) and give us another down year as we head down to a MAJOR bottom in 2013.  The last major trough was in 2009.”

<My comment today: As I look at Greece and all of the debt issues in Europe (and even our own), I think a significant drop from this year is VERY possible.  History would support that move.>

7 Dec Blog Comment: “11-years into the 1966 bear market the Dow made lows 25% below the high of the 1966 Bear market (high about 1000).  The Dow went on to make a run upward of 16% in the following year before falling in another Bear cycle.  If we go up 16% from the 1099 low we are in the range of 1275-1300. 

< My comment today: We’re there now.>

7 Dec Blog Comment: I think we’ll make 1290 by year-end and that’s up a little from my previous guess.”

< My comment today: I was only 6-days off on that guess>

3 Nov Blog Comment: “Historically, the smallest increase in the next Bull phase following a bear cycle was 29% in 1911-1912.  That would carry us to about 1420…(but) the high won’t be above 1550.”

< My comment today: Seems reasonable..>

My point (perhaps pointless): My thoughts are completely schizophrenic – we can go anywhere from here depending on the Euro-debt crisis.  Well, enough rambling, let’s look at some news, the market and the NTSM system..

We’ve had good news from China (growth ahead of expectations; good forward comments from Citi (they said the economy looks better); decent earnings so far; it is hard to believe that we have any problems out there; but then…

According to CNN/Money, a “…Fitch official told Reuters Tuesday, "Greece is insolvent so it will default."- Full story at…

http://money.cnn.com/2012/01/17/markets/markets_newyork/index.htm

Just check out yesterday’s blog for possible impacts; however, I don’t want to be a fear monger here.  Collectively the market has put aside Europe for the time being.

The S&P 500 was up over 1% today to 1308.  VIX fell almost 6% to 20.9.

Today the NTSM analysis remained BUY.

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

I am 90% long in the trading portfolio.  I may take profits on the trade soon to cut some risk. 

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.

The Eurozone Banking Crisis is heating up – Greece Talks Broke Down Friday.

Some quick reports on the Euro crisis:

The WSJ reported Friday that talks between Greece and its creditors broke down increasing the likelihood that creditors will incur huge losses.

As reported by the WSJ, when the Greece debt talks started in July, the loss proposed for bondholders was 10%.  In October the “haircut” was 50%. Since October, Greece’s economy had deteriorated further and higher cuts are now needed. 

This is apparently the “death spiral” proposed by some; Greece’s economy slows from austerity demanded by other Eurozone countries.  Revenue drops from lower tax receipts and the result is that the country is in worse shape than before the austerity began.

In the debt game, it is not a god idea to allow the debt to grow to crisis levels.  It is nearly impossible to fix – are you listening US politicians?

Now as always, we have to relate this to our economy and our banks.  Here’s a repeat of comments I quoted from Robert Reich’s blog from 5 October…

“A Greek (or Irish or Spanish or Italian or Portuguese) default would have roughly the same effect on our financial system as the implosion of Lehman Brothers in 2008 - Financial chaos…. Big Wall Street banks have lent German and French banks a bundle….The Street’s total exposure to the euro zone totals about $2.7 trillion.

That’s just US exposure.  Can the ECB backstop Euro-banks enough to support the financial system if Greece fails?  Then there’s the US banks.

To get an idea of how critical this may be, we can relate this to a specific case.  Jamie Dimon, CEO of JP Morgan Chase said recently that his bank’s exposure to Europe was relatively unchanged.  WSJ reported the exposure at 15.9-billion.  Earnings were about 4-billion.  So their exposure is 4x their earnings.  It is doubtful that even the well run JPM Chase would survive that calamity.

The market is likely to get very choppy soon, but today, it shrugged off Greece issues and posted a 5pt. gain and moved up to1294 after World markets posted strong gains.  VIX rose 6% to 22.2 so not all of the traders are sanguine about the market going forward.

There was an article on trading in Money magazine this month that quoted an analyst who said, “To be a successful trader, you must be able to predict the future.”  That couldn’t be more wrong.  Follow a system; follow the market; never try and predict the future.  It can’t be done.  That’s why I follow the NTSM system.

Today the NTSM analysis remained BUY.

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

I am 90% long in the trading portfolio.  I may take profits on the trade soon to cut some risk. 

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.

S&P Downgrades Europe

Today the NTSM analysis remained BUY.

