More Danger Signs

     There is a lot of  chatter out there about where the markets are headed.  One writer has noted that there is “Distribution”.   That means smart investors are selling stocks while the less informed and latently convinced of the bull market are buying.  Economic data indicate that the recovery is fragile, slower than hoped for, completely dependent on stimulus money and unsustainable.  The Federal Reserve is very concerned about it and is keeping the Fed Funds Rate at 0 – .25%  “for an extended period”.

    One of the contrary indicators of a market top is Put/Call Ratios.  It gets a little complicated but just accept that the ratios are at an extreme level strongly indicating a market top.  Money managers are all afraid that the market will correct before they can get enough stocks sold out of their portfolios to lock in the gains that will guarantee their huge performance bonuses.  Every one is looking around nonchallantly as they all back away toward the exits.  They’re all wondering who will be the last one holding the bag. 

    I hope it isn’t the little guy.  If you have been following this blog and you can’t see the danger signs at this point, you might consider a red and white cane!  Cash, money market funds, and precious metals are about the only safe place at this point.   It’s going to be very interesting to see where the S&P and Dow Futures indicate the markets are headed over the next few days.   Check the Market Risk Level Indicator at www.fundswitchers.com.   It’s pegged to the high side.

Cisco Systems and Short Covering

   This rally is going to be short lived.  It might last for a couple of months because John Chambers says that he is looking at growth for business to business and is hiring a few people.  It is only one clue as to which direction the market is heading.  But, the risks are still there and it could all come crashing down.  How much upside do you think there really is at this point.  There was a lot of short covering as well which added to the rally.   So, I for one am going to sit back and watch.   In September 2007, I watched the market increase another 2000 points after I went to bonds.  I was just out of stocks a little too early.  It still came crashing down.  Just later than I thought it might.  Remember, it is risk management at this point.

Buying Gold, Shorting the Dollar….

      This market has many characteristics of being ready to melt down again.  It may not but I certainly don’t want to be exposed to stocks with that kind of risk.  Here are the factors that are creating this risk.

     Governments around the world are diversifying out of  U.S. dollars and buying gold because the dollar is losing value.  The dollar is losing value because our government is printing so much money and dollar bonds yield very little.  The government is also buying up our own government bonds to keep the yields low.   At some point the value of the dollar will have to start climbing to keep the foreign governments from dumping the dollars they are holding and causing the dollar to go into freefall.  When they start to increase dividend yields and the Federal Funds rate, existing bonds will drop 20%-25% in value.  Bond mutual fund holders will then panick and dump their bond funds just like they did in 1994.  Stock valuations  will also tank because the economy is too fragile for the government stimulus dollars to be stopped.  The recent GDP numbers for the 3rd quarter were supported by those stimulus dollars.  It wasn’t a healthy sign for the economic levels we have been hoping would begin increasing.  Over the last week, the market has been vascillating, and drifting lower.  On the days that the dollar is weaker, the market ends on an upnote.  It then loses on the next day.  The weakness in the dollar is due in part to investors selling the dollar short with the  expectation of buying it back at a cheaper value and profiting  from it.  Those short positions will have to be covered at some point.  That is when the market will see significant drops, the likes of which we saw last spring.   

    Bond funds are beginning to lose value.  Just a few pennies at a time.  It won’t take long before those few pennies add up to a few dollars.  I have been telling my friends to avoid the bond funds in their 401k.  Since I have gone to cash on the 19th of October, I am entirely in money market funds until this whole mess runs it’s course.

   What really bothers me is that the talking heads all know what the ultimate outcome of the current fiscal policies will lead to.  Yet they are all talking in code;  “Don’t committ any more to the markets.  Take some profits.  There are still good companies to invest in.  It’s going to get a little choppy.  yadda yadda yadda…”  They can’t come out and say it.  The market is going to pullback again!  The only questions are how soon and  by how much.  It doesn’t matter that much to me.  As long as I can avoid a signifiant portion and get back in at some lower level and avoid the resulting losses.  I am looking for about 12%.  That puts my target S&P at 970 or lower. 

    Folks, the economy is not improving.  It has stopped hemorrhaging.  Jobs are still not being created.  But, they are no longer being lost at an accelerating rate.  Consumer debt is coming down which means they are not spending as much.  Recovery is dependent on consumption.  It ain’t happpening without government incentives.  Don’t be surprised if the markets demonstrate some small short term increases.  Those will be excellent 2nd chances to exit the stock market.

Dollars and Stocks and Gold! Oh My!

      Just like Dorothy in the Wizard of Oz, their are dangers along the way.   I have tried to keep you alert on how to avoid those dangers over the last year.  My most recent call on the 19th and 20th of October warned of the coming correction.  It is October 30th.  The Dow and S&P are both down 4% and 6% respectively.  And it isn’t done yet. The chart fairies are watching to see if the indices break through certain resistance levels to determine how severe the decline might be.  If you have followed my lead and gone to money market funds, then you will be smiling as the markets continue their descent.  Please go back and review my posts that are mentioned in my page called  Record of Switches Made.  I am looking for some feedback here folks.  I want to know who is using this blog and who is just reading it.  Is it starting to get your attention?  Have you benefited from it?  What is helping and what isn’t?  Are you starting to mention my blog to coworkers, friends, and others that might benefit.   I would certainly like to know how many fans I have picked up over the first year that are willing to share.  Come on people.  Let’s hear from you.

Your Portfolio and Your Hair; Both Need Trimming.

     It’s earnings reporting time and the good news is priced into the market.  There is a lot of banter by the talking heads on taking profits in this market and reducing equity exposure.  It is important to keep in mind that the people who work for the mutual fund companies cannot recommend that you eliminate your equity exposure as that would reduce their fee income.  It also flies in the face of Modern Portfolio Theory and it’s principles of diversification.  Brokers also will not make that recommendation because of compliance issues and the financial liabilities they would be exposed to.  And still, they are indirectly acknowledging the increased risk by recommending “Trimming some equity exposure and taking some off of the table”.   I am getting some excellent feedback comments on moves some followers have taken recently.   The current stock market risk/reward ratio is now skewed to the risky side and it is becoming increasingly recognized by the market pundits.   As I mentioned in my response to a comment in my prior post, if there is only 10% upside expected from here to the end of 2010 and a high probability of 10% to 20% downside between now and then, why would anyone want to stay exposed.  I guess the answer is one expects the path to that 10% over the next year to be slow and steady.  Has the market ever been slow and steady?  My reasoning then, why not eliminate that exposure and wait to see if one of the many risks threatening the economic recovery, expected earnings, and current market valuation levels actually generates a level of fear that causes to market to decline?   We all accept that the market goes up over time.  But, few promote the probability of temporary declines in the interim.  I don’t think it is unreasonable to expect a decline of 10% or more over the next few months.  If so, I would rather be in cash/money market funds and be ready to capture it as well as the additional expected 10% increase. 

      One added benefit, as one of my friends realized when she was in money market funds while the market tanked in March.  If the market does retest that recent  market bottom, one is not at risk of reacting out of fear and emotion, pulling out of the market at the worst possible time,  locking in losses and not recovering them because the market then recovered.   This is the biggest risk of all and why so many people lost so much  in the last decline.   Eliminating exposure when the risk is high is how the biggest losses of all are avoided and why one should pay attention to what is going on in the markets.   Take a look at the page entitled “Record of Switches Made” and you will better understand what I have done in the past.  It shows that I have avoided most of the declines which has been additive to portfolio values.   I welcome any questions or comments.

The Dollar, Bonds, Interest Rates, and Liquidity

     The diversity of opinions from market optimists and skeptics is like a shotgun blast pattern from 1,000 yards; it’s all over the place.  The data coming out is really conflicting.  Many normal assumptions are no longer valid.  The unique combination of factors is causing the market to act in unexpected ways.   The one factor that is drawing more and more attention is the falling dollar.    The excess liquidity that the government has pumped into the economy is causing the dollar to fall.  Global companies who have much of their assets and income defined in foriegn currencies are benefitting by those assets increasing in value as the dollar drops.  This is one reason the stock market continues to climb.  The excess liquidity is also driving demand for taxable and muni bond funds as a destination for cash looking for a low risk,  higher yielding alternative to money market funds.  The demand is driving bond prices up and yields down.  This is quietly creating another asset bubble.  Bond holders do not expect to lose money.  But, in bond mutual funds, when the rates increase, bond fund values drop as they did earlier in the year when US Govt bonds lost 20%.  For anyone who has balanced or bond funds in their 401k asset allocation, this drop in valuation will result in unexpected losses.  So far, bond funds have performed exceptionally well.  I think it is time to exit any fixed income investments to lock in those gains and avoid any near term losses. 

  The fear of interest rates increasing is also fueling a growing demand for gold as demonstrated by the new highs recently at $1,047 an ounce.  (I completed a Barron’s survey at the end of last year and one of the questions was where I expected gold to be at end of 2009; I said over $1,200 per ounce) 

       But, at some point the liquidity has to dry up.  Even if the current administration produces another stimulus package, it is probably not going to be as effective as hoped for.   The dollar has to be supported which will be a mandate for a higher Federal Funds rate.  When this happens, expect the dollar to strengthen and the market to sink.  That is where market volatility will pick up.  The stock and bond markets will both react negatively.  When you don’t have bonds as a destination for safety, then the only safe  investment will be money market funds.

    Skeptics say that the economy hasn’t shown enough improvement to justify current market valuations.  Optimist are also now saying that portfolio performance will depend on stock picking.  Either way, I expect the market to be in a narrow to slightly up trading range because of the different options strategies being used as hedges for portfolio protection and tax strategies.  But, by January I expect to see a very different change in market outlook. 

     By the way,  in my July 10th posting I wrote that asset allocation strategies would change to include a higher exposure to international equities.   The Chief Investment Officer, Global Asset Allocation Group of Fidelity Management and Research has upped his international exposure from 20% to 30%. 

      This market is being likened to being on a precipice.  It can go up.  But, it can also go down.   I don’t like what I see.  You have to make the call yourself, but with very limited upside potential and significant downside, what amount of risk are you comfortable with?  The Market Risk Level Indicator in www.fundswitchers.com is very close to being in the danger zone.  Trying to time the market top is not a wise thing to do.   Now that I have helped you to identify the risks, I hope that caution will become your watchword.

Bulls vs. Bears; Reviewing the Assumptions

The markets closed today at 9,600 and 1,040, about 3% off their recent highs on the 21st of Sept.   A nice bounce for the day.  The bad news is that the higher we go, the higher the risk level gets.   My target for exiting the market has been 1,125 on the S&P based earnings of $68/share and a P/E of  16 – 17.

My continuous research causes me to constantly question my assumptions as to what will cause the market to reach or not reach my projected target.  This weekend, I read a very enlightening article in The Economist  Briefing Section called “Unrepentant bears”.  In the context of current market activity, especially the Bond market rally, clues are developing that support a higher risk of market retrenchment.

As the prices of bonds increase, the yields decrease.  In a low inflation environment  this would support higher P/E’s in the stock market.  Hence, my target of 1,125 on the S&P.   But,  inflation risk is most assuredly there.  It is only a question of time.  With government intervention in the form of low Federal Reserve interest rates and stimulus in the form of housing and auto incentives, this market has all the  markings of  prior market bubbles.    The article points out a corollary in that  low inflation yields low earnings growth which would cause a contraction of the P/E on the S&P and lower valuations.   Provided that inflation doesn’t show it’s face for the foreseable future, we may be looking at a market that fluctuates up and down in a rangebound pattern over the next couple of years.  Keep an eye on my Market Risk Scale in www.fundswitchers.com.

Earnings estimates for the next few quarters may be a bit optimistic as economic growth may only be in the 1% – 2% range.  Inherent in my  prior mention of bond yields going lower is the very real risk of those same yields beginning to climb.  When that happens, watchout!  The recent massive inflows of investment capital has gone into the bond market.  When those yields start climbing, we may see a massive exodus and another major colapse of liquidity and valuations.

These factors; slower economic growth, increased savings rates, gov’t intervention and incentives, the threat of inflation, and bond market interest rate risks,  have not been priced into the markets yet.  At some point, they will be.  Their existance is being acknowledged.  But, they are being held at bay in this market recovery by optimism and market momentum.   Be aware that we are probably at or close to a near-term top.   The next couple of weeks should confirm a top or add a little more to it.  In either case, the downside risk is building and preservation of capital should be even more important.  Remember, avoid losses for better  long-term portfolio performance.

PIMCO Says, Think Risk, Not Asset Class

     I have written in the past about Modern Portfolio Theory (MPT) and how it is no longer an effective approach in reducing market risk effectively.  It has promoted Diversification through Asset Allocation for the last 50 years.  This last market collapse amply demonstrates how fallable it is.  I have been promoting Fundswitching which reduces risk by eliminating exposure when the risk level gets too high.  Barron’s has an excellent interview with one of the most successful, respected, and well-known asset management firms in the world.  The article is an interview with Mark Taborsky, VP Asset Allocation, PIMCO.  I recommend reading it.  Go to www.Barron’s.com.  It is another credible source leading the investing community away from the standard pablum fed to investors on how to reduce risk by diversifying into various asst classes.  It has become more apparent that the various risks need to be identified and understood in  order to avoid those asset classes where those risks are a clear and present danger.   Securities brokers and financial advisors are still far from adopting this philosophy because their compliance departments are too concerned with the liabilities inherent in portfolio recommendations and MPT is defensible.  Caveat Emptor.  Take charge.  Learn more.   Hopefully, this blog is helping you.

The “Herd” Is Getting Spooked

      The Jobs Report and Factory Orders data were worse than expected which contributed to the growing detrimental fear that the economic recovery is not going to be as robust as was hoped.  With the record advances that the market has seen over the last 6 months and the expectation of a correction or at least a breather, it looks increasingly like we are going to see that.  Since September 21 when the DOW hit 9830 and the S&P hit 1,072 we have retrenched almost 5%.  That could be iinterpreted as the breather are pullback.  I don’t think it is going to stop there.  Expect a full 10% and maybe a little more.   But, not much more. 

