06/28/2014 Complete Nonsense

Style Model	Small Value
Sector Model	XLF	0.13%
Large Portfolio	Date	Return	Days
BX	4/14/2014	12.21%	75
TIVO	4/23/2014	7.13%	66
SHOO	4/28/2014	-3.26%	61
PWR	5/12/2014	3.61%	47
JRN	5/19/2014	9.69%	40
BT	5/22/2014	2.43%	37
PM	5/27/2014	-0.96%	32
SR	6/2/2014	12.13%	26
CFI	6/9/2014	-2.18%	19
FRAN	6/16/2014	0.00%	12
(Since 5/31/2011)
S&P	Annualized	13.03%
Sector Model	Annualized	26.75%
Large Portfolio	Annualized	26.87%

 

Rotation: selling BT; buying ESI (ITT Educational).

The recent discrepancy between a bearish XLU (on the Sector Model) and a mildly bullish Small Value (on the Style Model) has now been resolved toward a more bullish short term configuration of Small Value and Financials:

	Small Value	Mid Value	Small Growth	Mid Blend	Large Value	Small Blend	Large Blend	Large Growth	Mid Growth
Finance	1	4	8	11	14	25	36	37	58
Utilities	2	5	9	13	16	26	38	40	59
Industrial	3	7	12	18	19	30	44	47	65
Staples	6	10	15	20	23	35	49	51	69
Healthcare	17	22	29	33	39	54	61	63	75
Materials	21	27	32	42	46	56	67	68	76
Cyclicals	24	31	41	48	52	60	70	71	79
Technology	28	34	43	50	55	64	72	73	80
Energy	45	53	57	62	66	74	77	78	81

 

The presence of Utilities and Staples in the upper half are cautionary, but not of immediate concern.  The Finance sector is in the lead.  Small caps are in the lead.  That’s enough to point to some kind of short term rally.

As I mentioned last week, though, all of this is a bit nonsensical in nominal terms because of the activity of the Fed.

Some months ago I posted this secular graph:

 

From: http://market-mousetrap.blogspot.com/2014/04/04132014-bursting-bernankes-bubble.html

This is a deviation channel for the birth rate plus 45 years (i.e. the median age for the workforce), and the S&P / money supply ratio.  It shows that in terms of real value the S&P is only pausing in a long term decline that will not terminate until the end of this decade.  The continued “rise” is partially an illusion created by a dramatic expansion of the Federal balance sheet.

We are 14 years into a 20 year long secular bear market that appears to be rising because of all the money printing. People who have been long the market have paid taxes on monopoly money, while people who have been short have lost their shirts (and their shorts).

In terms of sector rotation we’ve been in a stealth bear – that is, a bearish configuration that keeps going “up” in terms of dollars.

The typical sequence is Energy out performing at a market top, then Staples and Healthcare in an early bear, with Utilities and Financials at the end.  Financials outperform under the expectation of Federal stimulus and early business investment.

But now stimulus is being systematically withdrawn.  So, then, while we would have normally seen a bear market ENDING in Financials, we instead see the model calling for Financials at an all-time market high.

This is the kind of nonsensical mishmash that the Fed has made of inter-market analysis.  It has been the bane of hedge funds and a continuing embarrassment to economic commentators like Hussman.

That’s why calling a market direction has been so counter-intuitive. Interest rates, gold, and stocks have all defied any kind of “normal” behavior.

These are not normal times.

One could say that “this time is different” but that’s only good until reality finally returns:

·         The market is at an all-time high in a sector configuration that is typical of a terminal decline in a bear.

·         Financials advance when the Fed is increasing stimulus, but are now in play when the Fed is decreasing stimulus.

·         Interest rates go up when the Fed decreases stimulus, but they are going down instead.

Make sense to you?

It doesn’t to me.

To be honest, I never could make sense of this game.  That’s why I made the models. They don’t seem to care what it all means.  They just follow breadth and volume and call it a day:

 

The Sector Model continues to plug along. It seems to reach out for those sectors that are being condemned in the news, and I recently saw an article pointing out how Financials are typically the worst sector anyone could ever hold.

If it’s so bad that it’s making headlines, it’s probably the right time to invest.

Time will tell.

Tim