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.

Happy New Year for Stocks

The S&P 500 was up 1.8% to 1277 today.  VIX fell 2% to 23.

NTSM RETURNS

I’ve already posted the 2011 returns, but I want to point out that there was a mistake in the NTSM compound returns on the web page now titled, “Performance of the Navigate the Stock Market System.”  Correctly figured, the compound returns over the last 6-years calculate out to be 78% while the S&P 500 is up 3% over the same period.

I think Bernie Madoff went to jail for returns lower than that, but it’s not as crazy as it may sound.  NTSM was up 12% in 2011; if NTSM had returns of 12% each year, its investment value would double in only 6-years.

MUSING ABOUT WHAT TO EXPECT FOR 2012

2011 was eventful in the markets.  We had a significant correction that lasted 17.5 weeks and bottomed in October at 1099 (S&P 500).  We had a higher low on 25 November and the market is now up 10% since then and 16% above the 1099 bottom.

I posted at the time why I thought the 1099 bottom was a significant bear market bottom, although I expect that we will revisit lower levels before this bear market ends.  Remember, this secular bear market probably has at least another 8 or 9-years left.   

To review, here are the main 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.  It was 45 at the low.  (VIX topped out at 80 in 2008.)

-       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.

During the correction the market fell 19.4%  There are stats published for what happens after corrections of 20% or greater.  Are they applicable?  Sure, 19.4% is “close enough” so let’s see what we might expect.  According to Ned Davis research, the mean return 1-year later after a decline of 20% or greater is 42% (data from Jun 1962 thru Sept  2022.)  The smallest return was 23%; the max was 69%.  Based on that recent history, 2012 should be up in a range of 8% to 56% from where the S&P is now with a bias toward the lower end (just my opinion). 

I said at the time that the market should continue to surprise to the upside and I think those are all good reasons to believe that history may favor us with a reasonably good 2012.  Unfortunately, it will not be without angst.  The Eurozone Debt and the Eurozone Recession (already underway) are big issues that will cause us pain.  The extent of the pain will determine the quality of US returns – no surprise there.

TODAY’S NTSM RESULTS

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 great performance, it did have 2-down years in the last 6.  No system is perfect.