The Market Read 10/28/12

What is the market saying?

Looking at my chart on SPY (S&P500), we are still in an Exit Long stance. In reality, I am biased long based on signals and systems on different portions in my accounts. I have been debating letting the SPY signal be more of a Master switch like IBD suggests. Only go long when the main signal is long and override all other system signals. That makes sense to me. I will consider doing that starting January1, 2013. A New Year. A new methodology.  The signals on SPY have been remarkably accurate as anyone that has seen my blogs from day 1 will see. Also, the signals are infrequent, so we are not bouncing back and forth. I did increase my hedge positions to neutralize steep losses on longs. But the market is now entering its best 6 months of the year. Why do we then feel like a let down is ahead of us?

The elections – neither candidate is serious about the deficit. Instead we will kick the can down the road. Slow growth is more likely and slow increases in the market. The fiscal cliff could slow things down depending on who gets elected. But the fiscal cliff is an exaggeration compared to the fiscal abyss facing us a few years ahead when our Trillions of debt will finally overwhelm us. Politicians don’t really want to take anything away as that hurts them from getting elected. They prefer to give us the candy we are used to getting. One party gives their candy to the rich and the powerful (the military) and the other to the poor and now the lower middle class. Neither has the stomach to do what is needed - cut spending, cut entitlements and raise taxes on those that can afford it, including dividends on the rich.

I am still wondering how to take advantage of the fiscal abyss facing us. I am listening to “The Big Short” by Michael Lewis about the few who could see the sub-prime loans melt down ahead and how they advantaged their positions by buying Credit Default Swaps.

I am also working on my system on the NASDAQ. It is looking pretty good right now. I ran my top trading systems over three time periods; 2002-2005, 2005-2008 and 2008-2012. What was interesting is that most of the systems that behaved well in one period did not fare as well in another, with the exception of a couple. Then I took this base method and used that to create entry and exit points within the primary trend. The QQQ chart is show below showing the signals. The system and rules have to be finalized and written down and then back tested manually before trading. I do not want a losing year. The method is based on end-of-day. If I trade this method using options on the Q’s to begin with, I will prove it out with a relatively low risk. In fact I am thinking of using both straight calls and puts as well as selling credit spreads to take advantage of the time value of money during sideways moves that occupy the markets about 40-50% of the time. More on this method to follow.

Risks in the midst of a “Muddle Through” Environment 10/13/12

Talk by:

Dr. John M. Simms, Jr. Ph.D., CFA, Chief Investment Officer of Piedmont Trust Company

My Rating A-

This was the second time I have heard John give a talk at the AAII Charlotte Chapter and each time his talk was enlightening, full of data and charts and good words of advice. Speaking as an individual investor, he gets to the point, outlining all the risks we see.

John started of his talk showing the latest Barron’s cover Dow 14,165 Almost there… a rather bullish cover – the kiss of death to a bull market!

Risks:

The economy is struggling under weight of too much debt. State and local government finances are stressed by pension and healthcare costs. Global growth is slowing (collapsed)  and forward earning estimates assume continuation of record profit margins; a questionable bet. Fed has launched QE infinity, and while growth is elusive, fed is now leveraged more than Lehman! Entitlements and stimulus have created public debts and promises to pay we cannot afford to honor. Fiscal cliff will create further potential to slow down growth and possibly even push us into a recession. The US dollar is safe haven in light of Europe’s debt crisis.

Investment opportunities:

Gold still represents a hedge against poor policy. John pointed out that GLD had climbed 15.5% since he last visited us, and he intends to continue to hold his position in gold. My thoughts are to also continue to hold gold but will drop it when my technicals give a downward signal.

He likes alternative strategies that hedge downside risk. He is right in that it has been frustrating lately but he feels it will come handy in time.

Volatility is low and hedges are cheap, but don’t expect them to stay that way forever.

You can’t borrow and spend your way to prosperity. Although I feel you cannot “reduce taxes” your way to prosperity either.  History says to expect default, currency depreciation and deflation. That worries me as I think very, very few people will really be prepared for this when it happens. There is a possibility that none of this will happen and the clouds will lift away. I would not bet on it however. Both parties are taking us to the edge of the debt crisis. And then when the two parties are stalemated, there is Bernanke and QE3. Mr. Bernanke “owns” the stock market. Of course the banks are sitting on a huge amount of money (over 1Trillion dollars) and much is not entering the economy at all. Popular investments like China and Government bonds , popular income producing assets like REITs, dividend stocks, high yield bonds, emerging market debt may be due for a rest or worse. Exercise caution…

John went through pages and pages of charts. Correlations between asset classes have risen quite a bit over the past 10 years. I noticed he had managed futures as an uncorrelated class, and I asked him about that. He said they do not use managed futures at Piedmont Capital. This is an area I will explore for myself, and take another look at being cautious….

