01/12/2014 Don't Fear the Taper

Sector Model	XLU	1.70%
Large Portfolio	Date	Return	Days
ABX	4/11/2013	-24.47%	276
NEM	9/30/2013	-14.23%	104
ISRG	10/21/2013	11.59%	83
EW	10/28/2013	-11.13%	76
ARLP	11/11/2013	0.59%	62
JOY	11/18/2013	-1.45%	55
OXY	11/27/2013	-3.21%	46
MUR	12/23/2013	-1.01%	20
SWM	12/31/2013	-8.06%	12
NKE	1/7/2014	-0.66%	5
(Since 5/31/2011)
S&P	Annualized	12.75%
Sector Model	Annualized	23.07%
Large Portfolio	Annualized	28.65%

 

As much as I would like to get my fat fingers to initiate a trade, the revised trading rules for the model will not allow it.

Probably just as well.

On Thursday the sector model showed its mettle in a well-timed intraday move to utilities.

The entire market is shifting into a clearer picture now, with the best industries as:

AUTO	Bullish
FURNITUR	Neutral
TELEQUIP	Neutral
OILINTEG	Neutral
TOBACCO	Bearish
GOLDSILV	Bearish
UTILEAST	Bearish
UTILWEST	Bearish
MEDICINV	Bearish
UTILCENT	Bearish
FUNL SVC	Dead

 

Auto is the only “Bullish” industry here.  Everything else is either neutral or bearish.

We saw something similar this time last year when I gave one of my worst statements ever: “market getting defensive.”

Yeah, right.

The problem with timing in this environment is that the unprecedented operation of the Federal Reserve has warped both valuations and expectations.  The market is “overvalued” on Shiller PE, Demographic Projections, and Market Cap / GDP.  But the market is never a static creature – nor does it measure valuations in the PRESENT.

A stock isn’t worth what it is worth NOW.  A stock is worth what it will be worth in the FUTURE.  And that value will be measured in DOLLARS, which are still being printed.

The Taper is not tightening, it is merely a less aggressive loosening.

If you look at quantitative easing as the accelerator and tightening as the brakes, we merely let up slightly on the gas pedal.

The “economy” is another matter.  It’s like a hill.  If the car is going downhill you can apply the brakes and STILL accelerate.  If the car is going uphill you can apply the gas and STILL slow down.

So where are we?

In the natural course of events we would have had a most devastating bear market from 2008-2013.  That’s simple demographics: the baby boomers are beginning to retire.  Using those same demographics we would have STARTED a bull market in 2013 that would carry us through 2017.

The final demographic dip is from 2018-2024.

I’ve covered this a number of times before:

http://market-mousetrap.blogspot.com/2013/11/11242013-they-can-stop-blowing-bubbles.html

The wild card is QE.  CAN we taper in 2013-2017?

Absolutely, yes!

CAN we eliminate QE entirely during that time?

Again, yes.

CAN we soak all that excess money back into the void from which it came?

No – not until AFTER 2024.

Do not fear the taper.  The market may correct, but I do not think we’ll have a bear market until 2018, unless we go much further than a taper and completely reverse QE.

Politics plays a part here, of course.  There are wars and rumors of wars that can wreak havoc.  A pandemic may come.  But these are things far more destructive in themselves than a market move.

And if you are more worried about how a war could affect your pocket than your brethren, you probably deserve a good haircut to get you back into focus.

I expect a scare market, but not a bear market.

I could be wrong, but that’s okay too.  My plan is to make more money in bulls and lose less in bears.  Corrections are the best of both worlds.

Tim

PS – per the revised trading rules, there are now six industries in the buy zone: Auto, Tobacco, GoldSilv, UtilEast, Funl Svc, and UtilCent.  Of those industries, these are the best ten stocks:

BTI	TOBACCO
SWM	TOBACCO
NEM	GOLDSILV
ABX	GOLDSILV
UVV	TOBACCO
RAI	TOBACCO
GG	GOLDSILV
MGEE	UTILCENT
TM	AUTO
AU	GOLDSILV

 

Of those top ten, I currently own three.