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04152012 May 4, 2012

Posted by easterntiger in economy, financial, markets, oil, stocks.
Tags: , , , , , , , , ,

Current Positions  (Changes)

I(Intl) – exit

S(Small Cap) – exit

C(S&P) – exit

F(bonds) – up to 60%

G(money market) – remainder


Weekly Momentum Indicator (WMI***see 110111 for reference)

Last 4 weeks, thru 4/13

+13.95, +19.45, +2.0, -12.96

(3 wks ago/2 wks ago/1 wks ago/last week)

On 2/27, I wrote that the markets were due to weaken within weeks.  From March 2nd to March 7th, it took the deepest negative reversal of the year back to early February levels.  This was followed shortly thereafter by another upward reversal, mostly on two separate ‘news’ events, including, (1) the latest Greek scare being averted ($100 billion dollar loan guarantee), and, (2) the Fed chairman hinting that a new round of quantitative easing might be on the table (QE3?), under certain conditions.   At this point of narrowly focused optimism, the moderate level allocated to the F fund was forced to absorb a mild and manageable, negative turn.  This was to be corrected with reality within days.

I also mentioned the DJ Total Stock Market index (DWC), which was once the Wilshire 5000 index.  The target at that time was around 14,500.  Although it continued to rise beyond that target, closing twice above 14,900, it is now just under that earlier projected target and closed at 14398 on Friday.

To emphasize this same point, the Russell 2000 small caps, like our S fund, has spent almost ½ of the past 13 months in the 800 to 850 range, including the past 10 weeks and all but 3 weeks of the period from February to August of 2011. The only time out of this range came with the descent below these levels, into last years crash, and up from the bottom reversal in early October leading back into the range in early February, and back down under 800 today

That early March downturn has turned out to be essentially a dry-run for the current weakness that began from the April 2nd  peak.  Current levels are between 3 & 4% lower from that peak, by index.  The wake-up call this time around are the return of European concerns, specifically, rising Italian and Spanish bond rates, which raise the prospect of bank instability, as well as a decidedly different hint from the Fed chairman, that quantitative easing might NOT be counted upon to support the markets.  This second peak created a one-month ‘double top’ pattern, reversing downward to even lower, late January levels.  Overall, the internal market mechanisms have now weakened back to levels not seen since the debt and European issues of late November and are unlikely to recover back to recent levels for a minimum of 4-6 weeks, if not much longer.

Helping to accelerate the negativity on Spain last week was news that Spanish banks borrowed 316 billion euros from the  European Central Bank (ECB) in March. That was 50% more than in February. The current worry is not that Spain is about to default on sovereign debt but that Spain’s banks are in serious trouble and the banking system could be in for some negative surprises. Spanish banks have been seeing large outflows of cash as the economic situation worsened. The run on the banks is similar to the one on Greek banks over the last two years. The end result for Spain is going to be the same. They are too big to fail and too big to save but the European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF) are sure to try and it will cause market problems worse than we saw with Greece.

The current U. S. markets are very much skewed in the direction of a small number of stocks, while the broader markets are mostly mired in ranges that go back to last years peak levels, making no progress.  Lots of attention has been paid to Apple and it’s impact on the market, for good reason.  With the weighting of individual stocks in the Nasdaq, Apple alone represents 15% of the entire value of the NASDAQ 100.  So,  just two companies, Apple and Google make up over 20% of the entire index of 100 companies.

This upcoming week, the focus will be on the next round of economic reports, and, most significantly, the level of interest on Thursday in the next Spanish bond auction.  A lack of appetite for new Spanish debt is likely to have negative impact on European markets that would then ripple into our markets on Friday.  Otherwise, more earnings reports that might appear encouraging, as they are normally presented, but, not fully masking other details.

Projections for 1st quarter earnings are running as low as 0.5%, according to Standard & Poors/Capital IQ. And that’s after a mediocre 4th quarter 2011, indicating the end of big earnings improvements that followed the depths of the 2008 financial crisis.

Investors are skeptic and have been all year.  Just over half the total money invested in new funds has had two destinations: the iShares Barclays U.S. Treasury Bond Fund (symbol GOVT, with $297 million in flows) and Pimco’s Total Return ETF (symbol TRXT, with $267 million in flows). The standout new equity funds of 2012 in terms of flows are all iShares products – Global Gold Miners (symbol: RING), India Index (symbol: INDA) and World Index (symbol: URTH). Bottom line: even with the continuous innovations of the exchange traded fund (ETF) space, investors are still targeting international and fixed income exposure, a continuation of last year’s risk-averse trends and while ‘ETFs destabilize markets’ might be the prevailing group-think, this quarter’s money flows into newly launched exchange traded products reveals a strong ‘Risk Off’ investment bias.


I’ll go back one last time to the F fund.  The largest drop in 4 months on the ‘good’ news in early March has been followed by the largest rise in 5 months, after the latest dousing by the Fed chairman, dismissing QE3.  Clearly, from this move, and from the trend of purchases made by investors in the 1st quarter, the safety of the bond prices/falling interest rates still offer the safe bets once the weakness in equity prices accelerates in the coming weeks.




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