     The recent run-up, as we all now know, was the result of recovering from on oversold low point, hopes of a robust economic recovery,  and expectations of better profitability in the coming quarters.   The reported data  seemed to be supporting them.  The jobs report and factory orders disappointment are the first indicators to the contrary.   Given how far we have come, I think we are about to plateau around this level.  Basically, cold water has been thrown on this hot market.   Whatever advances we see from here on out should be at a more tepid pace.  

    Here are some actions I contemplated for people that I have personal communications with.   For stock mutual funds in taxable accounts, I was getting close to making a switch to money market funds.  But, there would have been short term taxable gains amounting to 5% of the portfolio.  This would have been a definite locked cost.  I decided it would be better to let the portfolio fluctuate 10% or more and make a determination much later  to lock the gains after they became long term capital gains (resulting in a much lower tax rate).   I made a switch in 401k accounts due to the international fund being held.  These are more volatile and fluctuate more. If you have been following the Market Risk Scale, you will notice that I moved the Indicator to reflect my belief that it is going to take longer for any significant market advances.  As the timeframe lengthens, the chances of adverse market events increases.  So, the Indicator reflects the higher risk level.  I am just managing the risk level here.  You should decide for yourself what you are comfortable with.

     The First Anniversary for this blog is coming up soon.   My posts appear when there is something worth commenting on.  I avoid writing for writing’s sake.  Unfortunately, for someone who is trying to check the blog or website daily and the posts appear irregularly, it is difficult to make it  habit.  If you have a comment or suggestion, please share.

Projections and Expectations.

   As Maxwell Smart used to say in the old T.V. comic series, “Missed it by that much!”     My half-hearted projection of an S&P of 1,100 by Sept. 25th almost came true!  But, with the last couple of days, it doesn’t look like it will happen.  Oh, well.  It was fun watching.   Still looking for 1,100 by November though.

    Now, the more serious reflections.  We did see an 18% increase since July 15th at which I predicted a 15% – 20% runup.  When the S&P was at 1,004 to 1,016 between August 16th and Sept. 5th, there was banter of a 3%-5% pullback.  Now that the S&P has hit 1,072 on Sept. 21, we will probably see that pullback.  It might be 5%-10% now which puts us back to 1,000 to 1,015.   It is a marginal move and not quite what I look for in meeting the requirements for a fund switch.   It could be a short term opportunity.  But, not one that I would do.   I think that this pullback could be more driven by the short sellers.  It certainly has been a dramatic runup and is primed for the shorts to profit from it.  As I mentioned in my prior post, ”The Herd”, the options crowd, and the short sellers have all conspired to make this look like the market was getting ahead of itself.  It’s probably true to a certain extent.  But, fundamentals are improving and a lot of investors will be looking at this as an opportunity to get in since they were left watching on the sidelines.   It is also the end of the quarter and a lot of money manager’s performance numbers are going to be measured and found wanting.   Just don’t get nervous and switch into money market funds because you think the market is heading back down. 

   I’m still waiting to hear some comments on these insights.  Anyone….anyone….Bueller…Bueller…

An Ex-Financial Advisor provides industry insights

It is time for someone to provide the type of 401k help individuals have been searching for without intense study to master the elements of investment management.  I am a proponent of mutual fund switching.  But, only when it is used with professional guidance.  As a former securities broker, I provided that professional guidance successfully.  In one case, I increased a Putnam Variable Annuity from $80k to $300k in 2 years simply by switching (within the annuity)  from a stock fund to the money market fund periodically as the market fluctuated.  In this way, I was able to capture the gains as the market increased and avoided the losses as it declined.  Not 100% mind you, but a significant part of each cycle.  I will post my insights and interpretations of market developments in this Blog and will be sending out periodic emails via my website www.fundswitchers.com to any that have an interest in increasing the performance of their mutual fund type investments.

The Market has formed a trading range

The last few weeks volatility has caught everyone off guard.  The best call was to be in cash.  Few people expected the Dow to go to 8000.   Few expect it to recover to 14,000 for several years.  For now, investors are caught in limbo not knowing where we are going from here.  This should create an excellent opportunity to trade in and out of the market and capture 5% – 10% gains each cycle.  Corporate profits are being adjusted downward as expected.  How long they will depressed is the main question and the one that will start the markets up again.  Until that time, we should be trading in a range of about 9200 – 8200 on the Dow.  Current targets of getting out at 9000 and re-entering at 8300 should be good for a couple of cycles.   This may change as time advances.  For now, October 29th, I have gone to money market funds 100% and will be looking for an entry back in at around 8200.

The “Faux Rebound”

As initially expected, the market had declined 300 points to just below a 8000 on the Dow Jones Industrial Average.  Then, by the end of the day it was up 550 points to over 8,800.  The big question is why.  One must recognize that there are many who follow the markets using a variety of subjective, objective, analytical, computerized, automated, homogenized, pastuerized, and naturalized systems.   In this case, the institutional investors who have been looking for a specific reentry point had programed automatic buying triggers to kick in when the prior market bottom was breached.  There was a significant volume in the days transactions which lends credence to the upward move.  Unfortunately,  some of it is attributed to the initial downward decline.  The whole thing is a technical move.  The only positive news is that 20 of the largest countries are meeting this weekend and are expected to support a global effort to support fighting the worldwide recession and there is some speculation that the recession will end by the 3rd quarter of 2009.  So, whats new.  Nothing has changed except the inevitable decline has been delayed for a few days.  My targets of 7,600 to 7,800 on the Dow still stand.  Earnings reports are being adjusted downward,  people are losing their jobs, and spending has dried up.  Until something happens that will change that for the better, the economy will continue to contract and the markets will continue to decline.

A Market Collapse Driven by GM and Credit Card Defaults

I know the Page Header is extreme and seems a bit sensationalizing, but the simple fact remains that these are the most significant risks to the market at this point.  The GM rescue is not a given and probably should not be done.  They have way too much debt and can’t pay it back.  They are a financial black hole.  Credit card defaults are on their way.  The American consumer is way over extended and not able to recover in the coming recession/depression.  These write-offs may prove to be greater than the mortgage fiasco currently working it’s way through the economy.  The only question is when will they be recognized and priced into the market.  I would think about 6 months or about the May/June time frame.  Until that time we will have to deal with a Congress that has no incentive to deal with GM and then a new Congress that will be to late to help.  GM is going to run out of money and will begin massive layoffs.  Their issues should be resolved in the bankruptcy process, not with Taxpayer dollars.  But, until that is decided, the market will churn.  Next week should provide a re-entry point with a short lived rebound propelled by the long term investors looking for another buying opportunity.  This round trip could prove to be a short one capturing a nice return opportunity of 8 – 10%.  Then we will review entry and exit targets again.

The Current Argument in Favor of Fund Switching

The mantra of “Stocks for the Long Term” still has merit, albeit, with a qualifier that you do not utilize the “Buy and Hold” method.  If you haven’t heard it yet, this strategy for long term investment success has been acknowledged in the mainstream as being dead.  People are beginning to realize this fact and act accordingly.  One can also extrapolate the same principle into long term buy and hold of mutual funds.  If you were told that your stock funds were going to decline by 17% to 28% over the next 5 months would you want to stay invested?  I doubt it.  You would switch into a money market funds that day.  Well, guess what folks.  You’re being told right now!  If you haven’t already moved into cash you might consider it now.  I believe we are going to see 1,000 point swings in the DOW beginning next week.  The first will be down to around 7,600.  The long term buying crowd will then step in and cause a rebound back to around 8,400.  Then, it will drop again to around 7,200.  This pattern will repeat itself until the analysts finally arrive at projected ‘09 earnings of $60 or less for the S&P at which time capitulation will occur and we will be flirting with a DOW around 6,000 to 6,500 and an S&P of 630 to 690.  It will occur over the next 2 to 5 months.  The only question in investors minds should be “how often should I switch from stocks to cash and back again?”  A single switch will avoid the most of the decline and should position ones portfolio to be 100% stocks for a really nice rebound.  But, don’t expect it to continue up.  As I have indicated in prior posts, we are in for an extended flat market that will only provide growth for those who make the occassional switches back and forth.  Making multiple switches will require close attention to where the markets are at noon to 1:00 daily.  Here is where the continued guidance and active management can pay off handsomely.

   On a side note, those of you that continue to believe in diversifiing portfolios should be able to grasp that fund switching accomplishes the same risk reduction goal by significantly reducing the volatility on the downside while increasing the upside volatility for your benefit.  Intuitively, this is going to be more recognized as time progresses  The next six months will be a milestone  in the history of investing.  Hopefully,  my prognostication will be accurate and first seen here.  Wish us all luck in the volatile times ahead.

Historical basis beginning to yield to reality of today

I keep talking about a trading range, lower earnings expectations, and eventually a market bottom.  The experts from the industry keep reinforcing the idea that historical valuations and bear market durations indicate that we are at or near the bottom of the current bear market.  Well, what would you expect from those that are dependent on individual investors to continue to keep their investments in all those funds whose performance they brag about being in the top 5% or top 10%?  How can you brag about being a top performer when you are down 20%?  Because, the ERISA Act of 1974 brought the average person into the investment world by enticing him into the markets with promises of retiring secure.  The problem is that the average person didn’t have the initiative or the interest in doing the necessary homework to learn enough about investing to protect himself.  He continues to believe what those in the industry keep telling him.  The industry also makes it difficult for financial consultants (Brokers) to think independently and tell you when you should be reducing risk. 

   This market is going to help change the way people think.  Perhaps it was necessary to make them realize what was at stake.  This blog is at the forefront of helping people to wean themselves from the propaganda that the industry has been feeding them.  Long term buy and hold is dead.  Diversify your entire portfolio not just an account.  Getting completely out of the market is a shrewd move when done at the right time with the right account. 

  We are increasingly seeing two camps.  There are those who went to cash (many late in the downward move) and those who are still fully invested.  Those that are fully invested tend to be the ones that have stayed with the industry recommendations and are buying more as the market declines.  Those that are in cash are looking for an entry point.  There is a distinction being made now between traders and long term investors.  Read into long term investors as those that will need much longer to recover to historic return rates.  Traders are the smart ones.  Fund switchers are a fringe group.  As the market declines, I am glad and proud to be more associated with the fringe group.  We will end up with a much higher return.  So, let’s get back to what is going on in the market. 

    The interest on safe 10 year treasuries has been overtaken by the S&P dividend yield for the first time in 50 years.  What this is supposed to mean is the price of stocks have fallen so much and the price of treasuries have risen so much that the cost of stock market risk is now next to nothing.   This is a great indicator that people should be buying stock which is why the market has been holding at 8,000. The only problem is that there is substantial risk that the dividend yields may be reduced in the next couple of quarters.  Investors are beginning to realize that cash flow problems due to the economy are going to impact dividend yields.   This is one significant reason that the market will break through the 8,000 level either today or tomorrow.  I am anticipating rentering the market when the Dow hits 7,600.  But, keep in mind, we will probably by cycling down into the 6,000 to 6,500 range.  So, there will be a few opportunities to capture some short rebounds from these bottom tests.

DOW Breaking 8,000 Prediction off by 1 day

It took 3 days instead of 2 for the Dow to break 8,000.  Sorry, people.  My bad.  It’s going to be interesting over the next few weeks as the people wanting to buy into these dips start to second guess themselves.  I have to believe that the volatility will continue as the bad news continues to drive the earnings lower.  Short term traders are going to be torn between wanting to buy stocks at these levels versus fearing further significant declines.  And there is were the cunundrum lies.  Keep in mind where we are headed with this economy.  There is nothing on the horizon but an Armada of depressing economic indicators and bad news.  The slide will continue with the occassional false rally.  But, when that first indicator comes in that hints at any kind of positive news, the market will set a record for gains in one day.  I would venture 900 to 1,000 points.  You don’t want to miss that one.

   For now, be watchfull of the market falling to a new low around 7,600 and then a short lived bounce back to around 8,400.  That would be a nice 11% gain in a week or two.  A few of those and you make up your losses from the recent market meltdown.  Remember,  any changes should be made in the last half hour before the market closes.   Happy Fundswitching.

Panic selling! So much uncertainty…

What an amazing day!  As you will have gathered from reading my posts, this was not unexpected.  For the week, I predicted a 1,000 point drop, the DOW to break 8,000 and also possibly hit my target of 7,600.  Surprisingly enough, all three happened!  What’s next? 

   Well, there are substantial numbers of professional investors that expected the market to drop as indicated by the number shorting the market (that means people who believe the market would decline and sold before they owned it with the expectation of buying it back at a lower price; buying low and selling high but in reverse order).   Now those investors who sold the market short will buy the market back to cover their positions and make a profit.  This is going to cause a large bounce.  The only question I have is will it happen on Friday or Monday.  I hope it’s Monday because I got delayed at 12:50 from entering my buy order in the 401k to switch back to stock funds.  If the market is down on Friday, all the better for me.  I will have gotten out when the Dow was at 9,066 and hopefully get back in at 7,500 avoiding an almost 1,600 point decline.  Thats about 18%.  If the market rebounds like I think it will, we should get back out and make 10% – 12%  in just a few days and be back into cash for the rest of the decline.  If I am wrong and the market drops to 6,500 we will only be down 15%.  But, what a rebound we will see from there.