The S&P 500 fell 1/2% to 1289.

Many in the news media reported today that the markets were down because S&P downgraded most of the European countries.  This had been widely anticipated and is of no importance to the outcome in Europe.  The troubles with sovereign debt are so well known, one must wonder why the rating agencies even bother with rating countries.  When they downgraded the US, interest rates hardly budged. 

A more likely reason for the drop was that, as of yesterday, there had only been 4-down days in the last month.  I suspect that some technical traders figured it was time to sell today.   

In the end, guessing the reason for an up or down day is meaningless folly.

Today the NTSM analysis remained BUY.

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

I am 90% long in the trading portfolio.  I may take profits on the trade soon to cut some risk. 

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.

Spain and Italy Held Successful Debt Auctions Today

Reuters reported the following today: “Spain and Italy spread cheer through euro zone markets on Thursday with solid debt auctions at sharply lower borrowing costs in 2012's first real test of appetite for debt from the euro zone's bruised periphery.

Much of the result reflected the success, at least for now, of what amounts to a back-door bailout by the European Central Bank, which has lent nearly half a trillion euros of three-year money to banks.” Full story at:

http://www.reuters.com/article/2012/01/12/us-spain-bonds-idUSTRE80B0GQ20120112

That is really good news since it will take away one of the major issues overhanging the stock market.  If the European banks have less risk of failing, fallout from a Euro-recession is likely to be much less. 

As I noted a few days ago, December retail sales were disappointing.  As reported today, they were flat from last year’s December.  The good news was that year-over-year retail sales were up about 8%.  That’s not bad.  The fact that December didn’t do as well may be due to the economy slowing; but I suspect that the retailers may have blinked and held too many sales in December, so it is hard to put to much in the December sales numbers.

The S&P 500 was up 1/4%-% to 1296 today.  VIX fell nearly 3% to 20.5.

Today the NTSM analysis moved up to BUY again.

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

I am 90% long in the trading portfolio.  I may take profits on the trade soon to cut some risk.  There are a ton of unknowns now.

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.

Fed Beige Book…Earnings Pre-Announcements…Misallocation of Capital

Here’s a Beige Book summary from the Federal Reserve as summarized by Bloomberg News:

“Contact reports from the twelve Federal Reserve Districts…suggest ongoing improvement in economic conditions in recent months, with most Districts highlighting more favorable conditions than identified in reports from the late spring through early fall.”

http://www.bloomberg.com/news/2012-01-11/u-s-federal-reserve-jan-beige-book-summary-text-.html

Regarding my comment yesterday that pre-announcements on earnings appeared problematic this quarter, here’s a completely opposite view quoted by the Street.com:

Doug Cote, chief market strategist with ING Investment Management said,

"Fourth-quarter earnings are on track to achieve the highest level for the fourth quarter in the history of the S&P 500," he added. "How can you be out of the market when corporate profits are hitting an all-time record?"  Full story at:

http://www.thestreet.com/_yahoo/story/11373024/1/stock-market-story-jan-11.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

And finally from MarketWatch (Washington), here’s the view of new Fed Governor Esther George, that agrees with what John Hussman, PhD, has been saying for some time: “The Federal Reserve may have pushed investors too far in search of returns, leading to a "mispricing of risk," said Esther George, the new president of the Kansas City Federal Reserve Bank, on Tuesday.”

 (She)  “…highlighted one of (former Fed Governor) Hoenig's chief concerns: the soaring value of farmland ...There may be other sectors experiencing similar conditions that may not be obvious for years, George said. While the Fed's current policy settings are designed to encourage risk-taking and stimulate much needed demand, on the other hand, the mispricing of risk can lead to misallocation of capital and weaker bank balance sheets…”  Full story at

http://www.marketwatch.com/story/fed-may-have-pushed-risk-taking-too-far-george-2012-01-10?siteid=yhoof2

A real estate bubble caused by unnaturally low interest rates? That could never happen…

Today the NTSM analysis remains HOLD.

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

I am 90% long in the trading portfolio.  I may take profits on the trade soon to cut some risk.  There are a ton of unknowns now.

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.

Fourth Quarter Growth sharply lower?

