Maybe, John Hussman, PhD was right?

S&P 500 was down 3.7% and VIX(S&P) rose over 30% today, Wednesday.

The interest on Italy’s debt (as driven by 10-yr bond yields) rose above 7% today and traders decided that Armageddon is here, again.   I don’t know…the bond ghouls are driving the train and you have to wonder whether the market is being manipulated.  Could our enemies be trying to bring down the west?  Perhaps it’s just a result of the buy-your-vote Politicians over-spending.   Well, enough paranoid musing...

Speaking of mental illness, my writings have been schizophrenic recently.  I agree with John Hussman that recession is likely, but even so, I still remain bullish until proven otherwise. 

The Navigate the Stock Market analysis took a big hit today, but it did not issue a sell. 

a.    Sentiment is neutral.

b.    Price is neutral.

c.     Volume is neutral, but just barely.  Volume was about average today so, in spite of the big %-move down in price, this was not a typical panic.  Perhaps it was just nerves; BUT, any more significant selling and the associated down volume will push the NTSM analysis to a sell.

d.    VIX(S&P), our best indicator, switched to sell today.

 Overall the NTSM system is HOLD.

I commented last week that we could see a drop to 1225 on the S&P 500; I certainly didn’t expect that to happen in one-day!

So here we are.  The S&P 500 fell to its bottom trend line so it has not yet confirmed a break of the up-trend that has been in play since 3-October.  So yes, I am still bullish, though cautiously so and further selling will crush that tenuous optimism in a hurry.

I remain fully invested, but I will watch the NTSM analysis and act accordingly.  NTSM is based on closing data and I have gotten burned in the past when I acted on “projected” closing data, so it is likely I’ll have to wait ‘till tomorrow evening depending on the market action.  If it looks like I can make a call before the close, I’ll post during the day.

If I do have to sell, I can do that fairly easily by going to 100% cash in the 401k.  It’s one fund, so one-click will get me to a 30% long position.  I think leaving 30% invested is OK, because if selling turns out to be a wrong call, I still have 30% invested.  If the market get’s clobbered, a 30% position would only give me a 15% loss in the portfolio if the market is cut in half.

QUICK POST

I am on the road today without time to run the Navigate the Stock Market model.  It is clear from the market action {higher closing price, decent volume & lower VIX} that the NTSM system would not be sell today.  Sentiment has been rising into the caution zone, but it is not a sell yet.  Even if it were, it takes more than one indicator to give a sell signal.

NTSM is either BUY or HOLD so I remain fully invested.

Cyclical Index Gives a Positive View on the Market

The S&P 500 was 1261 today, Monday, up 0.6%.

John Hussman, PhD, commented today:  “...in the U.S., our broadest models (both ensembles and probit models) continue to imply a probability of oncoming recession near 100%. It's important to recognize, though, that there is such a uniformity of recession warnings here (in ECRI head Lakshman Achuthan's words, a "contagion") that even an unsophisticated, unweighted average of evidence indicates a very high likelihood of recession.

... In our view, investors should presently hold risky assets only in the amount they would be willing to hold through the duration of significant downturn, - John Hussman, PhD, 7 Nov 2011,Weekly Market Comment, from http://www.hussmanfunds.com/wmc/wmc111107.htm

The market doesn’t seem to agree with Mr. Hussman, especially because the Morgan Stanley cyclical index is outperforming the S&P 500 since the recent October bottom.  Mr. Hussman’s comments are cause for concern though; I have great respect for his rigorous analytical approach to the markets. 

The blue line is the Morgan Stanley Cyclical Index.  The red line is the S&P 500.

I suspect Mr. Hussman is right.  The difficulty is in the timing, and that relates to my favorite investing saying: Trade what you see not what you think.  I think Mr. Hussman is right, but market action suggests we have further gains ahead.  Market action can change quickly, however, so the trick will be to be ready to sell when market conditions change.   

