Current
Signal Performance as of
Signal
Type |
Trade
Date |
Index |
Return
since issued |
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Nasdaq 100 |
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Russell 2000 |
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S&P 500 |
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After a brief pause last week, stocks returned to their winning ways and
experienced strong gains over the 5-day span. Helped by lower oil
prices, all major averages started the week by bursting higher, with the
Nasdaq Composite gaining 1.8% on increased volume Monday. With oil
prices on the rise again, stocks traded sideways the next day before
resuming their march forward for most of Wednesday's session on
better-than-expected inflation figures: the core Consumer Price Index
(CPI), which excludes volatile food and energy prices, edged up only
0.1% in April vs the anticipated 0.2% gain. The news sent stocks higher,
but the gains largely evaporated in the session's last 90 minutes on
profit taking. The weakness proved to be only temporary, as the main
indexes rebounded strongly Thursday. Investors were encouraged by news
that manufacturing activity in the Philadelphia area contracted in May
at a slower pace than it did in April. Tech stocks outperformed on the
day after an analyst upgraded Intel, sending the SOX semiconductor index
to a 2% gain. After such a stellar performance since the beginning of
the week and oil prices hitting new record highs, stocks were ripe for
profit taking Friday. Indeed the major averages all traded lower until
the session's mid-point and then gradually moved off their lows to close
the day almost unchanged. The market's ability to resist any significant
decline is a clear indication that the ongoing rally is alive and well.
For the week, the Nasdaq 100,
Russell 2000 and
S&P 500 posted respective
gains of 3.62%, 2.93% and 2.67%. The S&P 500 and the Russell 2000 have
now joined the Nasdaq 100 by finishing the week back above both their
50-day and 200-day exponential moving averages (EMAs).
For its part, our World Index Ranking portfolio
outperformed its U.S. counterparts this week with a 3.82%
gain. The portfolio consists of the 5 top-ranked world indexes
as of April 25, which marked the beginning of the current 4-week
holding period.
Our current Buy
signal remains in effect.
Consequences
In recent Trend Timing School articles we have reviewed some
of the key challenges facing the U.S. economy and financial
system, as well as the actions taken by the Government, and
the Federal Reserve in particular, to avert a more severe
downturn. There have been some positive signs suggesting that
the policies are working leading many in Washington and on
Wall Street to declare victory. Positioned as we are with
a Buy signal,
we would relish nothing more than embarking on the next major
stock bull market and the return of an economic environment
favoring smooth sailing. But for the sake of our wealth building
objectives, we must look at the possible consequences of the
dangerous fiscal course our leaders have plotted for us.
Sometimes, maybe even most of the time, the future is obfuscated
by conflicting data and expert opinions. As reported in today's
Market Update, the just released CPI figures
appear to paint a benign and satisfactory inflation picture.
We know energy price increases have been large, but the report
reveals that the sector overheating the most is food, with April
price increases of 0.9% (10.8% annualized), the highest rate
in 18 years! Then there is the latest Producer Price Index (PPI)
data from the U.S. Bureau of Labor Statistics which revealed
that overall, finished goods prices increased by 1.1 percent
in March which translates into an annualized rate of 13.2%.
If you think that's high, they also reported that upstream in
the manufacturing process, prices for so-called intermediate
goods rose 2.3% (27.6% annualized) and worse, the crude goods
index advanced 8.0% (96% annualized).
Not only are the published statistics confusing or even seemingly
divergent, but the analysis and opinions expressed by pundits
and the financial media can be even more disconcerting. To
wit, two now equally legendary former Federal Reserve Chairmen
are taking opposite views on inflation. Alan Greenspan was
quoted recently as saying "It's difficult to imagine any major
breakout of inflation as economic slack continues to increase."
