|
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)
|
|
|
|
|
|
Monday brought the month to a close with a heavy dose of profit-taking. Indexes returned 2-3%
of their stout October gains in the final day. Selling continued as November began
Tuesday with a surprise call for Greek elections and the failure of securities
firm MF Global reminding investors of risk. Stocks dropped a further 2.5-3.0%+.
Wednesday brought some stability to the week as markets found their footing with
investors nibbling at the fresh bargains generated by two days of heavy selling.
Thursday's action repaired more of the Monday-Tuesday damage when Greece backed
away from the referendum call. Stock investors cheered the news driving indexes
up in the neighborhood of 2%. Friday delivered a new jobless report that offered
modest improvement though traders looked reluctant pushing stocks lower early
in the session. Investors stayed cautious as the issue of the confidence vote
in Greece is still uncertain. The market remained below the zero line during the
whole session, disappointed by the inability of the G-20 world leaders to come
up with some real solutions to the current crisis during their meeting in Cannes
(France).
Over the week, market indexes gave back most of the prior week's advance leaving the S&P 500 (SPY), the Russell 2000 (IWM) and the Nasdaq 100 (QQQ) down 2.43%, 1.88% and 1.93% respectively.
The top 5 World ETF portfolio lost 1.94%
this week. The portfolio holds the top 5 ranked ETFs from October 7th.
Our Classic and Turbo Models remain on Buy signals.
Looking for leadership
Coming out of the 2008 financial crisis, growth investors
were interested to see which companies would drive the market higher.
These growth stock leaders become the names on the lips of investors
everywhere. Some may recall the China-driven cyclical bull market
in 2003-2007. Chinese thirst for building out infrastructure in
preparation for the Olympics and broad economic growth propelled
commodity and shipping companies to spectacular gains. Dryships,
Potash, and Brazilian iron ore miner, Vale, were among the hotshot
stocks of the day. The 2009 rally onset saw the resumption of Apple's
strong move upward, recently delivering the company to the top of
the market value rankings, surpassing energy giant Exxon. Other
shooting stars of the latest cyclical rally include Chinese internet
portal Baidu, online retailer Netflix, yoga apparel provider Lululemon,
among others.
As all growth investors know, shooting stars dramatically come back
down to earth. The recent market turmoil took its toll on these
growth stock leaders. High-flying Netflix lost the faith of the
hot-stock crowd. Fellow shooting star, Green Mountain Coffee, was
hit. Then, shoe maker Crocs saw investors wave goodbye. Apple's
first quarterly miss in years loped off a good chunk of value, a
similar fate befelled Dow Jones Industrial
superstock IBM, though
that stock continued to prove itself by marching right back up.
From this market "winter" will emerge new leaders to line
the pockets of momentum investors in the next upcycle. For awhile,
it appeared that a new breed of hotshot healthcare information companies
would pace the growth parade. Athena and Cerner are both at the
forefront of the move to bring electronic records into the doctor's
office and hospital. However, their earnings reports last week,
though solid, left mo-mo investors uninspired. Retailers have been
consistently strong. Under Armour, Nike, Ralph Lauren, Starbucks
are among many retail stocks that have help up well through the
turmoil and are threatening new highs. Mirroring this trend, our
sister publication ETFTide has held the retail ETF
regularly over the past few weeks, further indication that this
sector is showing leadership. But ETFTide also has found relative
strength among defensive issues to include treasury bonds. Along
those lines, utilities have been the top-performing broad market
sector in recent months.
It's a mixed bag. And one that reflects the ongoing uncertainty
afflicting the broader market. A monster decline in August and September
gives way to a record-setting gain in October. The final day of
October and 1st of November deal harsh drops to anyone trying to
get in on the fun. And we've been rebuilding that decline the past
couple of days. Energy stocks look like they might support the retailers
effort to push markets upward. And per the norm, investors are bidding
up the shares of high dividend stocks as a way to tiptoe into the
market with somewhat less risk. DVY, HDV, and SDY are back knocking
on the door of new highs and keeping pace with the market on strong
updays, while being less affected during the downers. This is a
market that wants to run higher. But also one that clearly doesn't
have much confidence as investors are very easily influenced by
the slightest rumor with a tendency to sell first, ask questions
later.