The Navigate the Stock Market analysis may not give us a sell signal at the high, but we can hope that it will be close enough to the high to insulate us from extreme losses that may come with a recession.   

A strategy to deal with conflicting recommendations is to split the difference – i.e., cut your normally invested stock-position in half until there is more certainty in the market.

One argument for remaining fully invested, at least for the short term, is that many stocks have already been priced for recession.  The Morgan Stanley Cyclical Index is still 19% below its high in March.  Manitowoc, the construction crane company and our poster-child for recession, is still down 75% from its high this year and that is after its price doubled from the 3 October low.  Clearly, the market is still concerned about recession.  It really comes down to one question: Was Ben Bernanke right last week when he said we will have slow growth, but no recession?  Depending on your answer, invest accordingly.

The NTSM analysis is HOLD as of the close on Monday. 

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 75% 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.  Bad news in Europe could send the markets down in a hurry.

How High Can the Stock Market Go?

The S&P 500 was down about 0.6% to 1253 on Friday and the VIX was down 1.1%...a good sign, although VIX is still stubbornly above 30. 

The S&P 500 remains in a Secular Bear market until it takes out the old highs around 1550.  I don’t think we’ll get that far, but who knows?  This bear market that began in March of 2000 is likely to last 20-years.

As I noted in Thursday’s blog, a 29% climb from the bottom is the lowest rise in past history after a cyclical bottom (at least when records were available), and that would take the S&P 500 to around 1420.  That seems doable, assuming we don’t get overtaken by bad news somewhere down the road.  In the near term, we tested the 1100 area just a few weeks ago and the S&P 500 is unlikely to go there again anytime soon, but of course, there are no absolutes in this game.  My guess is that we’ll see a bounce if we get down as far as 1225 this week and we’ll probably bounce sooner.  

The NTSM analysis remains BUY as of the close on Friday. 

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 75% 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.  Bad news in Europe could send the markets down in a hurry.

Famous Stock Market Quotes: “No. No. That's not true. That's impossible!”

But it seems to be true; we are in a bull phase.

To review, here are the reasons why I think we saw a major bottom on the 3^rd of October.

10-yr bond yields are rising again after bottoming at depression levels.

Breadth hit extreme low limits at the bottom – as low as the 2009 recession bottom.

Sentiment hit extreme low limits around the bottom.

The market was up 7-days out of 9-days after we made the 1099 low.

VIX fell more than 40% after the low of 1099 (although it has come back some).

The market was up more than 1.75%, 3-days in a row after the low – that has only happened after major lows.

Cyclical stocks outperformed the S&P 500 after the low.

The S&P 500 broke the old high of 1219 on 31 August and that got the S&P out of its trading range.

Volume was strong in the afternoons after the low; that is when the institutional boys move and that is also considered smart money.

All of these are indicators that 1099 was a major low. Bottom line: the market should continue to surprise to the upside.  

For Historical comparisons we have the following:

The market rebounded for 24-months from 1974-1976 climbing 73% to be followed by a 19% decline that took place over 17-months.

From 2009 to April 2011 the market rebounded for 14-months climbing 78% to be followed by a 19% decline that took place over 5-months.  After the 1932-1932 bull-run there was a 23% drop in only 6-months so the short time for a bear market has precedence.

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.  The shortest bull-cycle was 7-months in 1938;

The average Bull-return has been102%, lasting on average, 26-months.  That would carry us above 2200…Time for another famous stock market quote:  “No. No. That's not true. That's impossible!”   To which I reply, “Search your feelings; the high won’t be above 1550.”

The NTSM analysis switched back to BUY today, Thursday. 

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 moved up to 75% long in the trading portfolio.

Bernanke: No recession, but very slow growth

The S&P 500 moved up to 1238, a 1.6% gain for the day, Wednesday.

I’ve written on several occasions about the Shiller P/E-10.

