11/09/2013 The Lady or the Tiger

Sector Model	XLB	1.87%
Large Portfolio	Date	Return	Days
ABX	4/11/2013	-24.52%	212
QCOM	9/3/2013	1.77%	67
NEM	9/30/2013	-1.47%	40
BCR	10/4/2013	19.95%	36
BAX	10/7/2013	0.18%	33
BDX	10/11/2013	6.47%	29
ED	10/18/2013	1.99%	22
ISRG	10/21/2013	3.54%	19
EW	10/28/2013	-16.61%	12
FFIV	11/4/2013	3.26%	5
(Since 5/31/2011)
S&P	Annualized	11.89%
Sector Model	Annualized	24.13%
Large Portfolio	Annualized	31.05%

 

Rotation: selling FFIV; buying ARLP (Alliance Resource).

As I mentioned last week, the selling parameters are a ratio of:

(fundamental potential) / (current return rate). 

The current return on FFIV is an annualized rate of 942.24%... something that the fundamentals cannot sustain.

Nothing wrong with FFIV at all.  But I’ll take a little pop when it’s offered to me.

The question is – what to buy?

Well, the Sector model is in XLB (basic materials).

The Style model is in Mid Blend (basically anything).

BOTH are showing an aggressively positive configuration for the market, with a consensus target on the S&P of 1930 over the course of the next year.

So, commodity related stocks are a buy (per sector model) and stocks are a buy (per style model).

What gives?  Aren’t we overbought?  Shouldn’t we have a pullback?

We might, but a pullback is not the same thing as a bear.

Let’s revisit a post from May:

http://market-mousetrap.blogspot.com/2013/05/05172013-quantifying-bernanke.html

In that post we measured the effect of QE on the market against the levels it would have hit on a demographic projection.  The take away for today is that those same demographics show a bull market STARTING in 2013 and ENDING in 2018.

If QE were to continue past 2013, we would not see a continuation of the present advance, but rather an acceleration of market returns beyond 2200 on the S&P.

I say, “beyond,” because it’s impossible to say without knowing how much longer QE will continue.  2200 by 2018 is my estimate based on the PRESENT treasury balance sheet.  Additional expansion would give a higher number and create that bubble everyone has been so afraid of.

My own suggestion in May was that the Fed STOP QE in 2013, maintain the balance sheet through the next decade, and then reduce the balance by about 1% per month from 2024-2034.

That’s the ONLY way to do it without creating either an inflationary bubble (the blue line on the graph below) or a deflationary implosion (the red line on that graph).

What’s important for us today, however, is to understand that the demographics support a bull market from 2013-2018, with a normal cyclical bear starting after that.

The continuation of QE since my last post on this subject has changed the graph, but only slightly:

For the past few years I’ve been calling this a “fake bull market.”

The choice for Bernanke was either a fake bull or a real bear.  He chose the fake bull.

Now, NOW, we either get a real bull or a bubble.  Which one we get will be up to Janet Yellen.

Tim