Monthly Archives: May 2012

Thursday, May 31, 9:25 a.m.

Justin Harper, market strategist at IG Markets in Singapore said last night, “The phrase ‘sell in May and go away’ was probably the best investment move you could have made. Markets pretty much gave back all their first quarter gains in May.”

Yes, May was a bad month. But so was April. So also was the last half of March.

Most global markets topped out in mid-March, making the last half of March, all of April, and all of May ugly times to be in the market.

Our Seasonal Timing Strategy did quite well with its exit signal April 20. But I liked our signal in our non-seasonal Market-Timing Strategy just as well. It came off its October buy signal in mid-February, prompting us to take our profits from its October buy signal.

In fact, I liked the buy signal from both strategies in October just the same. And the sell signals of both last April.

But that’s history. What comes next is what counts now.

In the U.S. market will it be a summer rally in June and July like the 7% rally last June and July?Or did the rally in April in the U.S. market this year satisfy that similarity to last year?

Would you like to be a Certified Financial Advisor?

The annual CFA exams will take place this Saturday, thought by many to be the hardest exams taken by Wall Street professionals. As Ben Duronio points out on Business Insiders, fewer than 20% of candidates pass the exams on the first attempt. That’s an even lower percentage than law candidates who pass the bar exams on the first attempt, or accountants who pass the board exams to become CPA’s on the first attempt.

The CFA requirements are as demanding as any profession.

After fulfilling the education and experience requirements comes the exams, a series of three, Level I, Level II, and Level III, each given separately.

The topics covered in alphabetical order include Alternative Investments, Behavioral Finance, Corporate Finance, Derivatives, Economics, Equity Investments, Financial Statement Analysis, Fixed Income, Communications Skills, Performance Measurement & Evaluation, Portfolio Management, Private Wealth Management, Quantitative Analysis Methods, Risk Management, Standards, Ethics, & Regulations, etc.

Level I exams are offered twice a year, in June and December. Level 11, and Level III exams are given only once a year, in June only.

It’s the Level I and Level II exams being offered on Saturday. The exams for each level are all-day affairs, with a morning and afternoon session.

The best of luck to this year’s candidates.

To read my weekend newspaper column click here: Stop the Noise – Americans Aren’t Dumb! May 25, 2012

Subscribers to Street Smart Report: In addition to the information in the premium content’ area of this morning’s blog, there is an in-depth ‘U.S. Markets’ update from yesterday in the subscribers’ area of the Street Smart Report website. Please also stay tuned to the hotline!

Yesterday in the U.S. Market.

The U.S. market followed markets in Europe in experiencing a down day that gave back all of Tuesday’s gains, with the market closing just about on its low for the day after a late day attempt to rally back failed.

The Dow closed down 160 points, or 1.3%. The S&P 500 closed down 1.4%. The NYSE Composite closed down 1.9%. The Nasdaq closed down 1.2%. The Nasdaq 100 closed down 0.8%. The Russell 2000 closed down 2.0%. The DJ Transportation Avg. closed down 2.1%. The DJ Utilities Avg closed down 0.8%.

Gold closed up $ 15 an ounce at $ 1,564, now down only $ 8 for the week so far.

Oil closed down a big $ 2.94 a barrel (3.3%) at $ 87.82.

The U.S. dollar etf UUP closed up 0.8%.

The U.S. Treasury bond etf TLT closed up 2.5%.

Yesterday in European Markets.

European markets closed down sharply yesterday. The London FTSE closed down 1.7%. The German DAX closed down 1.8%. France’s CAC index plunged 2.2%.

Asian Markets were mostly down again last night.

The Asia Dow closed down 0.3% last night.

Among individual markets:

Australia closed down 0.4%. China closed down 0.5%. Hong Kong closed down 0.3%. India closed down 0.6%. Indonesia closed down 2.2%. Japan closed down 1.1%. Malaysia closed up 0.3%. New Zealand closed up 0.1%. South Korea closed down 0.1%. Singapore closed down 0.4%. Taiwan closed up 0.6%.

Subscribers Premium Content Area.

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To obtain access please click on the ‘Subscribe’ link. It will take you to an information page on subscribing to Street Smart Report, a subscription to which includes access to the premium content area of this Street Smart Post blog.

Markets This Morning:

European markets gave back earlier gains after release of the U.S. economic reports and are now mixed. The London FTSE is up 0.3%. The German DAX is down 0.2%. France’s CAC is up 0.1%.

Oil is down $ .12 a barrel at $ 87.70.

Gold is up $ 2 an ounce at $ 1,566 an ounce.

This Morning in the U.S. Market:

This week is a very heavy week for potential market-moving economic reports, which include the ADP Monthly Jobs Report, Chicago PMI, the next Revision to 1st Quarter GDP, the ISM Mfg Index, and The Big One!, the Labor Department’s monthly jobs report for May. To see the full list and times for each release click here, and look at the left side of the page it takes you to.

