Investors' Forum

We meet twice a month to discuss the stock and bond markets, and investment strategies. All investors are welcome to come. There is no money collected or invested by this group. We meet on the first and third Fridays of each month from 10:00 to ~11:30 a.m. in the Board Room.

Buy / Hold / Sell - Why?  Tough decisions that need to be made are discussed by John Dodge at the Friday, February 17 meeting.  Join us in the Board Room at 10:00 a.m.

Call Don Whitford at 985-3964 or Bruce Saunders at 245-0605 ( ) to get more information and to join our email meeting notification list. Our favorite investment websites can be found by clicking on the underlined words. All charts will be updated here weekly (usually Saturday) with comment by Bruce Saunders. [NC] indicates when the text of the paragraph has not changed since last week. Observations made in November 2011 on the difficulties of investing in the current market environment have been moved to the bottom of this page.

The plan for future forum meeting is to include a special topic of interest to the group. A volunteer will spend 10 to 15 minutes presenting this topic and others are encouraged to add to this from their experience. The meeting topics are given here with the meeting date and volunteer presenter. Please Bruce Saunders with the topic that you would like to present. We thank Jim Poole for compiling the list and obtaining the preferences.

Health of the Market    (2/4/2012)

The longer term market view is UP in a BULL market (see way below), and we are in the Power Zone.  The Health 'buy alert' occurred Friday, 1/6. The old Wall Street saying states if the month of January is up, the year will be up. Click here to see data to confirm this saying. It's all coming together, right? But maybe a little too fast. The Nasdaq and Russell 2000 small-cap index (shown) gapped up Friday on the good jobs report. Can this exponential rise continue much longer, or is this an exhaustion gap? The volume was not especially high on Friday, so perhaps this can continue for a bit. There is certainly a lot of momentum. Since the beginning of this year, the Russell is up an annualized 253%. This cannot go on much longer without a correction, IMHO. Another indication of the extreme overbought condition is a move above the upper Bollinger band by all indexes. 

[NC]  Considering international stocks or funds for diversification?  Check out the ETFs here.

[NC]  Below is the Russell 2000 small-cap index that tends to lead the overall market both up and down -- as the small-cap stocks are generally more risky than large cap stocks.  This index is shown in red. It's 200-day moving average (MA) is in blue (top pane). This moving average often acts as support and/or resistance to price movement as many people watch it. The buy and sell 'alert' poles are put on the price chart at a time identified below. The long anticipated Health 'buy alert' occurred on Friday, 1/6, when the 3-day average of the NH-NL indicator went positive for three consecutive days.

[NC]  The second pane below is the Relative Strength Indicator (RSI) for the Russell index, a measure of momentum of the market. This is the relative strength of the Russell 2000 itself -- it's not relative to any other index. Above 50 shows positive momentum over the last 21 days. The latest plot can be seen by clicking here. The green vertical poles indicate a positive change in momentum as the RSI crosses above 50; red poles indicate downward momentum when the RSI crosses 49. The threshold of 49 is used to give a more definite indication of the start of a down-swing. The recent positive crossing is the first of three criteria for a buy alert. 

[NC] The third pane is the Nasdaq McClellan Summation Index (red) and it's 5-day exponential MA (yellow). This is a running sum of the difference of two moving averages of the number of advancing issues minus the number of declining issues. A 19-day and a 39-day exponential moving average (EMA) are used. This shows whether a market move is broad based. As the trend changes, the red index will cross the EMA and a dashed pole will be drawn. This indicator must be consistent with the RSI before a pole is drawn on the price chart.

[NC]  Dr. Alexander Elder in his book Trading for a Living says that the New Highs minus New Lows Index is "probably the best leading indicator of the stock market". This display for the Nasdaq market shows the new highs in green and the new lows in red. The 3-day MA of the NH-NL index is shown in light blue. A green buy pole is placed if the 3-day MA of the NH-NL index goes positive for three consecutive days, or a sell pole is placed if the MA goes negative for three consecutive days.  To see a summation of the NH-NL numbers, click here.  A buy pole is put on the price chart indicating a Health 'buy alert', if the other indicators concur. The sell poles here are not used in the determination to place a sell pole on the price chart, due to the lag. 