From CNN/Money: “Experts are forecasting fourth-quarter earnings growth for S&P 500 companies to have sharply slowed, creeping up between just 7% and 8% from a year earlier, according to analysts at S&P Capital IQ, as well as rival earnings tracker Thomson Reuters. …”

(as I pointed out yesterday)…”another concerning sign: of the 26 S&P 500 companies that have already delivered fourth-quarter results, only 50% have managed to top expectations, which is significantly lower than normal. For the four prior quarters, around 70% of the S&P 500 companies reported earnings above forecasts.” – Full story at

http://money.cnn.com/2012/01/09/markets/earnings_outlook_fourth_quarter/index.htm?iid=H_MKT_News

The S&P 500 was up nearly 1% to 1292 today.  VIX fell nearly 2% to 20.7.

The NTSM analysis remains HOLD today as volume has slipped some toward the sell side.  Today’s up move helped, but not enough to get back to a buy.

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

I am 90% long in the trading portfolio.

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.

 

Stock Market Returns for Election Years .......“I'll be surprised if the U.S. gets through the first quarter without a downturn.” – John Hussman, PhD

In case you have been living under a rock – this is an election year.  Here’s a table of election-year stock-market returns since 1928. 

Many follow the “Presidential Cycle.”  The average return has been about 12% in election years.  There have only been 3-down years in the 21 election years since 1928. 

Of course, like 2008, we still have to worry about recession.  (In the 1966 Bear market, both peaks and troughs seemed to cycle rougly every 4-years, so perhaps this year will fool all of the pundits (including my previous commentary) and give us another down year as we head down to a MAJOR bottom in 2013.  The last major trough was in 2009.

Regarding the many pundits and talking heads on CNBC who suggest that we won’t have a recession because important economic data points look better, John Hussman wrote in his latest commentary: “Very simply, neither a strong monthly employment gain nor a slight uptick in the PMI are informative signals that recession risk has eased...the data set (not just a few points of data) continues to imply a nearly immediate global economic downturn.  Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) has noted if the U.S. gets through the second quarter of this year without falling into recession, "then, we're wrong." Frankly, I'll be surprised if the U.S. gets through the first quarter without a downturn.” – Weekly Market Comment, John Hussman, PhD, at http://www.hussmanfunds.com/.

That’s a very disconcerting comment, especially when you read the Mr. Hussman’s entire commentary.  Mr. Hussman, PhD, presents a typically, rigorous and analytic approach to the question of oncoming recession. His comments can’t be dismissed, but he does present some possible scenarios in which US recession might be avoided.

I don’t pretend to be an economist, so a few layman comments follow.  There have been some concerns recently that might corroborate Mr. Hussman’s views:  (1) The Holiday retail numbers weren’t as good as initially reported for many retailers.  Except for the high end, retail-buyers were late with their purchases and bought after retailers discounted heavily.  (2) A few pundits have suggested that the pre-releases of earnings have been trending down.  When it comes to stock prices, it’s all about the earnings. Another important data point is consumer confidence.

When it comes to consumer confidence – you can read the tea leaves either way.  Consumer confidence has been improving since October.  The Consumer Confidence from the Conference Board now stands at 64.5.  While the direction is good (up for the past 2-months), the overall number isn’t great and is at levels frequently seen in recession.

Here is a chart from an article titled, “Consumer Confidence at an Eight-Month High”, By Doug Short, posted December 27, 2011.  Full article at http://www.advisorperspectives.com/dshort/updates/Conference-Board-Consumer-Confidence-Index.php

If consumer confidence continues to improve significantly, I don’t think we’ll see a recession; but what do I know – I’m an Engineer.  My financial expertise, if you can call it that, is analyzing the S&P 500 via the Navigate the Stock Market computer program.

Today the NTSM analysis slipped to HOLD.

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

I am 90% long in the trading portfolio.

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.

U.S. Unemployment Rate Dropped to 8.5%

The Wall Street Journal - “The U.S. unemployment rate dropped to 8.5% in December, while a broader measure dropped even further to 15.2% from 15.6% the prior month, both at their lowest levels since February 2009.

While the unemployment rate has been falling in part due to people leaving the labor force, a large portion of this month’s number appears to come from people finding jobs...

The key to the drop in the broader unemployment rate was due to a 371,000 drop in the number of people employed part time but who would prefer full-time work.” Full story at

http://blogs.wsj.com/economics/2012/01/06/unemployment-rate-drop-is-for-real/ 

The WSJ said the unemployment rate drop was “for real”.

