11/30/2013 Be prepared for a "scare market"

Sector Model	XLB	1.14%
Large Portfolio	Date	Return	Days
ABX	4/11/2013	-31.49%	233
QCOM	9/3/2013	11.54%	88
NEM	9/30/2013	-11.26%	61
BCR	10/4/2013	21.05%	57
ED	10/18/2013	-1.67%	43
ISRG	10/21/2013	0.10%	40
EW	10/28/2013	-14.96%	33
ARLP	11/11/2013	-2.12%	19
JOY	11/18/2013	-0.41%	12
OXY	11/27/2013	-2.73%	3
(Since 5/31/2011)
S&P	Annualized	12.49%
Sector Model	Annualized	24.01%
Large Portfolio	Annualized	29.64%

 

Rotation: selling QCOM; buying OUTR (again).

QCOM currently has a return rate of 57.32%, so it’s in a good spot to take profits.

OUTR only netted a few dollars last time, but it might be better positioned now.  We’ll see.  In the meantime, my two gold stocks continue to flounder.

As for the broad market… eh.  People are talking it up and down, and I’m thankful that I don’t have to factor any estimates of the market’s direction before I pick a stock.  That said, we are overdue for a correction, but not due for a bear market, and we should be 5-10% higher by this time next year.  The taper, if it comes, might slow down the advance, but not reverse it.

The key here is that tapering is not tightening.  The wild card, however, is the estimate that people have.  No one pays for a stock based on what they think it is currently worth.  Instead, they invest based on what they think the stock will be worth in the future.  The same goes for the broad market estimates.  So then, while a taper is indeed not in itself the same thing as “tightening,” it IS a signal that tightening is more possible than it was before the taper.

As we’ve seen in previous demographic estimates, the market would be worth less than 1000 if there had been no QE, and even though we are due for a bull market NOW, that bull market would have begun at a much lower level than now.

With continued QE, the market should go up.

With tapering, the market should go up.

The market should only go down if QE is reversed.  Reversal should not happen before 2024.  If the market THINKS it is going to happen before then, we could see – not a bear market – but rather a “scare market.”  A scare market would look like 1987 – a sharp drop followed by a continued advance, causing market timers to suffer in both directions.  It will depend in large part on how believable and clear Yellen is that there will be no tightening before 2024.  I don’t think she’s considered that far, however, so a scare market is more likely than an uneventful advance.

Write down your plan ahead of time.

Stick with it.

Tim

 

 

11/28/2013 You don't need to know the future; you just need to know yourself

Sector Model	XLB	0.67%
Large Portfolio	Date	Return	Days
ABX	4/11/2013	-32.03%	231
QCOM	9/3/2013	10.98%	86
NEM	9/30/2013	-12.01%	59
BCR	10/4/2013	21.35%	55
ED	10/18/2013	-1.71%	41
ISRG	10/21/2013	0.40%	38
EW	10/28/2013	-15.26%	31
ARLP	11/11/2013	-2.46%	17
JOY	11/18/2013	-1.90%	10
OXY	11/27/2013	-2.49%	1
(Since 5/31/2011)
S&P	Annualized	12.55%
Sector Model	Annualized	23.70%
Large Portfolio	Annualized	29.55%

 

Yesterday, before the close, I noted that the sector model would be selling its position in XLK and buying XLB.

The full model has had a rough month, falling behind even as the S&P made new highs.  This is a natural consequence of the pre-rally pullback in small value stocks.  Since they typically outperform in December-January, they also typically underperform in November.

Value Investors, then, tend to have a boring November.  In crashes they fare well, and in booms they lag behind.  Momentum investors have had an easy time lately.

Technical traders are more concerned to know when they will outperform.

Fundamental investors never quite know when, but they do have confidence that they will outperform at some point in time.

The difference between the two kinds of investors is in the valuation metric.  Technicians judge returns against the dollar, and fundamentalists judge returns against earnings and debt.  Is the price movement making sense to you?  Then you are a technician.  Is the price making sense to the business?  Then you are a fundamentalist.

If the price moves against you, a technician will sell and a fundamentalist will buy more.

The presence of both kinds of investors makes the market work.  Neither is “better” or “worse” than the other, per se.  A good technician can do better than a bad fundamentalist.  A good fundamentalist can do better than a bad technician.  The important thing is to know what you are and trade accordingly.

Buffett made his billions by compounding 20% returns over decades.  20% is doable.  60% isn’t – at least not for a human being.  You might do that for a year or even five out of sheer luck, but beyond that you’ll fall back to the mean.

Know your goal.  Know your style.  Stick with it.

And enjoy the time with your family.

Happy Thanksgiving.

Tim

 

 

11/27/2013 sector update

The sector model is selling XLK and buying XLB before the close.

11/27/2013 (premarket) rotation

Sector Model	XLK	-0.12%
Large Portfolio	Date	Return	Days
ABX	4/11/2013	-32.85%	230
QCOM	9/3/2013	11.12%	85
NEM	9/30/2013	-11.65%	58
BCR	10/4/2013	20.79%	54
BAX	10/7/2013	4.35%	51
ED	10/18/2013	-1.73%	40
ISRG	10/21/2013	-0.53%	37
EW	10/28/2013	-16.04%	30
ARLP	11/11/2013	-2.59%	16
JOY	11/18/2013	-2.68%	9
(Since 5/31/2011)
S&P	Annualized	12.45%
Sector Model	Annualized	23.51%
Large Portfolio	Annualized	29.52%

 

Rotation: selling BAX; buying OXY.

