07/16/2013 Where Angels Fear to Tread

S&P Projection	7/16/2014	1860
Sector Model	XLB & XLE	0.08%
Style Model	Small Blend
Large Portfolio	Date	Return	Days
CAJ	9/25/2012	-0.76%	294
BOKF	2/4/2013	19.86%	162
ABX	4/11/2013	-37.77%	96
TPX	4/22/2013	-1.15%	85
TTM	5/6/2013	-8.07%	71
DLB	5/13/2013	-0.03%	64
MATW	6/6/2013	5.11%	40
OKE	6/17/2013	-0.92%	29
BTI	7/1/2013	3.47%	15
CLH	7/8/2013	5.89%	8
S&P	Annualized	11.09%
Sector Model	Annualized	24.31%
Large Portfolio	Annualized	29.94%

 

No rotation, but a couple of new features.

I’ve been experimenting with a “Style” model that looks at large, mid, and small cap; and value, growth, and blend ETFs.  This creates a grid of nine Styles, similar to the nine Sector ETFs I use in my Sector model:

Large Value	Large Blend	Large Growth
Medium Value	Medium Blend	Medium Growth
Small Value	Small Blend	Small Growth

 

The logic of this model is that the market progresses from Value to Growth, and from Small cap to Large cap as a market cycle progresses.  So, at a market bottom Small Value will predominate.  This idea is a bit counterintuitive, though, since “Large Growth” is “outperforming” in the depths of a bear market only because it’s not doing as bad as the Small Value stocks (that are getting smaller and more… er… valuable).

In any case, I’m using this as a comparison group to a timing indicator I’ve been building off the sector model.  The idea is that when they both agree there is a higher confidence of “where we are” in a cycle.  In the chart below I plot the aggregate scores of both the Sectors and Styles against a Typical market top:

In this theoretical construct, the market appears to be in a late bull – nearing a top but not there yet.  The expected value of the S&P a year from now is 1860 (as indicated in the first line above).

Although I am NOT advocating market timing, it is a matter of interest where we likely are in a cycle.  If we WERE nearing a top, for instance, we could expect the market to accelerate in a typical blow off (hence the 1860 projection).  But the sectors and styles are not YET defensive, and it doesn’t appear to be any time to panic.

Keep in mind that this is just showing normal market relationships.  With all the Fed intervention ANYTHING could happen.  This is not a market driven by the economy, but instead one driven by liquidity injections.  Any correlation with positive economic indicators is only because the economy ITSELF is also dependent on those liquidity injections.

We’re like a young woman being wooed into a marriage by a crazed lover with a credit card that WE’LL have to pay off once that expensive ring is on our finger.  Caution is warranted, but it's not time for the bride to run.

I’ve recently seen some calls to short oil, for instance.  Energy stocks tend to thrive in a blow off top, and my sector model shows both energy and basic materials to be well positioned.  I would NOT short oil here.

Tim