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Current Signal Performance
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Turbo Signal
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Turbo Model Returns (Long & Short Strategy)
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Nasdaq 100
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Russell 2000
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S&P 500
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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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Nasdaq 100
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Russell 2000
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S&P 500
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Another week, another gap down to open Monday morning trade as European shares faced pressure from
disappointing weekend meetings. Domestic indexes were lower by over -2% midday before recouping
half or more of their loss by the close. The Nasdaq continued to show substantial relative
strength, almost finding breakeven by the sound of the bell. Tuesday saw gains through the course
of the day with particular strength in yield-delivering shares and some momentum names. However,
news of a pushout of a facility to give Greece its next chunk of ECB and IMF-supported working
capital caused the market to roll over in the afternoon and give back all of the earlier gains.
Stocks ended marginally negative on the day. Stocks greeted Wednesday with strong earnings from
key Nasdaq 100 members, Adobe and
Oracle. But the day belonged to the long-awaited Fed meeting and
expectations for its "twist" strategy, a fancy name for a simple process of using Fed money to buy
longer-dated U.S. Treasury bonds in hopes of further bringing down long-term interest rates.
Investors, hoping for something more magical, didn't much like the Fed's blunt statement of economic
concerns nor a broad Moody's downgrade of U.S. bank debt. They sold the news hard, sending stocks
sharply lower after the Fed statement with losses ranging from -1.6% for the Nasdaq 100 to -3.7%
for small-caps. The Fed statement and stock selloff kept the bond rally well intact. Selling poured
into Thursday morning with European markets down 4-5% and U.S. futures gapping down over 2%. Fears
of a return to global recession pushed investors into safety assets and punished levered assets like
precious metals. U.S. stocks ended the day down around 3.5% after being lower by as much as 5%. Those
declines took many U.S. indexes down to their August lows. Global stocks suffered again Friday though
U.S. stocks found buyers at the support level of the August lows to end a choppy day up between
0.5-1.0%. Of note, precious metals accelerated their sellof, with silver suffering a horrendous
one-day loss of -13%, its worst daily tally in a couple of decades.
Over the week, most indexes gave back the entirety of the prior week's hefty advance leaving the
S&P 500 (SPY)
down -6.57% and the Russell 2000 (IWM)
off a whopping -8.92%. The
Nasdaq 100 (QQQ) held on to some of
the prior week's gain, losing a relatively light -4.31%.
A flight to safety pushed the U.S. dollar higher, compounding the
pain for our World portfolio, which suffered a -8.87%
decline. 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.
Our Classic model remains Sell,
while our Turbo Model continues its Buy
signal.
The Nasdaq's siren song
In our Weekly Update
dated July 22, 2011, we pondered whether
the Nasdaq 100
was on the verge of breaking out "into daylight" and taking
the range-bound stock market with it. Sure enough, the index did manage
to nudge above the 2400 line of resistance shown in that weekly and
appear to stage at least a modest break to new ground. Over the ensuing
four weeks, the Nasdaq 100 dropped by more than 15% as the riptide
took investors quickly out to sea on a series of gut-wrenching turbulence.
The Nasdaq 100 delivered a classic fakeout, a "trap" as
some would call it.
Same story with the S&P 500
back in May of this year. The index
was able to breach resistance at 1350 and appear on its way to higher
ground, only to be sent back downward to the tune of a nearly 10%
decline over the following 6 consecutive down weeks. Until Wednesday
of this week, the Nasdaq 100 was again marching to its own beat
- a quasi-bullish beat that begs market participants to jump on
board. Apple had finally cleared $400.
Amazon was surging higher.
Oracle gapped higher after strong earnings.
Some argued that this QQQ strength was too narrow, being led by
enthusiasm for Apple and Amazon, and that this is was just another
siren's song from the favorably structured Nasdaq 100. Why "favorably
structured"? As we pointed out last week, financial stocks
remain at the heart of the stock market's woes. The Nasdaq 100 has
essentially no financial stocks in its index. The other major indexes
carry a 14-22% weighting in financial companies. With the world's
(western) financial system still wrestling with having to finance
too much debt on too little growth, the Nasdaq 100 is obviously
in the catbird seat in its sector weighting. The other favorable
aspect of the Nasdaq 100 being that the large technology companies
that drive the performance of the QQQ derive a good chunk of their
sales globally, a benefit relative to companies dependent fully
on a U.S. or U.S./Europe recovery for sales growth.
