|
Current Signal Performance
|
|
|
Turbo Signal
|
Trade Date
|
Turbo Model Returns (Long & Short Strategy)
|
|
|
|
|
Nasdaq 100
(QQQ)
|
Russell 2000
(IWM)
|
S&P 500
(SPY)
|
|
|
|
|
|
Classic Signal
|
Trade Date
|
Classic Model Returns (Long & Short Strategy)
|
|
|
|
World
|
Nasdaq 100
(QQQ)
|
Russell 2000
(IWM)
|
S&P 500
(SPY)
|
|
|
|
|
|
Following two consecutive weeks of gains, stocks marked a pause by retreating modestly over the five-day span. After a quiet first session of the week that left the major averages almost unchanged, stocks moved higher early on despite news of a Chinese interest rate hike and a downgrade of Portugal's credit rating by Moody's. The rally attempt did not last, however, as the gains largely disappeared after the release of minutes from the Fed's last meeting showed that some members are concerned by the inflationary threat posed by high oil prices. This raised fears that the Fed might change its accommodative stance and start bumping up interest rates sooner than expected. Such concerns did not prevent stocks from advancing modestly Wednesday, yielding the Nasdaq Composite a 0.3% gain. The main indexes opened higher Thursday on better-than-expected retail sales and weekly jobless claims data, but quickly reversed course following news that another earthquake had hit Japan. Stocks trimmed their losses in late afternoon to finish the day modestly in the red. Caution ahead of earnings season and the threat of a possible government shutdown weighed on the market Friday, causing stocks to lose ground with the S&P 500 shedding 0.4% on the day.
For the week, the S&P 500 (SPY), Russell 2000 (IWM) and Nasdaq 100 (QQQ) respectively lost 0.22%, 0.66% and 0.89%. All three ETFs are located above both their 50-day and 200-day exponential moving averages (EMAs).
For its part, our World portfolio posted a 0.41% loss over the five-day span. The portfolio consists of the 5 top-ranked world ETFs as of March 25, which marked the beginning of the current 4-week holding period. Please note that since we have an active Classic Model Cash signal, the World approach calls for selling your holdings if you follow the "Long Only" or "Long and Short" strategy. Only if you follow the "Buy and Rebalance" strategy should you remain invested in the top 5 ETFs, as the strategy calls for staying invested at all times. Please go to the Classic Model "Description" page for all the details.
Our current Classic Model Cash signal and Turbo Model Buy signal remain in effect.
High-level
stock price drivers
Building on last week's article regarding the relationship between
stocks and the economy, we spend this week's edition coming at the
relationship from a somewhat different perspective. Last week, we
noted that both stocks and the economy follow fairly well-defined
cycles of ups and downs, with stocks leading the economy much of
the time. As investors look forward trying to gauge earnings growth,
etc. they use that information to buy or sell stocks today. Thus,
the market reflects, in part, those future expectations. But that
is only a part of the broad equation of inputs driving stock prices.
We find it handy to summarize the drivers of stock prices into three
major categories/inputs: earnings, sentiment, and money flow.
Perhaps the most critical macro driver of stocks is thought to be
earnings. Earnings are the primary input into any fundamental analysis,
which provides the backbone for much of the decision-making framework
for so-called "value" investors. To hear them tell it,
most mutual fund managers are value investors. That means they calculate
an intrinsic or target value for a given stock, buying it if the
stock is below their target, reconsidering or even selling it if
it reaches their target. If most mutual fund managers use fundamental
analysis as a primary decision tool, it's no surprise that stocks
in the aggregate have some general correlation with expectations
for earnings. As corporations announce their actual earnings, these
projections for stocks' target value move up or down leading to
buying and selling actions. Recently, stocks have been rising, in
part, because corporate earnings have been robust. The chart below
has an abundance of information, but provides a good overview of
corporate earnings past and projected, and how that maps to the
movement of the S&P 500.
