08/10/2014 A Hard Drive Crash, and a Stock Crash, on the same day!

Style Model	Small Value
Sector Model	XLF	-1.58%
Large Portfolio	Date	Return	Days
TIVO	4/23/2014	12.68%	109
SHOO	4/28/2014	-5.03%	104
PM	5/27/2014	-2.14%	75
SR	6/2/2014	8.95%	69
CFI	6/9/2014	-2.46%	62
FRAN	6/16/2014	-8.50%	55
BT	7/14/2014	-5.16%	27
RRD	7/21/2014	4.81%	20
CHFC	7/28/2014	-1.50%	13
ESI	8/4/2014	-39.97%	6
(Since 5/31/2011)
S&P	Annualized	11.99%
Sector Model	Annualized	24.99%
Large Portfolio	Annualized	23.19%

 

Rotation: selling BT; buying BSET

Last Monday my hard drive failed, and so did my trading.  The switch from NUS to ESI was catastrophic.  But later in the week NUS also crashed.  The fact that both of them collapsed was a good hint that some recent simplifications I’ve made to the Full Model were not well framed.

Reset on the hard drive.

Reset on the Full Model.

A cathartic week.

On the Sector Model, not much changed:

 

Boring.  Still above the S&P, still above the back-test baseline.  Nothing exciting like ESI on Monday!

I could go for a bit of boredom.

In any case, the reason I simplified the Full model’s internal metrics was because I was pressed for time and thought the simplification would work.  It didn’t work, and so I’m back to the more time consuming metrics.

More time, less money.  Less time, more money. Funny how it always works out that way.

The lesson here is that we can’t take shortcuts.  The ONLY shortcut is to put everything into an index and walk away.

If you want to beat the index, you need to put in the time.

No way around it.

I have more to write, but… no time tonight.

Tim

PS – for those who’ve been getting weekly emails, I have to apologize.  My email list was one of the casualties of the hard drive crash…

 

 

 

08/03/2014 Correcting the Correction Calls

Style Model	Small Value
Sector Model	XLF	-2.29%
Large Portfolio	Date	Return	Days
TIVO	4/23/2014	10.27%	102
SHOO	4/28/2014	-9.75%	97
PM	5/27/2014	-4.40%	68
SR	6/2/2014	7.36%	62
CFI	6/9/2014	-0.17%	55
FRAN	6/16/2014	-15.03%	48
NUS	7/7/2014	-19.29%	27
BT	7/14/2014	-2.97%	20
RRD	7/21/2014	4.81%	13
CHFC	7/28/2014	-1.89%	6
(Since 5/31/2011)
S&P	Annualized	11.95%
Sector Model	Annualized	24.87%
Large Portfolio	Annualized	24.40%

 

Rotation: selling NUS; buying ESI (again).

NUS is in free fall on the model, the same place ESI was in when I sold it a few weeks ago.

Both models have taken a hit with the recent market weakness:

 

And yet the matrix remains moderately bullish, with Small Value and Financials holding the top spot:

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

 

Market timers are once again calling for a total collapse, citing Shiller PE ratios that are not meaningful during periods of QE.

The question, though, is what the end of QE will bring.

As I posted on 7/13, the CAPE ratio at the end of June should be calculated at 16.55, instead of 25.96.

In the same way, price action relative to M1 shows us having had no real increase in market VALUE since 2010.

Here’s a close-up of the S&P / M1 ratio from March 2009 to June 2014:

 

John Hussman continues to argue that the market is in a bubble and needs to fall in real value.

He ALSO argues that at some point inflation will rise.

Put those two together, however, and you don’t NEED the market to “fall” in nominal price. 

Think about this for a moment: the market is currently above 25 on a CPI based CAPE ratio, but it is below 17 on an M1 based CAPE ratio.  That is, the market is “too high” based on current inflation, but “about average” based on the money supply.  The way to bring both readings together isn’t for the market to fall, but instead for inflation to rise.

At some point in the next decade (probably after 2018), inflation will rise faster than price.  When that happens the Shiller CAPE can fall from 25 to 17 without the market having to do much at all.

CAN the market fall?

Sure it can.  The market rises and falls all the time.

But it doesn’t HAVE to fall in order for the Shiller CAPE to correct.

And when you read about the fact that the market is in a bubble, consider that in a QE environment, the market has drastically UNDERPERFORMED.  In reality it’s gone NOWHERE for the past 4 years.

John Hussman is right on one point, though: when measured against inflation, the market will probably have no real returns over the next few years.

But those trying to time near term market price movements based on that observation are fooling themselves.

Pick undervalued companies in beaten down sectors.  Anything else is just gambling.

Tim