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Signal Update |
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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)
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S&P
500
(SPY)
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Market Update |
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It has been a good week on Wall Street in which all major market indices posted some strong gains. Trading volumes climbed on Tuesday as the investors returned from the long Labor Day week-end. This first session was marked with several M&A announcements, something hardly seen since last year's credit crisis. The biggest ones involved Disney, eBay, Procter & Gamble and also Deutsche Telekom and France Telecom on the international front. Wednesday, all eyes were focused on the release of the Federal Reserve Beige Book which showed some positive numbers, especially in manufacturing and residential real estate, helping stocks to score another up day. The market finished higher on Thursday for the fifth straight day. This time, increased earning guidance seems to have been the catalyst for the rally. Friday started with a report showing that U.S. import prices jumped 2 percent in August, much more than anticipated by the experts. This seemed to have put a cap on the market which finished the day slightly below the unchanged mark.
The Nasdaq 100 (QQQQ), S&P 500 (SPY) and Russell 2000 (IWM) respectively gained 2.87%, 2.66% and 4.15% over the four-day span. All three ETFs remain located above both their 50-day and 200-day exponential moving averages (EMAs).
For its part, our World portfolio outperformed
most of its U.S. counterparts this week as it posted a 3.24%
gain. The portfolio consists of the 5 top-ranked world ETFs
as of August 14, which marked the beginning of the current 4-week
holding period. Please note that the World
portfolio is being rebalanced today, as the current 4-week holding
period is now over.
Our current Buy
signal remains in effect.
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Trend Timing School |
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A
lagging trend: unemployment
One of the more vexing aspects of investing is how markets react
to news items. This is particularly confusing for new investors.
They figure that if a company announces good earnings the stock
should certainly go higher. It takes awhile to recognize that
the stock market has already anticipated the earnings announcement
and already factored that into the stock price. Rather than
sitting around waiting for things to happen, markets are forever
attempting to peer into the future, discounting or pumping up
prices according to their crystal ball.
As a broad economic measure, employment numbers are hard to
beat for the enthusiasm that surrounds their monthly release.
This market obsession with employment data is rather bizarre
though because employment is well known to be a lagging indicator.
This means that unemployment will continue getting worse even
when the economy has turned the corner and a recovery has begun.
Companies just coming out of a recession are naturally hesitant
to throw more cost back on their books unless business is consistently
improving. It takes some time for business managers to be convinced
of the staying power of the newly higher demand. Thus, they
wait to hire until the recovery is well under way and employment
growth lags the upturn.
Since March 2009 employment data in the U.S. has been getting
less worse. After peaking at a monthly loss of over 700,000
jobs early in 2009, the August 2009 report showed job losses
in the 200,000 range. Hence, unemployment continues to grow,
though at a much slower rate than only a few months ago. Despite
the slower rate, more and more people are being added to the
unemployment roles, increasing the unemployment rate. The unemployment
rate now stands at 9.7% and appears certain to cross the 10%
threshold before it begins heading back down.
What did stocks do upon reception of the latest depressing employment
report? They moved higher, of course, as a 10% unemployment
report has been fairly widely expected for over a year now.
Though there might be a little shock when the actual 10% unemployment
rate shows up in an official report, the stock market has moved
on to considering how strong or weak the subsequent recovery
will be. So, point one is that the stock market finds bottom
and turns up well ahead of unemployment hitting its peak. Thus,
unemployment is a very lagging indicator for stocks. The timing
of some other key indicators in measuring the emergence from
a bear market is shown in this handy chart put together by Fidelity
Investments from Russell Napier's book, Anatomy of the Bear.
The Cyclical Recovery Timeline
Source: "Anatomy of a Bear" - Russ
Napier (2007) (Based on averages of 23 recession periods from
1985 to present).
While the stock market tends to move higher well ahead of the
turn in unemployment data, you can see that there are some indicators
that make their move ahead of stocks. In December 2008, high
yield bonds took flight, soaring by upwards of 10% in one month.
That was one of the earliest indicators that investors thought
the market was recovering. U.S. stocks bottomed three months
later and haven't looked back since.
To be a good trend timer, you need to filter out the noise and
distractions that the day-to-day news delivers. Markets still
looked very broken in early April when we issued our current
Buy signal. But
the signs of thawing in the credit markets were widely evident
as spreads had dropped significantly from their panic levels.
Investors' willingness to embrace a little more risk had clearly
begun. As always, the markets were ahead of much of the data.
The data justifying that early recovery in stock prices came
out slowly but surely in the months that followed, and still
keeps trickling out today fueling what has now become a six
month long rally... and counting.
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FAQ of the Week |
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Question:
What is "structural" unemployment?
Our Trend Timing School article above demonstrates
that, despite all the hype, employment data is a poor tool for
timing investing decisions. This weak correlation is even weaker
than it used to be. This terrific chart from www.calculatedriskblog.com
shows how the U.S. economy has become much less resilient in
recent decades.
The U.S. economy used to take less than two years to fully recover
all the jobs lost in a recession. However, since 1980, it has
taken well more than two years to recover jobs lost in a recesssion.
The 2001 recession, though modest in its magnitude, required
almost four years to return to full job health.
You might recall former Treasury Secretary John Snow tap dancing
every month around the questions why the economic recovery was
offering no new net jobs (a "jobless" recovery it
was called). You can see that the severe 2007-2008 downturn
is still giving up jobs and likely will take at least three
years before the economy can grow those jobs back. This appears
to be a "structural" change in the economy; something
that goes beyond the normal ups and downs of the business cycle.
The U.S. economy has now gone ten years without generating any
net job growth. This creates greater "structural"
unemployment; a higher level of unemployment that the economy
just cannot overcome. Many of those jobs have likely been "exported"
as other nations become more competitive, a trend that has substantially
aided our World Index ETF portfolio and certainly
will continue doing so in the months and years to come.
Warm wishes and until next week.
The TimingCube
Staff
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