 

11/24/2013 They can stop blowing bubbles if they want

Sector Model	XLK	-0.47%
Large Portfolio	Date	Return	Days
ABX	4/11/2013	-32.15%	226
QCOM	9/3/2013	10.08%	81
NEM	9/30/2013	-8.01%	54
BCR	10/4/2013	21.89%	50
BAX	10/7/2013	4.26%	47
ED	10/18/2013	-0.41%	36
ISRG	10/21/2013	3.50%	33
EW	10/28/2013	-15.83%	26
ARLP	11/11/2013	-2.48%	12
JOY	11/18/2013	-2.94%	5
(Since 5/31/2011)
S&P	Annualized	12.56%
Sector Model	Annualized	23.45%
Large Portfolio	Annualized	30.20%

No rotation this week, which gives us time to step back and ponder a few questions.

Let’s say there are six people living in your house.  What will give your household the most money?

First choice, you get a better accountant to pay lower taxes.

Second choice, you send out resumes and get a better job.

Third choice, three other members of your family all get jobs.

I think that we miss the obvious when we talk about politics and economics.  You could try to pay less taxes or get a better job, but the most effective way of improving your family finances is if more of you are working.

In that family of six, though, some folks are too young to get a job, and some folks are retired.  You have young kids and your retired parents are living with you.  The amount of money your family has, then, depends on how old everyone is.  The more people there are between 25 and 70, the more money your household can earn.

In 1914-1918, the world was devastated by a horrific war that took the lives of countless young men.  To compound the problem, the Spanish flu killed off even more young working aged adults.  By 1929 the economy collapsed into a Great Depression that lasted until the end of the second world war.  Then, in 1945, the great generation did the greatest thing of all: they made babies – lots and lots and lots of babies.

In the 1970s those babies were trying to get jobs, so two things happened at the same time: the unemployment rate went up, and the employment rate went up.  To repeat, BOTH “unemployment” AND “employment” went up.

“Unemployment” is the rate of people who are looking for work.

“Employment” is the rate of people who are working.

People were entering the workforce even faster than jobs were being created.

Today we have the opposite thing happening.  Now “unemployment” and “employment” are BOTH declining at the same time.  When both employment and unemployment were rising in the 1970s, we had to fight inflation.  Now that both employment and unemployment are falling, we are fighting deflation.

But we need to fine tune this model with a question.  Who is most likely to create a job: a 25 year old, a 45 year old, or a 65 year old?

The 25 year old can take risk, but has no resources.

The 65 year old has resources, but can’t take risk.

The 45 year old has resources and can take risk.

Most jobs are created by people between the ages of 35 and 55.

The S&P tends to track the birth rate plus 46 years, adjusted by…

Ned Davis adjusts against inflation, but there has been no inflation during QE.  I’ve toyed with M2 money supply, but that’s not an exact match either.  The truth is that no one knows exactly, which is the cause of the confusion about the direction the market will take in the next few years.

In previous posts I’ve estimated the future trajectory, but all anyone can do is estimate during this period of QE.

What CAN be estimated, though, is the NATURE of the market.

As I’ve noted here:

http://market-mousetrap.blogspot.com/2012/10/1032012-before-debate.html

and here:

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

we are scheduled for a cyclical bull market to begin in 2013 and last into 2018.  In secular terms, this is a secular bear rally, with the final bottom to come in a collapse during 2018-2023.  By 2024, the secular bear is over and we enter a new secular bull.

The arguments you see in the news today are that we are either in a new secular bull market or we are beginning a bubble.

BOTH are wrong.  The 2009-2013 market was a QE bubble.  We are ENDING that bubble, not BEGINNING one.

Here is the breakdown:

1982-1999 secular bull market

2000-2023 secular bear market

2024-forward secular bull market

We know this from the birth rate plus 46 years.  The “secular market” is simply a reflection of what percentage of the population is between 25 and 70.  That’s it, PERIOD.  Everything else is noise.

But in the breakdown of the current secular bear we have the following:

2000-2007 secular growth halted

2008-2013 secular decline (i.e. cyclical bear)

2014-2017 secular rally (i.e. cyclical bull)

2018-2023 secular decline (i.e. cyclical bear).

In case you missed it, from 2009 we’ve had a roaring bull market and a mountain of quantitative easing.  Bernanke has been printing money like a mad man, and the market has been rising.  THAT was the bubble.  It isn’t STARTING now; they are trying to TAPER it now.

The bubble was the positive correlation of the Fed balance sheet and S&P returns:

http://www.jsmineset.com/2011/03/12/sp-500-versus-the-feds-balance-sheet/

But that correlation has recently broken down, even as the S&P continued to advance.  That breakdown in correlation marked the first bottom of the secular bear, and the beginning of a cyclical rally within that bear:

http://pragcap.com/chart-of-the-day-fed-balance-sheet-size-and-the-sp-500

If they continue QE without tapering, of course, we’ll see further distortion.  So, my point isn’t that they WILL taper QE now, but merely that they CAN taper now without the market collapsing:

To summarize, we are not ENDING a bull and BEGINNING a bubble.

Instead, we can END the bubble because we are BEGINNING a self-sustaining bull.

In the next correction you’ll see all the news stories shout about a bear market.  They’ll be wrong.  The next correction will just be a correction.  There should be no bear market before 2018.

I could be wrong, of course.  A sharp rise in taxes or a sharp rise in interest rates could reverse the effects of QE instead of merely taper.  If that happens, we could return to “normal” levels, which are drastically lower than now.  On that chart above, 2013 would have seen S&P levels below 500, instead of the current level of 1800.  But that would be a change in the Fed balance sheet.  At current levels, a mere tapering would not halt the bull market.

Confused yet?

That’s what happens when the Fed does something it’s never done before.

In simplest terms:

The market will go up if they continue QE.

The market will go up if they taper QE.

The market will ONLY go down if they REVERSE QE.

…that is… until 2018.

Enjoy the ride.

Tim