Tuesday it was the Case-Shiller Home Price Index, which showed that home prices fell fractionally in March, just 0.03%, and adjusted for seasonal factors were up fractionally, 0.09%. And the Conference Board reported that its Consumer Confidence Index plunged in May in its biggest monthly drop in 8 months, dropping to 64.9 from 68.7 in April, versus the consensus forecast of an improvement to 70.0. The board noted the reading is well below the 90 reading that indicates a healthy economy, but still well above the all-time low of 25.3 of February, 2009. The problem of course is that it’s heading in the wrong direction.

Yesterday it was that the NAR Pending Home Sales Index fell 5.5% in April, its first decline in four months.

Overnight, India reported its economy (GDP) slowed to 5.3% growth in the 1st quarter, sharply lower than the previous quarter, and the forecasts of 6.1%.

This morning it was that new weekly unemployment claims jumped by 10,000 last week to 383,000, worse than forecasts of a decline to 370,000, and the 4-week moving average rose by 3,750 to 374,500. And the ADP Monthly Jobs Report was that only 133,000 new jobs were created in May in the private sector, and the report for April was revised down to a gain of only 113,000 from the prior report of 119,000. And 1st quarter GDP was revised down to growth of only 1.9% from the previous report of 2.2%.

Still to come is the Chicago PMI Index, which will be released in 15minutes, at 9:45 a.m.

The pre-open indicators have been holding up well in the face of another batch of disappointing economic reports.

Our Pre-Open Indicators:

Our pre-open indicators are pointing to the Dow being down 10 points or so in the early going, meaningless as to direction later.

To read my weekend newspaper column click here: Stop the Noise – Americans Aren’t Dumb! May 25, 2012

Subscribers to Street Smart Report: There is a hotline from last night and an in-depth ‘U.S. Markets’ update from yesterday, in the subscribers’ area of the Street Smart Report website. Please also stay tuned to the hotline!

I’ll be back with the next regular blog post on Saturday morning, as usual later then the week-day updates, probably around 11 a.m. eastern time.

Non-subscribers: We believe we can help you not only make more profits, but just as importantly avoid losses, and at very reasonable cost!

Our portfolios were up an average of 9.4% last year in a flat year (S&P 500 unchanged for year) when many, if not most, managers and funds were down for the year. We were on Hulbert’s Ten Best Newsletters of the Year list for the 2nd time in 4 years, and #4 Long-Term Market-Timer in Timer Digest’s rankings. And we are off to an even better start this year, ranked #1 Long-Term Market Timer so far in 2012.

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**** End of Today’s post*****

Are investors as scared as certain indicators seem to suggest? On the one hand, 10-year treasury yields have dropped to all-time record lows of 1.62% and the U.S. dollar via PowerShares Dollar Bullish (UUP) is sitting at fresh 52-week highs. On the other hand, gold prices have plummeted 20% from the top and the franc via Currency Shares Swiss Franc (FXF) is testing new 52-week lows.

Granted, many attribute gold’s decline and the franc’s depreciation to the appeal of the greenback. However, the SPDR Gold Trust (GLD) and Currency Shares Swiss Franc (FXF) were big-time winners in previous flights away from European sovereign debt.

Moreover, the CBOE S&P 500 Volatility Index (VIX), the wildly popular “fear gauge,” remains below a 200-day moving average at a price of 24. Spikes above 30 are more typically associated with panicky emotions.

Clearly, you can’t have record lows in U.S. Treasuries and a rising VIX without some sweaty fingers. That said, there are plenty of mixed messages over the course of the last 12 months. Will there be a Hard or soft landing in China? Debt containment or contagion in Europe? Recession or expansion in the U.S.? Cessation or continuation of Federal Reserve intervention?

Not surprisingly, then, making headway in traditional stock assets has been rather challenging. Indeed, at this very moment at my keyboard, the S&P 500 SPDR Trust (SPY) has returned 0.0% over the previous 12 months (5/31/2011-5/30/2012).

Which U.S. Stock ETFs suffered a similar fate or worse? Have any provided investors reason to remain calm in the face of tremendous uncertainties?

In screening year-over-year performance for higher octane stock ETFs, I chose to limit the list to highly liquid (dollar trading volume $ 5M), low expense ratio performers. Here are 5 of the more palatable possibilities:

In spite of the ongoing Euro-drama, familiar themes are still working. First, Apple (AAPL) is a culture-changer. Its 17% weight in QQQ explains the overwhelming bulk of the success of this exchange-traded “fave.” European troubles may detain APPL (and QQQ), but those troubles are unlikely to derail pent-up demand for iPhone 5.

Second, consumer sentiment may have been stirred as of late, but it hasn’t been thoroughly shaken. Both discretionary spending as well as toilet paper and toothpaste purchasing have benefited VDC and XLY.

