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11132015 November 13, 2015

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

Current Positions  (No Changes)

I(Intl) – exit; S(Small Cap) – exit; C(S&P) –exit

F(bonds) – up to 75%; G (money market) – remainder


Weekly Momentum Indicator (WMI) last 4 weeks, thru 11/13/15

(S&P100 compared to exactly 3 weeks before***)

-18.07, 36.28, 36.12, 62.48


(Today from 3 Fridays ago; 2 Fri’s fm 4 Friday’s ago; 3 Fri’s fm 5 Friday’s ago; 4 Fri’s fm 6 Friday’s ago)

In 2001, the trend turned bearish, by falling through the 9 quarter moving average, stocks rallied 20% in 32 days, then fell 29% in the next 90 days. Stocks fell 44% within 7 quarters.

In 2007, the trend turned bearish, by falling through the 9 quarter moving average, stocks rallied 12% in 40 days, then fell 23% in 3 months. Stocks fell a total of 53% within 4 quarters.

Now, in 2015, the trend turned bearish in August, by breaking the 9 quarter moving average, then rallied 11.44% in 51 days into November 3rd.  We have now fallen 4% in 8 days. The pieces are falling into place for a decline of 20% or more within 90 days, and up to 50% within the next 6 or so quarters.

“History never repeats itself,  but it often rhymes”

A lot of attention was given in the past two months to the ‘bounce’ from one-year lows, following a 4-day, 11%, waterfall decline in August.  After taking two tries, over seven weeks, to rebound just over 5%, beyond 2020 on the S&P500, it was only through a sequence of Fed (rate softness) , European Central Bank (extending Quantitative Easing), and Bank of China (surprise rate cut) announcements in mid-to-late October to create a ‘bullish’ impression.  The truth was told at the end, when the November 3rd high failed, by 1%, to match the previous high, established in May.

Even after the recent 8% rebound from the August collapse and the one-year low, S&P price levels were only 1% higher than they were a year ago, even as S&P earnings are DOWN 6% from a year ago. That current S&P price level was still 2% BELOW the highest levels of almost 6 months ago. (This is called a ‘trading range’, no matter what the level of dramatics that occur in between.) The justifications for these zig-zagging price levels are simply to confuse, return only what has already been taken away, and, to continue to offer little reward for great risk. Earnings on the Dow Industrials peaked last May, along with the ‘all-time highs’, and have declined, by 10%(!), ever since.  This is another factor that weighs heavily on anyone’s suggestion for continuation of the bounce.  Earnings drive price levels.


Here is a day-by-day trend of how the major S&P sectors are performing this week.  To get to the main point, or, the bottom line, notice the fading trend on the bottom two rows.


How has holding F Fund positions compared to positions in the C, I, and S funds this year, given the higher levels of risk?

These three charts tell the story.

Use the ‘0’ line, in the middle, from left to right, as a guide for the plus or minus, advantage/disadvantage from holding in F funds this year, as compared to the other funds.

(click each chart to zoom in, then, back button to return to the page)


The C fund, most like the S&P500, has carried an average upside of about +1-2%, an average downside risk of -1-2%, a high of +4.53%, at one very, short point, and a downside risk of -6.1%.  It now only has a 0.65% advantage, which even now appears to be eroding today.


The I fund, most like the EFA International fund, has carried an average upside of about +2-4%, an average downside risk of -1%, a high of +7.22%, at one very, short point, and a downside risk of -8.24%.  It now only has a -4.84% disadvantage, which even now also appears to be eroding today.


The S fund, most like the small cap funds, has carried an average upside of about +3-5%, an average downside risk of -1%, a high of +8.98%, at one very, short point, and a downside risk of -7.23%.  It now only has a -2.86% disadvantage, which even now also appears to be eroding today.

This should make it clear that we are unable to declare any advantage for this year in equity funds, even if the returns in the F fund, and bond funds in general, have been both low-risk, and, of low appreciation.


Longer term indicators are on the cusp and could go either way from here, either confirming an early stage bear market down phase (most likely) or signaling that longer term cycles have turned back up (most unlikely). Given the underlying adverse liquidity (tightening credit and falling demand worldwide) conditions, that seems a less likely alternative; but, if the indications did turn to the upside, it is suspected that the up phase would manifest itself as little more than a broad trading range that has wide swings in both directions with little upside progress overall. This week has offered a window into this next probability, and, is now unfavorable. As I said in September, fund managers love a ‘Santa Claus’ rally, to fatten up their New Year’s bonuses.  Therefore, one more rally back to recent highs is not out of the question.  It would be very quick and very limited on return.  Don’t try to chase it if you’re already standing aside.  You’re likely to either be in, with risk, or, miss it, IF it comes, and not miss much.

Interest Rates

The shell game with the Federal Reserve continues, now with the December meeting supposedly holding the next key to whether or not rates will rise from the floor.  We’ve heard this before – next meeting….next meeting….next meeting.  So, how does this impact us?

Every threat to raise rates puts downward pressure on our F fund, and upward pressure on interest rates. Each realization of a weakening economy puts upward pressure on our F fund and downward pressure on interest rates.  This tug-of-war seems never ending.  The likelihood of a truly, major positive event signaling economic health is simply a pipe dream.  The further denial, and never-ending, but unfounded hope that the worst is behind us, only serves to stall the inevitable – that the Fed is bluffing on raising rates, since they are hinting at strong economic growth that simply cannot be sustained.  Recently, a ‘strong’ jobs report raised talk last week and this week of raising rates in December.  That report is only an estimate.  Averaging that report into the last 2 previous reports only creates an average jobs trend and outlook.  I mentioned earnings earlier.  We are in an earnings recession; declining earnings, year-over-year.  The Federal Reserve has NEVER raised rates during an earnings recession.  That rate decision requires a broader view than one employment report can contain, no matter what, or who, can tell us how certain they are that rates will rise.  Even if they do so in December, it is only by a small amount, and, that has more psychological impact than anything else.  Raising rates will also give them room to lower them again, once the true nature of the unsustainable levels of the current economic condition is revealed in the next few quarters.  We are talking about raising rates, while Europe, Japan and China are in rate cut cycles!! This F Fund strength, relative to the other funds, is already telling you that worldwide rate pressure is low, and, that F Fund prices are performing relatively well. That’s your cue.  Don’t worry about rising rates!!!



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