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06272012 June 28, 2012

Posted by easterntiger in economic history, economy, financial, gold, markets, oil, silver, stocks.
Tags: , , , , , , , , ,

Current Positions  (Changes)

I(Intl) – exit

S(Small Cap) – exit

C(S&P) – exit

F(bonds) – up to 50%

G(money market) – remainder


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

Last 4 weeks, thru 6/27

+12.61, +14.59, +27.84, +5.92

(3 wks ago/2 wks ago/1 wk ago/today)

Measured from the early May YTD high price levels, US stock indexes have had six intermediate changes in direction in the past two months, ultimately resulting in net losses since April 25th of nearly 5% on the S&P100, 5.6% on the S&P500, 6% on the Wilshire 5000, 6.2% on the Russell 2000, 6.41% on the NASDAQ 100 and 6.5% on the NASDAQ Composite.

The Russell 2000 (small cap index) has now ended 52 of the past 86 weeks within a distinct 100 point range, between 750 and 850 (today at 776). This is very similar to a period between 2006 and 2008 where it traded in this SAME RANGE for over 60 of 128 weeks, shortly before the infamous financial crisis and Crash of 2008.  This reference is not made to project a similar crash.  It is only to emphasize the lack of upward progress in over 5 years and to suggest the higher probability of more downside potential, as in 2007, than upside  potential for the foreseeable future, as in, years.

As an ongoing measure, I maintain a marker of closing prices of the S&P100 over many weeks, (I now have over 15 years of day-to-day price history) just to show how little overall market movement that has actually taken place this year.  This narrow range is in spite of headlines and unrelenting bullish comments from those who are always ready to convince you that better times are just ahead, if you just don’t bother wasting time to protect your investments. If you do, you’ll miss the ‘next’ rally.

Current/recent price levels for the S&P100, also known as the OEX















This overall ranging aspect is also referred to as ‘congestion’.  Congestion is not necessarily abnormal.  As a matter of fact, markets normally spend up to 2/3 of the time in congestion, and only 1/3 actually ‘trending’, either higher or lower.  However, the time-extended, narrow nature of this current congestion, along with low buying interest and heavy selling at/near peaks, strongly implies overall QUESTIONABLE EQUITY VALUE and A HIGHER THAN AVERAGE RISK/REWARD RATIO.

This risk can be no better described numerically than the TOTAL (not annual average) 10-year return in the S&P500, which now stands at 5.17%, through end of the day on June 26th!!!  Returns at this level over such long periods of time simply do not compensate us for the exposure to daily risks.  These risks are often found, after the fact, on a sudden Monday morning headline from somewhere around the world, at least a couple of times a year. Similar returns exist on the Dow 30, at 5.87%, and 7.16% on the NASDAQ. In the meantime, gold and silver returns are above 400% for the past ten years and are projected to go higher within the next decade. This shift to stock under-performance, present since 1999, is a predictable, cyclical phenomenon.  Following decades of expansion/over-expansion of paper assets, including real estate and stocks, only precious metals and hard assets/other commodities manage to find their true value, as paper assets ‘deflate’ to find their true value. Commodities more closely follow the rules of supply & demand in finding their appropriate pricing and are much less prone to speculative bubbles as are stocks or real estate. (As a personal aside, although I had temporarily suspended my purchases of metals, I am now resuming some selected purchasing at these 2-year lows.)

Just as dramatic as the differences between equity returns and commodity (metals) returns are the corresponding layoffs in many financial management and brokerage firms, such as J P Morgan in March and coming soon to Deutsche Bank, Goldman Sachs, and UBS, clearly favoring the disposal of equity research and equity sales organizations (they don’t expect their revenues to sufficiently overcome their costs for years to come).  They are instead focusing on commodities, i.e., oil, gold, silver, grains, etc.

