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Current Signal Performance
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Turbo Signal
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Trade Date
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Turbo Model Returns (Long & Short Strategy)
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Nasdaq 100
(QQQ)
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Russell 2000
(IWM)
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S&P 500
(SPY)
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Classic Signal
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Trade Date
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Classic Model Returns (Long & Short Strategy)
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World
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Nasdaq 100
(QQQ)
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Russell 2000
(IWM)
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S&P 500
(SPY)
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European debt concerns continued their leadership news role in driving markets. October began Monday with a sharp selloff on concerns Germany is growing tired of throwing money into the Euro bailout fund. The drop pushed most domestic indexes to new lows for this cycle leaving the S&P 500 hanging right on 1100. Small-cap stocks finished the day off a shocking -5%+. The plunge continued Tuesday with the bottom appearing to drop out of stocks midday as Apple did NOT unveil the iPhone 5 as expected (instead, consumers get the iPhone 4S). A rumored effort to further shore up beleaguered European banks sparked a massive short-covering rally in the final hour of trade reversing a sharp loss to allow markets to almost entirely recover the prior day's swoon. For example, the small-caps rose 6%, negating their entire prior day loss! Wednesday was more tame. Economic reports offered a lackluster start to Wednesday's action, but bulls led the day higher with the Nasdaq 100 up over 2%. A decent retail report and a plan to inject capital into ailing European banks kept traders smiling Thursday. The Dow Jones Industrial Average logged a third consecutive triple-digit gain adding 1.7% to its value. Friday's release of the employment report further bolstered the positive mood leading to early gains. A downgrade of Italy and Spain, however, tossed cold water on the rally party sending stocks into mixed territory for the final day of the trading week.
After plunging on Monday to new lows, the S&P 500 (SPY)
managed a decent recovery to a +2.26% gain for the week. The Russell 2000 (IWM)
sped +1.87% higher on the week. The Nasdaq 100 (QQQ)
likewise showed a weekly gain of +3.01%.
The top 5 World ETF portfolio offered a +3.17% win. 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 and Turbo Model both are in Sell.
When a quality stock gets the liquidity hammer
Value investors look for disconnects between a company's
underlying value (whether from an earnings stream or assets) and
the prevailing market price. The market price comes primarily from
the intersection of fundamentals and investor sentiment. We can
measure investor enthusiasm, at least at a high level, by observing
the price-earnings (P/E) ratio of the market. The soaring P/E ratio
in the late 1990s reflected the unbridled lust for growth stocks
(particularly of the technology variety) fueling stock markets to
the stratosphere in a final burst of giddiness. We can observe the
fundamentals, naturally, from corporate earnings projections, economic
growth expectations, and so forth. Last week, we set out a range
of possible S&P 500 prices based on this intersection of fundamentals
and investor enthusiasm - or lack thereof, these days.
The third factor in driving market prices is one we rarely see as
a primary driver. However, in bear markets, this third leg of the
stool occasionally comes to the fore. Liquidity is usually within
a "normal" range of inputs such that it takes a backseat
to fundamentals and sentiment. Earlier this week, however, as markets
came further unhinged by fears of a Greek default and the perceived
financial tsunami it might unleash, we saw some investors hit the
wall and forced to sell positions. This "negative" liquidity
event showed up in sudden, very sharp declines in prices of some
assets previously perceived as relatively "safe" and/or
attractive.
A good example is the stock of Annaly. This company buys mortgage
securities, typically of the highest grade, receives the coupon/interest
payments, and passes that cash flow along to investors. With the
Federal Reserve's stated objective to keep mortgage rates as low
as possible, owning mortgage securities is a very profitable business
- the prices of the mortgages (bonds, in effect) go up with each
dip in rates. Paying a dividend with an annualized yield of well
in excess of 10% makes Annaly a very attractive investment in times
of near-zero percent interest rates. As a result, Annaly's stock
price has been a land of stability throughout the market's recent
turmoil. Annaly suffered a couple of one-day plunges in the early
August wake-up call that shocked investors into panic mode. However,
Annaly's recovery was swift as investors looked ahead to the juicy
3% quarterly dividend to be paid out in late September.
Chart 1: Annaly holds up as investors eye dividend
Chart 2: Annaly investors cash out once dividend has passed
This week, Investors dumped Annaly like a hot potato. There was
no news. The sharp plunge over the first couple of October trading
days had the feeling of investors who simply needed to raise cash.
They had held on long enough to capture the dividend and were now
free to release the stock for awhile (Annaly pays a dividend once
per quarter at the very end of the quarter, typically, so another
dividend won't be forthcoming until late December).
Of course, this is par for the course for long-time Annaly investors
- they saw this same movie in 2008 as the stock was ripped back
and forth between investors selling to raise cash for margin calls
and/or redemptions, and value investors buying to get in on the
hefty dividend stream. The value folks also looked to capture the
sharp price recovery that brought Annaly shares back to a more reasonable
value. Recognize that Annaly was paying the same $0.50 per share
quarterly dividend throughout 2008, yielding as much as 28% annualized
during the Sept/Oct 2008 market plunge.
Fears in Annaly at that time were perhaps more on the doorstep than
they would be now. The 2008 financial crisis was predominantly centered
on U.S.-based banks and their poorly collateralized mortgage holdings.
With Annaly in the finance mortgage REIT, it's no surprise the company
got caught up in the collateral damage of finance company selling.
Today, the dividend is 20% higher than in 2008 and the shares have
more than doubled, (at least they WERE double before this week's
haircut.) Could the shares drop by half from here and reprise their
2008 behavior? They certainly could. Anything is possible when investors
must raise cash to pay their lenders.
A crisis of liquidity leads one to behave rashly, selling whatever
one has regardless of price. This bear market will deliver similar
breaks in logic, where companies that have done nothing but deliver
consistent performance (and cash flow) to investors see their shares
punished in a race to raise cash. For those of you who have a little
value investing money to allocate, those disconnects represent a
great opportunity.
In a bear market, weak perceived fundamentals and/or poor investor
sentiment can fuel a rush for the exits that exacerbates those who
are overly leveraged - forcing them to sell whatever is on hand
to raise cash to pay their lenders and answer their calls for more
collateral. Those who have taken a defensive posture, and respected
the bear market, have then the opportunity to step in to buy assets
on the cheap. When you have cash available, a liquidity crisis can
be your friend.
Question: What does it mean that almost all the World rankings
are red?
Some may have noticed that the bright red color denoting negative
trend has been working its way up our World ETF Ranking list. The
Strength indicator shown in the World ETF Ranking is a composite number
that comes from our proprietary ranking scheme. It has no real significance
in and of itself, but simply allows us to compare one ETF with another.
The fact that the Strength numbers are almost entirely red is consistent
with the negatively trending country and index ETFs we track in the
list. We note that the much-heralded BRIC countries are clustered
at the bottom of the rankings, reflecting the exit of money from those
once hotshot ETFs. The U.S. markets, weak though they've been, have
held up better by comparison against their international brethren,
with the Nasdaq 100
still above its August lows, and alone in holding
on to a green positive Strength number. For subscribers who are not
heeding the Classic Model Sell signal and are following the Buy and
Rebalance approach, owning the top 5 World ETFs at this juncture offers
a sort of "best of a bad lot."
Warm wishes and until next week.
The TimingCube
Staff
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