Chart 1: Nasdaq 100 substantially outperforms other indexes
during recent rally
As the chart shows, the Nasdaq 100 came only a stones-throw away
from its position prior to the August market swoon. Meanwhile, the
broader S&P 500 and more commodity-focused emerging markets
never came close to their pre-August levels. The performance of
emerging markets has been especially worrisome in that this group
has been lagging for most of the past year despite continued good
economic growth and low stock valuations. Bellweather economic commodity
copper is down sharply since the 1st of August reflecting the concerns
of a weakening global economy. Copper is rapidly approaching financials
and emerging markets in technical bear market territory (marked
by a 20% drop).
Chart 2: Copper joins other market laggards
The bullish side noted that technology and consumer discretionary
stocks are typical "early-mover" sectors. Both showed
good strength, rebounding strongly from the August weakness. Similarly,
the performance of some momentum stocks picked up steam. Stocks
such as ATHN, CERN,
AZO, MA all hit or came very near new highs
on outsized moves. These are the types of things that happen early
in a rally. This Nasdaq 100 rally kept moving higher with nary a
down day slowing its progress. Our Turbo Model, which is driven
by the Nasdaq 100, eventually got convinced into following along,
switching to a high-risk BUY signal late in the rally.
Rallies need to build up, spread out to other groups, become more
inclusive. This one never did. The Nasdaq 100 stood alone in clearing
its 50-day moving average. Just as with other rallies this year,
the weakness in financials and other economically sensitive sectors
came to overwhelm the more positive sectors of the market one more
time - as is typical of bear market rallies. While we can look back
now and opine on the rally's failure, say that it was destined to
fail (because we do expect rallies to fail in bear markets). To
do so would portray a false sense of confidence, because one never
knows for sure what the market will do. The Fed or European Union
could have come forth this week with surprisingly good news (as
investors were hoping), and sent the market collectively upward.
After all, stocks are not terribly expensive at these levels and
value investors have begun nibbling, if some reports are to be believed.
For this signal cycle, Turbo was right on, if you chose shorting
emerging markets on the signal. Turbo was not all that bad if the
Russell 2000 index were your vehicle of choice, losing a modest
-1.35%. Similarly, Classic's current Sell signal shows green when
applied to the S&P 500 and Russell 2000, while the relatively
stronger Nasdaq 100 remains in red. The moral of the story being
that indexes are behaving very differently over the past few months
with the Nasdaq 100 consistently stronger. Spreading our signal
bets among the indexes can improve our odds of being with the better
choice. Or applying some more fundamental thought to our choice
helps as well. We know that financials and international are at
the core of the stock market's woes. Applying Sell signals moreso
in those areas makes some sense. Similarly, we know the Nasdaq 100
has been the strongest of the pack over the past few months. Focusing
our Buy signals there makes some sense as a result.
With markets very unsettled, perhaps being more cautious, allocating
a bit less to our trades and/or spreading our choice across more
indexes, especially those best fitting the profile of the signal
(i.e. short financial-heavy indexes like the S&P 500 on Sell
signals). Of course, the ideal situation would be to have accurate
signals far more often than not!
Question: With interest rates already so low, why is the
market so fixated on the Fed?
We think that's an excellent question. The Federal Reserve has done
everything possible to keep interest rates at rock-bottom levels.
After this week's Fed statement, saying they would focus more on reducing
mortgage and longer-term interest rates, it strikes some investors
as an act of desperation by an entity with few remaining choices.
Judging by the negative reaction of the marketplace, investors somehow
were expecting something different? The Fed had told the markets,
in advance, what they were planning to do. The size of the so-called
"twist" strategy was even larger than expected. Still, investors
fled risk assets. We can only conclude that the Fed's statement, a
rather stern warning of the potential economic risks, is what surprised
investors. Yet, those risks are very evident and have not been hiding
from stock market participants.
Deleveraging is a messy process - winding down decades of debt will
take a good long while. It doesn't mean the economic cycle is dead,
of course. As several tech companies, in particular, have reported
recently, companies with exciting products are still doing quite well.
Just a week ago, stock markets piled on several consecutive days of
positive thinking. With the Fed's statement, that was all forgotten
in a few hours. Risk returned in a big way. Europe's slow and sluggish
process in resolving Greek and other Euronation debt; anemic domestic
growth; and slowing BRIC economies all overhang investors with little
improvement or resolution in sight. We think that anything the Fed
does will be of limited economic import. This week, the markets are
saying the same thing. With stocks taking giant steps backward so
easily, caution is advised.
Warm wishes and until next week.
TheTimingCube
Staff
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