Yesterday we finally got the break I’ve been looking for. Markets had been levitating on declining momentum and borderline extreme optimism. Keep in mind that market advances are fueled by constant wall of worry along with rising earnings expectations.
On the rising wall of worry, Rydex mutual fund investors had positioned themselves as extremely bullish and depleted their cash reserves which would have fueled the rally.
In addition Bank of America/Merrill Lynch and Goldman Sachs have reduced their 1q GDP expectations from 2% to 1.8%, implying slower growth.
While the seasons come and go….even here at 7000 feet with six months of Winter, Greece appears never ending.
And lastly, tensions between US and Iran. If war does break out it could potentially introduce a new Black Swan event in the form of a stupendous spike in oil. Such predictions for a spike in oil are very likely ludicrous but could $200 oil be possible?
Regardless, investment conditions for the time being are causing me to be very cautious and hedged (to protect existing holdings and first quarter gains). We’ll be patient and wait for the fat pitch before taking any swings. I’d like to see the pendulum of investor emotions to swing back to extremely cautious which would imply that many of the potential negatives would be factored into stock prices, which they certainly are not at the moment.
Long TWM
Just out is the ISI Hedge Fund Survey indicates that hedge funds are at their lowest net long position in 4 years!
This is a contrary indicator and means they’re going to be forced to buy into equities to keep up with the indices. Its another source of fuel for the markets.
The market as measured by the S&P 500 finished the month ahead +4.4%. Since 1950 there have been 18 Januarys in which the S&P 500 gained in excess of 4%, as it did this year. The S&P posted gains for the rest of the year on 17 out of the 18 occasions. The only failure was 1987 when the S&P gained 13.2% in January but ended up losing -9.8% between February and the end of the year. The last time there was a 4% plus January was in 1999 and the S&P 500 gained another 14.8% over the next 11 months.
Whether history will repeat remains to be seen, but there is no denying the prior history of 4% plus Januarys has been remarkable. Another positive today by our interpretation, was a “Golden Cross” buy signal. A buy signal is generated when the 50 day moving average of the S&P 500 closes above its 200 day moving average. There have been 5 previous “Golden Cross” buy signals since 2003. All of them were successful with the S&P 500 gaining an average of 8.6%, 12.9%, and 17.1% over the next 3, 6, and 9 months.
Thats a fair question and no, my name is not Green. There are many methods of investment screening and our method is to eliminate from consideration any company that we deem to be negative to animals or the environment. Granted most people would love to see portfolios filled so called Green stocks, but the problem is the risk is enormous …..see Solyndra or Evergreen Solar, Many are start ups at best and most will be big losers. When a “green” stock shows up as a selection in our quantitative model we will use it if possible. Please keep in mind that for all of our clients, preservation and growth of principal are our primary objectives and if that can come from the use of neutral or clean investments all the better. Brad Pappas
Every time the markets rally the collective sign of relief can be felt up here in Allenspark, the markets sell off the collective IQ of investors shrinks to fit Sunday football TV advertisements.
Markets have been up 6 out of the last 7 days, enough to move many bearish investors to the bull camp. Where we go from here is an important question. A healthy market will absorb the gains by moving sideways or with a shallow retreat.
We’ve been very quiet and admittedly a bit nervous with our high cash and short positions. Based on recent economic data the economy is not falling over the precipice but negative investor sentiment is very high at the moment, equal to levels seen in March of 2009, before the mega rally.
So, we’re very quiet right now and have developed a shopping list of equities to be purchased upon a pullback. Many will be familiar names from earlier this year and based on our quant models. Names coming shortly.
No positions
Well it looks like I sold the TZA prematurely which reminds me of a old time trader who once said “I tend to buy too late and sell too early”. The moral of the story is perfection is unattainable in investing but if you book profits on a high percentage of your trades you’ll do very nicely in the long run.
We’re currently sitting with approximately 50% cash and 20% in Gold and Silver in most accounts which makes us very defensive. But I’m wondering if this latest downside thrust is a bit too much and a bounce higher is coming. Our oscillators are very stretched on the downside so it appears to me that we’re at a low risk juncture for a quick bounce higher lasting a few days. For this reason I’ve take out a moderate position in BGU at $42.52. The Nasdaq is trading higher with gold/bonds weak today. This is nothing more than a short term trade.
