Musing on Sunday

“The greatest triumph of the banking industry wasn’t ATMs or even depositing a check via the camera of your mobile phone. It was convincing Treasury and Justice Department officials that prosecuting bankers for their crimes would destabilize the global economy.”
-Barry Ritholtz

I will return to the currencies on Monday, as I learn more from tracking curencies than anything else.  I also track world indexes -- just because.  OK, they go right along with tracking currencies. 

As of Friday's close of the 8 world indexes I track, six of the eight were losers.   China and the US gained slightly, while France, Germany, Hong Kong, UK and India lost more than one percenage point.  None-the-less, The Shanghai (China), while the best performer for the last several weeks, is in bear territory - 20+% decline from the high in 2009. 

Over the last 200 days, Nikki is the best performer. 



I would suggests this means we are in a bull market, that is actually rather quiet - where volatility and volume are low.  The bull market in stocks continues to be across the global economy.

The question becomes "when" do you buy?  (or sell)?  There is a "truism" among retail traders: "when the market rises, all stocks are lifted on the tide".  And the opposite: "when the market falls, all stock values fall". 

Fine, but like all truisms, this is hardly helpful to know "when" to invest.  What we can conclude is that "buy low, sell high" is another truism that is very hard to implement if one asks "when". 

For short term traders next week, the market is bullish. Just follow the trend, and be very cautious about shorting any stock or index.  For long term investors, however, the current market is very precarious.  The better part of discpline may be to wait for pullback, or even better wait in cash until Congress and the President of the US work out the budget and the debt limits in March/April.

WHEN? for long term investors

There are two technical indicators (for the greater US market) that can assist in answering "when".  This is $OEXA200R on stockcharts.com, and bullish percent index, also on stockcharts.com. 

The reader can find articles about the intepretation of $OEXA200R on stockcharts.com.  Generally, the chart is showing 87% which is very high.  If the reader will watch this chart everyday, then look for the indicator to drop below 65%.  Exit all long positions at that point.  If this indicator goes below 50%, then we are in a bear market.  Do not go long.  Go to cash if you are a buy and hold investor.

To go long after a drop below 50%, wait for the index to go above 65% again.  Then look for MACD to cross with an upward slope of the lines.  If the reader studies this, she will be able to observe that the signals are very accurate for long term conservative trading.

The other "when" indicator for the long term trader is the S&P Bullish Percent Index. 



 

The reader may read about this indicator at http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bullish_percent_inde

Chartcraft (where Cohen created this indicator) suggests that this market is getting ready to correct, and when a column of "Os" cross 70%, there will be a significant correction. If the reader goes back and looks at weekly (or monthly) charts and compares to this chart, she should observe that reversals in this indicator are accurate.  Also, the signals last a long time which is good for intermediate term (6 mo) traders.

So, going forward next week and into March the stock market investor should be very wary.  The short term stock trader should look to be long, and a short term trader would have to have very good reason to go short in any stock index or individual stock. 

I follow a portfolio allocation based on systems and risks.  I have a long term system that is low risk and built for income.  I have a medium term system that I use for 6 month to 1 year returns.  The risks are higher than long term.  I have a short term system (which I rarely use) that invests using options (no complex strategies).  I use a very-short-term system that is high-risk with high rewards.  It is high-risk because it is leveraged and uses binary options, futures, and other derivatives.  A very small percent of my portfolio is in very-short-term systems. 

Long term systems will not invest in anything presently.  Medium term systems will use covered calls in stocks and ETFs that track indexes.  I won't be using short-term systems this month as the volatility in the stock markets is low. 

Is the American economy faltering? Is the global economy recovering?  For the last 4-6 years, it is very difficult to tell, but one thing you can observe:

The Central Banks world wide have succeeded in driving the stock markets world wide higher and higher.  They have also altered the 4 year business cycle, extending the bottoms well beyond the norm. 

However, I learned long ago:

No matter what happens in the economy, there are always opportunities to make a return on your investment.

Now here is what I hear from all the news/articles/talking heads and so-on.  (These are my thoughts in summary)

1. The bull market in stocks is now going on 4 years.  That is slightly longer than the average trend. of 3.8 years.  According to InvesTech Research this is the one of the six longest bull trends in history.
2. The China bubble is bursting with ghost cities and overinvested capital.  (These are mixed signals, as I pointed out Friday China has printed some very good numbers and seems to be recovering nicely -- thank you very much.)  Richard Band of Profitable investing says China has a problem.  The demographics are terrible with its one-child policy.
3. The US debt is being increased by "tax, borrow, and spend even more" policies.  The challenge will come in March 2013 as the Democrats attempt to override, threaten and bully the Republicans into the tax, borrow, spend budget. 
4. Washington DC does not seem to recognize that raising taxes decreases growth and revenues in the long term. But don't worry, the VIX is not indicating they are afraid of what Washington is going to do.  The option traders were correct about the fiscal cliff: Will they be correct for March?  Watch very carefully. Congress will get things stirred up this spring.
5. The reported unemployment rate is ridiculous.  Who knows what the unemployment is due to corrections every single month, but the U-6 number from the BLS is 8.1%; not the U-3 number of 7.6-7.8% being reported.
6. The medium income of the US is falling into the swamp.  Tax revenues will go down as it falls.  But don't worry, the bureacrats will find a way to spin it all so that there will be a projected rise in taxes revenues (not collected) even as the middleclass disappears. 

For long term traders please review Sysco.  It has been beaten down, but its dividend payout is excellent.  Sysco just reported earnings, and sales were up 5.4% over last year's second quarter.  That was the company's highest sales ever for second quarter.  The earnings were down as they invest in new business systems to enhance productivity.  Free cash flow was also up, and dividends come from free cash flow.  They pay 3.5% at this point, and dividends have been growing successfully over the years.

While you think about Sysco, remember investors (v.s. traders): keep your eye on the big picture.  Stocks are in a precarious position for long term investors, and we could have a blow-off up with a huge correction down.  Look to "when" indicators to provide a hint. 

Until Monday, spend time with your families.  I learned far too late, that the your young ones are the most important people to you in today's and tommorrow's success.   Enjoy them while you can, and share with them love, caring and discipline.