Chart
1: Corporate earnings and stocks move in tandem
The second major input into the equation for stock prices comes
from investor sentiment. This sentiment is seen most directly in
the form of the price-earnings or P/E ratio. The P/E ratio can be
looked at as how much investors are willing to "pay" for
a given dollar of corporate earnings. This ratio can swing wildly,
from the stratospheric highs of the dot-com bubble to the depressing
lows of a secular bear market bottom. As investors become more enthusiastic
about stocks, they are willing to pay ever-higher prices for the
same amount of earnings. In a secular bull market, where by definition
investor enthusiasm for stocks marches upward, this ultimately leads
to the type of mania seen in 1999 where seemingly everyone is buying
stocks pretty much regardless of price. Conversely, in a secular
bear market, depressed investors struggle to get excited about stocks
and tend to keep a lid on P/E ratios. The chart below shows the
typical P/E ratio using historic earnings. We can see that P/E ratios
are lower than they have been in awhile, but still nowhere near
the lows that usually mark the end of a secular bear market.
Chart 2: P/E ratios reflect investor sentiment. which is
currently about average
Our final major factor driving stocks overlaps with investor sentiment,
but we separate it out because the drivers can be unique. That is
money flow, or simply demand coming from other investment sources.
Since the Federal Reserve began its QE2 program in early November
2010, the flood of money going into bonds has come to an end. With
the prospect of rising rates on the horizon, investors have shifted
their asset allocation away from bonds and toward stocks and other
assets. Stock funds have enjoyed their strongest beginning-of-year
inflows since 2007. This flow of money has served to support stocks
and fuel their rally.
To summarize, fundamentals in the form of corporate earnings provide
a foundation for stocks. Investor's willingness to pay for the continued
growth of those earnings, reflected in the price-earnings (P/E)
ratio, magnifies those earnings to arrive at stock prices. Investors
relative interest in stocks, bonds, real estate, or any other investible
asset drives money into the favored asset fueling the price momentum
for that asset. Stocks have been winning on all three counts in
recent months despite some very clear hurdles that would normally
push stocks lower. The ability of stocks to withstand the dramatic
recent events of widespread turmoil in the Mideast/North Africa
and a horrendous series of natural disasters in Japan has left many
investors scratching their heads. How could stocks ignore such waves
of uncertainty? Rebound so quickly and sharply? And deliver one
of the best first quarter performances in years? The trio of strong
corporate earnings, moderate and growing investor enthusiasm, and
a shift of money out of bonds and into stocks has all fueled a seven-month
stock rally that has had numerous opportunities to wilt. As we move
into another corporate earnings season, we will see if the warm
embrace continues.
Earnings, sentiment, and flow of funds serve as the backdrop for
stock price and volume movements. For us trend followers, we look
to our Models to read stock markets and gauge the direction and
strength of investor desire, or lack thereof. Such a mechanical
process keeps our emotions out of the picture, keeps us disciplined
in our investing, and helps us succeed where so many others struggle
during the ups and downs that stock markets throw our way.
Question:
Why is the Nasdaq 100 changing?
This week, the Nasdaq stock exchange announced a substantial rebalancing
of our favored Nasdaq 100 index. This index represents the top 100
non-financial companies listed on the Nasdaq exchange. Apple's soaring
stock price has pushed it to over 20% of the calculated value of
the index. Such concentration in one stock poses a noticeable danger
for investors in the index as any sudden shock in Apple's stock
would have an outsized impact. Secondly, the concentration diminishes
the ability of the index to accurately reflect its component company
values. Apple has become five times the weighting of Google, for
example, even though their relative market values is much closer.
In addressing these concerns, Apple will be reduced almost by half
in weight in the index, down to a more reasonable 12.3%. Microsoft,
Oracle, Cisco, and Intel will show the biggest gains in weighting.
To prepare investors for the change, the Nasdaq exchange has given
market participants a one month head start. They will enact the
change on May 2nd. Up to that date, investors and managers who build
portfolios that track the index will need to sell Apple shares,
and buy just about all the other companies in the index. This activity
is expected to pressure Apple's stock price, though there could
well be buyers that view the selling as an attractive entry into
the stock. Conversely, shares of Cisco and Intel, most notably,
have been laggards as the market has moved higher. New money flowing
into these shares could be met by sellers looking to take advantage
of any price improvement. In short, it's impossible to know the
impact this rebalance will have on the prices of the stocks other
than that volume will likely go up. We expect the Nasdaq exchange,
one of the most efficient and effective on the planet, will do a
good job making this as smooth a process as possible.
Warm wishes and until next week.
The TimingCube
Staff
|