Finally, investors have been craving income in a no-yield world. Utility stocks via SPDR Select Sector Utilities (XLU) as well as dividend production via iShares High Dividend Equity (HDV) rank high on any leaderboard.

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFexpert.

Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

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Managing your investments would be easy if you just bought stocks and watched them move higher.

In your dreams!

In the real world, even the best managers must deal with adversity.  Our choices, no matter how carefully chosen, do not perform as expected.  Something goes wrong.

Dealing with adversity is crucial to investment success.  Tonight we have an informative case study in JP Morgan Chase (JPM), a company that I have cited favorably several times and include in my flagship investment program.  My most recent favorable mention was just this week in my discussion of Europe.

While it is more fun to write about triumphs, it is just as important to think about losses.  Despite my overall record, I certainly make choices that do not work out.  I do not endorse “buy-and-hold.” I actively manage every program and every position, constantly reviewing the changing prospects for each investment.

Let us take a closer look at how to handle adversity.

What NOT to Do

There are two basic investment mistakes — mirror images of failure to analyze.

1. Blindly holding the position hoping that it gets back to your original “buy” point.  This is typical for the average investor.  It is about psychology rather than analysis.  It is buyer’s remorse, a desire to undo the losing decision.  “If only I had another chance…..,”  the investor thinks.  This is really stupid.  If the investment is a mistake, this mentality can turn a moderate loss into a  big one.  Some of the biggest companies have gone to zero — or nearly so.  Check out Worldcom, Enron, GM, Lucent, and many others.  Meanwhile, if the stock actually does recover, it is probably wrong to sell it at the original entry point.
2. Selling instantly and without analysis.  This is a trader mentality, which is fine if you are a trader.  We have all heard about cutting losses and letting winners run.  We also know about “buy low and sell high.”  It is more difficult than a slogan.  I listened to some traders discussing this stock and they opinions were mixed.

Analysis, not Paralysis

I can summarize what investors should do in one simple statement:

Review your investment process with the new information and decide accordingly.

You cannot go back and sell at yesterday’s or last week’s prices.  Each day is a new one.  Suppose that you had no position in this stock.  Would you buy it at the current price?  Is the investment thesis intact?

There are many excellent methods for finding great stocks, so the general advice is to review your own conclusions.  In an effort to be more helpful, I am going to review my own process.

Here is a very brief summary of my own method (further details available on request).

Sector Choice

I try to find a sector that is depressed and unloved.  This is where you shop for value.  You must be prepared for a constant bombardment of pundits on why you are wrong.

Stock Choice

I look for a stock that qualifies on four criteria:

1. It must have a great  business, with strong profit potential.
2. There must be strong management.
3. There must be a near-term catalyst, since no one wants to have “dead money.”
4. Corporate financials  — earnings, cash flow, balance sheet, and risk — must all be strong.

Regular Review

I constantly review every stock in the portfolio, asking if it still meets the tests.  Analysts who set a stock price target and then wait until it is hit are doing a poor job.  I adjust price targets constantly.  This is why I was able to buy Apple (AAPL) at 63 and hold it through the gains (trimming size to balance the portfolio).  There is no substitute for regular review.

Addressing the Bad News

With this in mind, let us go back to  JP Morgan.  If you are a current investor you should focus on whether the stock is attractive at the current price.  I do not yet have a personal conclusion, since I prefer to analyze more data, but I will share my thought process.

1. Is this still the premier financial business?  Do I still want some exposure to this sector?
2. Have I lost my confidence in Jamie Dimon?  On his show tonight Cramer (long the stock in his charitable trust) announced that Dimon was “just like all of the others.”  This might be a little harsh, but I relied on his interviews where he assessed overall risk.  Were these misleading?  Mostly they discussed counter-party risk, but I need to look deeper.
3. Has the potential catalyst changed?
4. What about the new financials?  The question is whether this is a one-time hit or something that affects future operating earnings.  In my experience there have been many “one-hit wonders” where stocks decline on bad news that is a one-time charge (Tylenol poisoning, Intel floating point processor).  The market sells first and thinks later.  The overall earnings picture before the news was very good, as we can see from this chart from Chuck Carnevale’s invaluable site.

Preliminary Conclusion

I wanted to write a timely story, and that meant doing it tonight.  We’ll know much more tomorrow.  Depending on what I see, I might sell or I might add to the position.  I have clearly stated the criteria.

Emaphsizing the main point:  Do not fall in love with a position.

Each day is a new start.  Be cool and analytical.  If you have a proven method, use it!

The projected wave iv I had in last post has gotten too big compared to wave ii at the same degree.  Although it breaks no EWP rules, it is not ideal and does not have EWP’s “right look”.  So I relabeled the waves in the above chart.  This count is aggressively bearish, and I usually like to go with the more conservative and cautious count, but price action demands this count be respected.  And the euro is showing no signs of slowing down on its way to 1.1876, which is also a good setup for stocks to sell off hard with it.  Look out below!

