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08252010 August 25, 2010

Posted by easterntiger in economic history, economy, financial, gold, markets, stocks.
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Weather Report  08252010

Current Positions  (Changes)

I(Intl) – exit; S(Small Cap) – exit; C(S&P) – exit ; F(bonds) up to 20-30%  G(money market) – remainder

Weekly Momentum Indicator (WMI***) – last 4 weeks, thru 08/24   +21.11, -12.81, -17.65, -32.54

(3wks ago/2wks ago/1 wk ago/this week)

Weekly Chart of the S&P 100 for the past 2 years (click here for a visual representation)

Apart from the obvious indecision which lead to weakness in equity prices, a distinct trend has developed in interest rates since mid-July – lower and lower rates.  These lower rates include the lowest rates on the 10-year treasury note since early 2009, now at 2.6%, and record low rates of 0.46% on the 2-year treasury note.  Since many mortgage rates are based upon these securities, these ultra-low interest rates fly in the face of those who had projected a rebound in housing, the so-called ‘housing bottom’, which fell apart with the report of a 27% drop in new home sales, the largest drop in history, while existing home sales plunged back to a level not seen since 1996. Inventories of unsold homes are at 12.5 months, the highest in 11 years.  The end of the government incentives put an end to the fluff and false hopes of an early housing recovery, with the exception of refinance activity, which remains active and for obvious reasons.  It takes about a dozen talking heads on television to find one who will admit that housing is undeniably connected to income, and income is tied to employment, so, with record levels of available workers who are under employed, unemployed, or otherwise, not at the peak of their earnings capacity, there is little or no hope for any stability in housing, much less a full recovery.  Housing has now followed the path of  ‘Cash for Clunkers’.

Low rates would also seem like the perfect opportunity for equity bulls to claim that stocks are the place to be, with returns on interest bearing securities presenting such limited potential for return. The absence of this rallying cry to ‘buy stocks now’ screams for the obvious – safety once again beats speculation and risk

Many daily and weekly indicators have continued to weaken in the past 4 weeks, suggesting that the time has returned for absolutely avoiding equities, unless one is willing to risk large losses.  Investors are still abandoning their equity investments. U.S. investors have already withdrawn $33.1 billion from domestic stock mutual funds this year, says a new study from mutual fund trade group Investment Company Institute. If this trend continues through the rest of 2010, this will be the worst year for mutual fund withdrawals since 2008 and the second worst in at least 30 years.  Hardship withdrawals from 401k’s are also way above average.

Of course, there is no such thing as being totally “out of the market.”  Investors have gone out of stocks and moved money into the new bubbles of our time: the dollar and U.S. bonds.

In fact, bond fund inflows over the last two years mimic that of the dot-com bubble in stocks. Bond mutual funds received $480 billion in new capital from June 2008-June 2010. That’s just $16 billion less than the most manic 24-month period of the dot-com craze.

Ten year average returns of 6314 mutual funds are at a paltry 2.46%.

What some have said for several years has become the obvious – this is not an investors’ market (buy & hold), this is a traders’ market and will remain so, in spite of our wishes to the contrary.  Brief periods that are conducive to positive portfolio performance will be mostly offset by periods of no gain or, unfortunately, of measurable losses. The habits which were not easy for everyone to acquire, that of adjusting to be fleet-footed behavior, must become a part of your thinking, if you will have any hope of holding on to your liquid assets.  That is, unless, you have several decades remaining towards your ultimate goal. This has been the case since 2000 and will remain so for the next 8 to 16 years, as the imbalance of capital ownership and debt shift and settle around the globe from holders, sellers and buyers.

One highly regarded market historian and technician stated recently that we will not move into a double-dip recession.  But, rather, we are moving directly into depression. He projects a 5,000 level for the Dow Industrials and $4,000 per ounce for gold over the next 3 years.  (Other market experts using entirely different points of view also project a dramatically higher price for gold within 2-4 years.)  As preposterous as the 5,000/Dow & $4,000/gold sounds, over the past 200 years, a periodic swing between the ratio of the Dow to the price of an ounce of gold has been as such – during stock peaks and gold bottoms, the Dow is 20 or more times the price of an ounce of gold; during stock bottoms and gold peaks, the Dow Industrials and an ounce of gold are roughly equal, or even as low as 0.3 in the mid-1800’s! (Gold is now at $1230, while the Dow is at 10,040, or about an 8:1 ratio, which is down from the high of almost 38:1 about 11 years ago, mostly due to the 400% increase in gold prices). When this ratio peaks and falls, it’s time to sell stocks and buy gold. When it bottoms and rises, it’s time to sell gold and buy stocks.  Hint – the ratio is falling – we’re still in the ‘sell stocks, buy gold’ phase.

From the previous reportOil, gold, silver and other commodities have staged a 3-4 month ‘flattening’, symptomatic of what some call consolidation.  Gold actually fell to a 9-week low last week, so there is likely to be a trend change.  With a further development of trend in the next 3-4 months, there is not enough information to suggest whether it will be of the ‘advancing’ or the ‘correcting’ nature.  Only in the context of the longer term positive trend is it a great time to be a buyer. (There is no practical change from this position in the past month.)

***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, thirteen-year history for this indicator at the time of update in this report (08/24/2010).***

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