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01102013 January 10, 2013

Posted by easterntiger in economic history, economy, financial, gold, markets, silver, stocks.
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Weather Report 01102013

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) last 4 weeks, thru 01/10/13
+3.93, -3.84, +26.75, +23.08   (S&P100 compared to exactly 3 weeks before***)
(3wks ago/2wks ago/1 wk ago/today)

This 3+ year rebound from the most recent market bottom of March 2009 to current levels is #8 in terms of time (3y6m8d) and #10 out of 29 in %age advance (121) out of 30 bull markets in history.

Similar Advances

1942-5 – up 158% (4y1m1d)  — 1962-6 – up 80% (3y7m14d) — 1896-9– up 173% (3y0m28d)

In each case, a very dramatic decline occurred, all similar to levels near the 40-50% levels, close to the lows of 2011.  This could unfold by the end of 2013.

One key measure that I follow is a gauge of buying strength between stocks (risk) and bonds (safety) has signaled market turn zones 4 times in the past 2 years, at 0.3549 (2/11), 0.3532 (5/11), 0.3516 (4/12) and 0.3568 (9/12).  This measure is now at 0.3555 after hitting 0.3566 last Friday.

Before you become impressed with a 121% return in 3-4 years, recall that your timing would have had to have been perfect at the bottom (this never happens), you would have had to be all cash in order to make that purchase, and, unless you met those two conditions, you would have either incurred losses from the decline into that point, or, more likely, you would have found yourself joining that party quite some time after March 2009, when you felt comfortable with the market environment, which was surely looking quite negative in terms of outlook at that bottom.   That March 2009 bottom was also a TWELVE-YEAR LOW!!  So, technically, this 121% should be averaged over the 15-16 years from where it truly began, not just from 3 years.  7.5 to 8%% per year….near where the long-term averages suggest.  But, hold on.  We will correct this for one other factor later after we look at the performance of world markets for 2012.

Hint – all that glitters isn’t gold.

Recent touches this week at 5-year highs are portrayed as good news for market watchers.  The news fails to acknowledge that these 5-year highs are coming at about one point per day over the past week, due to lower volatility, lower volume, no real buying, and simple complacency to the risks.  This is the ideal environment for what is called ‘distribution’.  Distribution is the process where ‘strong hands’ are distributing (selling, unloading) stocks at high prices to ‘weak hands’, usually retail and individual investors in a very slow, deliberate and methodical manner. This also means that with the exception of retracing the moves down, all we done is go nowhere in 5 years.  Similarly, year-end reports of a low double digit gain overall in 2012 in some indexes don’t account for the fact that these double digit gains are back to single-digit gains, when averaged for the previous two years, which were slightly negative (2011) and slightly positive (2010).  Single-digit gains over three years when accounting for the current significant risk of equity positions puts those gains into a reasonable perspective.  Further, markets that continue to bounce off old highs without going through, and without regular pullbacks for low-risk buying opportunities, are often referred to as ‘overbought’ and represent high-risk buying zones.  Buying in overbought conditions invites a higher probability of loss than for gain.

Here is a broader picture of 2012 performance among a wider number of asset classes.

TotReturn

PLEASE CLICK THE TABLE TO ENLARGE

Here is a table of local currency, US$, British pound, EURO and gold measured market 2012 returns.

Local USD GBP EUR Gold
1 FTSE/Thailand 35.7% 40.8% 36.4% 37.1% 32.0%
2 DAX 29.1% 31.2% 27.2% 27.8% 23.1%
3 Hong-Kong 22.9% 23.2% 19.4% 20.0% 15.6%
4 Bombay SE 25.7% 21.1% 17.4% 18.0% 13.6%
5 Korea Exchange 9.3% 18.7% 15.0% 15.6% 11.3%
6 Stockholm 12.0% 18.7% 15.0% 15.6% 11.3%
7 Swiss MI 14.9% 18.0% 14.4% 15.0% 10.7%
8 All Ordinaries 13.5% 16.8% 13.2% 13.7% 9.5%
9 Euronext100 14.8% 16.7% 13.2% 13.7% 9.5%
10 Nasdaq 15.9% 15.9% 12.3% 12.9% 8.7%
11 Russia TSI 10.5% 15.6% 12.1% 12.6% 8.4%
12 S&P500 13.4% 13.4% 9.9% 10.5% 6.4%
13 FTSE 100 5.8% 11.8% 8.3% 8.9% 4.8%
14 Nikkei 225 22.9% 10.1% 6.7% 7.2% 3.3%
15 Toronto SE 4.0% 6.9% 3.6% 4.1% 0.3%
16 Shanghai 3.2% 4.5% 1.3% 1.8% -2.0%
17 Shenzen 1.7% 3.0% -0.2% 0.3% -3.4%
18 FTSE/JSE 4.8% 0.9% -2.2% -1.7% -5.3%
19 Bovespa 7.4% -2.1% -5.1% -4.7% -8.2%
20 Madrid -7.2% -5.7% -8.6% -8.2% -11.6%

When corrected for the decline of our currency value of the US dollar in terms of the growth in value of gold, we’ve actually had, on the S&P500, only a 6.4% gain for the year, rather than 13.4%.  The US dollar declined in value by 6.5% in 2012.  Recall that you must also view this in terms of the past 3 years (two flat years before) and the risks of exposure to downside threats.