401K Monthly Analysis – 10/6/12

The S&P500 (SPY) chart points down based on my trading system, which gives me some reason to be cautious. The indivdual mutual funds in the 401K are all still showing up signals, although a pull back might be in order. Being conservative, I also hedge my long positions using SPY put options in a separate account. I am extremely averse to large losses and will do everything I can to prevent that, including giving up as much as third to half of my upside through buying “fund insurance”. However this insurance has cost me over the last several months and I realize it is a price I pay to avoid volatility in my account.

Going into my current company’s 401K the top funds selected by my monthly analysis are Fidelity Equity Income, Fidelity Disciplined Eq, Spartan 500, and Royce Opportunity. Fidelity Government Income Fund and Fidelity Blue Chip Growth fund needs replacing. Fidelity Govt Income Fund took a big hit Friday. Gold also went down. The stronger unemployment numbers have some people convinced that the economy is turning the corner and further Bernanke handouts may not happen. Royce Opportunity requires a long stay in the fund and I have a small position in it that I intend to hold for a few months due to the redemption fee for getting out early. See charts below on these funds.

As far as the 401K monthly analysis on my previous employer’s funds, top of the pick is American Century Equity Income Instl, Vanguard Inst Index, PIMCO Global Bond fund and TRowe Price Intl Discovery and Fidelity Mt Vernon Growth. The Cohen Steers Realty fund needs exiting. I see down signals also on VNQ and SPG which are all realty funds. The realty sector has recently turned downwards.

Notes:  The methodology I am using has been written up in the past and is based on a momentum strategy where I put my money into the funds with the best performance based on a slower monthly rate of change analysis using 3 and 6 months performance data. I conduct the analysis 1 month, always during the weekend between the 2^nd and 9^th day of the month. All my change orders are submitted Sunday night and are effected after 4 pm Monday.

Iranian Currency Collapse 10/5/12

Previously we have seen the Asian currency crisis. Then the Russian Rouble collapsing. Now it is the Iranian Rial’s turn. I hope that we in the US get our fiscal house in order or else it will happen to us one day because of our growing debt…we must protect ourselves from this type of scenario. 

Rial is the Iranian currency.

In 1979 70 rials = US $1
> > 2012 last week 24,600 rials = US $1
> > 2012 earlier this week in Iran 34,800 rials = US $1
> > Inflation 24% per year but some say it is more like 50%.
> > Currency has lost 80% of its value since 2011.

What has happened to Iran’s currency? Perhaps the US sanctions and US banks cutting of the Iranian Central bank and Iran not having planned for this attack by hoarding dollars or Euros have finally caused the Rial to break.

Dark pools, hi frequency trading, high volatility, flash crash, Procter and Gamble becoming a penny stock for a short while; all these are now a real part of the global trading markets. So much money can be moved so quickly, triggering computer algorithms to kick in, compounding effects. Most of the population is completely unawares. This is one reason why I prefer to have put options as protective tools and gave up mostly using sell stops. 

I can see that future wars will be fought on an economic basis, and that powerful countries such as the US, Russia, Israel, UK and China that have heavy think power, will need to prepare for attacks from foreign soil, or from within. Not a bomb will burst; but livelihoods and not lives will be lost. Much later, people may find out what really happened. This could be happening now to Iran. It begins with a crack. A small weakness. Then prying open that crack. Or perhaps as a flood. Huge. Overwhelming in a short massive onslaught.

Well worth thinking about as to how to protect yourself. Diversification, insurances, technical systems that are emotionless, and currency hedging are the tools for survival. Maybe keep an open buy order for a major stock or three at ridiculously low levels as a limit order. Might make you rich in an unexpected way one day. Some would also suggest buying low when the vultures are feasting. I find that hard to do, unless there is an established uptrend. Low can go lower and eventually disappear. You can do that with a portion but not all your portfolio.

But who knows. No one has the golden key. But we have been warned…