|
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)
|
|
|
|
|
|
Markets began the week with an upbeat tone on rumors of a new fix to the European debt troubles. Finally
coming around to the fact that Greece must default on its debt, European leaders worked to beef up a capital
backstop large enough to assure investors that Italy and Spain had the backing to avoid Greece's periled
path. Stocks embraced the news rising to gains of roughly 2% Monday. Continuing the optimism and good cheer
Tuesday, traders pushed stocks as high as a 4% gain on the small-cap index before discovering that the
Eurozone debt agreement was actually not completed. The Russell 2000
then gave up fully half of its profit
in a burst of afternoon selling to close with a 2% pop. With no agreement coming from Europe, stocks found
reason to return to selling Wednesday, delivering -2% blows to the major indexes and fully erasing Tuesday's
gains. Amazon announced a new tablet computer - good news for Amazon;
maybe not for fellow Nasdaq 100 leader
Apple. Thursday was the wildest day yet as the ugly month of September draws near its end. Stocks gapped up
at the open on a rare flurry of good news: German support for the Euro bailout fund, revised upward U.S.
GDP for Q2, and shrinking jobless claims numbers. Sellers quickly took advantage of the higher prices,
however, quickly erasing a +2% start to the day. Buyers reemerged in the final minutes to push most indexes
back into a +1% position. The exception was the Nasdaq, which ended the day lower. Chinese stocks were
pounded on news that U.S. regulators are opening an investigating into Chinese accounting practices. Whether
because of this, or not, recent momentum stocks had a bad day that was not reflected in the broader market
averages. Such high-fliers as Baidu,
Priceline, joined Apple, Amazon, and other Nasdaq stalwarts in the red
Thursday. Selling in those issues continued early Friday with indexes giving up Thursday's late-day gain from
the opening bell. A late-morning bounce only served to bring in more sellers as stocks pushed downward
throughout the afternoon and into the close to finish out a dismal quarter for stock investors worldwide.
Despite the negativity shown by stocks as the week wore on, U.S. markets were actually mixed
over the five-day span. The S&P 500 (SPY) dipped a
modest -0.34% held up by a positive performance
from financials and defensive sectors. The more risk-sensitive Russell 2000 (IWM)
marked a new
closing low for the year down -1.29% on the week. The Nasdaq 100 (QQQ), by
comparison, sits about
5% above its low for the year despite a relatively bad -3.07% performance on the week.
The U.S. dollar continued to be the beneficiary of the global angst
nudging higher for the week and adding to the downward pressure on
international markets. That has not been a problem for our World
portfolio, currently holding all five positions in U.S. ETFs, which
only suffered a -0.58% 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.
Will corporate earnings prove the market wrong?
As the ever-dangerous month of September comes to a close
the S&P 500
tallies its fifth consecutive losing month - its
longest losing streak since the beginning of the last bear market
in 2007-2008. After a 5-month swoon beginning in late 2007, the
S&P 500 managed to rally from 1300 to 1400 over the next two
months, before the summer of 2008 began the next leg downward. Though
the past few months look very similar to the beginning of that bear
market, we can be certain this story will play out differently.
For one, in late 2007. we were just entering a recession after a
few years of decent (albeit somewhat illusory) economic growth.
China was growing mightily, working its way quickly up the world's
economic rankings. European banks were concerned with exposure to
U.S. mortgage-related securities, not so much concerned with their
own nations' debt. Once the Fed assuaged credit markets in November
2008, repair was fairly quickly underway. The whole bear market
cycle lasted little more than one year.
Beyond the knee-jerk reactions to every utterance out of Europe,
markets these days are worried about another global recession. The
price of copper, which we highlighted last week, could be a harbinger
of bad things to come having lost well over 20% now in very short
order. Positively, corporate earnings remain healthy, at least domestically,
running at near $90 per share for the S&P 500. Slap a very modest
12 price-to-earning (P/E) ratio on those earnings and you get a
theoretical S&P 500 value of 1080, or about 7% below where we
are now. That leads many to conclude that today's markets are reasonably
valued, and perhaps cheap. Figure that investors get some good news
out of Europe, grow a little less sour, and become willing to pay
closer to the average 14-15 times earnings, the S&P 500 jumps
near 1300. Table 1 below shows the range of P/E ratios and S&P
corporate earnings with the current earnings boxed and the current
S&P 500 range highlighted.
Table 1: Intersection of investor enthusiasm (P/E ratio)
and earnings leads to prospective S&P 500 levels
It is those earnings that will bedevil stocks going forward we expect.
We think that Europe will deliver the same fits and starts of good
and not-so-good news in the months ahead, causing markets to lurch
around. Yet, the state of earnings going forward has become very,
very unclear and is what will determine whether stocks fall a whole
lot further. We get some new datapoints early in October to consider.
