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Turbo Signal
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Nasdaq 100
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Russell 2000
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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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Investors entered the week looking to reverse a six-week market slide. Early M&A action appeared to bolster stocks. But weakness in oil prices offset the effects of any bottom-fishing to leave markets mixed and little changed in the Monday session. Tuesday's "not as bad as expected" retail and China production reports gave bulls reason to stand firm and deliver a solid bounce off the 200-day moving average. Indexes gained more than 1% on the day though volume was mixed. A weak regional manufacturing report and more Greek default concerns Wednesday erased most of Tuesday's bounce. The manufacturing report fed bearish notions that domestic economic growth is subsiding. Greek concerns held court once again Thursday pushing indexes up and down in a wild day that ultimately ended with only modest changes, but saw oil prices plunge over 4% on economic slowdown worries. Along with oil's plunge were some worrying signs as several income-focused ETFs sold off sharply in the afternoon on Eurodebt contagion fears. Friday morning brought soothing words from Europe regarding support for Greece. This steadied markets ahead of options expiration, but the results were muted with stocks only gaining fractionally on the day. The Nasdaq 100
fell behind with RIMM dropping over 20% on a weak report, dealing the Nasdaq 100 its seventh straight weekly decline. Oil prices gave up another 2% despite a pullback in the dollar. Ultimately, a negative week in tone with sharp drops in oil and underlying Eurodebt contagion fears keeping bears on the prowl.
The seventh straight losing week for the Nasdaq 100 (QQQ)
took 1.56% of the index' value. The S&P 500 (SPY)
dipped 0.43%, while the Russell 2000 (IWM)
found a small gain of 0.29%. All three indexes remain below their 50-day moving average and are now very near their 200-day moving averages with the Nasdaq 100 and Composite
actually dipping just below this reference line.
Our World portfolio dropped back 0.66% on the week as the U.S. dollar moved higher in a choppy fashion. Please note that since we have an active Classic Model Cash signal, the World approach calls for staying in cash if you follow the "Long Only" or "Long and Short" strategy. Only if you follow the "Buy and Rebalance" strategy should you mark the end of this four-week period and rebalance to this weekend's top 5 world ranking ETFs, as the strategy calls for staying invested at all times. Please go to the Classic Model "Description" page for all the details.
Our Classic Model Cash signal and Turbo Model Buy signal remain in effect.
Desperately
seeking support
Yikes! With markets continuing their "sell in May" swoon
through much of this week, investors are looking for some emotional
support to get through a nasty correction. We talked last week about
the typical shape of a stock market correction. As we described
last week, markets tend to run down to a point where it gets technically
"oversold". One measure of this condition is the RSI indicator
falling to around 30. We noted last week that the S&P 500
was
approaching this point after six consecutive down weeks. The S&P
500 was also approaching its 200-day moving average, which often
serves at least as a point of reflection and rest in a downtrend,
if not a point from which to launch a rebound attempt.
With that background, we find markets this week having encountered
all those key points this week - becoming oversold and hitting the
200-day reference line. Of more interest, this condition is fairly
widespread. Not only are all the major indexes at or very near their
200-day moving averages this week, but some major market sectors
are in a similar place of potential support. This creates a good
place to enter the market on any Buy signal, such as our current
Turbo Model is suggesting (more on that below).
Here are some pictures showing the support lines:
Chart 1: Major indexes clinging to dual
support
Chart 2: Key sectors trying to find
support
Chart 3: While market leader Apple looks for support
A second possible support: markets (in the guise of the S&P
500) have endured seven consecutive losing weeks, the worst losing
streak since March 2001, and only the fifth such instance in 83
years. Getting to seven and eight consecutive weeks of a downtrend
is extremely rare. That March 2001 drop did extend for an eighth
week. However, that was in the thick of a bear market, and stocks
rebounded from that long, 8-week slide to gain over 9% in the month
following that downdraft.
Chart 3: S&P 500 oversold and due for a bounce
A third
possible support: individual investor sentiment has dropped to lows
consistent with prior interim market bottoms. Though sentiment indicators
are widely considered to be of secondary value, they do work their
contrarian magic more often than not. If everyone is already bearish,
there's only one way for them to go - and that's become more bullish!