On a side note, don’t miss out, only one more day to get Elliott Wave International’s free Financial Forecast newsletter.

The euro has solidly broken through 1.2600 support.  As I said in last post, there is nothing really holding up the EUR/USD until 1.1876.  Since last post, the EUR/USD has dropped almost 200 more pips.  Although price action looks extremely bearish, and a waterfall of a decline may occur, be prepared for pops along the way – at least psychologically.  I don’t see any reason to abandon the aggressively bearish view at this point.  Longer term, the EUR/USD should make it to the 1.1876, and it’s quite possible it will make it there in quite a hurry as the price action suggests.

14 Elliott Wave Trading Insights You Can Use Now

Also, remember this chart above from my May 12th’s post (click here for full post)?  It shows the weekly EUR/USD and the big declines that occurred after big chart gaps.  In the past, there was a 2700 and 1100 pip loss following their gaps.  The most recent gap occurred around 1.3000, and the pair is currently trading at 1.2400, which registers a 600 pip loss so far.  So history is repeating itself.  There still may be plenty more to go, but again, be prepared for sharp rallies and major reversal patterns. *** Momentum on the intraday charts is showing that a bullish divergence is building, and the daily RSI is oversold.  I’m still aggressive in taking big short positions, but am also closely watching for any big reversal patterns that demand I protect my gains. ***

PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

Financial markets tumbled in US morning amid disappointing macroeconomic data and lingering concerns over the Eurozone. Wall Street opened lower with both DJIA and S&P 500 losing more than -1.0%. In the commodity sector, crude oil slumped with the front-month WTI crude oil breaking below 90 and diving to 87.49, a level not seen since October 2011, while the equivalent Brent crude contract plummeting to as low as 103.23. Gold also tumbled as the euro declined to 1.24 against the greenback. The yellow metal initially dropped to as low as 1530.4 before recovering to around 1550. Further weakness is expected.

Italy’s failure to meet its target at bond auctions raised concerns over the country’s ability to access funding from the market. The country auctioned 5.73B euro of 5-and 10-year bonds, compared with the maximum of 6.25B euro. Yields for the 10-year debt increased to 6.03%, the highest since January 30. For Greece, the EU requested the debt-ridden to show more “determination” to reduce its budget deficit and stated that it will review the progress after the election in mid-June. Yet, it remains uncertain whether Greece would eventually stay in the bloc.

Confidence in the Eurozone weakened more than expected. Economic confidence fell to 90.6 in May from 92.8 a month ago. The market had anticipated a milder dip to 91.9. Industrial confidence slipped to -11.3 from -9 in April, compared with consensus of -10.2, while services confidence slid to -4.9 in May from -2.4 in April, compared with market forecasts of -2.8. Consumer confidence dropped to-19.3 low, inline with consensus. In the US pending home sales surprisingly declined -5.5% m/m in April, following a +4.4% gain in March. The market had anticipated a milder drop of -0.1%.

Reuters estimated that Saudi’s oil output has reached 10.1M bpd in May while that in Libya dropped modestly to 1.42M bpd, compared with pre-war level of 1.55M bpd. Indeed, Saudi’s oil minister Ali Al Naimi has recently raised his concerns about high oil prices and emphasized that the Kingdom could increase supply with its spare capacity of 2.5M bpd and working inventory of 80M barrels.

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May 30, 2012

Growth Rates & Government Spending

How fast is the federal government’s spending rising? It’s a politically charged question these days, of course, and so there’s an excess of spin attached to the discussion of government budgets at the moment. Fortunately, the offending numbers are easily located and dissected, courtesy of the Congressional Budget Office’s “Budget and Economic Outlook: Fiscal Years 2012 to 2022″ report (specifically: the historical data in tables F-1 and F-3). The results may enrage or inspire you, depending on your political persuasion and budgetary assumptions. But the first intelligent step in any debate is to take a sober look at the data, assuming it is available. Oh, yes, one other necessary condition for informed analysis: no screaming, please.

Posted by jp at May 30, 2012 6:18 AM

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In the short-term world of trading, your job is to anticipate the short-term behavior of others.

In the world of investing, your job is to take advantage of the short-term behavior of others.

Markets render a short-term verdict, but only professors believe them to be efficient.  Warren Buffett famously notes (see here for more wisdom):

“I’d be a bum on the street with a tin cup if the markets were always efficient.” Fortune April 3, 1995

“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”  Berkshire Hathaway 2004 Chairman’s Letter

This is great advice, but difficult to follow.  How can we tell when the market is inefficient and fearful.  We need evidence!  Should we bail out of the market?  Should we buy puts (even at high prices) to protect our risk?  Let us turn to another expert– Perry Mason (actual historical ad — and many others — available here).

Let us take the advice of these two great iconic figures, seeking edge through evidence.