Back to the simple math of it. Assume that the global economy does
slow down to flat, earnings lose steam and fall about 10% (not a
big drop for earnings). With earnings at $80 per share, we are now
considering a range for the S&P 500 of 960 to about where we
are today - thus, the whole market range takes a step downward with
today's S&P (already nearing a 20% "bear market")
as the high-end of the range. It's quite common to see S&P 500
targets around 960-980 these days from bearish prognosticators;
and now you see how we get there from a fundamental earnings perspective
- never minding the technical chart machinations that fuel computer
program-driven trading day-to-day.
Suppose this whole slowing global economy argument doesn't come
to pass (or is less worse than investors fear), earnings hold up
just fine with even tepid growth, investors begin to understand
how Europe backstops its debt woes, and China/Brazil/India declares
victory in taming inflation. That's a bullish case supporting earnings
projections moving into the $95-100 per share level and putting
a floor of around 1200 under stocks, likely pushing upward to 1300+
on the S&P 500. As a reference, S&P 500 earnings grew about
15% year-over-year in 2010. Thus, even a slowdown to 5% earnings
growth would yield at total S&P 500 earnings of just over $90.
The points are twofold:
- Earnings projections remain over $100
per share for the next four quarters and are likely too high, if
you believe any of this slowing economy idea. Those projections
are more likely to come down than go up. A drop to $90 per share
(or flat earnings with today) can still support the S&P 500
around 1100-1200 as we are today. Revisions below the $90, suggesting
FALLING earnings (not just slowing growth) and a return to recession,
would provide fundamental support to another leg down in stocks.
- investor sentiment is awful right now. Bearish thought now pervades
almost all investor surveys (AAII's, et al). Despite a relatively
benign week in terms of change, we had three negative reversals
in stocks during trading this week. Stocks sold a veritable trifecta
of positive news Thursday:
a) news of a German vote supportive of
building a larger capital fund to backstop other Euronation debt,
b) a modest upward revision of U.S. GDP,
c) a drop in weekly jobless
claims - all news items that heretofore would have brought buyers
into the market (and initially did!).
The mood among investors is
pretty sour, though the bulls have thusfar managed to keep further
damage at bay.
With the more cyclical sectors - e.g. energy, materials, emerging
markets, commodities - having dropped down another step, is it inevitable
that the remainder of the market will follow suit and take another
step downward? Our Classic Model leans that way. But a little bit
of unexpected cheer could turn the sour sentiment a little sweeter.
And earnings could be shown to have more life ahead than the market
is granting. Remember, ANY perceived earnings growth going forward
plus stabilization in the Eurodebt drama will likely keep stocks
within spitting distance of 1200. Will earnings be that positive
catalyst? The next three weeks will be interesting.
Question: How does Europe get out of its debt troubles?
Finance, and especially banking, is largely an exercise in confidence
and trust. If I am going to loan out money to Joe, I need to be confident
he will pay me back. It's also a highly leveraged system where one
dollar magnifies into 10, 20, 100? As a result, when the wheels are
in danger of falling off the finance wagon, those in leadership trot
out every idea they can conjure up to maintain that confidence, that
trust in the system. Europe has been working for the past year plus
on the right vehicle, the right language, the right combination of
things to keep that trust and confidence in place; to limit the holes
in the boat from taking on too much water. The markets have not been
buying it of late.
The market shows its confidence through its willingness to buy debt
dependent on the assets and werewithal to pay of the issuer. This
week, Italy sold some new bonds and had to pay a full percentage point
MORE in interest than they had not too long before. Confidence is
slipping.
In the U.S. you have a single entity in the Federal Reserve and a
nearby cohort in the U.S. Treasury, it is relatively quick and easy
to take dramatic action to try and shore up confidence and maintain
trust. They just take the bank over (or arrange its sale, more likely
these days) and the system marches along without widespread fear taking
hold. Europe has no such facility. The European Central Bank's mission
has been focused on keeping inflation low - hardly a mandate that
offers the flexibility to address a debt crisis. Thus, Europe has
been trying to create vehicles for building a pool of available funds
to give investors confidence that the system won't collapse. It's
being created on the spot, as we go. Of course, we are also talking
about having to bring together the nations in the European Union to
financially support and fund these vehicles. Enthusiasm for that support
and funding have varied from country to country and time to time.
Germany clearly bears the brunt of the financial burden as the largest
European economy, with France a critical player. It's taken a couple
of rounds for these two to realize the urgency of the situation and
that they are the only ones who can keep the boat afloat.
This week, the German Parliament voted strongly to support a heftier
financial commitment to a money pool to support and backstop Europe
overall. That's a big positive step forward in building confidence
and trust (and a much clearer message of support than the Germans
have given in the past). Still, investors are wary and not sure if
the resolve is there to broadly save the Euro. Greece appears certain
to default on some portion of its outstanding debt. Limiting that
damage on European banks is now at the heart of the discussion and
why this "money pool" (or "bailout fund" as some
call it) is so important to building confidence. If the European financial
system can convince investors that there is enough capital to prevent
a contagious spiral of debt defaults, bank writedowns, and general
force-fed deleveraging (at the market's pace rather than at a more
relaxed "managed" pace), markets will have put one of their
biggest worries on the backburner.
Warm wishes and until next week.
The TimingCube
Staff
|