Chart 4: AAII Investor sentiment approaches lows
Back to the Turbo Model Buy signal. Turbo has held fast to its Buy
signal all the way down. Certainly that's a disappointing trade.
But the question is whether it's outside the norm for the model;
it's not. That's the key question. Though rare, Turbo has delivered
similar drawdowns before only to bounce back with stellar gains.
After all, this Model has delivered an annual return of at least
10% every year of its decade+ testing. All Models
can, of course, have their failures. With as many as thirty trades
in a year, there will be plenty of opportunities for very successful
trades. While we can wallow in our disappointment with this drawdown
and apparent poor signal trade, a better approach is to use the
lemons to at least try and make some lemonade. To that end, adding
to your Buy position at this point is a far lower risk entry than
the market was at a couple of weeks ago. With the plethora of support
as noted above, the current point is a solid place to average down
in price in your Turbo trade. Can the market crash and deliver further
misery to this signal? Of course. Markets get to this point by becoming
ever more fragile. Fragile things are certainly more prone to breaking,
and so it is with markets. All we can say is that odds appear to
be on the side of markets finding at least one positive week coming
soon, with a rebound getting us Turbo Model investors back in the
game. The key is to look at the bigger picture. And that picture
is one of Turbo ultimately having our back despite its poor shooting
on occasion.
The crash scenario leads us to note how we are reliving last summer
(it's deja vu all over again, right?). Greek debt contagion fears,
concerns about a double-dip recession and global economic slowdown,
worries about what happens when the Fed stops easing -- we went
through all these exact same ailments last summer. It's amazing
that so little has changed, isn't it?! Greek debt will get strung
out and restructured. The impact of the Japanese earthquake on corporate
earnings and its drag on economic growth will pass. That sets the
economy up for a stronger second half of 2011 according to many
economic and market forecasters. However, there's no question that
the market and investor psyche has suffered some recent bodyblows.
Caution remains the order of the day as our Classic Model Cash signal
outlines. However, our shorter-term trading model, Turbo, maintains
a Buy stance, and its a whole lot cheaper to buy into that signal
here than it was a couple of weeks back.
Question:
What about QE3?
As a sign of how dependent investors have become on the Fed to provide
shelter from the storms, not long after the Fed announced their
intention to end their QE2 program were commentators beginning to
wonder about the Fed's next act - a 3rd round of Quantitative Easing
(the program whereby the Fed actively purchases bonds in the market
to influence interest rates to stay low, low, low). With interest
rates having recently trended back downward to very low levels,
one wonders whether investors are pricing in a 3rd round of Fed
participation. The Fed has maintained that they have no such plans.
We'd take them at their word on that. The Fed has been pretty clear
that they believe recent soft economic indicators are related
to the Japanese earthquake impact and are a transitory situation.
As such, they have indicated no urgency to take a different course
and remain on target to end their QE2 at the end of June. Do bond
yields then shoot up immediately after the Fed leaves the party?
Um, no. As evidenced by recent sub-3% 10-year Treasury yields, investors
are not anticipating a sharp change upward in yields. Outside of
just being concerned about soft economic reports keeping a lid on
interest rates, investors likely realize that the Fed will take
other measures to gracefully unwind their $600B bond purchase program
dubbed QE2. For example, as they did a year ago, the Fed will certainly
roll over existing bond payouts into new purchases, of some sort.
They can scale back their reinvestment program very slowly, effectively
removing their dollars from the market without causing much of a
disruption.
If the Fed and other forecasters are correct about a stronger second
half 2011 economy and powerhouse corporate earnings (some as high
as $100/share for the S&P 500?), their job of easing their way
out of the market will be made a whole lot easier. Expect the Fed
to continue to talk interest rates lower, to participate in the
markets just enough to keep participants aware of their presence,
and for interest rates to remain lower than we all might expect
- even without QE3.
Warm wishes and until next week.
The TimingCube
Staff
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