Thread: Market Talk / June 11 - 17

Sunday, June 11, 2006

A Week of Fed Fear: To Undershoot or Overshoot?
Last week the market discounted two scenarios in the economy:

The Fed is undershooting by raising interest rates too slowly to stave off rising inflation, which will require much more tightening in the future.
The Fed is overshooting by raising interest rates too high for the economy, threatening to plunge the economy into recession.

The only thing that's clear is that the "market" is irrational. No, we didn't say it was "wrong" -- the market is always right. But, it can sometimes get pretty confused about the effect of the Fed on the economy.

Right now, the economy is in a short term slump after running at a higher-than-average rate for some time (due to various factors, such as liquidity, low tax rates, too much consumer debt, etc.) and this has caused asset prices (i.e., housing prices) to go too high for the Fed to stomach. So, they are targeting asset prices (according to former Fed Chief Greenspan's speeches).

What have they achieved? Exactly what they were looking for, in fact. House prices have leveled off and the bubble has been gradually deflated. Now, the only thing that's left is to declare victory. But, this Fed hasn't done that yet. They want to keep the thumbscrews on the economy a little while longer. And, that has the market worried.

Our opinion is that the Republican market machine is about to swing into action with the new Treasury Secretary taking the reins and steering the market toward this November's Congressional Elections. The Republicans are not going to give up Congress without a very big fight and a robust economy is exactly what they need right now. There may be a bit of backstage arm-wrestling between Treasury and Big Ben Bernanke going on right now. We suspect that Big Ben could get injured and declare victory over inflation sooner than many think. And, that would certainly be music to the market's ears!

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Robo, I think he hit the nail on the head. We may see the market surge earlier this election to make the Republicans (me too) gain an advantage, makes sense to me.

It's only June....the dow could easily drop another 1000 points between now and the third or fourth hurricane (and $80 oil) and still have time to recover before the November elections. "Sell in May and go away".

When many other Non-US markets got hammered down to the 10% and lower figures last week, it makes me think our markets, inflation, and consumer sentiment aren't in any better shape. The nail heads of the US Markets haven't hit the wood yet.

In case anyone isn't familiar with the "sell in May and go away" theory, I copied this last October during the lows from one of the newsletters....-

THE MARKET'S FAVORABLE SEASON APPROACHES! October 14, 2005.

As I remind you twice a year, in the spring and in the fall, the stock market moves in remarkably consistent seasonal patterns. It makes most of its gains in the winter and early spring, and suffers most of its declines in the summer months.

The pattern has been obvious for many years, as evidenced by the decades-old Wall Street maxim "Sell in May and Go Away". However, it wasn't as clear when one was to re-enter the market in the fall.

Research by Ned Davis Research Inc. in the 1980s indicated it was a good bet to re-enter on October 1, while research by Yale Hirsch of the Hirsch Organization came up with November 1 as the time to buy. Hirsch found that over the previous 50 years an investor who bought the S&P 500 index on November 1 each year, and sold it the following May 1, would have equaled the profits of a buy and hold investor, while cutting market risk by 50% (since he or she was in the market only six months each year). By doing so the 'seasonal investor' would also have avoided some nerve-wracking market plunges, including the worst months of the 1973-74 bear market, the 1987 crash, and the 1990 bear market.

However, the rally that begins the market's favorable season obviously does not begin exactly on either October 1 or November 1 every year, nor does the favorable season end each year on May 1.

So when I began my own research into seasonality in the 1990s it was my goal to find a way to catch the variations in seasonality as they take place each year. That research finally led me to combine the market's general seasonal pattern with a technical 'indicator', MACD, which was developed by Gerald Appel in the 1980s, to 'trigger' a signal when the market changes direction into either a sustainable rally or correction.

The result was my Seasonal Timing Strategy, introduced in Riding the Bear in 1999 as a means of continuing to make gains in the remainder of the 1990s bull market, and not give the gains back in the severe bear market I predicted was just around the corner.

The strategy says the earliest entry in the fall is October 17, but only if MACD is on a buy signal at the time. If the market remains in a decline, as indicated by MACD remaining on a sell signal, the entry is delayed until MACD triggers its next buy signal. In the spring, the earliest exit is April 20, but only if MACD is on a sell signal when that date arrives. If the market remains in a rally, as indicated by MACD remaining on a buy signal, then the exit is delayed until MACD triggers its next sell signal.

Back-tested over the previous 50 years, the entry was sometimes delayed by MACD to as late as late November, while the exit was sometimes delayed until mid-June. Thus the favorable and unfavorable seasons lasted between four and eight months, and the 'seasonal investor' was able to be aware of that at the time.

It made a big difference in what could be expected from seasonality. Back-tested over the previous 50 years, the strategy tripled the performance of the S&P 500, and used in my newsletter has had similar performance in real time. In particular it got us nicely through the severe 2000-2002 bear market by missing the biggest parts of the declines, which as seasonality tells us to expect, took place mostly in the unfavorable seasons each year.

Originally Posted by plpjap

It's only June....the dow could easily drop another 1000 points between now and the third or fourth hurricane (and $80 oil) and still have time to recover before the November elections. "Sell in May and go away".

When Henry gives me a sell signal on the DOW I'll worry about DOW 10,000.

He is currently long the DOW. I'm not saying it can't happen, but when Henry shorts the DOW again I'll be watching.