Then, just this week, his predecessor Paul Volcker, warned
the congressional Joint Economic Committee that the U.S. could
be facing a period of skyrocketing inflation similar or worse
than that experienced in the 1970s. Volcker recommends limiting
the growth of the money supply. He also openly questioned
the current policy of measuring inflation after stripping
some of the most volatile and most central elements of every
day life: food and energy. When confronted with the 0.1% April
core inflation numbers released on Wednesday, Volcker's reaction
was "It doesn't feel quite right."
If asked to pick a camp we would clearly have to side with
Volcker who actually experienced the stagflation crisis of
the 1970s first hand, and is widely credited with ending it.
Of course, in the same breath he is also credited with the
recession that followed in the early eighties. In contrast,
Greenspan is routinely recognized for his contribution to
the liquidity bubble and loose lending practices which are
at the heart for the current credit crisis.
In reality, most of us know that prices for most everything
are rising, from grains, to dairy products and meats, as farmers,
food and trucking companies have to pay ever increasing energy
costs. Not to mention corn consumption for subsidized ethanol
production which is reportedly depleting feed supplies. The
general thesis favoring future inflation is supported by much
data. A large component of price inflation has its roots in
the increased demand for everything from emerging economies
like China, India and Russia. The demand for commodities stems
primarily from increased consumption from the growing middle
class populations of these countries. The current inflation
rate in India is 8.6% with China's right behind at 8.5%. Retail
sales in China increased by 22% in April, versus 21.5% in
March. Sadly, in the aftermath of the devastating earthquake
in China, commodities like steel and cement are likely to
be driven to new highs as the country rushes to rebuild the
destroyed infrastructure. The money supply in most developing
nations is growing at 15% or more. Since China and other Asian
countries produce much of the goods imported by in Europe,
Japan and the U.S., it is hard to foresee lower prices in
the near future.
Besides demand driven price inflation which will most likely
be with us for a long time, there is the more direct and potentially
more damaging currency inflation being forced on the U.S. dollar.
With the ongoing war spending, the economic stimulus package,
swelling entitlements, shrinking tax revenue and a crisis of
confidence in the U.S. financial system stewing to top it all
off, there is little doubt of the method politicians will use
to get out of the predicament. Government officials give lip
service to the notion that "a strong dollar is in the country's
best interest", but many economists believe that they have deliberately
thrown the dollar under the bus. There is now a widely held
expectation that the Government will continue to boost liquidity
and inflate the dollar to pay for the deficits, as well as further
bailouts that may be required as the credit crisis continues
to unfold. Proactive erosion of a currency's value is the oldest
form of indirect taxation in the book. If history is any indicator,
we will sooner or later have to pay for our fiscal self-indulgence.
What
we can do in the mean time is to grow our assets faster than
inflation, and we do that by staying fully invested with the
primary trend and by focusing on the strongest and fastest
growing world markets.
Question:
Why are regional ETFs not included in the World Ranking?
There have been a number of regional ETFs in existence, some
of which have become quite popular as underlying markets have
done well in recent years. There are the natural geographic
groupings such as Europe (IEV)
, Latin America (ILF)
and Pacific (VPL), and also the more creative
associations like emerging markets (EEM)
and the so-called BRIC
nations of Brazil, Russia, India and China (EEB).
The practical reason for not including regional markets and
ETFs or other country groupings in the World Index Rankings
is that most are based on proprietary indexes for which historic
data is not publicly available. The more fundamental reason
for excluding regional funds is to preserve geographic diversification.
The pitfalls of regional funds are best highlighted with an
example. Had we included regional funds in the list, we could
be faced with a scenario in which our current champion, Brazil
(EWZ), was joined in the Top 5 by ILF (in which Brazil accounts
for over 66%), EEB (in which Brazil accounts for over 48%),
and for good measure EEM (in which Brazil accounts for over
13%). We like Brazil a lot, but not that much!
The only exception we make to the geographic diversification
rule relates to U.S. markets, of which there are currently seven
in the rankings. It is conceivable that at some point in the
future all Top 5 positions are occupied by U.S. indexes and
funds. We decided it was a risk worth taking.
Warm wishes and until next week.
The TimingCube
Staff
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