The Markets Going Forward

  With the new lows being hit yesterday and wiping out 10 years of equity growth it is time to ponder our mindset to keep focused on the ultimate objective of asset growth.  We have been in risk reduction and loss prevention mode and should now begin looking at how to profit from putting cash to workat a market bottom.  I have been saying that I expect the Dow to drop to as low as 6,000 to 6,500 and the S&P to between 630 and 690.  This is a possibility but I don’t think it is highly probable.  Remember, a market bottom is simply a low point.  It is not wise to try to guess what that is and invest only at that point.  If the market activity today provides another modest drop, then our downside is limited to about 10% for a short period of time.  The lower the market goes, the stronger the forces become for supporting a rebound in stocks.  With over $8 trillion sitting in money market funds, CD’s, treasuries and cash equivalents, there is a significant amount of it that is looking for a better home.  That is stocks.  But, there is so much confusion and doubt that the asset managers are holding off until we get a little clarity.  For that reason, we may be looking at today’s market activity as one of the best opportunities we will probably see for years to come to move back into stock funds.  If it rebounds today, I would expect to see the opportunity present itself again in the near future. I am not saying that the market will rebound to it’s levels seen a year ago.  But, I would say in all confidence that we will probably see a consistent trading range of 7,000 to 8,500 on the DOW.  Given that, I believe we are going to see several opportunities to move back to cash when the Dow gets above 8,000 and then backinto stock funds below 7,500.  Each time should provide opportunities to capture gains of around 10%.  These are extraordinary times.  Last year, I made one switch that held for 13 months.  Now we may see opportunities for switches  that last a couple of weeks.  It is entirely up to the individual.  I just hope to provide the insights acurate enough to enable you to capture those gains.   Good luck.

What we now know and don’t know

  The investing public wants to take a little encouragement from Friday’s rally.  Don’t be fooled.  The sudden rise of the markets in the last 30 minutes of trading was a reaction to Obama’s choice for Treasury Secretary by the institutional investors who shorted the market and began to cover those shorts by buying.   Choosing Timothy Geithner was encouraging only in that he is perceived as having the background to understand the complexities of the financial crisis.  That doesn’t really solve anything. But, it is a constructive step in the right direction. 

  Over the last few days, the market has done what I expected.  The 500 point bounce had to happen at some point.  If it doesn’t continue up another couple of hundred points, I will be surprised.  As I projected in an earlier post, the market should rebound to about 8,400 and then start down again.  This is what makes fundswitching so profitable.  I missed my chance to move into stocks Thursday when the indices were under my target and capture a 10% swing.  But, there will be other chances. 

     To help everyone understand where we are headed, an update on the status of the financial crisis is necessary.   Keep in mind that what drives the markets is earnings and the expectation of earnings.   Right now, earnings are headed down for the next several quarters.  The thousands of analysts that are scrutinizing all of the companies are still hindered from updating their forecasts because they are not sure to what extent each of these companies are affected by the losses on Colllaterlized Debt Obligations (CDO’s) and Credit Default Swaps (CDS’s).  These are the financial instruments created by bundling residential mortgages together and then selling them to investors who want the interest income as  return on their money.  The CDS’s were a type of insurance written against the CDO’s in case some of those mortgages failed.  The problem is anyone can write CDS’s,  there was no oversight on them, and too many were written against CDO’s that had bad mortgages in them.  So, no one really knew how many were written.  When the housing bubble burst, the CDO’s became a risky investment that no one wanted to buy. According to accounting rules for valuing investments at the end of the day called “Mark to Market”, suddenly there were all these investments that were going bad and they had to be accounted for on the balance sheets.  This drove companies to sell liquid assets like stocks to balance the losses the CDO’s and CDS’s had created.  Hence, the stock market took a dive.  Banks needed cash so they stopped loaning it and liquidity dried up.  Without the ability to borrow short term, companies had difficulty meeting their daily cash flow needs.  Layoffs ensued.  People had already slowed down on spending over the last year because mortgage rates had gone up, houses were being foreclosed upon, and gas prices had doubled.  Many who were already stretched on credit card debt paid their bills with more credit cards.  In essence, we had a “perfect storm” in the financial markets.

   So, for reasonably accurate earnings forcasts to be produced, the amount of CDS’s has to be known to know who owes what to whom.   That is being accomplished through an organization called The Depository Trust and Clearing Corporation.  They have registered about 90% of the CDS’s and the some of the $700 billion in government bailout funds has provided the needed time and money to work through the problem.  We have already begun to see earnings estimates being adjusted downward.  The doubt and fear that is causing the market to decline is a direct result of the financial ”perfect storm”, worries about how bad the earnings are going to be, and how long and deep the recession will be.  The only guides that the talking heads and market pundits have are statistics from prior recessions.  This recession is now being compared to the great depression in terms of how far down the market has declined and what the duration will be.  For this reason, don’t expect the Dow to stay at 8,000 or the S&P at 800.   Read my prior posts for the extrapolations done to understand how far down the markets may go.  Again, the financial forces of the optimists (Long Term Investors) and pessimists (traders and fundswitchers) should cause the markets to fluctuate in a trading range that I believe will be 7,000 to 8,500 for about the next 2 years.  We are already into this bear market 13 months and three years is the longest on record.  Time will tell.

   By the way, please let your friends know about this blog.  It might help them and will help me to spread my message on how to profit from this market.

Fools Gold and Bear Market Rallies

  As an advocate for fund switching you have to know what I’m going to say.  If you are in stock funds, this is a great day to switch to money market funds.  If you knew that the markets were going to decline why would you stay invested?  The lows are going to be tested again sometime in the near future.  Virtually everyone is acknowledging this. 

   The markets are going to rally like this at the slightest glimmer of improvement.  Much like fools gold, it will attract the naive.  So far, the 900 point climb from Thursday’s low simply provided a 12 % gain opportunity.  Why not look for it again.  And again.  And again.  A 36% gain is better than riding this roller coaster. 

     The perception is that Obama is putting together a strong team to address our economic problems.  They don’t have even a plan yet let alone be in the process of implementing it.  And we still are going to see the consequences of the existing problems.   Talk about grasping at straws!  I really hope that they can have a significant impact when they come into office.  For now, the realiity still is jobs are being lost, spending has slowed, earnings are dropping, and the government is funding bailouts with money it doesn’t have. 

   These latest announcements on who is on the team may well provide a modicum of hope.  That may prevent the market from dipping under 7,000.  But, still that is 1,500 points from where we are right now.  Hope is not going replace a 20% decline in your portfolio.  A switch into money market funds can. 

    Ask yourself a simple question.  Which direction do you think the market direction has the strongest probability to go from here?  Then act accordingly.

The Market’s Eye of the Storm

  It’s sunny out and we have had 4 days of market increases.  What a relief.  But, as I am sitting watching House M.D., I am still facing overwhelming economic facts.  I’m not trying to be a pessimist but we are in the eye of an economic hurricane.  Retail sales are tumbling.  Unemployment is soaring.  Tight credit is causing private demand to plunge and there is little prospect for a quickturnaround.  Businesses are hoarding cash to survive and cutting costs anywhere that can be cut.  There is a collective mentality of thrift which is the opposite of what is needed.  Government bailouts are being proposed, debated, and delayed until after Obama takes office.  The spending on infrastructure being discussed is undermined by the states fiscal rules requiring most of them to balance their budgets.  With tax revenues vanishing, states plans for infrastructure spending are being cancelled.  Without states participation federal spending will not occur and federal stimulus efforts will be minimized.    

    One has to wonder what is behind the markets recent rise.  We have only been given hope by the Feds that efforts are underway to solve our problems.  I believe market participants are relying too heavily on historical data for guidance on where we should be going.  The extent of the indices decline are being used as indicators of value.  Granted downside risk is substantially lower than what it was a year ago.  But, we still have potentially 20% – 25% further downside.  Remember, a 50% decline requires a 100% gain just to recover.  Until there is some solid evidence that we are beginning to turn the economy around, one should be heavily into money market funds and cash equivalents.  I am still in capital preservation mode.

The Markets Tug of War between the Bulls and Bears

This first week of December has been relatively flat.  The S&P and the Dow Jones have been having daily fluctuations of 4-5% but have stayed between 815 - 878  and 8150 – 8664 respectively.  Daily volume is about 50% higher than normal.  Over the last 30 days with the exception of Thursday the 20th ( the S&P  hit 752 and the Dow hit 7551)  the range has been between 800 to 930 and 8000 to 9000 respectively.  This range has been a little higher than expected but still it is staying within the range. 

   These are just dry statistics.  The question is what does it mean.    As I have not posted for almost a week now there really wasn’t  much of any significance to comment on.  I have been listening, reading, and watching.  I am convinced that it is a short term tug of war that the bulls have retained some ground.  They are going to tire out and we will soon begin to see the real economic effects on the markets.  I keep reading and hearing that the market is bottoming but it  is not THE bottom.  The bulls are encouraged by the recent steps being taken to address the auto industry problem and the homeowner foreclosures problem. 

   GM is going to get $17 billion in bridge loans until March 1.  This will give them the needed time to negotiate with labor, subcontractors, etc, in order to initiate the stuctural changes required.  It will also put the problem in Obama’s lap.  It seems to be the most logical and only possible alternative to give the auto industry a chance at recovery.  

   A federal program to reduce mortgage interest rates to 4.5% should help many existing homeowners restructure their mortgages.  But, it doesn’t solve the housing crisis.   The two key economic factors that need to improve are banking liquidity and consumer demand.  Until job losses stop their decline and consumer debt is reduced, the general public is not going to be in much of a spending mood.  The job losses report came out and was substantially worse than expected.   Consumer debt defaults have yet to begin showing up in the form of losses and write-offs.   But, they are coming and they are going to be big! 

   To address the question of what do the above mentioned statistics mean, we must not be lulled into a false sense of relief.  The worst is probably behind us.  But, we still have another potential 15%-20% decline ahead of us.  I would expect this to be spread out over the next 6 to 12 months at which time we will probably have hit the bottom of this bear market.  Again, keep in mind that a 15% loss needs a 30% gain to recover it.  So, be patient and remember that you never get in at the bottom and you never get out at the top.  Just try to pick a reasonable re-entry point. 

    I would also like to formally announce that my website www.fundswitchers.com is now up and running.  We still have a few minor changes and adjustments to be made but, it is in place and can be useful now.  Please let me know what you think.  All comments are interesting and helpful.

Economic Crisis Myopia

It’s Dec. 14th.  The Dow is at 8629 and the S&P is at 879.  My Website Fundswitchers.com has my predicted short term trading ranges at 7,500 to 9000 and 730 to 900 for the Dow and the S&P respectively.  In my post of Nov. 15th, I predicted a 1000 point swing, breaking 8,000 on the Dow and hitting my target of 7,600.  They all occured in the subsequent 4 days.  In addition, I predicted a bounce back to around 8,400.   It went to the top of my range of just under 9,000.  I further predicted that the Dow would then drop to around 7,200.  We are still waiting on that one.  

   The reason for the summary is that I have been highlighting the negativity in the markets and am convinced that further market declines are on the way.  Over the last two weeks the market has been focused on the auto industry problems and what is going to be done about them.   I think the market is being myopic about our financial crises. 

   Wall street analysts are finally beginning to come out of the closet and admit that next year is going to be a lot worse than what the optimists are hoping for.   The market technicians who examine charts and trends ( in the industry they are known as Chart Ferries ) have been trying to convince many to believe that we may have seen the bottom already.  Since the accepted time lag from a market bottom to a beginning of recovery is typically 6 – 9 months, many investors have been drinking the Kool-Aid and  supporting the markets over these last two weeks thinking that might be taking advantage of the perceived bottom.   But with the never before seen extended volatility, the flaws in the lending industry, the confluence of unlikely economic indicators, and a melt down of one of the nations largest industries, I have to ask myself, why should we expect the current bear market to be similar to past bear markets.  I expect the duration to this bear market to be around 36 to 42 months.  Given that we are already 13 months into it and the 6 to 9 month lag from bottom to recovery beginning, I am going estimate that the market should experience a decline starting in the next 30 days and then stay in a Dow Jones range of 7,000 to 8,000 until Summer of 2010.  Watch for announcements soon addressing commercial real estate, Big Box retaillers closing, and the loss of tens of thousands of retail jobs.  We should hit 7,500 in the next 30 days.

The 2009 Market Outlook is Here

On November 15th, my entry titled, “The Current Argument in Favor of Fund Switching” contained a projection of a 6,000 to 6,500 Dow Jones and 630 to 690 for the S & P.   My November 3,  posting explained how the Dow and S & P valuations are arrived at.   Now that we are close to year end, more market strategists (read economists)  are posting their expectations.   As expected, they have reduced earnings expectations for the S & P to a range of $50 to $70 with a bias to the low side.   As the earnings reporting season begins in mid-January, much of the economic damage from this recession will be confirmed.   Market analysts on the other hand are still projecting the S & P for 2009 to finish at at around 950 to 1000.   I still hold the opinion that the P/E will be in the neighborhood of 11 with earnings for the S & P around $55.  That puts the S & P at 605.   To confirm my opinion, 37% of mutual fund assets are in cash equivalents ( money market funds) . This is in deed  an expectation of further market declines. 

    What I find disturbing is the continuing practice of the mutual fund and money management heads still trying to spin a declining market into a  positive story of great opportunities for the long term.  It will be even greater investment opportunities soon.  So, just wait another 30 days or so.  For now, there is no threat of the market rallying big and leaving you in cash.  Keep watching and waiting.  It’s still not too late to get into cash if you haven’t done so already.   Please share these insights with your friends.  They will be thankful.

Fundswitching and the “January Effect”

As we leave 2008 and watch the markets in a predictable short term climb, one naturally wonders why would the market be going up with all of the bad news recently?  The first explanation is a phenomenon called “The January Effect”.  In essence, it is the result of investors repositioning  investments to minimize their tax liabilities; selling some positions for a tax gain/loss and then reinvesting in something else.   Mutual fund companies also declare and distribute capital gains/losses to their share holders at the end of the year as well.  Many people don’t want to be invested until after those distributions are made.  For this reason, during the first week of January the markets are usually higher.   I would also expect some rebalancing of portfoli0s.  Those that have lost substantial amounts in stock funds will be buying more  to bring their asset allocation back into their target ratios.  You have to admire the discipline of those that would do this in these markets.  Chances are they are following the advice of their financial advisors.  Unfortunately, I think they are going to get burned again.