Since the recent European elections  there has been a dramatic change in risk appetite.  Ed Yardeni sees this as a switch for risk on/risk off.

“The big switch was flipped to the off position following the May 6 French and Greek elections, which could upend all the bailout deal and fiscal pacts worked out by European leaders over the past two years. Such an outcome could push Europe deeper into a recession and weaken global economic activity. In other words, Risk On tends to be associated with widespread confidence in the outlook for global economic growth, while Risk Off indicates widespread fears that the global economy will sputter.”

Investors need evidence!  Is the pessimistic outlook warranted?  This week will provide more data.

As usual, I will offer some ideas in the conclusion, but first let us do our regular review of last week’s news and data.

Background on “Weighing the Week Ahead”

There are many good sources for a list of upcoming events. In contrast, I single out what will be most important in the coming week.  My theme is an expert guess about what we will be watching on TV and reading in the mainstream media.  It is a focus on what I think is important for my trading and client portfolios.

This is unlike my other articles at “A Dash of Insight” where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting the news in context.

Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially — no politics.
2. It is better than expectations.

The Good

The US economic data last week was mixed, but had some high spots.

• Housing and Car Sales Lead.  The Bonddad Blog takes a page from UCLA Prof Ed Leamer to reach the following conclusion and chart:

Put simply, as an economic expansion ages, housing is the first sector to weaken, followed by cars. If they are strengthening rather than weakening, a recession is not near. And to be blunt, both sectors are indeed strengthening.

Let’s look at this three ways. First here are the raw numbers of housing permits (left scale) and vehicle sales (right scale), measured quarterly to limit some of the noise. Both peaked well before any recession started, even in the case of the brief expansion in the middle of the 1980-81 “double dip”:

• Signs of GOP compromise.  Fewer GOP candidates are signing the Grover Norquist “pledge.”  I cite this not from a partisan perspective, but as one who seeks solutions and compromise.  Concessions by either party are good.  (More to come on the “fiscal cliff” issue.)
• Michigan Consumer Sentiment hit a four-year high.  While this was helped by lower gas prices, it also reflected perceptions of better job prospects.  Check out the chart from Doug Short — still not at peaks, but also not confirming the recession scare.

• Zillow data suggests that home prices are moving higher (via Calculated Risk).
• New home sales strengthen.  Calculated Risk has been authoritative on this subject for years, so I am watching the analysis and forecast (a long and gradual recovery) with great interest.  Here is Bill’s comment on the recent data:

“Clearly new home sales have bottomed. Although sales are still historically very weak, sales are up 25% from the low, and up about 15% from the May 2010 through September 2011 average.”

The Bad

There was plenty of bad news on the economic data front.  Here are the most important items.

• Downticks in “flash” PMI reports.  These are getting a big play for those with a short time horizon.  The question is whether the captured data is really accurate.  The initial forecast for the US PMI was released by Markit Economics, predicting a dip.  There were also negative reports on various European countries.  This is an interesting new data source for the US, worth watching with interest.
• Durable goods sales were weaker.  Steven Hansen has a thoughtful analysis, looking more deeply into the headline data.
• Facebook should be worth only $ 23.  Or even $ 13.80.  Who could have known?
• The informal European Summit disappointed.  While the Eurobond concept was floated and stronger deposit insurance mentioned, there was no solid outcome.  The market wants immediate answers, and the European leaders have a different time frame.
• Spanish bank problems threaten escalation and contagion.  Spain has stepped in to assist  with bad housing loans at the fourth-largest bank.  While this is a pro-active move, investors immediately raised questions about the status of other banks.  How much more help will be needed?

The Ugly

The “fiscal cliff” grabs the ugly award for this week.  The authoritative Congressional Budget Office (CBO) reported on what would happen in the absence of any policy changes.  Assorted tax cuts and stimulus programs will expire.  This is headline-grabbing stuff, especially for those who have not been paying any attention.

Hardly anyone expects even a fraction of this to take place, but it makes for good headlines.  The marginal effect is clearly negative as the average investor acts in a way that he/she believes to be smart and well-informed.

It is wall-to-wall crisis coverage.  I plan to write more extensively on this topic.

The Indicator Snapshot

It is important to keep the current news in perspective. My weekly snapshot includes the most important summary indicators:

• The St. Louis Financial Stress Index.
• The key measures from our “Felix” ETF model.
• An updated analysis of recession probability.

The SLFSI reports with a one-week lag. This means that the reported values do not include last week’s market action. The SLFSI has moved a lot lower, and is now out of the trigger range of my pre-determined risk alarm. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. Before implementing this indicator our team did extensive research, discovering a “warning range” that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.

The C-Score is a weekly interpretation of the best recession indicator I found, Bob Dieli’s “aggregate spread.” I’ll explain more about the C-Score soon.  We are working on a modification that will make this method even more sensitive.  None of the methods are worrisome.  Bob also has a group of coincident indicators. Like most of the top recession forecasters, he uses these to confirm the long-term prediction. These indicators are also not close to a recession signal.