Based upon recent weeks performances, this rebound is clearly showing signs of what can be termed, without exaggeration, exhaustion.

Total changes over the past week, the net change since the day of the announcement of the fiscal cliff deal are as follows:

Current 1/2/13 High Total Change Daily Change
COMPQ

3121.76

3118.18

3.58

0.716

Dow Indus

13471.51

13412.71

58.8

11.76

S&P500

1472.12

1462.43

9.69

1.938

S&P100

667.59

663.87

3.72

0.744

Wilshire

15520.17

15380.61

139.56

27.912

$RUT

883.19

873.99

9.2

1.84

EFA

57.92

57.78

0.14

0.028

One additional measure of market activity is the volatility index, or the VIX.  The VIX is a gauge on the movements of major investors, as they hedge their portfolios against risk.  Following the removal of the fiscal cliff uncertainty, hedges, or bets against high risk, were unwound at an extremely high rate, declining the VIX by 37% in five days.  While this might point to a feeling of reduced risk on one hand, it is also a significant rise in complacency on the other hand.

As per The Wall Street Journal’s MarketBeat column, the 37% hit was the biggest five-day drop since 1990. And, according to the same column, it doesn’t bode well going forward:

In the nine previous instances in which the VIX fell by 30% or more over a five-day span, stocks have lagged their customary returns, Bespoke Investment Group says.

The S&P 500 has averaged a 1.5% decline over the next week, Bespoke also says. The index also averages a drop in the ensuing month and three-month time horizons.

Further, using this gauge, over the next six months, the S&P 500 has averaged a 3% gain, below a 3.9% average return for all six-month periods since 1990.

“The results are not attractive,” says Paul Hickey, co-founder at Bespoke.

For one corresponding downside target, if the NASDAQ breaks 2435 (June 4th low and July 26, 2011 high), it is likely to show a continuation of excessive weakness.

Bill Gross is the manager of Pimco’s Total Return Instl (MUTF:PTTRX), and was named Morningstar’s Fixed Income Fund Manager of the Decade in 2010.  Earlier this week, Gross discussed his economic outlook for 2013. Originally the result of two tweets via the Pimco Twitter account, the fund manager mentioned that “stocks in 2013 depend on two primary things […] one: real economic growth, which we see at 2% or less, and second of all, the Fed […] Ben Bernanke isn’t Rumpelstiltskin,” adding that “he can only spin straw into gold for so long.”

Gold ($1655.70) and silver ($29.97) are undergoing minor corrections, well within the normal ranges in terms of time and price, from their highs on Oct 5th (gold) and Oct 1st (silver).  In terms all corrections measured back to the beginning of futures trading for gold, as of Jan. 5th, 84% of all corrections of this type have been complete within this time frame, likely leading to another rise in price.  In another 30 days, 95% of all corrections were complete in gold. While in silver, 82% of all corrections were complete within 90 days (Jan. 1st) and 85% were complete within another 30 days.

Bill Gross also chimed in on his perspective on gold by simply Tweeting, ’gold goes up…’.

Obviously, Gross’s general bullishness on gold is a result of the Fed’s continuous monetary easing, but it’s worth noting that he doesn’t have a specific target.  On the subject, he had this to say:

“We think gold will move higher, as well commodities; it’s hard to say exactly how much. Gold, to my way of thinking, is a function of real interest rates. To the extent that real interest rates have continued low […] ultimately it’s an asset that depends on inflation, to the extent that the Fed and other central banks can re-flate the economy […] a 10-20% return from gold […] is a thing of the past as well.”

Even more interestingly, Gross admitted that, in his opinion, “all asset markets are in this period […] in which less than double-digit returns are going to be the order of the day.”

On the contrary to Gross projection, in dollar terms, gold is on a 12 year win streak that is difficult to match as an asset class.

We’ll see if Gross is right as the future unfolds, or, if gold will continue to be the standout investment for the next decade.

Caution – as shown earlier, these ‘double-digit returns’ are also influenced by dollar erosion!!

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