    During the last 2 weeks, the various sources that I use to gather economic facts are still indicating that we are in for more negative consequences.  In my post of November 14th I mentioned that credit card defaults were going to be the next crisis.  They have begun to rise and are at 6.6% vs 4.6%  a year ago.  The historical high was 7.5%.  They are expected to be in the mid teens by the end of the year.    

    The credit crisis is impacting the global as well as U. S. economy.  As businesses hord cash to keep their balance sheets appearing healthy, they are also doing it to make sure they can stay afloat through this recession.  The consequence of tight credit and little cash to fund normal business activity is a reduction of overall activity and purchases.  This compounds the economic contraction.   The continued reduction in earnings and slowing of business activity is going to have a domino effect.  Those have yet to be identified.   As I have been saying,  cash is king.  A 20 – 25% drop in the S & P  is very probable at this point.

U.S. Govt. Bond Funds at Great Risk

Back in late 93′ and early ‘94 all the brokerage houses and mutual fund companies were starting and selling bond funds both open and expecially closed end.  The industry needed something more marketable than stock funds because were we coming out of a bit of a market decline and people were gun shy.   My company had been introducing their closed end bond fund products as were all the others and were providing some nice incentives if the brokers were to sell increasingly higher amounts to their customers.  Government bonds were yielding 6% which was the average from the prior 200 years.   Being as independent and skeptical as I was, I was concerned that interest rates were going to go up to about 8% over the next couple of years.  If that were to happen, the value of all US Govt.  bond funds would drop by about 25%.  People who buy bond bunds do not expect to lose that kind of money with conservative investments like bonds.  Bonds funds are great investments if rates are going down like they have been.  But when rates start to go up, watch out!  Consequently, I didn’t sell any of them.  My branch manager even came into my office to ask me why I wasn’t selling the product.  I told him why and he asked me what made me so smart.  I just told him I worked to hard to get my clients and I wasn’t gong to lose them over a bad investment like this.

     Sure enough, about a year later, interest rates had risen to 8% and were even heading to 9% later.  Everyone who had sold any bond funds to their clients had to deal with the fallout.  All except for me.  Many clients lost up to 35% in the so called conservative investments.  Put that into perspective of today when people have lost 35-45% in riskier stock mutual fund investments and you will understand the gravity of problem. 

    The reason I tell this story is that history is about to repeat itself.   I posed the concern in October on one of the financial community chat boards and no one took notice.  I have had notes here to write about bond funds for over month and usually I am ahead of the curve.  Barron’s front page is on bonds (not bond funds) so I need to address this.  This is the salient point; anyone who has a 401k, IRA, Variable Annuity, or even a brokerage account with US Govt bond funds in them needs to know that the risk is at it’s highest right now!  I challenge anyone to get the talking heads that work for the mutual fund companies to admit that switching out of bond funds is a wise move now.   For those who have lost large amounts in the stock market and have switched into bond funds, you are about to get hit with the “Double-Whammy”.  Remember, Warren Buffet sold all of his bond holdings in October.  Everyone thought he did that to invest in stocks for the long term.  I think he did it because he acknowledged that the risk had increased.  Even though money market funds are yielding next to nothing, that is better than losing 20% in stock funds or bond funds.

   As I frequently remind you, please share this with your friends and co-workers and tell them about WWW.Fundswitchers.com.

Corporate Bond Funds are safer.

   I think I should expand on bond funds a little more.  Given that many 401k’s don’t have a corporate bond fund option,  my prior post was in the context of what I think one should avoid for retirement plans.  Keep in mind the simple rule that if long term bond rates are low the risk is higher that they may increase causing bond funds to decline in value.  Currently, corporate bond funds rates have increased.  There has been a great deal of doubt as to how secure they might be.  But, now investors are becoming more comfortable with them.  There is really a shortage of decent choices as to where to place investments at this time.  So, corporate bonds are becoming more attractive to investors.  As the demand increases so does the price.  That will cause the yields to decline.  With current yields in the 8% + range and bonds increasing in value,  it’s not unrealistic to expect 20% + return for 2009.   I believe that corporate bond funds are a simple investment of choice until the DOW and S&P drop to my target levels of 7,500 and 750 respectively.  At that time I will be switching into stock funds.

    It is interesting to note that there is now in excess of  $8.5 trillion in cash equivalents on the sidelines.  I mentioned that there were over $8 trillion in cash equivalents in my November 21 blog entry.  So money is still exiting the market.  But, when it begins to come back we should see one heck of a rebound.  That is still quite some time away.  The big question is how to grow investments over the next 5 years.  According to new research results on the aftermath of past financial meltdowns done by Alan Blinder of Princeton and Kenneth Rogoff of Harvard housing pricings take about 5 years to bottom, unemployment would be expected to reach 11%-12% in the next couple of years and equities should lose half their value from their peak by the time we reach a bottom.  Obviously, we are not there yet.   Expect some volatility though.  As I have been saying and will continue to say, within this volatility will be the opportunities to capture gains while avoiding the declines.  I believe that this is how one will be growing investments over the next 5 years.  It  beats sitting on investments that just fluctuate up and down.  Again, introduce your coworkers and friends to www.fundswitchers.com.

The 2009 Market Decline

 It is January 19th; Martin Luther King Day and we are about to swear in a new President.  There is optimism and hope in the air.  The DOW is at 8,281 and the S&P is at 850.   My predictions posted in November have been surprisingly accurate.  I am still anticipating declines to 7,500 and 750 or lower in the near future for the DOW and S&P.  The DOW Futures is indicating another 125 points lower for Tuesday.   My only wish at this time is that my message could reach more  average investors to help them in the coming year. 

    I have to say that I believe that more investors are begining to grasp that the market decline to the mid to low 7,000’s is inevitable and the selloff has begun.  My prediction of a DOW at 7,200 posted November 15th hasn’t happened yet but I’m expecting it soon.  Market optimists have succeded in supporting market valuations above 8,500 until just recently hoping that a turnaround is just around the corner.  Unfortunately, future earnings are going to decline. 

   The past 20 years have experienced growth supported through borrowing and spending or what we call leveraged growth.  Companies have used this financial approach to increase their return on investments.  Now credit is very tight and they can no longer rely on borrowing to make money.  In fact, they are having to pay back what they have borrowed and must sell assets to do so.  This is called Deleveraging and is one reason so many stocks have gone so far down in price.  The deleveraging process is still going on and will continue through 2009.  Using leverage, companies have been able to average 15%-16% returns.  Previous lows in market cycles have averaged 8%-9% returns.  This one is expected to average even lower.  With these lower returns, earnings will drop and with that stock valuations will drop accordingly.   We have to hope that Obama will develop and impliment programs that will stimulate growth, the credit markets, and jobs.  Without these three, this recession will be longer and deeper than expected. 

    You can certainly expect some volatility to both the up and downside through 2009 and into 2010.  Fundswitching will be a way to make your retirement funds grow in these up and down markets.  Follow along and I will help you to understand the risk levels as we progress.  

      Watch WWW.FUNDSWITCHERS.COM and review the concepts to help you better understand what I present in this blog.  In my next entry, I will tell you about  Exchange Traded Funds or ETF’s.  This is the new security type that accomplishes Fundswitching without using mutual funds.

A Bear Market Rally and The Big 4 economic issues to solve.

      We are entering a dangerous period for the investing community.  People are becoming financially exhausted from the so called “Great  Recession” and are looking for any indication that it might be coming to an end.  The stimulus package as almost completed and has sparked a rally in the markets Friday.  Provided that the stimulus package gets passed, I am expecting a significant continuation Monday that probably will amount to 400 – 500 points on the Dow and 35 points to the S&P.   Financials will lead the charge and other sectors will rise with the rest of the tide.   The only problem is we are still faced with deteriorating fundamentals.   The smart money will sell into this and build more cash positions in preparation for later in the year.  My research is finding more and more experts moving toward much lower levels in the markets.   I explained in my November 3 posting the valuation justifications and degree to which the levels can drop to.  My posting of November 25 stated that rallies will occur at the slightest glimmer of hope which is what is happening.  After Monday, we should be at the same level we were at on November 25th.

       Be wary of near-term future efforts to solve the economic problems we are faced with.   Four things need to be addressed to turn the economy around;  create jobs, reduce outstanding debt (both corporate and personal), stabilize housing, and increase liquidity.

   The proposed job creating infrastructure projects cannot be implemented because states across the country don’t have the money for the initial funding.  That has to be provided before the federal matching funds they qualify for can be added.   Outstanding debt can only be solved through the deleveraging process which has to run it’s course.   There will be a period of bankruptcies in the financial sector and restructuring of  mortgages, corporate debt, and commercial real estate.  All of this is going to take at least a year to occur.  As far as housing goes, in the  mortgage industry  the foreclosures recognized to date do not even represent half of what is coming.  There is an entire “Shadow Foreclosures” group  that has not even been acknowledged.  Another wave of mortgage adjustments will be occuring soon.  So, any projections as to when the housing market will bottom should be taken with a healthy dose of skepticism.  Liquidity will only be freed up when the balance sheets of financial companies become healthy enough that they will begin to feel comfortable enough lend their cash out.   And only then to the most credit worthy borrowers.   Needless to say, there are substantial obstacles to overcome before another bull market begins.

Intraday Stock Trading Pattern; Institutional vs. Retail Traders

       If you watch the intra-day trading patterns you will observe the level of volatility or range of trading.  What is interesting to me is where the futures market indicates the direction the market is at the beginning of the day, the actual trading levels during the day,  and then where the market actually finishes.   Today, traders thought the market should be going lower (by 100 points),  it started that way, went further south until just before the last hour (down by 200+), then recovered to finish at just about where we started.   It is generally acknowledged that the first half hour and last half hour are primarily institutional traders.  It is known as the “smart money hour”.  The rest of the day is attributed to retail trading  (much of which could be day traders).  

       My interpretation of the day is as follows;  The institutional traders were expecting another decline in national sales.  The market drops by 100 – 150.  Retail traders start to follow suit and continue the selloff.  The market is down by 220 at 3:00 p.m.  The sales number comes in at up almost 1% (preliminary report mind you).   The institutional traders turn the market around and by the close we are were we started.   They called this 1% jump the largest jump in sales in 14 months.  But, after the figure is revised downward as they often are, it will become an almost meaningless statistic and the trend will continue as before maybe just not as bad.   For now, it can be interpreted as a preliminary slowdown of bad news with the possibility of the end of the bear market.  Yeah, right!

Stimulus Plan Catch 22

   The approach that the stimulus plan is using is flawed.  It is being discussed amoung the talking heads as the market sinks below the November lows.  The problem is that the approach is trying to stimulate credit while consumers and corporations are trying to reduce credit through deleveraging.  The economy has been dependent on spending and that is what the plan is trying to increase.  The underlying cause of the Great Recession is a reliance on and generation of too much debt.  We must go through the process of deleveraging to get healthy.  The stimulus package will only be helpful in stimulating jobs.   That may help some to maintain their standard of living, keep their house out of  foreclosure and reduce their outstanding debt.  But, it will not solve all the 4 major issues I wrote about last week.   For this reason, the Great Recession is going to be longer than expected.  The markets are coming to realize this and valuations are dropping accordingly.  

     In my post on Dec. 14, I had predicted that the Dow would drop to 7,500 within 30 days.  I got it wrong only in the time it took to happen.  It should be at that level if not today then in the next couple of days.  It is not going to be the bottom, but we are getting close.  And at this point one can go back into stocks at any time because the downside risk has been substantially reduced.  There is a possibility of another 10% further downside.  There is no rush to get back in as their are no apparent signs of a market recovery any time soon.  It could be another three years.  It could be 3 months before it begins.  But, at this point don’t get greedy and think you are going to get in at just the right time.  You won’t see the market recovery coming and you don’t want to risk being in cash when it starts just to avoid a little further downside risk.  You also are probably going to see some false starts which may provide some exit points for repeated fundswitching opportunities.    So far, we have exited at 9,066 and are going to be getting back in at around 7,500 avoiding  a 1,600 point loss (18%) and getting money market rates in the meantime.

DOW 7,200 PREDICTION COMING TRUE!

   Please go back and read my November 15th post.  I accurately predicted the first drop of the DOW to 7,600 and a rebound.  I also predicted the next drop to 7,200 which is happening today just over 3 months from when I called it.   We are reaching the capitualation phase where everyone is throwing in the towel.  This is when the market gets to be oversold.  It is time to focus on the S&P index.  It is more representative of the overall market.   In my companion website WWW.FUNDSWITCHERS.COM I have changed the Risk Scale Expected Ranges to 6,500 – 8,000 for the DOW and 650 – 800 for the S&P.  As a result of an expected lower range, the risk level has increased as you will notice by the arrow indicator moving to the left somewhat.

      The  dynamics at work now are as follows:  The investing community is no longer hopeful of a quick recovery and has become more concerned with preserving capital.  The optimistic support that kept the markets up is gone.  Any support at this point is from longer term investors looking to buy into a bottom of a bear market with the expectation of significant returns over the next 3 to 5 years.  These are the smart investors and are going to be very right!  Unfortunately, most of the investing population is going to be vulnerable to their fears and will be acting emotionally.   If you have been following my postings and moved into cash months ago, you are well prepared to buy into this capitulation phase.  

    At this point we probably have about 10% -15% downside risk which puts the S&P at 675.  Don’t make the mistake of trying to get in at the very bottom.   700 is a good entry point.   Expect the market to react violently to the upside on any positive news that might indicate an improvement to the economy and an end to the bear market.   This would be false rally and a jump of 1,000 to 1,500 points on the DOW and 150 points on the S&P.  When that happens it might be  another opportunity to get back into cash and wait for it to settle back down again.  It is going to be an up and down market for the next couple of years.  Profit from it.

