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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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After weeks of gains, stocks finally retreated over the five-day span. With investors patiently awaiting the Federal Reserve's decision on interest rates, the major averages experienced see-saw action during the first two sessions of the week to remain little changed by Tuesday's close. As expected, the Fed announced Wednesday that it was leaving short-term rates unchanged near 0% and acknowledged that economic activity has picked up. Stocks initially rose after the announcement, but a sudden wave of profit-taking hit the markets late in the session to send all indexes into the red, with the S&P 500 shedding 1% by day's end. Disappointed by news that existing-home sales fell 2.7% last month, investors continued to sell Thursday, causing another 1% retreat for the S&P 500. After the close, Research In Motion reported quarterly results that fell short of estimates and issued a cautious outlook. Coupled with disappointing data on housing and durable goods, the negative news resulted in a third straight losing session for stocks Friday, albeit on reduced trading volume.
The Nasdaq 100 (QQQQ), S&P 500 (SPY) and Russell 2000 (IWM) respectively lost 1.74%, 2.13% and 3.13% over the five-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
its U.S. counterparts this week with a loss of only 1.26%.
The portfolio consists of the 5 top-ranked world ETFs as of
September 11, which marked the beginning of the current 4-week
holding period.
Our current Buy
signal remains in effect.
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Trend Timing School |
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Market
anatomy 2: the wall of worry
We often hear that bull markets like to climb a wall of worry
while bear markets descend a wall of hope. The rally in the
stock market since March has demonstrated this wall of worry
concept very well. Let's step back to early March and remember
just how high the Worry Wall looked at that time.
Below are a few of the headlines causing angst in the market
back in mid-February 2009:
"Japan's GDP Plunges"
"Eastern Europe Credit Ratings Downgraded"
"Fed Considers 'Bad Bank' Structure to Deal with Toxic
Assets"
"AIG Reports $62B Loss - Largest in Wall Street History"
"April Crude Oil Sheds $4.59 to $40.17 a Barrel as Global
Recession Drags On"
Reading those headlines day after day would warn anyone away
from stocks. But it is just that sort of overwhelming hand-wringing
that sets the stage for the most powerful bull rallies. By mid-March,
just about every investor who could had already thrown in the
towel and gone to cash... or decided to just ride out the bear
market storm. Funny then that a couple of rumors and notes,
which would normally be dismissed, sparked the first wave of
stock market recovery.
The stock market, so desperate for any whiff of positive news,
received a lifeline from Citigroup CEO Vikram Pandit on March
9th when an internal memo to employees noted that
Citigroup (stock symbol: C) had seen increased lending for January
and February. In other words, the Citigroup ship was perhaps
no longer sinking quite so fast. This sudden, positive news
tidbit forced traders to cover their massive short positions
in financial stocks (and C in particular). C leapt 38% on March
10th amid a broad rally in financial stocks. JP Morgan
and Bank of America grudgingly confirmed within a few days that
their books also looked a little less bad. The confidence rebuilding
game continued later with a relaxation of accounting rules and
Treasury Secretary Tim Geithner saying that the results of the
murky bank "stress tests" had come back kind of, sort
of, ok. You could feel the worry subsiding, at least a bit.
After the initial short covering rally in March, value investors
returned tepidly to the market as the worst appeared to be over
and many stocks were selling at the lowest P/E multiples in
years. In fits and starts, the market recovered throughout April
and held firm in May. After rising from the depths of despair,
and with quick hefty gains racked up, the worrywarts started
pounding the drums again. This time the fear was a market that
had run "too far too fast" - certainly way ahead of
the return of positive corporate earnings. This worry turned
the market lower through the second half of June setting the
stage for another leg of the rally. That rally started when
Intel raised earnings guidance for the remainder of the year.
Other companies followed suit, confirming that business, by
and large, was not getting worse anymore with some even offering
a positive outlook.
By mid-August, with earnings announcements largely passed, the
drumbeat of fear began again. We saw the return of cries that
the market had moved too high given the continuing weak employment
and other selected data. But the negative data was mostly from
lagging indicators. Virtually all of the leading or coincident
indicators were pointing, if not to growth, at least to a stabilization
in the economy (albeit at a very low level). With little substantive
argument to support the fears, the new mantra for the worriers
was how September is historically the worst month of the year
for stocks. Indeed, even Standard and Poors came out with an
article on August 31st reaffirming the dismal history
of September results and warning investors. The fear took its
toll on the market with September 1st being a heavy
down day in stocks.
But bulls love to take advantage of such fear-induced declines
in a bull market. Investors, many of whom completely missed
the first leg or two of the market advance, jumped on stocks
the very next day proceeding to push stocks grindingly higher
throughout much of September.
With the market working on yet another month of gains, it is
certainly reasonable to expect a pause and perhaps even a more
significant pullback to digest the heady gains we've seen since
March 9th. The Chinese market, which was an early
mover in this rally, already had a pretty steep correction in
July and August and now wrestles with whether to resume a solid
uptrend. The U.S. market is overbought by most measures and
will need to rest at some point. We choose to profit from the
wall of worry and take comfort in the gains that our timely
Buy signal has
delivered knowing that our system will recognize when it's time
to bank our gains and play defense.
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FAQ of the Week |
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Question:
What is the VIX?
VIX
is a ticker symbol for the CBOE Volatility Index. This index
measures the near-term (30 days) expected volatility of the
S&P 500
. It does so by calculating a ratio of at-the-money put and
call option volume. When investors are buying lots of put options
to protect themselves from a near-term market decline, the VIX
will rise. Thus, it is said to be a "fear" indicator,
or an indication of how much concern there exists near-term
from investors. As a result, we can look at the VIX as a good
proxy for the wall of worry concept described above in our Trend
Timing School. As the fear subsides, investors buy less
protection (less "insurance" if you will) and the
VIX declines. The following chart shows how the VIX has declined
over the past few months as the stock market has become more
comfortable.
The VIX will typically hover around the mid 20s with a drop
below 20 indicating a fairly elevated degree of complacency
about risk. During the market crash of September 2008 the VIX
spiked to 2-3x normal as investors frantically bought protection
against further market declines. Our chart below shows how the
VIX has behaved throughout this bear market and has now returned
to a normal level, yet another sign that the market has entered
a period of relative calm. Whether it is the calm before another
economic storm, or the beginning of a sustained period of market
contentment the VIX unfortunately cannot tell us.
Warm wishes and until next week.
The TimingCube
Staff
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