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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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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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Optimism over this week's EU Summit and passage of an austerity measure in Italy bouyed European markets, leading to a postive start to the week in the U.S. S&P 500 rained on the parade later in the day with a report that virtually all the Eurozone countries were on watch for possible credit downgrade. Stocks finished fractionally higher for the Monday session. Tuesday provided a tightly traded session with little news to spark investors either way. The good news being that stocks continued consolidation the prior week's heady gains with little real selling challenging the jump higher. The consolidation continued Wednesday with investors awaiting the outcome of the EU Summit meeting and indexes reacting to news and rumors from Europe. A reduction in unemployment claims offered initial support for stocks Thursday morning. That positive was overshadowed by new ECB Chief Mario Draghi's reiteration of restraint in playing a larger role bailing out European finances. Investors fled the scene, pushing stocks down around 2% for the day. Friday offered just the opposite, with European markets feeling better about the Summit proceedings and U.S. investors following suit. Stocks shrugged off some negative earnings preannouncements from Texas Instruments and DuPont to keep the positive Friday tone intact and negate Thursday slide.
Stocks were able to hold on to the sharp gains of the prior week. The S&P 500 (SPY) took in another +0.95% addition with the Nasdaq 100 (QQQ) ticking higher by +0.71%. The more risk-sensitive Russell 2000 (IWM) added +1.41%. All three indexes have reclaimed their 50 and 200-day EMAs. Of note, the S&P 500 is within spitting distance of a bullish 50-200 crossover, making next week's trade of more import for technical folk, though the simple moving averages still have quite a ways to go (and the 200-day simple moving average provided obvious overhead resistance to the S&P 500 this week).
The top 5 World ETF portfolio gained +0.91% this week. 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 Turbo Model remains on a Buy signal while Classic continues to be a Sell.
A mathematical analysis of market trends paints a grim
outlook
They say that history doesn't repeat itself but that it often
rhymes. Along those lines, and being suckers for a good mathematical/mechanical
approach to investing, we found John F. Carlucci's analysis this
week to be of interest. A further disclaimer is that we are on record
as being believers in the secular cycle view of the investing landscape.
Carlucci's article feeds into our bias toward this framework for
analyzing the broad, big picture trends in stocks. This analysis
is more negative than we expect, but would certainly get us to a
point where stocks are set up for another generational secular bull
market.
We have often presented information behind the secular cycle view
of the investing world. As a reminder, we offer Chart 1 as an example.
This chart simply notes the 15-20 year downtrend that some refer
to as a secular bear market. Beginning in year 2000, we are somewhere
in the middle of the current secular bear market, a period defined
by shrinking investor enthusiasm for stocks, even in the face of
rising corporate profits (the fundamental foundation for stock prices).
Chart 1: Secular cycle suggests more downside to come in
years ahead
John F. Carlucci's analysis comes to a similar, though more specific
view by taking a very long-term trendline for the S&P 500
and
examining market extremes above and below that trendline. The red
line in Chart 2 below is that long-term stock market trendline.
Secular bull markets drive stock prices well above this red trendline,
while secular bear markets push it below. The variances to trend
created by those cycles are shown in the light blue peaks and valleys
graphic at the bottom of the chart. You can see from the variances
that the market gets extended by 80%+ at the peak of the secular
bull market while extending about a bit more than 50% on the downside
in a secular bear market. The variance piece suggests we have a
whole lot lower to go before this downtrend cycle completes.
The chart also provides a shorter-term market target. The black
downsloping lines portray the similarity in slope between the previous
secular bear markets. They provide a reference for the bear period.
The green and blue upsloping lines are simple long-term trendlines
measuring the bottom of the secular bear move (the green line) with
the blue line noting an intermediate low point. The chart offers
that the next move for stocks is to follow the path carved in past
secular bear markets (highlighted in yellow) and drop to the blue
line. Were this to happen, the market would return to its 1990 level,
giving up ALL those hefty gains of the 1990s.
Chart 2: John F. Carlucci's analysis of secular market cycles
points to a big decline ahead
(for the full article explaining this analysis, go here: http://advisorperspectives.com/dshort/guest/John-Carlucci-111208-The-Great-Repression.php)
Thanks to Doug Short's excellent site for publishing the analysis
- Mr. Short developed the original chart behind the analysis.
After the past few months, investors would welcome ANY trend that
runs for more than a week or two and doesn't reverse with a 5% move
in a single day. Those types of moves are impossible for investors
to deal with unless you are just trading for a day or few. Certainly
we look forward to a more trending market, and wouldn't be at all
surprised if that trend is another leg downward. But a further 50%
drop over the next year, as Mr. Carlucci outlines, would be a shocker.
Question: What is your outlook for 2012?
Of course we are trend followers rather than economic forecasters.
So anything we would say is coming from readings of market historical
trends, and it's going to focus less on economics than on what we
might profit from. History would suggest fairly high odds that 2012
will be a losing year for stocks. To have the bottom drop out along
the lines of the analysis discussed above, we think that the Euro
falls apart causing serious damaging ripples across the financial
sector coupled with unexpectedly sharp slowing in China and the nascent
U.S. recovery hitting a wall. All that certainly could happen. But
a contrary analysis would point out that bonds offer very low yields,
which would become even lower in this doomsday scenario. Investors
are feeling compelled to take on more risk as yields shrink. That
supports stocks, at least to some degree, and particularly higher
yielding stocks like utilities, drug companies, etc. Further, in 2008,
the U.S. was entering the worst recession in decades. While that sour
economy lingers in certain sectors, there is nothing yet on the horizon
to suggest a similar dropoff in economic activity.
We do think that stocks face plenty of headwinds - coming changes
in tax code, in addition to the global economic struggles outlined
above. We continue to view stocks as being in a cyclical bear market
that likely runs until at least sometime past next year's election.
While the market could well remain volatile, the level of volatility
seen in recent months is just extreme and will give way at some point
to a more defined trend. Recognize that stocks now have only one positive
month in the last seven - a pretty bad losing streak. We would expect
a more mixed positive-negative performance in the months ahead. In
short, better opportunities to profit from trends because the trends
have a little bit longer shelf life.
Thus, better trends to work with, but a losing year for stocks. Of
course, positive or negative year, anything would be better than the
hyperactive whipsawing we have experienced for the last few months.
Regardless, our commitment is to continue working to improve what
we offer to you so that your wealth can experience growth, regardless
of market direction.
Warm wishes and until next week.
The TimingCube
Staff
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Turbo Model
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Classic Model
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