The Bernanke Rally; Strong but short lived

       The markets want visibility.  Bernanke and Obama are trying to give it.  This rally is based on hope and promising words.  Unfortunately, the reality is that we have little confidence that the bailout plan has the right stuff to fix the problems in the timeframe we want it to be in.  This economy is like the Titanic.  Once you get it up to speed it’s hard to turn.  It’s different in that the economy is not going to sink.  I find it extremely hard to believe (as do the rest of the country according to the Consumer Confidence level) that the bailout plan can get the economy going in the second half of this year.   The markets may turn, as they react 6 – 9 months before the end of the recession, but I wouldn’t count on it.  Conversely, no one wants to be late in getting in on the rebound.  So, earlier is better.  The downside risk has been significantly reduced and the upside potential will be extraordinary.  I stil maintain that 675 – 700 on the S&P will be a great re-entry point.  And anyone advocating maintaining one’s long term Asset Allocation is going to minimize their growth opportunity.  Remember, the purpose of  diversification  is to minimize risk.  At an S&P level of 675, the risk is almost gone.

The Bottom of a Declining Market

    In prior posts, I made note of the difference between analysts and strategists.   Analysts project earnings from a bottom-up approach and usually take awhile to modify prior projections.  Strategists project from the top-down, are more macro-economic minded, and are primarily  economists.  This means they are looking at the effects of the overall economy on earnings.  Three months ago analysts were still projecting a consensus earnings of $95/share for the S&P.  Economists were talking about possibly as low as $60/share.  A month later the estimates were lowered with a low of $50/share.   Now,  Goldman Sachs Chief Strategist has lowered it again to $40/share.  The question everyone is asking themselves now is how low will this market decline to.

     Every market bottom is an overextension or oversold point and cannot be viewed as an opportunity lost.  Therefore, the P.E. ratio at that point is not a realistic valuation.  So, in using historical points of reference, low P.E.’s of 7, 8, or 9 are not realistic.  Therefore,  a purely subjective pick of 11 allows for a certain degree of overextension.  The earnings outlook is now lower by about $10/share  from 2 months ago.  If a consensus of $45 -$50/share is used multiplied by P/E ratio of 11 would yield an approximate S&P valuation of around 500. 

    Considering the other market factors  such as Investor Sentiment, lack of visibility, downside velocity, Washington Fatigue, fear of missing the bottom, etc., one can understand why we could be going as low as 500 and rebound over 100 – 150 points from almost anything positive that usually comes out of left field.  I am maintaining careful, daily observations to refine my projection of the level of market risk.  The ultimate result will be a correlation of downside exposure vs.  length of time the portfolio is underwater.   My measure of success clearly would be to minimize both.  An entry point lower than 675 is not unrealistic although, it increases the chances of missing a Bear Market rally or bounce.  You have to use the information and pull the trigger yourself.   Any comments and results would be greatly appreciated.  

Bouncing Along the Market Bottom

  Today the S&P and Dow both had a SMALL bounce.  The world markets all responded positively to an announcement by the Chinese that their manufacturing numbers were up for the second month in a row and the domestic markets recovered nicely.  Come on!  Since when did the Chinese Government ever tell the truth or every present economic data that wasn’t manipulated in some way.   Why should anyone put any credence into this data.  There is nothing that would create any need for an increase in manufacturing of any kind.  Sure, they say they are going to be spending more in infrastructure.  But, how many roads can you really build.  They have the cash and a growing unemployed work force.  I suspect it is just make work to quell the growing dissatisfaction of the unemployed.   The Chinese economy is not about to supplant the American economy in leading the world out of recession.  We are still getting indications of deepening  economic malaise.  So, why would the markets rebound to any significant amount other than for those with short positions to cover them. 

   In the last 30 days, S&P earnings have been adjusted downward.  The projections of an economic recovery beginning have been adjusted outward to 2010.  And oil is beginning to rise due to declining supplies and increasing demand.   Copper is still not on the rise.  Neither is lumber.  These are the two essential materials needed for economic growth.   What is the rush to get back into the market?  We are probably going to be bouncing along this market bottom for quite awhile with a few opportunities to get in and out.  I still maintain my entry point being 675 to 700 in the S&P.

Back into the Stock Market with Both Feet?

     Very soon like a 5 year old in a rain puddle!

       My research is uncovering some very interesting and telling data.  Retail brokers are hearing more and more from their clients to be taken out of the market.  This is what one would call a final capitulation phase.  And it’s at this period that one should be going “All In” to benefit from the inevitable Bear Market Rally.   Earnings visibility is still nonexistant.  GM is on the verge of bankruptcy.  Eastern European banks are collapsing.  And some savy profiteers are bidding up the prices of Credit Default Spreads (CDS’s) and then shorting the market.  Most novice investors have no idea what that means.  Suffice it to say that they are exerting enough market influence to  cause stocks to decline regardless of the fundamentals.  It also means that the market will become extremely oversold and will bounce higher.

     Expect more unemployment, business failures,  housing foreclosures,  ultimately a longer deeper recession, and more opportunities for taking advantage of the coming fluctuations.  It is unfortunate for most whose portfolios have declined so much.  But, if you have been following my postings and acted on the information, you have avoided most of the decline.   I am now expecting the S&P to actually get close to 600 if not through it.   I would be surprised if it went below 550.  In any case, 600 is the new target reentry point.

Hope for the Financials!

       Today, as I mentioned on the March 2 post, one of those inklings of hope from left field has appeared.  Citibank has reported in a memo to employees $8 billion in operating earnings for the past two months.  With the financial sector so far down, this type of profit report is a surprise and renews investor optimism in a major upturn in the future of  banking.  Realize that 4 of the 30 stocks in the Dow Jones Industrial Average are financials.  So, a nice pop in those will have a significant impact in the index.  Reviews of accounting practices like Mark to Market and asset valuation methods are being done to determine if there are more accurate, relevant, and less damaging means of financial reporting.  Should the rules change, we can expect further increases in financial stocks.  Be careful in this environment though.  We still have significant risks to be resolved.  But, with this latest surge of hope, a lower bottom of around 600 on the S&P is much less likely.  And I just posted a lower expectation than 675.   There I go trying to get in at the very bottom.   Remember, the best time to invest is when everything seems to be going bad and everyone is thinking the worst.

It’s only a Bounce….

     This is an expected,  natural event and part of the bottoming process.   Again, I remind you that markets are driven by earnings and expectations of earnings.  This bounce was started by the Citibank’s  CEO’s profitability memo and accentuated by day traders and short sellers covering their positions.  The possibility of it being “The Bottom” of this bear market spurred others to jump in and move it a bit more than is warranted. As one that looks for solid Fundswitching opportunities, this one was marginal.  I would rather see a potential swing of 15% before switching.  If you made a switch when the S&P was at 675, today would be a good day to switch back and capture an 8% gain.  The market still has the downside risk with very limited upside potential due to the ongoing problems with market fundamentals;  lack of job growth, housing foreclosures, lack of credit, and constricting consumer expenditures.  I still expect the S&P and Dow to return to levels below 650 and 6,500.  With the banking and financial sectors beginning to strengthen and time, we will be getting closer to improvement in fundamentals and the upside potential increasing. 

      As I have detailed in past posts, and has been confirmed in recent market activity, my reentry point of 650 – 675 is reinstated and I believe will prove out over the next few weeks.   And yes, I just did an about face on my reentry point.  As market conditions change, it’s better to be accurate and flexible  than miss a good opportunity.

This Rally is a Sucker’s Bet!

     These are interesting times!  For the last two weeks, I have been trying to disect the conflicting opinions, indicators, data, and psychological factors that have been feeding this rally.  In short, it is built on a foundation of sand.  For months now, I have promoted following a compass with “Earnings and the Expectation of Earnings” as  “True North”.   The path through the investment jungle is taking us on a dangerous journey.  Most of us have lost much because we did not keep our compass accurate.  More is at risk again.   From an S&P low of 666 to a recent peak of 823, this is being recognized as one really big bear market rally.  Obviously, not expected.  As I have pointed out,  short covering is one major contributor to the rally.  More importantly, and recently, mutual fund managers  have been listening to the “Chart Fairies”  a little to earnestly in their hopes and desires of improving portfolio performance by the end of the quarter which is in a couple of days.   The “Chart Fairies” have noted the technical changes in market activity which is resulting in said fund managers to add fuel to the fire.  Momentum, short covering, and leading economic indicators that are weak or  “less bad” than prior months do not make for the beginnings of a new bull market.  These are elements that cause us to view a distorted reality and begin muttering “My Precious”.  There is an abundance of data that contradicts a positive short term market outlook.  Yet one cannot deny that there is a change in the air from the past few months; kind of like the change from free falling to having a parachute deploy – you’re still falling just not as fast. 

    Ok, so enough with the metaphors.  Looking back at my Stock Market Risk Scale on www.fundswitchers.com in the early part of March, the risk indicator was between 9 and 10.  This was indicating a strong time to get back into stock funds.  I didn’t pull the trigger because I got sucked into trying to get closer to the market bottom.   In my last post March 13th, I said it was a good day to get back into cash to lock in an 8% gain.  If you did not agree then, you better be more convinced now and lock in a 20% gain.   Earnings for the S&P are expected to be lowered by 20% – 30% over the next couple of weeks.  Again, I ask you keep your “True North” and respect the strength that “Earnings and the Expectation of Earnings” has on the markets.   I am confident that we will have another opportunity to capture additional gains in the near future as the market pulls back again.

The Bear Market Rally Debate

    If you were on a debate team and sides to a subject were being decided, you could almost flip a coin as to which side to take and find valid points to buttress an arguement.   If it weren’t a topic with such personal impact it would be an interesting academic exercise.  Unfortunately, you don’t want to be on the wrong side of this one!   As one who is still in cash through this historic rally, I must pose this question;  Doesn’t it strike you as odd that the market should rebound so strongly in the face of the current economic crises and coming challenges?  I have to believe that the market is misreading the current data points and events or these events are not quite as they seem.   Case in point;  the recent surprising upside profit reports of some well known large banking institutions.  This is what kicked off this rally in the first place.  One explanation of major contributing factors to the profits is the unwinding of AIG’s huge portfolio of default credit protections.  In the process, the banking counterparties made inordinate fees/commissions on the trades.  These will not occur again.  And with the condition of their mortgage, consumer, and commercial loan portfolios deteriorating,  bank profits will probably not continue at the same rate.  In fact, one of the nations largest shopping mall owners has just declared bankruptcy.  I wonder how that is going to affect the markets Monday and the banks holding their loans?

   The rally was reinforced with a variety of economic indicators that were regarded as “less bad” and interpreted as meaning the economy might be “turning the corner”.   Inventories were experiencing a rebound.  This normally would be indicative of increasing sales growth.  But, in reality, they were due to over-liquidation levels and needed restocking. 

    The rally was also exacerbated by all those institutional speculators covering their short positions.   The vast majority of market pundits are  expecting this rally to end.   In all honesty, why would you expect this, the largest 1 month runup since 1938 to continue?   I would expect a pickup in short-selling this coming week.  But, I would not expect declines in the DOW and S&P to below 7,000 and 750 respectively.   I  would also expect the market to be range bound over the next few quarters as well.   Check the Risk Level Indicator for current market risk and consider your positions.  Again cash is preferable for the short term.  Good luck.

The Bear Market Rally and My Accuracy of Past Predictions

    In light of the current market, please go back and read my postings on Feb. 20th,  March 2,   and the Current Argument in Favor of Fund Switching from Nov. 15th.  My accuracy, whle not being 100%, was pretty darned close.  I emphasize my past record because if my insights are acurate then perhaps you may be persuaded to listen and use current insights to your advantage.  Having said that, my current research is strongly convincing that we are about to enter a prolonged ( my estimate is 3 month) stair-stepped market delcine.   As people come to realize that the economy is not going to recover as quickly as hoped, it will drift downward until the next earnings report period provides some inkling of hope again.

        The dynamics are very interesting.  Most of the market participants, both retail and institutional, have market experience from the last 20 years and have learned that investing right after major declines has proven to be extremely rewarding.  This mentality is supporting the bear rally preventing it from coming back to where fundamentals dictate where it should be.  The differences in this market come from the unique causes of the decline, the proliferation of ETF’s (Exchange Traded Funds),  and the failure of reliable quantitative analysis methods used in the past.   The causes have been covered in my prior posts.  ETF’s are addressed in separate page that you can go to (ETF’s vs. Fundswitching).   The quantitative analysis methods only work if the assumptions are the same as in past market conditions.  We know that those conditions are substantially different this time around.  The government is injecting hundreds of billions into the markets.  Interest rates are the lowest on record  and yet credit is extremely tight. 

        Given the dynamics, the mentality of the market participants, the fundamentals, and differences of this market, the most telling clues of where the market can be expected to go comes from Insider Trading.    As Alan Abelson succinctly put it, “Nobody ever sold  a stock because they thought it would go up.”   Washington Service, a research outfit, states in a recent report that officers and directors have sold in April  more than 8.3 times the total shares insiders bought which turns out to be the least monthly amount bought in 27 years.  Understand that these executive types are the closest to the business battlefields that you can get.  If they are selling in droves, it kind of throws cold water on a heated market.  Keep a close eye on the Market Risk Scale on my website WWW.FUNDSWITCHERS.COM.   Again, cash is an excellent position to be in to avoid the current market risk and to be prepared to capture the next rally.     Feel free to post any comments and the results of your portfolio moves.   I’m sure everyone who is following this blog would be interested to know.  Happy Fund Switching!

S&P Market Valuation: Risky or Not

     The stock market has seen an unprecidented rise in less than 7 weeks.  From a  a March 9 low of 666 on the S&P and 6,559 on the Dow to 888 and 8,250 respectively today April 30th amounts to 34% and 25% gains in each.   It is generally accepted that the markets were oversold at the recent low levels.  Now, one has to  wonder if they are overbought.

