|
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)
|
|
|
|
|
|
Very high levels of market Volatility continued this week with European debt uncertainty the
driving force. While U.S. markets took a holiday Monday, European markets plunged on the latest
round of fears about the ability to resolve the Eurodebt crisis as well as catching up to
Friday's weak U.S. jobs data. U.S. investors returned Tuesday morning with Dow Jones Industrial
futures off over 200 points. However, once trading got underway investors found their footing,
generally pushing stocks slowly higher throughout the session. Though the Industrials still
gave up 100 points, the Nasdaq 100
pared its loss from -2% to close breakeven on the session. Gold flirted
with $1900 before settling below it. The Swiss central bank shocked
investors with aggressive support of the Euro in an attempt to bring
down the soaring Swiss Franc. Positive news from Europe finally flowed
Wednesday giving investors reason to push up shares in the neighborhood
of 3%. The main point was Italy's passage of an austerity plan hoped
to dampen the recent uncertainty surrounding that country's finances.
Stocks gave back about 1/3 of those gains Thursday on little news.
Europe returned to the forefront Friday with one of the European Central
Bank members resigning, Greece looking to be on the edge of defaulting,
and investors showing little appetite for holding stocks over the
weekend - especially with the 10-year anniversary of 9/11 on Sunday
and a "credible" terrorist threat unnerving New York City residents
(and Wall Street traders along with them, no doubt). Stocks ended
the day 2.5-3.0% below their Thursday closing values.
After another week filled with volatility, stocks once again found
themselves on the losing side of the ledger. The S&P 500 (SPY) closed with
a -1.64% decline. The Nasdaq 100 (QQQ) once again was a relative outperformer
holdings its weekly loss to -0.19%. The Russell 2000 small-cap index (IWM) ,
viewed as the best barometer of investor risk appetite these days,
dropped -1.40%.
Our World portfolio suffered a -3.39%
drop with global stocks coming under heavy pressure on widespread
global economic concerns. With the Classic Model on
a Sell signal, the World
approach calls for staying in cash if you follow the "Long
Only" methodology, or taking a short Nasdaq 100 (QQQ) position
if the "Long and Short" strategy is your guide. Only
"Buy-and-Rebalance" followers should be
invested in the World portfolio at this time. Go
to the Classic Model "Description"
page for a more detailed explanation of the strategy choices.
Both the Classic Model and Turbo Model remain Sell.
Ah, September
We recognize that the stock market follows a never-ending
succession of bull and bear markets. There are multiple cycles of
varying frequencies strengths which constantly combine and interact
in the market. There are the longer decade+ secular market phases
intertwined with the shorter cyclical bulls and bears, to which
we can add many other periodic and repetitive patterns. As soon
as a cycle emerges, someone turns it into predictions and investment
strategies. A major sub-category of cyclical predictions consists
of those that depend on, or are controlled by, the time or season
of the year. There is no denying that many things in nature and
society are affected by seasonality. Changes in business and economic
activities - e.g. employment, buying patterns - occur predictably
at given times of the year. The real question is how regular, predictable,
and valuable these patterns are as an investment discipline.
There are countless theories which seek to exploit market cycles
ranging from some with uncanny predictive accuracy to the complete
quack. We will review a few of the most popular theories here, but
we'll spare you the one about astrological convergence as well as
ignoring the hemline theory (stocks moving in the same general direction
as the hemlines of women's dresses).
The best 6 months of the year. This is the corollary
to the worst 6 months theory, immortalized by the old Wall Street
saying "sell in May and go away". Various studies have
shown statistically that the period from November 1st to April 30th
delivers gains nearly 80% of the time, and on average has vastly
outperformed the May 1st to October 31st stretch. 80% is a pretty
good probability for any strategy, so this one continues to live
on (and prosper?). Certainly this year, sell in May has been a winner
as the market peaked for some indexes early in that month and have
done little positive since.
October panic. Many
investors think of October as the month of danger for stock markets.
The October crash of 1987 is still lodged like a thorn in the memory
of many investors. More recently, October 2008 was no picnic either
as Ben Bernanke and Henry Paulson took to Capitol Hill pleading
for TARP funds to avert a global financial catastrophe. While some
major market crashes and events have occurred in October, it is
September that more rightly should cause investors to shudder.
Chart 1: September isn't a winner - Dow Monthly Average since October 1928
Avoiding May and September look like reasonable months to hit the
beach and stay on the sidelines. It would appear that those two
months offer much of the reason behind the success of the "sell
in May" theory.
Pre-Thanksgiving buy signal. The adherents of
this scheme buy on the Monday before Thanksgiving and sell on the
third day of January (staying in cash for the rest of the year).
