Current
Signal Performance as of
Signal
Type |
Trade
Date |
Return
since issued |
|
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World |
U.S. |
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Nasdaq
100
(QQQQ)
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Russell
2000
(IWM)
|
S&P
500
(SPY)
|
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Stocks sold off heavily this week as the correction returned once more, causing our Model to issue a Cash signal after the close Wednesday. After a quiet session Monday that saw the main indexes rise modestly ahead of a much awaited Fed meeting, stocks started to retreat the next day after the U.S. Central Bank acknowledged that the economy is slowing and would require further help from the Fed in the form of asset purchases. If the Nasdaq Composite
lost 1.2% on the day, Wednesday's session proved to be much worse for equities as all major averages plunged on heavy trade, clearly showing that institutional investors unloaded shares. Fears of slower growth in China and the Fed's cautious outlook on the economy fueled the sell-off, which resulted in a 3% loss for the Nasdaq Composite. The negative action caused our Model to issue a Cash signal after the close, forcing us to exit existing long positions at a loss. Unfortunately, such whipsaws do happen and are almost impossible to avoid for a trend-based model such as ours when, as in the current environment, the market exhibits alternate bullish and bearish behavior over short periods of time. The key is to ensure that losses from such whipsaws remain small. In such times, it is important to remind ourselves of our investing goal, that is to outperform the market over the long-term, knowing that we will be able to take advantage of more favorable conditions for our investing style sooner or later. Stocks gapped lower at the open Thursday following a disappointing quarterly report and weak outlook from Cisco Systems. The main indexes were able to recoup a portion of their losses but still closed in the red, with the Nasdaq Composite shedding 0.8%. Weak economic data caused equities to continue their retreat Friday: the Consumer Price Index (CPI) for July increased 0.3% vs the expected 0.2% rise while retail sales for last month were weaker than expected. The Nasdaq Composite lost an additional 0.8% during Friday's session, capping a very negative week for the markets.
The S&P 500 (SPY), Nasdaq 100 (QQQQ) and Russell 2000 (IWM)
respectively lost 3.63%, 4.36% and 6.25% over the five-day span. All three ETFs are now located below both their 50-day and 200-day exponential moving averages (EMAs).
For its part, our World portfolio posted a 4.43% loss this week. The portfolio consists of the 5 top-ranked world ETFs as of July 16, 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 now have an active 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 "Our Service" page for all the details.
We now have a Cash signal in effect.
Indigestion hits stocks - yet again
This week's issuance of another Cash
signal reflects the continued uncertainty among stock investors.
As we've seen over the past few years, news out of China seems
to have been the last straw. Prior to China's most recent splash
of cold water, however, the market was already struggling to
find reason to push stocks above June's high water mark.
Chart 1: June highs resistance
As we thought it might, July lived up to its usual strong showing
on the back of good corporate earnings. Macroeconomic concerns
continued to weigh on investor minds keeping volume lackluster
throughout July's move upward. Turning into August, the market
appeared ready to boost stocks further. A strong rally the first
day of the month added to optimism. But the rally quickly stalled.
Was it just consolidating July's gains in preparation for another
burst higher? Had the market hit a wall only to turn back downward?
For a few days, weakness early in the market day served as a
buying opportunity with bulls stepping in each day to push stocks
back near even. Friday's labor report failed to provide any
optimism though. Then, reports out of China showing declining
oil imports combined with downward growth revisions from Singapore
brought some sellers back into the market. This week's downbeat
economic news has pushed the tone decidedly negative - U.S.
central bank's being unwilling to reduce stimulus thus supporting
the rally in Treasury bonds, U.S. exports noticeably turning
down for the first time in a year, and reductions in 2010 growth
projections from various corners. Wednesday's drubbing proved
too much and this time the buyers did not step in leading our
Model to issue the Cash
signal.
Reflecting the extreme volatility of investor mindset has been
the performance of the U.S. dollar. Recall that the dollar has
been acting as the temporary safety asset of choice - rising
when investors are fearful and declining as they embrace risk.
Chart 2: U.S. Dollar sharp moves
The dollar has spent the past few months sharply trending: first
higher, then lower, perhaps fueled by hedge fund trading as
so few investment opportunities have existed during this time.
Technically, the dollar fell all the way to its prior low only
to vault higher off that support. If the dollar is rising again,
the Euro is falling again. However, there has been a clear relaxation
of Euro concerns and quite positive growth news out of Germany.
Thus, one wonders how far this Euro selloff will proceed in
the absence of any new bad news regarding European debt, etc.
In summary, investors remain cautious with the bond rally continuing.
As long as bonds are moving higher (and interest rates lower)
stocks will find it difficult to mount any powerful rally. In
the short-term, the U.S. dollar acts as a mirror of investor
concern - rising as those fears gain attention. European concerns
have diminished near-term replaced for now by a return of China-based
slowdown worries. Those worries inflict particularly acute damage
on commodity-related sectors, a key leadership group over the
past few years. Thus, if it's not one thing, it's another as
stocks digest the recovery move of 2009 and bide their time
until a clearer economic picture emerges. This week's Cash
signal reflects this uncertainty. With September, a notoriously
bad month for stocks, right around the corner, cash might prove
a good place to be for a spell.
Question:
How can the Fed "ease" further if rates are already at zero?
There was some perhaps confusing verbage in the press describing this week's Federal Reserve meeting and the statement issued from that meeting. We saw several headlines blaring that the Fed was increasing stimulus or similar language suggesting a new round of easing by the Fed. With short-term target rates already near zero, how could the Fed pull rates down any further? Exactly! In fact, the Fed did nothing more than say they would continue doing what they've been doing - keeping rates low while expressing somewhat fresh concerns about second half 2010 economic growth (see market reaction above). What was perceived as new is that the Fed will be rolling over money received from maturing mortgage and agency bonds back into the market. In other words, they will continue buying bonds in an effort to influence rates to remain low.
For the past year, investors have wondered how the Fed might go about raising rates from the zero level. The Fed kept arguing (and still does) that it has no intention of raising rates anytime soon. However, the Fed has bought massive amounts of bonds - stepping in as a buyer back when other buyers were scarce to keep the credit markets running effectively and stabilize rates (lowering them if they could). One idea was that the Fed could nudge rates higher by stopping these purchases, thereby effectively taking money OUT of the credit markets and decreasing their drive to keep rates low. With some of the Fed's bond purchases maturing, the time was now to see whether the Fed would keep buying or not. They said they would reinvest the proceeds of the bonds and keep buying - they would maintain their prior strategy. That gave investors further reason to believe interest rates will remain low though dampening stock investor hopes that better economic growth will allow the Fed to step back a bit.
Warm wishes and until next week.
The TimingCube
Staff
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