   A year ago the S&P was at 1400 and trailing earnings were $66/share for a P/E of 21.  Future earnings at that time were $95 per share (rediculous estimates)  for a P/E of 14.7 and we know where the market went from then.  Now, it is at 888 with trailing earnings at $19.24 for a P/E of 46.   As I have written about in the past, the 20 year average is 13.7 and valuations are based on earnings and expected earnings.  So, valuation based on trailing earnings isn’t realistic.  Expected earnings is more relavant to the direction of the markets.  Currently, expected earnings consensus is in the $40 – $45 range.  That yields a P/E of 19.7.   Seems kind of high at this point especially given all the unknowns and challenges ahead.  Earnings are down 60% but higher than expected due to effective cost custting and modest price increases.  If earnings were growing instead of shrinking this higher P/E would be justified.   Many investors are starting to believe that the bottom of the recession is at hand and think that we should start to see earnings growth on the upswing in the near future.  One indicator supporting this belief is consumer spending.  It increased 2.2% last quarter which is the best rise since the recession started.   Personally, I don’t think earnings are on the upswing yet and are probably not going to be for quite some time.   For this reason, I think the markets are a bit rich.  In addition, a number of mutual funds had short positions and due to the April increase have had to make buys to cover their shorts which has driven the markets further to the upside. 

     The only question in my  mind now is how long and how far down to expect the markets to decline.  I mentioned in my prior post to expect a stair stepped decline over the next few months.   In summary, I think the markets at this point have a much greater probability of declining than increasing.  So, avoiding that risk and picking a lower reentry point is a more sound move.

The Next Bubble To Burst: Commercial Real Estate

   If you have been following this blog, I often refer back to prior entries for you to review because they contain insights that have proven to be prescient.  Of special note were the series in mid to late November that contained surprisingly accurate predictions of subsequent market activity.   I now refer you back to my entries of Dec. 14, and Feb. 7.  My comments about the markets then were accurate and I hinted about problems coming in commercial real estate.  These are now looming over the markets but are not priced in as of yet.  It is Sunday morning May 3, 2009.  The S&P and Dow are at 877 and 8,212 respectively.  I will venture to say that this is probably the top of the recent Bear Market Rally.  We are about to get the results of the new “Stress Testing” for banks this week (Thursday) and they are not going to be too realistic because the standards have been lowered and they are not severe enough.    Don’t expect the present administration to release results that will be so bad as to cause the market recovery to be derailed.   In addition, in my opinion, these results have not taken into consideration what is about to happen over the next several months.  And that is the imminent implosion of the commercial real estate market!  

     You may have heard of General Growth Properties.  They are the nations second largest mall owner and just filed for Chapter 11 bankruptcy due to their  commercial property debt.  Why is this significant?  Because it finally brings to light what has been slowly developing over the last year.  Commercial real estate is highly leveraged, meaning it was purchased by developers using loans primarily.  It was also purchased at peak prices.  The same characteristics we had in the residential mortgage meltdown.  

      Prices of commercial property have fallen by 30%-40% over the last year and many of the loans underwriting these properties are coming up for refinancing.  These properties were also used to back Commercial Mortgage-Backed Securities (CMBS).  Combining the drop in property values, the tight credit environment, and the increasing rate of leases being lost (which makes the payments on the loans) means banks are about to see huge losses on their commercial real estate loan portfolios.  Office vacancy rates are up to 12.5% from 9.9% a year ago and delinquencies are spiraling.  Commercial property loans account for 22% of American bank loans, up from 14% in the 80’s and 90’s.  I questioned the banks profit reports in my April 18th posting.   I was right and time will prove that out. 

    The finanicals led the markets from their lows March 9th to their highs this last week.  I suspect that they will lead them back down again although it is going to take longer.  As in my prior post, I still think we will do a stair step down to the low 7,000 and 700 levels on the Dow and S&P.  

    As I have encouraged you in the past, please share these insights with your co-workers, friends, and anyone that you care about.  My track record speaks for itself at this point.  Avoiding a 15% drop in the markets now provides a 20% gain opportunity later.  Use the Risk Factor Scale on WWW.FUNDSWITCHERS.COM to help you in making your fundswitching moves.  As always, your feedback, results and comments are welcome by me and others wanting to know how well this resource is helping.

Getting Out At The Top Of A Rally.

     In short, it rarely happens and is just too risky.   In my last post  May 3rd, I ventured to say that we were at the top of the Bear Market Rally.  I was barely wrong.  It was 8,212 when I wrote that and yesterday we topped out at 8,512.  It really doesn’t matter.  I may have been wrong on the exact top.  But, we will find in the next few weeks that the Risk Level Indicator in WWW.FUNDSWITCHERS.COM is right and that one should be completely out of stock funds until we return to more realistic valuation levels .  This is going to be an excellent learning period to better understand how fundswitching works.   I’m sure it is a bit uncomfortable for those who switched out of stocks when the indices were lower.  But, keep your eye on the longer term.  Consider that I failed to follow my own advice and missed the last two moves.  I am still ahead after switching out  when the Dow was 9,066 back in late October.  And with the risk level so high, I expect to still profit nicely.  What is important is the net result of one’s actions.   I’m sure there is an urge to get back in to the markets with the latest continued increases.  But, that is exactly why I provide this blog and Risk Level Indicator in the web site; to help you to avoid making serious mistakes that cause major losses. 

   So, stay strong.  Keep your discipline and your eye on the major factors affecting the longer term market direction.  You will find that your confidence level will increase substantially after the coming market pullback.   The next challenge is going to be deciding when to reenter the market.  It’s hard to tell at this point.  It may be in the low 7,000’s.

New Bull Market vs. a Bear Market Rally

     This is the biggest question weighing on most Americans today.   For the average American, it can be answered simply by looking around you.  If you live in a suburban, urban, or metropolitan area, the economic activity has a visible aftermath.  You might see another retail space becoming vacant or the added open parking spaces at local restaurants during peak dining times.  I’ve noticed a couple more empty used car lots and fewer cars at repair facilities.  Fast food restaurants are not as busy.  The list goes on.  Almost every small business has seen their sales levels decline to the point that it becomes difficult to keep the doors open.  All these declines show up in the various leading economic indicators.  One metric is the amount of sales tax revenues reported quarterly.  Here in California, revenues have fallen off of a cliff.  Our deficit is now projected to be over $20billion.  I for one have not seen a any indication that these declines have turned a corner.  Which means, the economic recovery has not begun.  If you have read my page that tells how the recovery will happen you will understand what needs to be addressed.

      In watching CNBC, any time a guest comes on that works for an investment management company or mutual fund company I can promise you that they will spin the market so that it is going to be up at some point.  I mean really!  Does it make sense that someone whose income is dependent on people continually investing more money and keeping that money in the markets would actually come out and say that the market is going down in thte near future and you should move your money out of our stock funds and into cash?   He would be fired the next day.

     What about the recent new secondary issues that have enabled companies to raise billions to retire debt and shore up their capital structures?   Buying stock after a record run-up so that companies can replace secured financial obligations with equity that is at the bottom of the list in terms of who gets their money back first should the company go bankrupt is simply transfering risk to the unwary.

       I would summarize that there is nothing to indicate any new bull market in the works.  Retails sales are coming in weak.  GM is going into bankruptcy. Oil supplies have dropped and prices are going back up.  Business conditions are not improving.  Foreclosures are increasing again.  Credit card defaults are climbing as expected.  Jobs are continuing to be lost.  Does this all sound like an economic recovery?  Keep an eye on earnings for the next few months.  I guarantee you they are not increasing.   Watch the risk scale on WWW.FUNDSWITCHERS.COM.  If you are not in cash at this point, I have no idea what would persuade you to move out of stocks.

U.S. Gov’t. Bond Funds: I Warned You!

   Barron’s May 18th, 2009 front page shows Uncle Sam with penniless pockets and hilights a 20%  loss in value on 30 yr. Treasury bonds.  My post of Jan. 3, 2009 warned of the risk to Gov’t Bond Funds in retirement plans and proposed that switching out of them at that time was a wise move.   I even mentioned that Warren Buffet had quietly sold all of his bond positions in October.  Well, he revealed in his Bershire Hathaway annual letter to share holders in February that when “the financial history of this decade is written… the Treasury-bond bubble of  late 2008″ may rank up there with the housing bubble of of the early to middle part of the decade.   I hope that those of you following my insights took advantage of it and avoided that loss.  If not, chaulk it up to building confidence in my views.  I won’t get them all right.  But, you certainly would benefit by being aware of them and at least considering if they apply to you. 

   Having said that, I need to address the current market condition.  My Market Risk Scale Indicator is pegged to the high risk side. The reasons or this are as follows:  1)  The markets keep vascilating around 8,500 and 900 on the Dow and S&P, 2) P/E valuations are on the high end of the historical ranges, 3)  S&P earnings have been continually revised downward, 4) we have just had a monster bear market rally, and 5) anything can happen to create a lot of fear that can cause a serious pullback.  In summary, the markets are more than fully valued with little more than hope buoying it and there are way too many ongoing crises that can pull valuations down.  Top it off with California heading for bankruptcy and you can understand my apprehension.  Until we see some solid indications that the economy is turning around, I would maintain capital preservation mode.

Rally Sustainability, Patience, And Perspective.

     The biggest argument against Fundswitching is not getting the timing right on the swtiches.  The biggest argument for fundswitching is reducing your risk.   If you get out too early you risk missing a major market move up.  But, if you are watching the risk level, the move is generally an overshoot and returns to lower levels.  This translates into much less volatility and more secure gains in the longer term.  Then when the market turns south, we fantasize of losing the difference from the market top to the lower levels.   Think of employees of ENRON and WORLDCOM.  Their losses were quantified from the top valuations of their company stock held in their 401k’s which was unrealistic.  Had they either acknowledged or watched their level of risk and switched out at any time they would have had none of the subsequent losses.   

     In September of 2007 when I decided to move into bond funds, the DOW was at 12,000.   I watched it climb to over 14,000.  Do I regret not waiting to get out at a higher level?  That is a question of fantasy.  I made a decision based on the risk level I perceived.  It is never going to be exactly correct.  But, it is better to be early than late.  The subsequent decline which I expected to be to around 10,000 or 10,500 was realistic and would result in avoiding a loss of 15% – 20%.  Both decisions were wrong of course.  But, the net result was positive.  In the subsequent 20 months, I have avoided a loss of over 25%, I had the opportunities to make it back with market volatility,  and it is still not finished. 

      The purpose of  explaining these experiences is to help you to understand the perspective that must be maintained.  In my website WWW.FUNDSWITCHERS.COM , the basic principles are explained for you to incorporate into your portfolio management discipline.  It is easy to become disillusioned with the short term market movements and one is tempted to loose focus on the long term goals.  It happened to me in early March when I waited to get in at a point closer to what I thought the market bottom might be and  I missed the massive Bear Market Rally.  As I said, it is better to be early than late.  But, Iam still ahead because I got out at 9,066.

    This market is one that requires discipline and can be dangerous.  Certain economic indicators are being interpreted as positive and are helping the market to advance.  If you buy into it, you are taking on significant unknown risks with limited upside potential.  Any poker player would pass on this bet.  Until we begin to see some hard signs of economic recovery, sitting in money market funds is safer.  Review some of the economic clues  I mentioned in my May 15 posting.  That is where those hard signs will first be available.  Corporate bond funds, if they are available in your 401k, can be a better choice than the low yields in money market funds, also.

Technical Trading vs. Fundamental Analysis

   It is June 1st and the market is up 200 points.  The volatility index (VIX) has been dropping as the market has stabilized around 8,400 on the Dow and 900 on lthe S&P.  My Risk Indicator in WWW.FUNDSWITCHERS.COM is almost pegged to #1; the highest level of risk.  One naturally has to think that I am reading this market completely wrong. 

   Over the weekend, I noticed that Barron’s had little to say about the direction of the markets.  In fact, the whole issue felt like it was looking for something worthwhile to talk about.  What I did pick up from it and other sources was an emphasis on the technical aspects of this market.   It is essential to understand that “Technical Analyses” are primarily concerned with statistics, momentum, trends, and market movements that are all more short term oriented.  If technical analysis indicates that the market is heading down with strong momentum, technical traders sell.  There is an expression, “You don’t catch a falling knife”.  Which means you don’t buy when the market is falling or you will get hurt.  Conversely, if the moving averages indicate the markets are climbing, then “A rising tide floats all boats” and you can benefit.  In either case, the continued movement is more speculative in nature.  This is not the type of investing suited for novice market participants.  It is the type of investing that causes them to buy when the market is at it’s top and to sell when the market is at it’s bottom; the exact wrong thing to do and why people loose so much money.  In other words, it is a very effective instrument of wealth transferance and the reason that this blog exists!

      My website has basic concepts to help understand valuation, volatility, and risk to help avoid losses and maximize growth.  I place the most value on “Fundamental Analyses” as this is the bedrock on which investing is ultimately built on.  It is by it’s nature more long term oriented.   The opinions and views presented in this blog will be less concerned with the more speculative nature of technical moves because they are unpredictable.   Followers of this blog must understand this and keep it in perspective.  In my website, under the “About” tab and The Process, I emphasize, “You never get out at the top and you never get in at the bottom”.    Effective fundswitching requires keeping a focus on long term success.  This means resisting emotional reactions to daily events.   Ultimately, portfolio volatility and losses will be substantially lower and growth will be substantially faster.

   As I have written in the past, until market fundamentals improve there is an extreme amount of risk.  I can guarantee you that after switching into money market funds you will see continued market increases as we are seeing today.  Be patient and keep your discipline.  Switch back into stock funds when the risk has subsided or you will be facing risks that you are not comfortable with.  Remember, as you gain investment experience your comfort level will increase.   Gee, isn’t this interesting and fun.?