Behind this hair-trigger mentality lies widespread uncertainty over
what exactly happens if Greece defaults. Markets do not seem to
have any comfort at all with this notion, though many commentators
and forecasters argue consistently that this event will not be avoided.
Does that default spark a true contagion taking down banks and markets
worldwide? Or will it actually turn out to be a positive for the
Euro, not to be held back by a clearly ailing economic member? Markets
don't have a clue. Thus, they go ballistic on any news suggesting
an unraveling of support for a continued Greek backstop/bailout.
Our two Buy signals have thusfar turned out ok. But we view the
market as remaining on loose soil; the most recent evidence being
how sharply stocks fell earlier this week. True bull markets settle
in and grind higher, led by strong cyclical sectors. This whipsawing
market led by utilities still is not quite ready for prime time.
That said, it's a seasonally good time to be a stock investor with
October-April often being a good stretch. We would like to see all
systems go so we can fully dive into our Buy signals. But our advice
is to keep some powder dry for now and/or a tight leash on at least
part of your position until we see a broader set of rowers and a
consistent new set of fresh-faced momentum stocks to power this
market forward.
Question: Does the Fed set interest rates?
No. The Fed (short for Federal Reserve Board) does not really set
interest rates. It cannot dictate long-term interest rates which are
set mostly by market forces, but can seek to temporarily influence
the direction of the changes.
The mechanics are as follows. In the U.S., interest rate decisions
are taken by the Federal Open Market Committee (FOMC) as it targets
a desired short-term interest rate (the Fed Funds rate). This is
the guideline rate for the shortest overnight loans between the
Fed and financial institutions. The way the Fed works to achieve
the target rate is by engaging in the open market for bonds and
other debt securities. Through agencies like the U.S. Treasury,
the Fed can issue or buy back IOUs, effectively injecting or withdrawing
liquidity from the system. The beauty is that the Fed also has the
option of simply creating the dollars it wants to inject (often
referred to as "printing money").
For example, when the Fed wants to push rates down it can buy back
large sums of bonds from banks and other institutions. Buying the
bonds pushes prices up and rates down. The banks then have extra
cash reserves which, unlike the IOU they sold back to the Fed, are
not earning interest and must be loaned out as rapidly as possible.
In a competitive market the way to issue loans faster is by offering
more competitive rates, thus carrying forward the downward pressure
on rates the Fed intended to create. The rub is that just because
there are extra cash reserves available and the bank wants to increase
loans, it does not necessarily mean borrowers want it at the expected
rate.
Since 2008, the Fed has broadened its approach to more directly
impact long-term rates, as we discussed in our article on their
"twist" program last week. While this lowering of rates
pushes money out into the banking system, banks have been sluggish
at lending the money to consumers. Whether that's because of a lack
of demand, tighter credit requirements leading to fewer credit-worthy
loaning opportunities, or the banks preferring to use the money
to improve their balance sheets, the net impact is to create a logjam
in the financial system preventing the Fed's money injection from
reaching the economy. The Fed figures that if it keeps pushing rates
lower and lower, at some point the logjam breaks. For one, as rates
go down, the ability of borrowers to financially support loans goes
up. Secondly, as rates fall, businesses find it ever more attractive
to pursue new projects. The projects simply have a lower hurdle
to clear to cover the interest on the loans and deliver profitable
cash flow.
Nothing is easy in this era of deleveraging economies and stuck
financial markets. Thus, we will continue taking baby steps in trying
to repair and recover from the worst recession in decades.
Warm wishes and until next week.
The TimingCube
Staff
|