The market reacted with a big ho-hum and finished down on the day.  In the end it is about earnings in the US.  Europe is still a worry since it may bring down the US earnings.  In addition, until today there were only 2-down days in the last 2-weeks so technically the Market was due for a down day today, especially on Friday when many traders don’t want to be long over the weekend.

The S&P 500 ended down ¼-% to 1278.  The VIX fell nearly 4% to 20.65.  It would appear that the options market thinks we have more upside ahead.

The NTSM analysis appears to be BUY today, but that might change to HOLD  later depending on the final volume.  It really makes no difference at this point because I am holding long either way.  

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

I am 90% long in the trading portfolio.

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.

Navigate the Stock Market is BUY

Yesterday I pointed out that collectively, the folks who trade a couple of the Rydex 2x funds that I track were only right 48% of the time.  In other words, when more money was invested in the long funds at the close of any given day (betting that the next day would be up - and vice versa), those investors were right less than ½ the time.  That’s a recipe for losing money.

I have wondered whether the NTSM system would do any better on a daily basis.  The NTMS system was designed to identify tops and bottoms so I didn’t expect too much. 

I looked at the output of the NTSM system for every day in 2011.  If NTSM was Buy and the market went up the next day I credited it with a correct result. If NTSM was Sell and the next day was down, I also credited the system with a correct answer.  A Hold got no credit.     

The results are in - the NTSM system was correct 53% of the time for 2011 on a daily basis.   That’s better than a coin flip, but only slightly better, so I don’t think I will try to use the NTSM system for day trading.  The daily Buy, Sell, or Hold output gives a general indication of the market condition and while that was generally true, there were two instances in 2011 when the NTSM system changed from Buy to Sell (or vice versa) in 3-days.

The NTSM analysis is BUY today.  

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

I am 90% long in the trading portfolio.

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.

Navigate the Stock Market: Hey! If you're not making money day-trading, don't do it!

As regular readers know, the NTSM system uses Rydex leveraged funds as an indicator of sentiment.  These Rydex funds are leveraged funds that are priced twice a day.  By leveraged I mean that they use options to move twice the direction of the index they track.  The Nazdaq 100 2x strategy fund will gain 2% if the Nazdaq 100 moves up 1% and, since it works in the opposite direction too, you can lose money twice as fast if you are on the wrong side of the trade.

They are intended for trading so there is no penalty for trading and one can switch long and short positions frequently.  Years ago these funds (along with the Prudent Bear Funds) were the only way the average investor could easily short the market.  Now there are numerous ETF’s that trade all day long that make more sense for short term trading and it is easy to buy options from the convenience of your computer on-line; but the Rydex funds are still used by many and I use them for long term trading when I hold a position in the trading portfolio for weeks.

The sentiment indicator is counter to what you might think.  When the indicator reaches an extreme level of bullishness (i.e., many investors are betting on upward movement in the stock market) the indicator flashes a sell signal.  The opposite is also true – an extreme number of people betting on a drop in the market is a bullish indicator.  So at tops and bottoms the sentiment indicator is a counter indicator.

But that raises a question; what about on a daily basis?  Are investors more accurate each day that the funds trade?  I decided to analyze this - hey, what can I say...I'm an engineer.  We have odd ideas of what is fun.

I looked at the Rydex 2x funds that NTMS uses as its sentiment indicator.  For each day that more people were betting the next day would be down, I checked to see if the next day was actually down.  I did the same for days when most were betting on an up day the next day.  (I actually wrote some equations to check this stuff so I didn’t have to do it manually and checked for the entire year of 2011.)

As it turned out, investors in the funds were only right 47.8% of the time.  That's worse than a coin flip where you would be right half the time on average and break even.  That amounts to a loss of around 5-million dollars per year (in round numbers) just from folks trying to beat the market day-trading a few Rydex funds that I checked.  Hey! If you're not making money day-trading, don't do it!

Tomorrow, I will check the NTSM system using the same approach to see if the daily calls of the system (buy, sell or hold) can predict the next day’s move.   I have always said no, because I designed the system to call tops and bottoms, but it is about time to crunch some numbers and find out.  

The NTSM analysis is BUY today.  

I bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.  I remain 100% long in the long term portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM System” – the link is on the right side of this page). 

I am 90% long in the trading portfolio.

Just a reminder: 100% invested in stocks is way too much for most rational folks.   Don’t do it unless you have a high tolerance for risk.  While I like to brag about the NTSM's great performance, it did have 2-down years in the last 6.  No system is perfect.