The Stock Market Plateau

      Since the market bottomed on March 9th it has been on a 3 month tear.   Part of it was an expected rebound from an oversold condition.  That formed a foundation for technical indicators to create what looked like momentum and a solidly increasing 50 day moving average (a trend line heavily used by the chart fairies) .  It eventually crossed the 200 day moving average (another trend line used) which gave the market it’s final push into it’s current levels.  The market fundamentalists  increasingly became resistant as valuations, based on future earnings, got ever richer until the market leveled off at where we are now.  We have reached an equilibrium of sorts;  between those who believe that we are in a new bull market (which include Jim Kramer) and those who continue to believe we are in a short term correction and are not convinced that the earnings will be there to support these valuations.   In short, with limited upside potential and continued risks that threaten the economic recovery and could cause a substantial decline (to what I believe would be the low to mid 7,000 level),  risk management dictates that one avoid these risks for now.    Granted, with all due respect to Jim Kramer, there are great companies that are growing earnings nicely in this questionable market.  But, those investments  are for the individual stock pickers, not the novice 401k participants that I am trying to help.

      What we are waiting for now are indications one way or another of what will become of the economic recovery.  As it stands, I am seeing substantially reduced consumer spending.  Golf courses are offering bigger discounts to get people to play.  Pebble Beach is letting NCGA members play for $375 without staying at the Lodge.  You used to have to spend a minimum of two days to get a tee time at $500 a pop.   Auto repair shops have slowed down.   Restaurants are not busy.  Gas is going back up over $3 a gallon.  Mortgage interest rates are increasing.  Refinancing has slowed.   The list goes on.  Analysts will not have this data for another 2-3 months.  It will take another month to report on it.  Some of the talking heads are projecting 25% declines in the market in August.  The odds are just stacked against further market increases.  I think this roller coaster is about to head for another thrill.  Time will tell. 

    If you have seen similar evidence in consumer spending habits, please share them.  Your comments are also welcome.

ETF’s and 401k’s

     This morning at 7:35 a.m. P.S.T on CNBC,  for the first time someone in the media broached the concept of ETF’s being in 401k’s.  Tom Lydon of ETFTRENDS and Bob Pisani both proposed that they will eventually be part of 401k’s at some point in the future.   Considering that 1)  ETF’s have been around since 1993, 2) that they account for 40% of the trading on the domestic exchanges, and 3) that they account for 6% of the all assets, it is about time that this idea be discussed.  There will be problems though.  First, the purposes of the various ETF’s need to be understood fully before they are purchased.  Second, having the knowledge of how to use them properly will be used as a major objection to their inclusion in retirement plans.  It is this problem that I have tried to address by trying to provide a simple tool for novice investors in WWW.FUNDSWITCHERS.COM to use as a guide for when to move in and out of stock funds or Fundswitching.  Fundswitching was the original means of trading an asset class as opposed to the now discredited buy and hold methodology.   (Read my page on ETF’s for more on the background on ETF’s and  Fundswitching)    The major problem was understanding the level of risk in the markets.  The Risk Level Indicator was created to address this need.  As of late, it has been pegged to the high risk level and is now beginning to move lower.  In early March when the market was at 6,500 it was pegged to the low risk level.  I believe we should see the market move to the 7,200 – 7,500 level where I think will be an opportunity to move back into stock funds again.

The Stock Market Trending Down…For Awhile.

   It is July 7th.  The market has dropped to 8,163 from a high of above 8,800  As I had written in prior  postings, trying to guess the top of the market before it happens is risky and difficult.  But, my Market Risk Indicator in my website www.Fundswitchers.com  has been pegged at the highest risk level for a few weeks now.   So, it doesn’t matter if you exited stock funds at the top; just somewhere above where we are now.   As I had exited stocks in September at 9,066 and missed getting back in when the market was down below 7,000, (due to violating my own rule of not trying to get in at the bottom)  the volatility from then till now has completely bypassed me.  I still expect to avoid a loss of 15% – 20%.  

     The question that now presents itself is what my re-entry point will be.  Given that 6,500 on the Dow was an oversold level, I would think that 7,300 should be an expected low in the near future.   If you got out at 8,200 or higher, then re-entering stock funds at 7,400 would provide a nice 10% gain or more.   And as I expect this market to continue with these fluctuations in my expected Dow range of 7,000 – 8,500, this opportunity should present itself again.  This is how one can achieve 20% – 50% gains over index funds.   Any takers?  Let me and my followers know what your results are.  Together we can give this simple Market Risk Level graphic some credibility with the sceptics.

My View On Market Direction

    This point of the market is really interesting.  We have seen a drop of about 800 points on the Dow and 80 points on the S&P or 10%.   The bases of views have migrated from those of  hope to more solid indications of economic recovery of which we have little.   It is the first week into the earnings reporting season and few are expecting anything much.  Most are looking more into the future with the 4th quarter earnings of this year being more indicative of what to expect in 2010.   That may prove to be less encouraging than what most are hoping for.

     One has to rely on fundamental analyses at this point to have a starting point to determine where we might be headed.   The P/E ratio of the S&P is like the Kelly Blue Book for the stock market.  So, looking at that is a good starting point.   Earnings for the last 12 months doesn’t tell us much of what to expect so leave that one alone.  For the next 12 months, or better yet, for 2010, analysts are expecting upside surprises, but don’t really know how much.  Analyst consensus earnings are currently around $78 per share.    I don’t recommend putting much faith in analysts projections because they tend to be way too optimisitc.   Strategists (read economists) on the other hand are more realistic.  Their numbers are more like $68 per share.  As of today with the S&P at 880 that comes out to a P/E of 12.  Some are projecting $46 which comes out to a P/E of 19.   The historical average is around 14.  So, you can see why I think it might be little too rich.  One has to consider that with continuing job losses of over 1/2 million per month, the consumer base is not exactly getting stronger.  Consumers account for 70% of the demand in our economy.  So, I don’t have a lot of confidence that even the economists are going to be close.  With the crises in commercial real estate and credit card defaults gaining strength and job losses still mounting, one can understand why my Market Risk Scale Indicator is still set so high.  One can also understand why the market is so range bound as well.  I still believe that over the next couple of months economic indicators will demonstrate that the economic recovery continues to be weaker and further out than is expected or even hoped for.  Add to that the growing threat of the dollar losing value and its place as the worlds most secure currency and you begin to understand how the domestic markets will underperform relative to other world markets.   Mark my words.  Asset allocation strategies are going to change substantially to include a much higher exposure to international equities.   As these strategies change there will be several fluctuations that will provide profitable fund switching and ETF trading opportunities.  The long term performance of mutual funds will lag resulting in growing dissatisfaction and more growth in the ETF trading market and hopefully, a greater interest in a tool like the MARKET RISK SCALE. 

Market Visibility: Unexpectedly Positive

   I have been writing about how the market is looking or any indications of economic direction and I wasn’t expecting anything positive.  I was wrong!  Yesterday, several data points started to point to a recovery of sorts.  Given the mindset of investors (primarily institutional), anything positive is going to trigger a buying wave.   With investors over-reliance on technical analysis, I think we are about to see a market move of about 15% -20% to the upside.  So downside risk all of a sudden shifted away.  I am moving into stock funds for the foreseable future.

     I have emphasized Fundamental analysis as a basis for long term market direction.  I still think that the fundamentals are not in place yet.  But,  when they are the market will have already made it’s initial move up.  In fact, some floor traders are making comments like “who needs fundamentals”, which is a little unnerving.  Still, when the data points begin to indicate a positive change and the market reacts to it, one has to get onboard.  Remember the expression, “a rising tide floats all boats”.   Every day we get closer to an expected recovery.  So, if it is perceived that we are recovering, then the markets will respond and we want to benefit from that until we get to an overextended point again.

    Here is a summary of data points that are fueling this upward move.  Prices for commodities like lumber, copper,  silver, and gold have been increasing.  These are materials that are used in construction and manufacturing.   Cyclical and industrial companies are beginning to improve indicating end demand for  industrial production is increasing.  Financial companies have been reporting better than expected earnings.    Discover Card and Capital One are reporting a small drop in 30 day delinquincies and charge-offs.  Intel earnings were substantially better than expected, which may indicate consumer demand for chips is higher than previously thought.   The dollar is weaker, which helps foriegn economies and companies who are more commodities dependent.  I’m sure there are other data points that are contributing that I haven’t seen yet.   This may be the beginning of the financial recovery that many have hoped for.  But, it may only be a head fake.  Time will tell.  In the meantime, it certainly fits the criteria for making a fundswitching move or buying stock ETF’s.  Keep an eye on the Market Risk Scale for future changes and help in deciding when to lock in the gains.

Market Optimism and the Next 6 Months

    Yesterday, I sent a rare shot-gun email to all of my registered followers.   If you registered and didn’t get the email, please let me know.  If you haven’t registered, this would be  good reason to do so.  

    The purpose of the email was to let everyone know about what I perceived to be a radical shift in market risk.   Read yesterdays posting for details.    I wanted to make sure that anyone who is applying the Market Risk Scale to their investment decisions was notified promptly. 

      You may not realize it, but this about face in my perception of risk is a very bold call.   If  I’m wrong I will have seriously undermined all the work that I have put into this project.  But, if I’m right, you will gain a lot more confidence in my opinions.   It’s the old  1,000  ataboys  vs.  1 awshit conundrum.  

      This earnings reporting period looks like it is going to be what starts the market forward again after the bear market rally/rebound.  We still have another week of data and earnings coming in.   Remember, the markets usually lead the economic recovery by 6 – 9 months.   The upside is somewhat limited by the ongoing challenges.  It might take a quarter or two which puts us at October to December, to get to where the market will want more hard data that the economic recovery is happening before it advances further.  But, as economic uncertainty recedes, we should have no difficulty getting to 10,000 on the Dow and 1,000 on the S&P and it might happen sooner than we think.  The  “will” of frustrated investors  is going to be a stong force moving this market.  The last 4 days have resulted in a  565 point jump.  Realistically, we could only capture the last 94 from today.   Even that may be given back as the market oscillates.  But, I firmly believe the trend is going to be positive.

Changing Market Expectations

  In my last few posts, as in most of my posts, I try to keep you apprised of how I perceive the markets are evolving.  This week and last are providing important positive data that has shifted the outlook from pessimistic to more optimistic.   There is a massive amount of money waiting for an all clear sign to get back  into stocks, if we continue to see better than expected earnings,  I would expect to see a nice move up.  Money managers do not want to be caught holding cash when the market moves because their portfolio track record will suffer relative to the benchmarks they measure against.   For this reason, I think we may see a slingshot effect that might move the markets into a higher,  more speculative valuation level in a few weeks.  In which case my Market Risk Level Indicator will reflect that and we may go to cash. 

   My Market Risk Scale Indicator is not completely correlated to market direction.  I pay close attention to market and economic factors as they develop.  This diligence is what enabled me to notify you that the risk level had changed dramatically even though the market had started rising.     Let’s not misunderstand.  I am not saying that the economy is recovering.  This move is a continuation of a rally and by it’s nature is only temporary and can just as easily turn into a market pullback.  Sustainability is relative to time.  I take short term beliefs and constantly modify them with current events and data as they unfold to more correctly anticipate and understand long term events.   Hopefully, you will follow along and use my interpretations for your benefit.    And as always, please share in the comments section how you have used this blog and your results.

Let’s Hear From You!

    On Wednesday morning, July 15th, I sent a shotgun email to you my many followers.  I switched into stock funds and I would like to know if you did the same.  If you did tell us why.  If  you didn’t tell us why.  It’s time for a some feedback people.  Over the last week, all the media has been expounding on the continuing rally and expectations are high.  Let’s hear from you in the comments section.

The Markets Are Off And Running!

    After I noticed the first indications of economic improvement beyond Intel’s earnings report, the market began a tentative advance;  kind of like a slow jog warm up before a full sprint.   As I mentioned in an earlier post this week was going to provide the critical data on whether the markets and the economy were beginning to improve.   They most certainly are!  Everyone is not so much debating it, but discussing it.   The shorts are covering.   Money managers are buying.   And individual investors are just starting to come back.   Hopefully, you acted on my post of June 15th and moved back into stock funds. 

      My question now is how far will this enthusiastic rally go.   Momentum is building.   Thera are indications that the various economic crises are beginning to weaken.   The technology stocks are increasing their sales projections for next year because companies are looking for the efficiencies that better technologies provide.   The housing market is showing signs of strengthening.   Industrial commodities prices are continuing to increase.   Industrial end demand is projected to increase substantially.   The list is growing.   We are definitely witnessing a sea change in the world economic outlook.   As I have mentioned before, the market leads the economy by 6 – 9 months.   So, unemployment will still lag.  Importantly, companies should initiate hiring plans again which will give hope to the millions of unemployed.  There is pent up demand for goods and services which should provide a nice jump in economic activity for next year as well.  

   As far as how high this rally is going to go, I will examine that in the near future.  But for now, enjoy watching your portfolio and net worth grow.  Expect some  “irrational exuberance”  and emotion buying on the part of investors who are relieved that the market is recovering.   My expectations of hitting 10,500 on the Dow look like it might happen sooner rather than later.

    I would still appreciate some feedback in the comment section.  If you are finding my opinions accurate and are helping you to rebuild your investments, then please let your friends know about my blog.

ETF’s, 401k’s, and Technical Trading: What to Expect

    For those of you who have been following me, I would think that your confidence level has been climbing.   For those of you who are just discovering this author, I would encourage you to explore my archives and scrutinize my postings before the major market events of the last 9 months.   After having done that, this posting may become more interesting.

