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02282010 May 25, 2010

Posted by easterntiger in Uncategorized.
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Weather Report 022810

Current Positions (No Changes)

I(Intl) – exit; S(Small Cap) – exit; C(S&P) – exit ; F(bonds) exit;  G(money market) –  remainder

Weekly Momentum Indicator (WMI***) – last 4 weeks, thru 02/25   -37.35, -11.64,+7.68,+12.83
(4wks ago/3wks ago/2wks ago/last week)

While the short term indicators improved slightly in the past month, the longer term continues to be only neutral to possibly negative as the averages are slightly higher than a year ago, but still significantly lower than 1 1/2 to 2 years ago. Like many of us, there are many investors who have some portion of their retirement accounts in the stock market – if the market does not recover, more of these investors are likely to sell or to roll over to safer investments (for those not familiar with roll over options, put “retirement plan rollovers” in a search engine for more info). There have been reports that stock redemptions have risen from last year – some investors are forced to sell because they need the money; others just want out.  Records also indicate a highly skeptic attitude of the latest rally from the lows of last March and July by individual investors.  During the most recent 5-7% drop in January/February, selling or moving to safety significantly increased. The stock market averages are not far from the lowest point in 12 years and still remain in an overall downtrend, with no sign of a change in trend showing yet.  So far, there are few, if any, indicators which might be suggesting a market bottom is near – most indicators remain negative. Several indexes are within a small percentage of exactly where they were on December 1st.  In other words, 3 months have passed only to have market levels end up back near the same places.  At this point, no reasonable opportunity for moderate to low-risk gain exists.

Returns – S&P500, last 40/50/60 days  -1.11%/-0.39%/+2.1% ; Gold,  last 40/50/60 days  +1.95%/+0.41%/+0.07%.

In early February, spooked by fears that Greece or Dubai World would default on their debt repayments, Australia’s ASX-200 Index fell below the 4,500-level, losing 10%, of its value in three-weeks, due to rapid unwinding of Aussie /yen carry trades. This puts dollar carry trades at equal or greater risk in unforeseen scenarios. There were equally sharp downdrafts on Wall Street, the Nikkei-225 Index in Tokyo, and the Hang Seng index crashed below the psychological 20,000-mark. Sovereign debt fears hammered the Australian dollar by almost 10% from a few weeks earlier. It began to feel like 2007-08 all over again.

Over the past few months, price movement/momentum on practically all major asset classes has approached and stalled near multi-month highs, as expected – (see S&P100 and Gold returns above).  Weekly relative strength on the S&P 100 is falling and is near the lows not seen since last March at the last market bottom.  Whether this indicates a weakening or a strengthening process is still uncertain.  The possibility exists of a ‘Head & Shoulders’ pattern, where the higher ‘head’  (highest point on January 8th) rises above two slightly lower, ‘shoulder’ levels (left shoulder 10/16, right shoulder 2/19), and would indicate an upper level market exhaustion (weakening condition) and can precede a coming time of weakness, or an outright correction.  Downside targets would be 5% to 10% below the current levels.  Time-wise, a likely target of April or May would also coincide with a near-term turning area, from either an intermediate low or intermediate high, and an opposite extreme (bottom or top), sometime in August, depending on what happens between April and August, rise or drop.

Last year’s parabolic rallies in copper, gold, Brazilian and Russian stocks, and the Australian dollar, are running out of steam.  Volatility has returned to the money markets, amid worries about a possible “double-dip” recession for the world economy, capital flight from European sovereign debt markets, monetary tightening in Australia, China, and India, and the President Obama’s backing for the “Volcker rule,” – which calls for a clamp-down on the speculative trading binges of the Wall Street Oligarchs.

In addition to these kinds of pressures, for the remainder of the year, there are a number of other reasons to temper overly optimistic outlooks:
(1) with so many asset classes rising beyond expectations last year, there is very little upside room remaining in the near term,  as demonstrated by the current 3 month flattening in many assets,
(2) buying volume progressively decreased during last year, while selling volume was extremely high,
(3) bearish, rising wedge patterns exist on a majority of the indexes,
(4) the 10,730 high on the Dow 30 in January,  touched a multi-year trend line and reversed downward,
(5) Treasury bond prices are looking weaker, which normally precedes weakening stocks by 2-3 months,
(6) the unemployed/underemployed numbers have yet to significantly stabilize or turn positively,
(7) the Dow Industrials is maintaining the pattern of going back and forth around 10,000, almost 30 times in the past 10 years, while the S&P500 is struggling with 1100, after topping twice over 1500 in 2000 and 2007.
(8) the rising prospect of additional debt crises in a growing list of nations does not bode well for maintaining stakes in risky assets which rely on growth (equities, real estate).

The only possible remedy to the above and other concerns would be the same artificial stimulation responsible for last years’ rally, with neither percentage gain nor duration anywhere near extraordinary by bear market standards.

As of the end of November (latest available) the price earnings ratio on the S&P500 was 85, a decrease from record highs of recent months, but still one of the highest since records were kept on the index from 1936.  The stock average remains overpriced in relation to earnings in the extreme, a very negative indicator since stock prices ultimately depend on earnings.   The ratio is very high when compared to an historical average of closer to 15 or 20 times earnings. In response to an inquiry S&P reported “S&P 500 lost more money ($202B) in Q4 2008 than it made ($194B) in Q2 2007….with the continued outlook, the P/E is projected to go higher, with the 12 month As Reported estimated EPS actually turning negative for the first time in index history.”

For returns over the longer term, the last ten years, from 2000 to 2009, represent the 2nd worst ten-year period on record, exceeded only by the period from 1930 to 1939.  And, quite naturally, the three decades with the worst returns, 30’s/60’s/00’s, followed directly after the three decades with the best returns 20’s/50’s/90’s.  So, what should we expect from 2010-2020, based upon each 2nd decade after the highest returns???  The 2nd decade following the 20’s and the 50’s, that would be, the 40’s and the 70’s, offered below average returns, both decades with only slightly positive returns for the ten-year spans.  So, based on a measure of 100+ years, we should expect below average returns for an additional decade or so; that is, unless some currently unforeseen circumstances occur, circumstances which absolutely defy historical norms and patterns.

***The Weekly Momentum Indicator is a strength measure of the S&P100, the largest 100 stocks in the U. S., in terms of market capitalization (share price of each of the 100 stocks times the number of shares available to the public).  The WMI is the difference in the S&P100 average opening price for each of the past three Monday mornings and the average closing price for each of the past three Friday afternoons.  This detects upward, sideways or downward movement of the overall market, since the markets generally move in synch from one index to another, and correlates very well with identifying opportunities for reward/gain and for situations for risk/loss in all equity indexes.  Rising numbers from the prior week are positive opportunities, while falling numbers from the prior week are avoidance opportunities.  I have a weekly, ten year history for this indicator at the time of update in this report (02/25/2010).***

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