This week’s big news on the recession forecasting front this week came from New Deal Democrat writing at The Bonddad Blog.  He notes that the ECRI has retreated from a robust method with many leading indicators, seasonally adjusted, to a single reed.  NDD snips that reed, showing why the year-over-year real income indicator is misleading.

Meanwhile, there are many others who have developed recession forecasting methods that have matched or beaten the ECRI, while providing transparency for consumers.  These are the methods that I have been highlighting for many months.

Our “Felix” model is the basis for our “official” vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions.  This week we continued as “bearish” although we do not (yet) have any short positions.  Felix respects the market action, and the last three weeks have been convincing.

[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list.  You can also write personally to me with questions or comments, and I'll do my best to answer.]

The Week Ahead

Sometimes the quirks of the calendar mean that we get a lot of important data in a short time frame. That is the story this week.

Friday is the big day since it includes the employment situation report along with the ISM manufacturing data (a good input for estimating the jobs report.)  We will also get personal income and construction spending.

Thursday is the big tee-up for Friday.  The Chicago PMI is the best guess about the ISM index.  The ADP report is the best guess for the non-farm payroll number.  We also get the (backward looking) adjusted Q112 GDP data and initial jobless claims (not part of the Friday reporting periods, but more recent and relevant).

Tuesday and Wednesday will provide housing price data from Case Shiller (a bit old) and Conference Board consumer confidence.

While there are no big decisions scheduled from Europe, we know that there can be headlines — plus or minus.

With all of this in mind, the US employment story is the feature for the week.

Trading Time Frame

We have been partially invested in trading accounts, in a bearish position with 1/3 of our position profitably in bond ETFs.  It reflected our “bearish” posture, and I would not be surprised to see  a “buy” recommendation for an inverse ETF next week.  Felix does not try to call market tops and bottoms, but respects trends in the three-week range.

Investor Time Frame

For investment accounts I have been buying on dips in stocks that we like. I tried to explain the most important concept for individual investors in this article about the Wall of Worry. I have had many emails from people who had a personal breakthrough in their investing when they understood this concept. If you missed it, I urge you to take a look.  You can contrast this with the many  pundits who claim miracles of market timing.

The single most difficult thing for me to explain is that investors should often embrace opportunity just as traders are trying to do some fancy footwork.  Investors should not be trying to guess the next market move. Instead, take what the market is giving you.  You should not be a “buy and hold” investor, but instead engage in  active management.  Think about risk control rather than market timing.

If you are really worried, you can imitate our enhanced yield program. Buy good dividend stocks and sell short-term calls. I am targeting 8-9% returns on this approach, and achieving it no matter what the market is doing. You can, too.

Final Thoughts on the Economic Evidence

Factual evidence consists of actual economic data and – -more importantly — reported corporate earnings.  So far, the factual data has been strong.

Speculation from many sources includes a European collapse and a US recession, leading to lower earnings.

Does the current market reflect the speculation or the facts?  Here are some interesting perspectives:

• Brian Gilmartin, a favorite of Real Money fans, has a new blog.  Fundamentalis features corporate-specific earnings news as well as a macro take.  Brian is off to a great start, and we will all enjoy reading his work.  On the current earnings front he notes,   “…(N)o matter how earnings act, the market p/e continues to compress over the last 12 years. In fact, despite 20% – 30% growth off the 2009 bottom, the S&P 500 hasn’t traded much over 15(x) earnings since then. Even during the 2003 – 2007 rally, the S&P 500 multiple stayed roughly even with earnings growth at about 15(x) earnings.”

•  Scott Grannis agrees, suggesting that the market is pricing in plenty of bad news.

“As a reminder, the chart above shows the trailing PE ratio of the S&P 500. At 13.4 today, it is approximately equal to what it was at the end of 2008, when the market fully expected a multi-year global recession/depression and years of deflation.”

• Eddy Elfenbein writes that the market is looking cheap, and the dip is centered in economically sensitive names.

The pessimists are expecting a decline in economic growth, earnings, and profit margins.

This week should provide more solid evidence about whether the negative expectations have any justification.

No matter what evidence we get, do not expect a Perry Mason style “confession!”

Before the markets opened on May 30, a Dow Jones article captured the serious nature of the escalating crisis in Spain:

European stocks fell Wednesday as the euro sank to its lowest level since July 2010 and Spanish bond yields soared, with concerns over Spain mounting. “Investors are heading for the exits once again as fears for a Spanish economic collapse heads closer to becoming a reality,” said Mike McCudden, head of derivatives at Interactive Investor. “It appears to be only a matter of time before it’s not just the banks that need bailing out, but the Spain itself,” he added.