     This market has become one of extraordinary significance.   The  confluence of crises we experienced were almost unprecedented.   Investor reactions resulted in “generational lows” in market valuation.  The recovery is faster than any experienced before.   The investment losses were suffered for the first time across the socio-economic spectrum due to the widespread participation of 401k’s.  Long held investment principles and theories have failed and are being labeled obsolete.   Behavioral Economics, hueristics, and investor psychology are all coming to the forefront to help explain these failings as fundamental analyses are ignored and technical market analyses have become less reliable.   Market volatility has increased partly due to the explosion in popularity of Exchange Traded Funds (ETF’s) and the availability of trading analysis tools to individuals on the internet.   All of this is contributing to a general loss of confidence in projections of market direction.  Yesterday, Friday July 24th, several highly respected market pundits were asked on CNBC where they expected the market to be in the next 12 months.  The range was a Dow Jones of 3,800 to 12,000.    Given this guidance by the so called “experts”, I would like to present my take on the next 6 months.  It’s going to be very interesting.

       The are 3 questions on everyones mind right now;  1) will we see a pullback before the market advances to a consensus of an S&P of 1,050 – 1,100,  2) how long will it take before we reach that valuation, and 3) has the recession hit bottom.  The next two weeks will answer the first question.  The nature of the second question is so that traders can take profits and reduce their exposure to downside risk.   The third question has a groundswell of believers that I believe will fuel a continued rally.

     This market is not acting, in the sense of  technical analysis, in the expected ranges of historically similar patterns which renders them less effective.   Fundamentals are in the background, but are acting less as a leash to keep valuations reasonable and more like a bungie chord snapping valuations around.  As I have written about before, this market is being driven more by hope and emotion.

    I expect the S&P to climb to 1,050 - 1,075 and then retrench to 1,000 or possibly a little lower over the next 4 months.  Then, we should see another climb to 1,100 -1,125 until the projected fundamentals actually show improvement or something from left field (referred to as a Black Swan) scares the bejeezus out of the markets again.  With the backdrop of a market that should fluctuate in a range of 950, – 1,100 on the S&P, getting out at the upper end of that range eliminates the potential risk of a Black Swan event.  It’s all about risk management.

    What I will be watching for is a point at which the reality of current economic fundamentals vs. the projected improvement of those fundamentals crosses a threshold of risk that still exists due to the ongoing crises that until recently seemed to be a clear and present danger.  Above that threshold represents to me a level of speculation one should be concerned about.  One that could create a level of volatility that results in excess swings in the S&P and Dow Jones Industrial Average.  You will have a choice; switch out of stock funds or sell when the market gets into the top end of my projected valuation range, or simply hold on for the longer term trend up and forego the opportunities to capture shorter term gains.   As always, your comments are welcome.  This is one post that I will expect to refer back to.

The Summer Rally: S&P Ratio Target – 17

   What a great move we are having!  Projected earnings are coming in higher than expected and momentum has continued.   In my July 15th post, I wrote of an expected 15% – 20% move up.  So far,  we have gone from an S&P of 906 on July 14th to 1,002 today.  That is 11% and we are still climbing.  If earnings are on track to come in at $68 for the year as economist are predicting, then an expected P/E ratio of 16 to 17 should be achievable.  That puts the S&P at 1,088 to 1,156.  The Market Risk Scale Indicator at that point will be in the high risk range and I believe we will be in a speculative market valuation level.  Anything can happen then to cause the market to retrench.  Manage your risk as you see fit.  But, I will be looking for some shelter.  

     It sure would be nice if some of you would let us know if you did what I did and went back into stock funds on the 15th.   John, I am also hoping that you are continuing to follow my opinion after the sparring session we had on the 15th.

And Now A Pause For The Cause

     As can be expected, we should see a slight retreat of about 3% – 5% over the next week or two so don’t be too concerned.  The market has had a really nice run in a very short term so, we need to have a pause before we continue on up.   There are concerns that the dollar is weakening too much.    It had a strong rally because the international community needed somewhere to put cash when the market was tanking in March.  So, they bought dollars for safety.  Now, the market has been recovering and there are more sellers of dollars than buyers.  There are chart fairies looking at the charts of the dollar and projecting possible breakdowns to further lows.  These fears will be a few years before they manifest themselves via inflation.  For now, there is nothing to take the dollar’s place.  It should be fine.

    There should be an increase in short selling activity as a reaction to the market increase.   That, in my opinion, would be the reason we would see the market retreat.  Short sellers already had their heads handed to them over the last couple of weeks as the market advanced.  Now, at this higher level they are frothing at the mouth even more.  Froth away.   Economic indicators are continuing to improve.   Friday, new unemployment claims  reports are expected to be a couple hundred thousand lower.  I am also hearing of improvements in  company financials and hiring plans are being put into place.  You won’t hear of this for at least 3 weeks.  But, when you do the market should be quick to respond and we may see an S&P of 1,100 before November (less than 3 months).   For now don’t worry about the short term.  The outlook is getting better and better.

New Jobless Claims Drop – Market Continues Advance

   This week everyone was waiting to see what the New Jobless Claims number would be.   If it was above 350k, then the economy would not be recovering as everyone hoped.   But, fortunately, it came in at 303k resulting in a jump this morning of 125 and 13 points on the Dow and S&P.  We are now only 600 and 90 points away from the 10,000 and 1,100 levels I have been projecting.  You can really sense the optimism of investors now.  Stay tuned for more indicators helping to push valuations beyond where they should be.   Just for fun, anybody interested in guessing the date the S&P hits 1,100?  I’m going with September 25th.  Keep an eye on my Market Risk Level Indicator on www.fundswitchers.com for when we get into the speculative valuation levels on the indices.

A Market Pullback? The Current Message

    It is August 16th and the S&P is at 1004; only 2 points higher than August 3rd.  A number of market pundits are projecting a market pullback.  I still think it will be a modest 3% – 5% if at all.  Nothing to react to really.  We are 11% into my projected 15% – 20% move up from July 15th and holding.   The predominant questions now are;  1) who is really driving this market,  2) can market fundamentals continue to improve, and 3) are 2010 earnings estimates reasonable at a consensus of $68 per share.

   The options volatility index (or VIX) is higher for September and October.  This normally indicates that professional traders (or the smart money)  think there might be a pullback coming as historically happens.  But, a couple of market research organizations seem to think that this indicator has gotten diluted by traders investing in an ETF’ that bets on the same move  and may not be as reliable as it once was.  So, whatever anticipated pullback there is may already be factored into current pricing and the traditional poor performance of September may not occur.  This is the minority opinion.  I know it’s complicated, but this is as simple as I can put it.   An additional important data point is short interest.  The number of investors selling the market short has declined significantly which indicates they believe the market will be climbing more.

   Market fundamentals have not faltered yet and analysts are still holding to their earnings projections for 2010.  But, consumer confidence has dropped a bit and their spending patterns have not been as robust as expected.  The holiday shopping season should reveal consumers true feelings and then we will know more. 

     So, what s the message today?   Sit tight and let the market churn.  I still believe the trend will continue to be up until we get to an S&P of 1,100 or more.  Keep an eye on the Stock Market Risk Level Indicator on www.fundswitchers.com.

Future Earnings Growth: The Big Question

     Economic outlooks and market projections can be biased by particular disciplines subscribed to by prognosticators.  I liken them to the views Chiropractors and Surgeons have on back ailments.  Each thinks he can cure 90% of the cases they encounter using their respective disciplines, when it is probably more like 50/50.  Market trends can no longer be explained wth a high level of confidence using one discipline alone.   I suspect it is because the older “Experienced” investment pundits who rely on past trading patterns (chart fairies) and investment company analysts (fundamentalists) may not be considering the effects of newer influences.   Influences like technology that makes data and the results of trend analyses instantly available to the individual investor.  Influences like behavioral economics (emotional/irrational investment decisions) that the new substantial investing public exercises which can cause unexpected market moves.  These influences didn’t exist in older patterns that are used for comparisons.  The expected similarities have deviated.  So,  predictions are  not as accurate as one would hope. 

      Applying these explanations to the current market trends might go further in explainng the anomoly a polarized investing community wants to call either a Bear Market Rally or a New Bull Market.  A collective  sigh of  relief was given on Monday when the market plunged 186 points.  All parties expressed relief that we are finally seeing signs of a break in the runup of the indices with expectations of a  5%-10% pullback before another leg up.   Everyone has their opinion as to why we should see this pullback, even to testing the lows of March.  But, the market came right back to within 40 points of Friday’s close of the Dow Jones and 100 points off of it’s recent highs.  Let’s keep in mind that the markets are looking 6-9 months out.   Earnings growth in the future is going to be the result of a chain reaction of economic factors resulting in job creation, increased worker confidence in their job security, and ultimately those workers spending more money.  Any one of the links in the chain reaction can become weak and cause a stumble.  The most recent was world wide distrust of China’s economic reports.  Few believe their numbers but all acknowledge that world wide growth will depend on China’s fast growing consumer demand, industrial growth, and economic stimulus plans.  US economic growth is going to be hampered going forward due to the US consumer saving more and spending less.  Growth is also going to be less because companies will be borrowing less to increase their profitability.  In my July 10th posting, I wrote about how domestic markets would underperform and asset allocation strategies would change to include a higher exposure to international equities.   But, for now, investors refuse to allow the market to decline.  Any sign of a pullback and buyers see it as an opportunity to gain more exposure to risk assets (stocks).   There is a subtle strength to this New Bull Market and a lot of money on the sidelines wanting to get in.  Right now, there are great expectations for future earnings growth.  So, valuations should continue to increase.  More later.

The September Advance

      It has been about 2 weeks since my last post when I suggested to sit tight and let the market churn.  We are at an S&P of 1,016 and a Dow of 9441.  Since my July 15th post we are 12% into my projected 15% – 20% advance.  The projected pullback has been barely 3% and very short lived.  So, basically nothing much has happened in August as I expected.  But, now it is Labor Day Weekend and current earnings growth expectations for the remainder of the year and 2010 are being revisited.   

   Kopin Tan, whose weekly submittal for Barron’s is the front page story this week, wrote an  excellent summary called Fall Outlook.   The Chief Strategists for 10 large investment firms are sharing their views.   7 out of  the 10 are projecting S&P earnings for 2010 to be between $70 – $75.  This is a little more than the $68 I had been using for determining my current target for switching to cash.  I still maintain a P/E of 16 which puts the S&P at 1,156.   My early August posts were projecting an S&P of 1,100 by November and I even half-heartedly guessed that it would hit 1,100 by Sept. 25th.  That is looking surprisingly more like it might happen.  In addition, if it does get to 1,125 I would expect my Market Risk Scale to be pegged to the high risk side and definitely worth considering moving to money market funds and not bond funds.  Look at it this way.   Even if the market moved higher, which be assured that it would, I would only expect that it could advance 3% – 5%.  Whereas, anything could happen to reinstate the argument of this still being a Bear Market Rally and becoming a W shaped recovery.  Again, it is all about risk management and avoiding losses.  Most economists agree that Gross Domestic Product (GDP) growth is going to be in the low single digits.  This doesn’t make a higher S&P P/E ratio very probable.   At an S&P of 1,125,  upside potential being less than 5% over the next several months and the downside potential being 15%-20%, one can understand why money market funds might be the best position. 

   As always, keep an eye on the Market Risk Scale Indicator in www.fundswitchers.com and your comments, results of moves, and input are greatly appreciated.

The September Advance Continued

   Septembers and Octobers are supposed to be months where the markets decline.  Not so this far.   I am pretty excited about keeping track of  my projections on my August 7th posting of hitting 1,100 by Sept. 25th and my July 15th posting of moving up by 15%  – 20%.   We are 16% into my projected run-up.  So, I was right again and it happened in less than two months.   The fundamentals seem to be shaping up and the market has already made the move I projected.   The really  interesting aspect of this move up is that the volume has been lighter than expected.  That may be explained by the fact that short interest is off substantially and that the flash trading that has been in the news as of late has probably been toned down to keep the press from using it as amunition in arguments to ban it.  Even so, it seems to continue a slow steady climb and no one knows if or when it is going to turn south.  As the values continues to climb so does the risk level.   There are 8 days left until September 25th.  If the S&P increases 5 points per day we will hit 1,100.  I am still looking at 1,125 as an exit point.  After that, watch out for any “Black Swan” event.  If you get out at 1,125 or a little higher, then a Black Swan event will be welcome for us Fundswitchers.  Again, keep an eye on the Market Risk Scale in www.fundswitchers.com.

This Bullish Move Is Beginning To Be Suspect

    In www.fundswitchers.com my Market Risk Level Indicator is on 4 and has been slowing trending toward the high risk level.  If you have read my recent posts you know that I am looking at an S&P target of 1,125 to make a switch to money market funds.   There are some interesting data points that one should be aware of at this point. 

    First, we are coming into the next earnings reporting season.   Market analysts are at a consensus of $73 earnings per share for the S&P which is about what I have been using.   This supports my first assumption.  Second,  before the beginning of August, investors began putting money relatively strongly into stock funds and very heavily into bond funds.  In September,  money flow into stock funds reversed because a pullback was expected.   (Sounds like fundswitching doesn’t it)  But, the market climbed even higher.  As a result,  investor sentiment did an about face.  Bullish sentiment climbed 5 percentage points (not 5%) and bearish dropped 4%.   The Put/Call ratiios turned stongly bullish as well.  This ratio reflects what options both institutional and individual investors are actually investing in and indicates what they actually believe is happening in the short term.  I know I’m getting a little technical, but these are really important.   What is important here is,  as more investors move into one camp and it becomes the dominant belief, the more contrary it becomes.   Basically, ”The Herd” is taking over and that becomes very risky.   It appears as though some sort of capitulation is happening.  More individual investors are becoming convinced of this bull market and are now coming in.   This is resulting in a broader participation of stock price advances which is causing the indices to climb.   This next week will be interesting to see if the earnings reports indicate economic improvement.  I think they will.  But, it is time to start becoming wary.  The market will get ahead of itself.   If you have any interest,  I recommend reading an article in Barron’s titled “Home on the Range”.  Vitaly Katsenelson has a successful track record over the last 12 years and he follows an Active Value investing approach that seems very similar to my fundswitching philosophy.