I'm currently trading very short-term in this Market.
Good Investing/ Trading

The Kingdom of TSP
Sunday Addendum
June 11, 2006

Some economic news via links.

Gas prices hold steady.
http://money.cnn.com/2006/06/11/news...berg/index.htm

Optimism from finance ministers.
http://money.cnn.com/2006/06/10/news...reut/index.htm

From CNN on Sunday:

"If this week's inflation readings exceed expectations, traders predict a bloodbath.
"Everybody's so afraid of it," said Todd Clark, director of stock trading at Nollenberger Capital Partners in San Francisco. "If the numbers show a big increase in inflation, the market's not going to like that at all."
On the plus side, Clark also said he expects a big boost if the inflation numbers come in lighter than expected."

We all know the consensus predictions. Surely there is a subset of economists who have a better than average track record with these numbers. Anyone know something and willing to share??

Pilgram,

More pain to come! My only hope is we stay above 1240's on the S&P.

I think the Fed has it wrong on inflation. However, with the 4 year cycle at hand and the big questions below it will make for some big market swings. Everone is watching the Fed!!!

They have already shown they will be a problem going forward. At this point Ben has BIG BIG problems. Some of his board members are also clueless. My opinion of course.

Will the Fed undershoot by raising interest rates too slowly to stave off rising inflation, which will require much more tightening in the future.

Or will the Fed overshoot by raising interest rates too high for the economy, threatening to plunge the economy into recession.

At this point I really don't care since I'm trading very short-term right now. I think we are oversold and due a rally. Oh, and even if I did care, nothing I can do about it. When the technicals say buy, I try and catch the falling knife!

Currently a very High Risk Market and only traders should be playing.

Selling Rallies and currently 65% long. I don't like to go more than 50% stocks, but here I am. I will add shares in my Brokerage account tomorrow if we continue down. Very likely we will! I still think a short-term bottom is close, and then a tradeable rally!

Good Investing/Trading

Some have asked me, "Who is Henry?" ( SEE DATA BELOW )

I use several of these guys before making my investment decisions. I never go with just one guy and sometimes the group gets it wrong. On average I have more winning trades than losing. I also read many on this board, and have the up most respect for Tom's opinion and read his comments daily.

I also follow the Shark's daily comments and get his service. We are lucky to get his daily comments FREE. Many more I follow at Safehaven free, but the final investment descion is always left up to me. NO ONE CAN EVERY KNOW FOR SURE WHAT MR. MARKET WILL DO!!!!!! I use Bob Brinker for long term trends and no sell from him! The market is going thru a normal correction that started in May. No start of a new Bear Market Mega-Trend Yet.

http://www.bobbrinker.com/

I get professional advice about my car, my house, why wouldn't I for the stock market. I hope these advisers have it correct this time and we get a rally from these levels before the October lows! Who knows, maybe these are the lows for the year and in October we will test these very levels again before going higher. Only the SHADOW knows for sure!!!
It doesn't matter to me. When I get sell signals I will head back to cash, or short in my Brokerage account.

Good Investing/Trading!

Henry's Background:

MarketThoughts LLC is the investment advisor to the hedge fund Independence Partners, LP. Marketthoughts.com is a service provided by MarketThoughts LLC. The mission of MarketThoughts LLC is to provide the highest level of performance, service, integrity and education to our readers. This involves providing insights into the factors that will affect the stock market and individual stocks - helping our readers to maximize returns in favorable investment climates and protecting assets in unfavorable climates.

In January 2000, the founder, Henry To, CFA of MarketThoughts LLC alerted his friends and associates about the huge risks created by the historic speculative environment in both the domestic and the international stock markets. Through a series of correspondence and e-mails during January to early April 2000, he discussed his reasons and the implications of this historic mania, and suggested that the best solution was to sell all the technology stocks in one's portfolio. He also alerted his friends and associates about the possible ending of the bear market in gold later in 2000, and suggested that it was the best time to accumulate gold mining stocks with both the Philadelphia Gold and Silver Mining Index and the American Exchange Gold Bugs Index at a value of 40 (today, the value of those indices are at approximately 110 and 240, respectively).

As we move forward into the 21st century, the pace of change and the availability of economic opportunities will not only be plentiful, but will actually accelerate. The role of modern globalization and the proliferation of the internet as an individual empowerment tool will give rise to a new “knowledge worker age” – promising to transform whole industries (as well as the financial services industry) and the way we work and play going forward. Here at MarketThoughts, we will also keep our readers up-to-date regarding such life-changing trends, as well as the effects these trends will have on the financial markets and your investments. Recent articles include our “three important questions” article (which discusses the aging demographics in the developed world as well as our current energy infrastructure) as well as our 2005 beginning-of-year three-part articles on China, which is available in our archives.

I hope you will be able to join us as we continue to learn along the way. The ride here will be very exciting, indeed.

Sincerely,

Henry To, CFA

http://www.marketthoughts.com/background.html
http://www.marketthoughts.com/index.html


Please download the pdf file by clicking on the following link: http://www.hable.ca/downloads/Commentary.pdf

http://www.safehaven.com/article-5333.htm

I was reading one of the longer articles somebody linked to this morning (I don't remember which one, I read everything that appears on this board). It was primarily about possible currency moves but, thinking about it a little later, a line stuck in my memory as especially significant. It said that an unexpected uptick in CPI later this week was a distinct possibility because rental rates have been rising and these make up 30% of the index.

If I want to check for myself, where is data like that available?