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Turbo Signal
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Turbo Model Returns (Long & Short Strategy)
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Nasdaq 100
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Russell 2000
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S&P 500
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Classic Signal
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Classic Model Returns (Long & Short Strategy)
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World
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Nasdaq 100
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Russell 2000
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Buoyed by solid earnings reports, stocks resumed their march forward this holiday-shortened week despite a poor showing Monday. The major indexes suffered heavy selling during the first session of the week after Standard and Poor's downgraded the U.S. debt outlook. Stocks recovered a good chunk of their losses by day's end, but the S&P 500 still finished the session 1.1% lower. Better-than-expected housing data helped the market recover in part Tuesday, as the large-cap index rebounded 0.6%. After the close, IBM and Intel delivered quarterly earnings reports that topped expectations. The news provided a huge boost to the technology sector Wednesday, resulting in a 2.1% gain for the Nasdaq Composite on strong volume. The positive action spilled over to the rest of the market, lifting the S&P 500 by 1.4%. With Apple also releasing a better-than-expected earnings reports after the close, the tone was set for additional gains Thursday. Indeed, the Nasdaq Composite rose an additional 0.6% on lower volume ahead of the Good Friday holiday.
For the week, the Russell 2000 (IWM), S&P 500 (SPY) and Nasdaq 100 (QQQ) respectively gained 1.13%, 1.32% and 2.98%. 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 1.80% gain 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. The World portfolio is being rebalanced today, as the current 4-week holding period is now over. 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.
Some
secondary market indicators suggest a wall of worry is building
(already built?)
A couple of weeks ago we talked about the high-level drivers for
stocks: corporate earnings/fundamentals, investor sentiment/enthusiasm,
and money flow/liquidity. We noted that all three of those factors
appeared to be rowing in favor of stocks. This week, it appears
stellar corporate earnings will once again trump all else. Strong
corporate results have erased early week concerns over U.S. and
European debt and pushed indexes back upward. This move has put
the S&P 400 Mid Cap index, for one, back into the black for the month. Should
that condition hold, it would be the eighth consecutive month of
gains for that index. The last time such a move occurred for midcaps
was 1995 when it launched a 10-month win streak and proceeded to
stretch that to 16 up months out of 18. While stocks march upward
holding off all attempts to bring them down, we note that there
are secondary indicators showing odd, and very defensive, behavior.
We view secondary indicators as a subplot to the main market story,
of course. But sometimes, they can offer interesting insight into
the mind of investors. Herewith are three secondary indicators currently
at odds with the general upward trajectory of stocks:
1) the bullishness of defensive sectors: as the chart below shows,
defensive-minded sectors Healthcare and Consumer Staples have been
the leading sectors over the past month. The non-cyclical sectors
typically lead the way when investors are fearing a downturn, or
the economy is already in a recession. This isn't the first time
over the past year that these defensives have led the market. The
tepid enthusiasm with which many investors have embraced the market's
rally since its March 2009 kickoff is indicative of secular bear
markets, where investors struggle to overcome their own cautious
biases.
Chart 1: Defensive sectors lead the market over the past
month
2) dropping T-bill yields: Imagine investors rushing into ultra-safe
U.S. Treasury bills that are paying near zero interest. And doing
so when virtually every other asset class is showing bullish behavior!
That appears to be happening over the past few weeks. This could
be flows of capital from abroad seeking safety from Mideast conflict?
Or just certain investors that fear a downturn is coming which will
drive even more money into the safe arms of T-bills? One thing is
certain: this behavior is clearly at odds with a Fed on the verge
of raising rates.
Chart 2: U.S. short-term Treasury rates are falling?!
3) put/call ratio elevates: Investors looking to protect their portfolios,
or profit from a downdraft in stocks, buy put options. Those seeking
to profit from increasing stock prices buy call option. The ratio
of put option activity (bears) to call option activity (bulls) gives
a glimpse of how concerned some investors are about the future stock
market direction. Recently, this ratio has hit levels never before
seen. Some investors are concerned enough about the future direction
of stocks to load the boat with put options. The chart below is
inverted as a high level of puts to calls suggests bearish beliefs
- that the market will fall.
Chart 3: Put/call ratio hitting new highs
This march through a few secondary indicators shows the caution
with which some investors are approaching this market. This could
also be viewed as a "wall of worry" still existent despite
a strong stock rally and continued glowing corporate profits. Secondary
indicators are interesting, but usually are not consistent enough
in their message to provide reliable predictive power. Thus, our
Models minimize their weight compared to other factors. Our more
sensitive Turbo Model continues to view the market as bullish, while
its harder-to-sway sibling, Classic, remains in Cash awaiting a
more definitive resolution to the market's recent consolidation.
Question:
Can you explain the market's reaction to the Standard & Poor's rating outlook
downgrade?
Earlier this week, Standard & Poor's (S&P) issued a release stating that they were
lowering the U.S. debt "outlook". Though this news stirred
an already boiling political pot, it was of little substance to
most investors. Bond prices, which should have plunged on such news,
rose strongly pushing yields further down. This buying seemed driven
by nervous stock investors already on edge from news earlier in
the morning that European debt issues were flaring further. Stock
investors are a twitchier lot, of course.
Why the lack of response from bond markets? Well, the S&P outlook
change was driven by a pessimistic view of whether Washington's
two parties can come together to agree on substantive budget reductions.
That same morning, Moody's issued a similar statement with a different
conclusion - that the parties will likely find enough common ground
to make some meaningful reductions. Further, S&P's release noted
that inaction on the budget deficit would lead them to consider
changing the U.S. debt rating two years from now. That's a pretty
long time from now, and anyone would agree that alot will happen
between now and then as we head into the next election cycle. Thus,
S&P's warning was along the lines of "you guys get along
and take action or else."
Further backdrop on this action from S&P is the damning heaped
upon rating agencies that failed investors during the buildup to
the mortgage crisis, which still substantially impairs our economy.
They certainly want to appear more proactive than during that episode,
and the U.S. debt situation is a pretty easy target. Thus, markets
concluded that the U.S. debt situation, while concerning, is still
far away from a real fire, especially when compared to Europe's
debt woes. S&P's outlook change was watered down enough to leave
bond investors ultimately non-plussed. That said, a failure to raise
the debt ceiling could well spark a much different reaction in bond
markets. Though some pundits oddly seem to delight in and egg on
U.S. failure (talk about being unpatriotic!), we'll admit to being
cheerleaders of U.S. financial strength and hopeful that sanity
overcomes political posturing for the good of us all. Meanwhile,
American companies are delivering yet another quarter of outstanding
growth, a source of some optimism at least.
Warm wishes and until next week.
The TimingCube
Staff
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