[NC]  On Friday, 1/6/12, the 3-day moving average went positive for the third day, and a green pole was placed on the chart. This was the last of three criteria for a Health 'buy alert'. 

---  Bond Market  --- [NC]  High-yield bonds act more like stocks than the bonds normally covered in this section. In an economy that is slowly recovering, high-yield bond funds are often better than stocks or stock funds due to their low volatility -- even if they are called junk bond funds. Slow and steady would be good, and if the market drops, these funds will move slower so that one can get out without much damage. [NC]  The total return (interest reinvested) of traditional bond investments are shown below using a fund proxy. The price (CP) at the pole on 11/1/2011, and the percentage gain (BP) and annualized gain (Ann) to Friday give an indication of how each bond fund has been doing since 11/1. The funds shown range from long-term to short-term, and exchange-traded funds are now being used to watch the bond market. Note that municipal bonds (blue) are amazing.  Barclays Treasury 20+ Year iShares ETF (red) [yield 3.30% as of 12/31/11] Barclays Treasury 10-20 Year iShares ETF (green) [yield 2.78%] Barclays Treasury  7-10 Year iShares ETF (yellow) [yield 2.56%] Barclays TIPS iShares ETF (purple) [yield 4.11%] Barclays Treasury 3-7 Year iShares ETF (turquoise) [yield 1.68%] S&P National AMT-Free Municipal Bond ETF (blue) [yield 3.34%].  Chart and data by FastTrack.net. [NC]  An interesting table of global government bond yields can be see by clicking here. [NC]  Interest paying savings accounts can be found here.

Volatility

[NC]  The Volatility Index (VIX) shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge".  This is from Investopedia.com. 

[NC]  The S&P 500 is plotted with the VIX at the bottom. In the middle is the RSI/Stochastic of the VIX. This is the sum of the RSI(14) and Stoc(21,13) divided by 2. Above, the white 50 line is danger (starts with a red vertical pole); below 50, starting with a green pole, the probability of making money in the market can be much better. All indicators lag the market, and are not good in a choppy market.

[NC]  The RSI/stochastic indicator crossed up through 50 on Tuesday 11/15 giving a VIX Sell Alert. This was followed on Thursday, 12/1 with a VIX Buy Alert.  The VIX continued to drop even as the market rolled over. This indicator is now back in gear with the market action.

 

Stocks above 50-day Moving Average

[NC]  This chart shows the number of Nasdaq stocks that are above their 50-day moving averages. Click here to get the latest. The horizontal lines at 20 and 75 are arbitrary. The Nasdaq composite index is shown below on a percentage scale for correlation.

[NC]  This chart shows that the market is at an extreme in that over 80% of Nasdaq stocks are above their 50-day moving averages. When this happened in October 2010, there was a small correction and then the market continued up.

Bullish Percent Index

[NC]  The Bullish Percent Index takes a group of stocks and records the percentage of those stocks that have a Point & Figure Buy signal from their point and figure chart. The BPI for the S&P 500 is shown. 

[NC]  A 5-day EMA has been added where crossovers seem to be a good indication of a short-term trend change as shown with the S&P 500 in the bottom pane.

[NC]  For a simplified analysis of how to use this index, read this article. 

Sector Bullish Percent

[NC]  Looking at the BPI of sectors is a good way to get a feel for how they are performing. Click here to see charts for ten S&P market sectors.

Insider Transactions

[NC]  This Barron's chart shows the ratio of insider sales to buys. Here is more than you wanted to know about how to use this information.  

Longer-Term Outlook:  Up in a Bull Market

[NC]  The longer-term indicators followed below are signaling a market rally within a bull market. The downtrend line formed as part of the large symmetrical triangle has been broken. The indicators tabulated below are quite positive.

[NC]  Note that Alexander Elder in his 12/19 email gives the long-term view that a bull market has been with us since the March 2009 lows. This  is because the lows this year were higher than the July 2010 low of ~1025.

[NC]  The definition of a cyclical bull market used here is (1) higher highs and higher lows on a weekly basis, and/or (2) the S&P 500 closing above its 200-day SMA.