“The ECB’s rejection of the Spanish government’s plan to recapitalize Bankia…puts Spain on the steps of the region’s fiscally based liquidity hospital, the European Financial Stability Facility/European Stability Mechanism. It looks increasingly likely that it will be knocking on the door soon asking to be admitted,” said JPMorgan. “Spain looks to have gotten to the point where it cannot bear the burden alone. The Spanish government recognizes the need for burden-sharing, but it does not want the kind of burden-sharing that was made available to Greece, Ireland and Portugal,” it added.

The markets in the U.S have been relatively calm having avoided new lows for six trading sessions. U.S. investors expect the European Central Bank (ECB) to bail out the markets once again. As we outlined in detail on May 26, the market may be underestimating the problems associated with the narrowing list of possible policy responses in Europe.

As shown in the chart below, on Wednesday morning the yield on a ten-year Spanish bond hit 6.70% for the first time since November 2011. If the ECB had a bandaid “solution” with little in the way of negative consequences, it is logical to assume they would have acted already. The ECB will take action at some point, but the low-hanging fruit is no longer on the policy-response tree.

At 7:00 a.m. EDT Wednesday, Bloomberg reported on a possible policy response in Europe:

The European Commission called for direct euro-area aid for troubled banks and touted common bond issuance as an antidote to the debt crisis now threatening to overwhelm Spain. The commission, the European Union’s central regulator, sided with Spain in proposing that the euro’s permanent bailout fund inject cash to banks instead of channeling the money via national governments… Proposals for more liberal use of European bailout money are likely to face resistance in creditor countries such as Germany, Finland and the Netherlands, the scenes of growing taxpayer opposition to more aid.

Since they are all flawed in some way or involve having Peter bail out Paul, the expression “likely to face resistance” has been common in recent media reporting. When push comes to shove, Europe will do something. The question is how low do the markets have to go to qualify as a shove.

The tables below, originally shown on May 26, have been updated as of the May 29 close. Even while the S&P 500 tacked on 14 points, Treasury bonds (TLT) and the U.S. Dollar (UUP) had very modest declines showing risk-averse investors were not impressed with the “good” news from Greece and the Wall Street rumor of a giant stimulus package coming from China. The tame reaction from TLT and UUP was one of the reasons we did not buy into Tuesday’s rally.

While the S&P 500 and EWG recaptured two of the support levels in the table below on Tuesday, it appears as if those levels will be surrendered early in Wednesday’s session.

This entry was posted on Wednesday, May 30th, 2012 at 8:04 am and is filed under Currencies. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

Tuesday, May 29, 9:25 a.m.

It’s well known that markets don’t like uncertainty.

And it’s estimated that almost $ 3 trillion was wiped out of equity valuations globally in the market corrections in May. Understand, the value doesn’t shift to different owners. It disappears. If your house is worth $ 200,000 less now than it was five years ago that $ 200,000 didn’t move into someone else’s bank account. It disappeared – does not exist anymore. It’s the same with stocks or bonds or mutual funds when they lose their previous value.

But is there really enough uncertainty to cause the kind of damage we have seen?

Most of May’s losses are being attributed to uncertainty over Greece.

However, with all the months of debates by experts, and focused meetings by global leaders and EU officials, it’s pretty much known what will happen – isn’t it?

If only markets would listen to the experts.

For instance, economists at CitiGroup forecast a 75% likelihood that Greece will leave the euro-zone, and even pinpoint the likely day, January 1, 2003. So there you go. Seventy-five percent certainties are more than it takes to be successful in investing.

Whoops – Jacob Kirkegaard, an economist at the Peterson Institute for International Economics says he thinks the probability of Greece exiting the euro-zone is less than 5%.

Oh. – Okay, so there is some uncertainty over whether Greece will stay in the euro-zone.

But everything will be all right if it stays, right? We can see that in the way that global markets rallied yesterday in reaction to the news over the weekend that the pro-austerity, ‘stay in the euro-zone’ New Democracy party has moved ahead in pre-election polls in Greece.

Well, maybe not.

Michelle Meyer, an economist with Bank of America has warned clients that “The situation in Europe is becoming more uncertain.” The worse than expected euro-zone recessions raise concern about spillover effects to the U.S. economy even if Greece stays in the euro-zone.

But the euro zone only accounts for 15% of U.S. exports. So recessions there wouldn’t hurt the U.S. economy much – would they?

Sure there are nervous experts who seem to think that that even if Greece stays, the debt crisis is moving on to Spain and toward Italy.

Craig Alexander of TD Bank worries that the primary impact on the U.S. from a worsening EU crisis would be financial markets turmoil. “If the banking system in Europe seized up it would be a mess.” he says. “It would hark back to Lehman Brothers in 2008.”

Reuters reported this morning that “Worries about the cost of shoring up Spain’s banking system have Spanish debt costs elevated, while the gap between them and German 10-year yields is near euro era highs, as the risk grows that Spain may be forced to seek an international bailout.”

