The following commentary is an excellent discussion of
the yield curve, its definition, interpretation, and the current status. I’ve just posted the bottom line; but if you
have an interest in the yield curve, it’s a good read!
FOLLOW THE CURVE (dShort.com)
The current yield curve is nowhere near inverted…despite
the bubble calls. Based on lending standards, the yield curve, and the yield
spread, there's no credit bubble here. The business cycle looks healthy to me.”
- Ryan Puplava posted at dShort.com, Advisor Perspectives, at…
http://advisorperspectives.com/dshort/guest/Ryan-Puplava-131122-Yield-Curve.php
Recession: My own comparison of S&P 500 prices to the
Morgan Stanly Cyclical Index (a basket of stocks sensitive to recession) also
shows that investors agree, but there are signs of concern. Cyclicals have been underperforming the
S&P 50 recently, but not enough to worry about.
In the following “sentiment” discussion, Tony Dwyer,
Canaccord Genuity senior managing director, says that “Taper” will not cause
problems for the market.
‘SENTIMENT IS TOO HIGH,’ STOCK MARKET BULL SAYS (CNBC)
"One of the things I want to address is: People get
so wrapped up on whether the market is overvalued, undervalued or fair. That's
not relevant," he said. "What's relevant is what changes the
direction of the underlying trend in valuations. And when you're in an uptrend
in valuations in a nonrecession environment, it's one thing: Fed policy. And
Fed policy of tapering does not change the interest expense on existing debt,
which is what crushes economic activity because we have so much variable-rate
debt." Story at…
http://www.cnbc.com/id/101218344
His view of the high sentiment was that, once again, any
pullback would be less than 4%.
We have heard from Hussman and others that the current
high corporate profits can’t be sustained and they will fall soon. Here’s another view…
THE PROFIT DEBATE (dShort.com)
“In the second quarter of 2013…[corporate profit as a %
of GDP]…touched 9.9%, the second highest rate on record... Most analyses
mistakenly stop there, concluding that margins are unsustainably high and will
shortly fall. We need to dig a little deeper, however, to do fair justice to
the topic….Today's high after-tax profit margin is due primarily to low
interest costs and not high EBIT [earnings before interest and taxes] margins (which
are competed away in a capitalist system). Interest costs will likely rise as a
percentage of GNP over the course of the next five years. That is to say,
economy-wide profit margins should gradually fall as interest rates rise–not
collapse as some predict. I write all this to address a topic frequently
debated and to lay out a case that the most negative scenario of collapsing
margins outside a recession is a low probability event.” Full story at DShort Advisor Perspectives at…
http://advisorperspectives.com/dshort/guest/Alan-Hartley-131121-The-Profit-Debate.php
Regarding Profits:
We know from FactSet that a high percentage of companies have warned of
falling profits. Keep in mind though,
every investor knows that fact and it is already built into stock prices. So far, the market is not-concerned.
MARKET REPORT
Friday, the S&P was up 0.5% to 1805 (rounded).
VIX was down 3%
to 12.26.
An interesting indicator rarely mentioned is “unchanged
volume”. It is a measure that follows
from observation of tops and bottoms.
Tops tend to be rounded and slow to develop. As a top approaches, more stocks are likely
to remain at the same price. One can
track either unchanged issues (the number of stocks that didn’t change price)
or the volume of shares traded in unchanged issues. I prefer the volume associated with unchanged
stocks. Unchanged volume hit an extreme
level on 18 November (5-standard deviations above the norm) that has been
exceeded only twice in the past 2-years.
On both of those occasions the market dipped about 8% afterward, but
necessarily right away. (For
perspective, the unchanged volume on the 18th was about 10-times
higher than today. That is one reason I think the market will have a small
correction in the coming weeks, perhaps after the Thanksgiving Holiday
week.
In spite of my call for a pullback, I wouldn’t bet
against the markets during Thanksgiving week.
The seasonality indicator around holidays is pretty strong. The markets should be up overall, though,
perhaps not by much. (BTW - The elements of the NTSM long-term system are
designed to avoid corrections less than 10%, so the NTSM analysis may not
generate a sell during small corrections.)
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of stocks advancing was 53% at
the close Thursday. (A number above 50%
for the 10-day average is generally good news for the market.)
New-highs outpaced new-lows Friday, leaving the spread
(new-hi minus new-low) at +168 (it was +83 Thursday). The 10-day moving average of change in the
spread was plus 11. In other words over
the last 10-days, on average, the spread has increased by 11 each day.
Still, the 4-measures of Market Internals that I track
for this indicator did not agree, (advancing volume was slightly negative) so
this trend following indicator is neutral.
Market Internals are a decent trend-following analysis of
current market action, but in 2013 (so far), if I had been buying the positive
ratings and selling negative ratings I would have under-performed a
buy-and-hold strategy.
NTSM ANALYSIS
Sentiment is EXTREME
negative at 74%-bulls for the 5-day indicator.
All other NTSM indicators are
neutral, but are creeping up. Overall, NTSM is neutral. That is a broken record.
(I am mostly out of the market already.)
MY INVESTED POSITION (NO CHANGE)
I remain about 20% invested in stocks as of 5 March
(S&P 500 -1540). 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.
I still lean toward getting back in, after a pullback, to
speculate on a final ride to the top.
NTSM did give several buy signals over the weeks of 14 and 21 Oct, but
the market just looks too frothy to rush back in…we’ll see if the market will
pullback so I can join the insanity. If
not, cash is fine.