[NC]  The S&P 500 weekly chart gives a good perspective on the market. A weekly chart should be used to determine the primary market trend. A cyclical bull market trend started in mid-March 2009, and ended on May 2, 2011. The bear market starting at that point ended on October 3, 2011. The market showed bullish characteristics from that point to mid-November when the market dropped away from its 200-day SMA.

[NC]  The technical indicators listed below give a feeling for the strength of the overall market and whether there are signs of a turn.

• Consensus of the above - UP in a BULL market.

Stock Market Cycles

[NC] The cycles discussed below are combined into this one chart, which includes the annual seasonal cycle, the four-year presidential cycle, and the ten-year decennial cycle. The composite curve drops in the Aug/Sept time frame, like is occurring now. The S&P 500 index also shown, has tracked this combined historical cycle very closely through April as shown, and beyond where the S&P curve ends on the chart.

[NC] This chart comes from an excellent 5/4/2011 article by Fidelity that can be accessed here. It is titled "Sell in May or stay the course?" and it covers the near-term economic milestones that could affect the market. It includes a chart of the Citigroup Economic Surprise Index as of 4/27 against the 10yr Treasury yield.

Intermediate-Term Cycles

[NC] The top pane below shows the S&P 500. The red background indicates when at least a 4% drop has occurred (after at least a 4% rise). The price would stay in the upper Bollinger Band in a nice rally. An extreme price move above the top or below the bottom of the band is typically followed by a short-term reversal. The previous rally took the price way above the top of the band and the expected correction occurred. The price then penetrated the bottom of the band with a later upward correction.

[NC] The lower pane shows the various weekly price oscillators (see the color code on the chart). When they are all at one extreme, the market is very overbought or oversold, and a change in market direction is expected. The dashed vertical poles show the times when the 10 and 20-week oscillators move out of the extreme area together. The market is in an overbought condition again.

[NC] The 39-week sell alert triggered on Wednesday, 8/3, very late! (red arrow). A 39-week buy alert occurred on Friday, 10/14 as shown by the green arrow. This longer-term alert stayed on a buy even through the dip in the yellow 39-week oscillator in late November.

Annual Seasonal Cycle

[NC] Mid-October through mid-May is the strongest time of the year for the stock market -- the Power Zone. Since 1950, the average daily return of the Dow Industrials has been 27 times greater from November to May than the average daily returns for the other six months (appreciation only). The 5.5-year S&P 500 log chart below shows the total return, if invested from 10/1 through 4/30 of each year, and in a money market fund (green) during the unfavorable time of the year. There were three years when you should have been out during the favorable time -- the 2000-01 and 2007-09 bear markets. All the other times, the transition to the (green) money market was at a higher price than the year before.

[NC]  For much of this time the seasonality system avoided the down-drafts, and gave about the same overall return. This year, the system gave excellent results as the low for the year came on 10/4 -- just after the switch from the MM fund to the S&P. 

[NC] Jerry Minton has done a more detailed analysis for his investment firm Alpha Investment Management and has a slightly different favorable period, which he calls the Power Zone. Click here to see all the details. Jerry's free weekly newsletter is well worth the time to read. He says that "The principal cause of this skewing effect is the behavior of investors in response to the overly optimistic forecasts (for the next calendar year) of the army of highly paid, respected, and confident "experts" pronouncing on everything from company earnings to the stock market, GDP, interest rates, the price of oil, etc. Most of the time these experts get it wrong and begin to revise their earlier estimates downward during the following summer, thus producing the May to November Dead Zone."

Presidential Cycle

[NC]  The third year of this famous cycle was disappointing as it was flat, when we all hoped for the average 18.5% S&P gain. The fourth year is generally up, and maybe the market will make up for the flat 2011. If only Europe could get it's act together. The political gridlock in the US is not helping either, but the economy is improving nevertheless. 

This third year of the presidential cycle, 2011, produced the following gains, which can be compared to the table.