Simple, and beats buy and hold consistently over the years according
to proponents.
Election predictions. Popular wisdom has it that
the stock market does better with a Republican president. That would
be incorrect, however. Over the last hundred years or so, the average
yearly gain under Democrats is almost 30% higher than when the Republicans
occupied the White House. And the results are quite consistent from
one administration to another. How about: there has never been a
loss in the year preceding an election year (almost true). Interestingly,
the pre-election years, or year 3 (this year in the current cycle),
are by far the best as we noted in a prior weekly (see our September 24, 2010 FAQ for some great charts on election cycles).
The Congress effect. A surprising and odd chart
popped up recently showing that stocks are not too enthused about
Congress being in session. Naturally, Congress being in session
can create some confusion and uncertainty, we suppose. This cycle
can be hard to play as Congress meets for about 110 days each year,
and sometime sporadically so. The only real consistent part of the
schedule seems to be that Congress is more likely to be in session
in the January-June months than July-December.
Chart 2: The Congress effect - S&P 500 Daily Price (Annualized)
The January effect. One of the most reliable seasonal
predictions is that January tends to be the best month of the year
for investors. Per our investigation, January months are up an impressive
78% of the time for an average gain of 4.45%. In fact, it should
probably be renamed the November/December/January effect because
they are often the three strongest gainers of the year.
The spring thing. This theory contends that the
January through April market performance is a reliable indicator
for the balance of the year. If spring is up, the year will be up.
Even if frequently correct, this theory is not very useful because
by the time you know how stocks performed during spring a lot of
the year's gains are already behind you.
For those interested in all the stock market historical facts and
figures, and seasonal strategies galore, the Stock Trader's Almanac
is a must read.
We note that seasonality does not factor into our Models, as we
focus on the market's price movements being agnostic as to month,
day, or season. Of course, we welcome the creative brilliance of
our subscribers to find a way to combine the best of the above cyclical
novelties into an actionable signal.
Question: Was Brazil's sudden interest rate decrease good
or bad news?
This week Brazil's central bank surprised market watchers by lowering
their interest rate saying it was taking action to mitigate the effects
of a "global economy in crisis." The developed world's problems
will last longer than expected, and there's little governments there
can do to speed up a recovery, it said. The "international scenario
shows signs of a disinflationary bias," the central bank's monetary
policy committee said in the statement.
Disinflation means that the rate of increase in prices will be slowing,
not that prices will actually decline. For fast growing "emerging"
economies such as Brazil, Russia, India, China, et al. price hikes
and inflation have been a force to reckon with. With a fast-growing
economy fueling consumer spending, concerns of real estate bubbles,
and sharp wage rate increases have joined ramping food and energy
costs to create the potential for an inflationary spiral. An inflationary
(or deflationary) spiral occurs when the inflation or deflation becomes
assumed by the population. By assuming prices will continue to move
higher, people are incentivized to spend today to avoid tomorrow's
higher prices. Of course, that rapid spending fuels those very price
hikes creating a self-reinforcing cycle that is hard to break.
Brazil's interest rate decrease and rather somber comments on the
global economy put yet another negative feather in the cap of those
fearing a global slowdown, or worse yet, a return to a global recession.
Australia had been considered possible to follow suit with their own
rate reduction. However, a stronger-than-expected GDP report held
off that rate reduction prospect. The world's second largest economy,
China has been raising interest rates consistently over the past 2+
years in an effort to bring growth from double-digits down to 7%.
Recent reports showed Chinese economic growth still over 9% despite
efforts to slow it down. Thus, you would expect efforts to rein in
growth to continue in China. Whether China will succeed in easing
into this 7% target, or going too far, and creating the so-called
"hard landiing" will matter a good deal to the global economy.
We have yet to see China make any economic missteps in the decade
since their economy really joined the top five global economies.
Economics is very far from an exact science, of course, and managing
consumer behavior, credit conditions, asset prices, et al. such that
the economy smoothly shifts from hyper-growth to more moderate growth
is almost impossible. Something will go off-kilter at some point in
China; no one knows when or what. In the meantime, the U.S. and Europe
continue to muddle along with a mountain of concerns to deal with.
Adding Brazil's less optimistic outlook to the fray was indeed unwelcome
news. As always, how much of this is already reflected in stock prices
is unknown. We do know that the wild and wide range of stock prices
over the past 2-3 weeks indicates investors really have no idea what
to expect, whether a bottom is being put in, or whether the market
is just digesting the sharp early August drop in preparation for more
downside pressure. Ah, September!.
Warm wishes and until next week.
The TimingCube Staff
|