From the Motley Fool at http://www.fool.com/investing/general/2011/10/31/5-things-that-should-spook-investors.aspx we get the following:

“The P/E-10, a price-to-earnings ratio that uses average earnings over the prior 10-year period…(is)…flashing red right now: Based on Friday's closing price of 1,285.09, the S&P 500 index has a P/E10 equal to 21.6 By comparison with the indicator's long-term average, that suggests stocks are roughly 30% overvalued.”

So we have that bit of bad-news analysis, the continuing European saga, and John Hussman’s weekly comment (yesterday’s blog), to remind us things aren’t all that great.

Today we saw a slightly better than expected ADP employment report and we heard Bernanke’s comment that we were getting past the slow patch in the economy, but we would see a slow economy for years to come.  Hmmm…the good news seems pretty lame.

The one thing in our favor is that the market assesses news and prices stocks accordingly.  The 3 October 1099-bottom (on the S&P 500) still looks like a significant major bottom in this cycle of the bear market.

I commented about 2-weeks ago we could see and 5% pullback and that is about what we had.  That is typical 3 to 4-weeks into a rally off a major bottom.

The NTSM indicators of Sentiment, Price, Volume, and VIX are all hold.

Overall, the NTSM analysis is HOLD today, Wednesday. 

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 50% long in the trading portfolio.

Greek Vote/ ISM Numbers/ John Hussman/ Uh-oh…

“Greek vote rattles world markets”…Uh-oh…

from (CNNMoney) – “Investors around the world reacted badly to news that Greek voters will get to hold a national referendum on the recent bailout deal...Bank stocks around the globe were hit particularly hard in trading Tuesday…Gary Jenkins, head of fixed income, at Evolution Securities…said “European traders are rightly worried that the continent's financial system could be on the precipice of a complete meltdown.  "What happens next is a complete unknown and unknowns are not liked by the market," he said. "It raises the chances of a disorderly Greek default, and the one thing they were trying to avoid was a disorderly default." – From http://money.cnn.com/2011/11/01/markets/world_markets/index.htm?iid=HP_Highlight

 

The ISM numbers…Uh-oh…

The Institute for Supply Management (ISM) numbers dropped to 50.8 from 51.6 last month. Economists had expected it to be 52.  A reading below 50 indicates expansion.

John Hussman, PhD…Uh-oh…

Paraphrasing Mr. Hussman:  For the simple set of conditions when ECRI Weekly Leading Index growth rate is less than -7; ISM Purchasing Managers Index< is less than 52; and the S&P 500 was below its level of 6-months earlier the economy…has been in recession within 13 weeks, 100% of the time (at least for every post-war recession for which data is available). “This is the combination, incidentally, that we observe today.”

Regarding the stock market Mr. Hussman said, “The overall ensemble of evidence places the current market among a set of historical counterparts that is best characterized as a "whipsaw trap" - an overbought rally in an unfavorable overall Market Climate, about 70% of instances which fail to follow through.” - from John Hussman, PhD, Weekly Market Comment (1 Nov 2011) The full article at http://www.hussman.net/wmc/wmc111031.htm  is highly recommended. 

As Mr. Hussman often points out, an “unfavorable climate” doesn’t necessarily mean we can’t have good short-term returns in the stock-market.

I moved 50% of the trading portfolio to Long using the QQQ ETF based on 3-items: (1) the NTSM recent BUY recommendation; (2) we were due for a pullback after the straight up move since 3 Oct; (3) big down days are often followed by upward movement.  That’s a nervous trade that I will dump quickly if we don’t see some upward follow-thru.

It is hard to buy when everyone else is selling, but as noted by my actions, I am still Bullish. We’ll see.

The NTSM analysis dropped to HOLD today. 

(If the S&P continues down, NTSM analysis will switch to a sell – perhaps in a few days.  It may just as well turn up and I prefer not to try and guess the market or the NTSM system.  Unfortunately, the NTSM system is not good in a quick market turn-around.)

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.).

I am now 50% long in the trading portfolio using QQQ (no 2x-ETF this time to limit some risk).

(See the page “How to Use the NTSM System” – the link is on the right side of this page).