• Dow Jones Industrials  (DJIA)  +5.5%
• S&P 500  (SPX)  0.0%
• Nasdaq  (OTC)  -1.8%
• Russell 2000  (R2K)  -5.5%

To see a chart of every four-year S&P cycle, click this link. The complete cycle for all indexes is analyzed here.

The 4th Year 

[NC] The chart below shows the average performance of the SPX during the 4^th year of the presidential cycle. Note that January is up and February is down. The chart has been calculated by averaging the daily percentage change of the SPX over the 4^th year of the Presidential Cycle. Dashed vertical lines have been drawn on the 1^st trading day of each month.

Thanks to Mike Burk for this analysis.

Observations

[NC] Each investor or trader has a certain time frame the he (she) is comfortable with. There is the long-term investor who looks at the market and calls it a bull market starting with the March 2009 low. It will remain a bull market until we have a lower major low -- when the current pull-back drops below the April 2010 low of ~1025 on the S&P 500. Of course this indication of a change from bull to bear lags behind the market top (May 2, 2011 maybe?) by many months of down-side action.

[NC] So to avoid the large drawdown, if one should sell when the bear indication occurs, one looks at a shorter time frame. We have been following an intermediate-term outlook where a cyclical bull or bear market is defined in the section called Longer-Term Outlook. Supplementing this approach is the section that addresses Stock Market Cycles of various periods, including the average market action for the month.

[NC] The Health of the Market section and the sections below that describe the shorter-term outlook. It is designed to catch the beginning an end of market swings that last 2 to 4 months. This is momentum trading. Of course all indicators that flag buy or sell points lag real time by time constants that are designed to smooth out the market fluctuations and minimize lag -- two conflicting requirements.

[NC] The problem in 2011 was that the market swings have been sharp and occur very often. Momentum trading does not work well in this environment. One tends to buy well off the bottom of the swing, and sell after the peak has occurred by too much to make a decent profit. Emotions get in the way also. It is hard to buy near the bottom of a swing due to fear the market will go lower; and it is hard to sell when the market is doing well as greed requires a bigger profit. So often one buys too late (near the top of a swing) and sells too late (near the bottom of a swing). It is also hard to cut your losses when a trade goes against you. This is why an investing or trading system is required. But no system where chart reading is involved is totally reliable and timely. Mechanical systems have not done well either as they were back-tested during more tranquil times. Company or sector fundamentals are helpful, but not for timing entry and exit points.

Comparison to Past

[NC]  This chart shows the bear market that started during the 1937-38 recession. The first correction went up 46.45% before dropping 10.35%. Then a rise of 21.68%.

[NC]  Our market today seems to be following this chart. The total Dow rally from the 3/9/2009 low to the 3/23/2010 high is 66.3% (101.1% for the Russell), not far from the +59.76% move shown on this chart.

[NC]  The first correction, similar to the +46.45% in 1938, was from the March 9, 2009 low to the June high, the Dow rallied 34.4% (the Russell 2000 was up 53.5%). Since then there has been a drop of -7.4% (-9.9% for the Russell) to the July lows. This compares to the chart Dow drop of -10.35%.

[NC]  After this drop on the chart, a 21.68% rally occurred. Our current situation produced two rallys totaling 38.5%, with a 7.6% drop between them -- from 7/10/09 to 4/23/10. 

[NC]  On the chart, the next jagged drop of -21.72% ended in late spring of 1939. Our current market peaked in April 2010 and dropped to a low on July 2, 2010, a -16.0% drop. Since then we had another low in August and the best September since the September 1939 shown on the chart. The Dow went up 27.9% from the July low to the February 18, 2011 high.  In 1939 the rally went up 26.0% to form a double top. 

[NC]  After a correction to the run-up to the February 2011 high, the market continued up to peak on April 29, 2011. The top in the fall of 1939 was followed by a -28.27% drop into the summer of 1940. Our Dow drop from the April 29 high to the October 3, 2011 low was -16.8%. The Dow is up from that low by 19.7% on 1/25/2012. In 1940 the final high produced a 23.17% gain.

AmiBroker software is used for the charts, except for the StockCharts.com charts. The AmiBroker charts use either FastTrack or Yahoo data,  This page is for amusement only, and should not be taken as advice to buy or sell anything.