Steve Barrow, head of G10 currency research at Standard Bank  says. “The bad news on Spain just keeps coming.”

But, Spain is the 3rd largest economy in Europe and the 12th largest in the world. Surely, it’s not really in that much trouble.

And its Prime Minister, like the prime ministers before him in Ireland, Portugal, and Greece, assures markets that Spain will not need outside support.

But then, markets themselves are known for ignoring what politicians say, seeing problems before they arrive.

And Spain’s stock market, has been steadily plunging, now at more than a 15-year low. Every few days it bounces as traders apparently jump in trying to catch the bottom. But as oversold as it is, so far it’s just been a relentless plunge for more than a year now, its rally attempt off the October low feeble at best.

It’s given back all of its spike-up gains from the 2002-2007 bull market, now down 77% from its 2007 peak, with no sign of a reversal. (And it’s down another 2% so far today).

Okay then, there may be uncertainties in Europe beyond just whether Greece will remain in the eurozone or not.

But do markets elsewhere really have uncertainties about their own economies that also justify their declines?

Well, okay. Maybe something is going on globally that the U.S. market continues to ignore.

Subscribers to Street Smart Report: In addition to the information in the premium content’ area of this morning’s blog, there is an in-depth ‘Global Markets’ report from Thursday in the subscribers’ area of the Street Smart Report website. and the regular mid-week in-depth ‘U.S. Markets’ update will be there tomorrow.

To read my weekend newspaper column click here: Stop the Noise – Americans Aren’t Dumb! May 25, 2012.

Yesterday in European Markets.

European markets gave back early gains to close mixed with only fractional moves. London closed up 0.1%. Germany closed down 0.3%. France closed down 0.2%.

Asian Markets closed Up Last Night.

The DJ Asia-Pacific Index closed up 1.2%.

Among individual markets:

Australia closed up 1.2%. China closed up 1.2%. Hong Kong closed up 1.3%. India closed down 0.1%. Indonesia closed up 0.1%. Japan closed up 0.7%. Malaysia closed up 0.6%. New Zealand closed up 0.5%. South Korea closed up 1.4%. Singapore closed up 0.5%. Taiwan closed up 1.1%. Thailand closed up 2.9%.

Subscribers Premium Content Area.

For Street Smart Report subscribers only, used to provide additional info to that provided in the newsletter, mid-week reports, and hotlines.

To obtain access please click on the ‘Subscribe’ link. It will take you to an information page on subscribing to Street Smart Report, a subscription to which includes access to the premium content area of this Street Smart Post blog.

In the premium content area this morning: Our signals, short-term and intermediate-term on the U.S. Stock Market, Gold, and U.S. Treasury bonds.

Markets This Morning:

European markets are up this morning. The London FTSE is up 0.4%. The German DAX is up 1.0%. France’s CAC is up 1.1%.

Oil is up $ .61 a barrel at $ 91.47.

Gold is up $ 8 an ounce at $ 1,580.

This Morning in the U.S. Market:

This holiday-shortened week will be a very heavy week for potential market-moving economic reports, which include the ADP Monthly Jobs Report, Chicago PMI, the next Revision to 1st Quarter GDP, the ISM Mfg Index, and The Big One!, the Labor Department’s monthly jobs report for May. To see the full list and times for each release click here, and look at the left side of the page it takes you to.

There were no reports yesterday.

This morning the Case-Shiller Home Price Index showed home prices remained unchanged in March.

Still to come are Consumer Confidence at 10 a.m., and the Dallas Fed’s Mfg Index at 10.30 am.

Our Pre-Open Indicators:

Our pre-open indicators are pointing to the Dow being up 90 points or so in the early going.

Subscribers to Street Smart Report: In addition to the information in the premium content’ area of this morning’s blog, there is an in-depth ‘Global Markets’ report from Thursday in the subscribers’ area of the Street Smart Report website. and the regular mid-week in-depth ‘U.S. Markets’ update will be there tomorrow.

To read my weekend newspaper column click here: Stop the Noise – Americans Aren’t Dumb! May 25, 2012.

I’ll be back with the next scheduled blog post on Thursday morning at 9:25 a.m. Occasional random posts can be at any time.

Non-subscribers: We believe we can help you not only make more profits, but just as importantly avoid losses, and at very reasonable cost!

Our portfolios were up an average of 9.4% last year, our Seasonal Timing Strategy up 15.8%, in a flat year (S&P 500 unchanged for year) when many, if not most, managers and funds were down for the year. We were on Hulbert’s Ten Best Newsletters of the Year list for the 2nd time in 4 years, and #4 Long-Term Market-Timer in Timer Digest’s rankings. And we are off to an even better start this year, now ranked #1 Long-Term Market Timer so far in 2012.

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**** End of Today’s post*****

global uncertainties