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.
[NC] The VIX line is color coded to indicate
short-term market conditions. When it is red, do not enter new positions.
Green shows a good market. Blue is a transition time. If there is a
sharp few-day up move in the VIX (red) or down (green), noted by the
dashed poles, it gives an earlier signal than the green or red
RSI/Stochastic poles. But, of course, with a more sensitive indicator come
whip-saws.
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.
- Price Trend of S&P 500 - UP
- Above/below 50-day SMA: UP
- Weekly RSI(14) Confirmation - above 50: UP
- Weekly MACD Histogram + or - confirmation - UP
- Bull market weekly higher highs and higher
lows? - BULL (closed above 1285)
- Moving Averages (simple daily averages)
- UP in BULL Market
- Bull: price above 200-day SMA - BULL
- Bear: price below 200-day SMA
- UP: Both SMAs moving up - UP
- DOWN: Both SMAs moving down
- MIXED: averages not moving together
- Market Leadership (relative strength) - UP
since 11/25 low
- Small caps generally lead large caps - UP
since 11/25 low
- Technicals (QQQ) tend to lead the general market (S&P 500)
- UP since 11/25 low
- Growth stocks lead value stocks (small-cap) - SAME
since 11/25 low
- McClellan Summation of Advances & Declines of
Nasdaq (slope) - UP
- Highs and Lows of Nasdaq - UP
- NYSE New Lows - UP if less than 40 for three days
- UP
- Nasdaq New Lows - UP if less than 70 for three days - UP
- 3-day MA of NH-NL positive or
negative - UP
- 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.
[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]
Since 1928 the SPX has been up 71% of
the time in the 4th year of the Presidential Cycle
with an average gain of 6.7%.
The best 4th year for the SPX was 1928
(+38.7%), the worst 2008
(-38.5%).
[NC]
The chart below shows the
average performance of the SPX during the 4th 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 4th year of the Presidential
Cycle. Dashed vertical lines have
been drawn on the 1st trading day of each
month.

[NC]
Since 1964 the OTC has been up 75% of the time in
the 4th year of the Presidential Cycle with an
average gain of 7.6%. The
best 4th year for the OTC was 1980 (+33.7%), the
worst 2008 (-40.5%) followed by 2000
(-39.3%).
[NC]
The chart below has been
calculated by averaging the daily percentage change of the OTC over the
4th year of the Presidential Cycle. Dashed vertical lines have been
drawn on the 1st trading day of each month. Note that
January and February are very good months for the Nasdaq, unlike the
fairly flat two months for the
S&P.

[NC]
Since 1980 the Russell 2000 (R2K) has been up 63%
of the time in the 4th year of the Presidential
Cycle with an average gain of 6.9%.
The best 4th year for the R2K was 1980
(+33.8%), the worst 2008 (-34.8%). The chart looks very much like the OTC
chart above.
Thanks to Mike Burk for this
analysis.
[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. |