Even though our TSP holdings aren’t diverse enough to follow the larger trends, don’t be the last to understand/recognize that the ‘lights have been going out’ on equities/stocks as a source of appreciation, already for a decade.  Stock gains aren’t impossible, but, they’re significantly harder to locate, acquire, and, most importantly, to sell at the right time.  If you miss the boat, by not diversifying your other assets away from TSP holdings alone, you may suddenly find yourself ten years older, wondering what happened.  This is why I prefer regular opportunities and the relative safety of large F fund allocations, when the trend is right, as I mostly avoid the rather choppy, risky, small returns on equities, outside of low-risk scenarios.  Unfortunately, the best opportunities for C, I and S funds occur when the risks are the absolute highest, as in, when the world financial condition appears at its worst, when selling has reached multi-year lows and when ‘buying in’ is presented with the least evidence of likely positive return.

In a way similar to a trapeze artist swinging from one support to another, the current market only appears to move in response/reaction to regular reports (monthly jobs reports, monthly GDP reports-coming this Thursday morning at 8:30, monthly consumer confidence, weekly jobless claims, monthly supply managers surveys, monthly purchasing indexes, etc.), or, to the latest utterance, official or ‘otherwise’, from key G20 members, the European Central Bank or the US Fed chief.  These utterances are often virtual repeats of earlier, meaningless announcements regarding their ‘stepping in if necessary’, regardless of earlier ineffectiveness, or such as Ben Bernanke pledging commitment to low interest rates, as he has done at EVERY Fed meeting since 2008.

The fact still remains that many of the recent rallies were used as selling opportunities by those who hold large portfolios, such as mutual fund and money managers, hedge funds, etc.  Keeping the markets at these net, ‘no-return’ levels still accomplishes two things.  One, it consumes the risk premiums from speculators betting on downward momentum, when that downward push can be otherwise prevented.  Second, it keeps hope alive for those with ‘long’ or upwardly biased positions, even if reasonable returns are not achieved relative to the constant risks involved in the chase.

There is a dichotomy between technology stocks and the broader market attempts to deceptively disguise the true underlying weakness.

For example, today’s market ‘up day’ ignores the fact that today’s highs are, in most cases, below both (1) the highs of the week, and (2) last week’s highs.  The most likely suspect is so-called, end of the month ‘window dressing’. After booking two consecutive losing months, it’s now time for fund managers, money managers, portfolio managers to pretend to buy (as opposed to the actual ‘trading’), in order to improve their quarterly results as much as possible, only to come back to reality by selling these same shares within the next few days/weeks, to settle their positions and reduce their longer term risk.  As usual, the cue to this masquerade lies in the lack of motion in the bond markets, from where any funds being used for stock purchases would originate.  Since there is no corresponding decrease today in bond prices, from bond selling, you can be assured that the measure of money actually being used this week for stock purchases is negligible, if not non-existent.  Today, the 20-year treasury note price is actually up .20 cents from yesterday, and also up .14 cents from the closing price of 2 Friday’s ago, indicating no selling for stock purchases.

And, quite possibly due to the strength/lack of selling volume in Apple, which composes almost 12% of the NASDAQ market cap, techs appear to be stronger than they actually are.  However, numbers, as it’s said, don’t lie.  Since the early May peak in price levels, the trading days with technology stocks making ‘new low’ prices have beat the  days with ‘new highs’ by a ratio of about 3:1.

Also since May 2nd, all commodity prices, particularly oil, gold, silver (which is actually down over 20% since early March), and copper appear to be in the process of seeking bottoms.  Also seeking a bottom is the heavily burdened Euro currency, due to increased threats to its solvency. Regarding oil prices, unfortunately, the silver lining we see in lower oil prices (lower gas prices) is not large enough to overcome the dark cloud, threats of decreased demand, projected from falling economic activity in major areas of consumption, like China, India, Russia and the US.  This spells recession in many of these same areas where growth is needed to offset weakness elsewhere, such as the US, Europe and China. Several European, North/South American, and Asian markets also remain mired in ranges close to their lows of the year.  The Japanese Nikkei bounced off of a 27-year low earlier this month.



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