Tuesday, July 30, 2013

Technical Tuesdays: Curb Your Enthusiasm?

We begin with the following excerpt from Sam Stovall's (Chief Equity Strategist at S&P Cap IQ) latest missive:

"Since WWII, bull markets have averaged four years in duration, mainly because of the treacherous third year. Of the prior 10 bull markets, five declined in price in year three, with three of these resulting in new bear markets."... "Surviving the critical third year has traditionally resulted in a revival of upward momentum. Indeed, of the six bull markets that celebrated their fourth birthday, five (83%) went on to celebrate their fifth birthday, recording an average price increase of 21%."

So, lets do the math.

On the bull's 4th anniversary date of March 9, 2013, the S&P 500 stood at 1551.18. If we add to that the average price increase noted in Sam's commentary, 21%, we get to 1877 next spring. Using a good operating earnings estimate for the twelve months ending March 2014 of $106, stocks will be priced at 17.7 times earnings. At virtually 18 times earnings, the most enthusiastic types will note that the rule of 20 roolz: 20 - inflation rate = appropriate P/E ratio*.

Sounds good. Then there's this from Orcam Financial Group (via Pragmatic Capitalism via Marc Chandler's marctomarket.com).


Given the fact that there is little to no advance signs of a market turn from such data plus the fact that the data seems to be coincident to each other** plus the fact that so much has changed in terms of the very structure of the market that such data is likely highly contaminated, all that one can do is note that the US equity market is at a point where problems ensued.


Investment Strategy Implications

When looking to divine the future for equities, history is a mystery. As Sam is found of noting, it's a guide not gospel. And certainly no substitute for logic and analysis. Reliance on simplistic rules of thumb (like the rule of 20) is fool's gold.

Investors operate in a changed environment yet far too many rely on tools and methodologies better suited for a more simple time. It's like the difference between analyzing an economy that is perceived to be closed when it is anything but.

Accordingly,

Given the interconnected nature of the globalized economy and markets plus the complexity of relationships and financial instruments plus the speed with which a seemingly minor incident can transmit and transmute itself throughout the global network, the rise to valuation normalcy is problematic for anyone who believes that the extraordinary economic and financial times we live in warrant a below average P/E.

Count me in that camp. My enthusiasm is curbed.


*Actually, according to one source, the rule of 20 is more like the rule 19.3, which would be nearly spot on given that inflation tends to run closer to 1% than 2% in the current environment.

**I suppose one could argue that the fall off in NYSE margin debt precedes the drop in equity prices. But given that we are talking about only two episodes, this is hardly a large enough sample to work from.

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Technical Tuesdays is a service of Blue Marble Research Advisory and illustrates selected elements of market intelligence analysis. Market intelligence analysis - along with fundamental and thematic analyses - form the three-legged stool of the analytical approach employed by Blue Marble Research Advisory. We believe that only by integrating the three disciplines can one effective analyze the complexity of today's globalized economy and markets.

To learn more about Blue Marble Research Advisory services and its integrated approach to investment strategy and decision-making, click here.

Wednesday, July 24, 2013

A Bull For The Ages

Just how good has this bull market been? The best in the post WWII era, that's how good.














Source: J. Kleintop, LPL Financial, Bloomberg data
Note the time period is four years

Tuesday, July 23, 2013

Technical Tuesdays: Diverging Paths

The performance spread between the three major global markets - US, EAFE, and emerging markets - gets more pronounced with each passing day. This divergence is NOT a sign of strength in the overall global markets but a sign of weakness.

In a globally integrated economy, one would assume that happy times in one area that is not accompanied by something resembling happy times elsewhere signifies that something is seriously amiss.

Is this of concern to most market participants, specifically those that are US based? Apparently not, as higher highs and a gravitation toward normalcy in valuation models is well underway. And this drive to valuation normalcy is occurring despite the many unresolved and unknown outcomes inherent in these extraordinary times.

The prudent investor would argue that the extraordinary times we live in warrant a below average valuation level; that the uncertainty of extraordinary actions like QE to infinity should be questioned aggressively and not blindly accepted as being a sweet deal with no consequences.

Investment Strategy Implications

Does the fact that US marches to all-time highs on its own of some importance? Does it suggest that in a globalized economy and market where the interconnected nature of business and finance with the ability to transmit an occurrence at speeds greater than policy makers can react to create an environment where something, somewhere, somehow may manifest itself into something unforeseen faster than you can say high frequency trading? Does it suggest that something may be rotten in Denmark? One would think so.

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Technical Tuesdays is a service of Blue Marble Research Advisory and illustrates selected elements of market intelligence analysis. Market intelligence analysis - along with fundamental and thematic analyses - form the three-legged stool of the analytical approach employed by Blue Marble Research Advisory.

To learn more about Blue Marble Research Advisory services and its integrated approach to investment strategy and decision-making, click here.

Monday, July 15, 2013

Bloomberg Radio Segments - July 3rd

My recent appearance on Bloomberg radio's popular program, "Taking Stock with Pimm Fox and Carol Massar" can be heard on my media blog: Beyond The Sound Bite. The markets, the economy (yours truly), the geo political (Ian Bremmer), and the changed market structure (Adam Sussman) were just some of the topics discussed.

Friday, July 12, 2013

The Changed Market Structure: How Markets Really Work

Today's "What's News" section of the Wall Street Journal online has a lead story titled: A Peek at Trucking Data, and Then the Stock Surged.
Glimpses of Key Figures Can Aid Investors in Truck Stocks, Soybeans, Bed Makers and Others.

Here are the opening three paragraphs:

"Just before the stock market closed March 4, an industry-research firm emailed a monthly report on commercial-truck orders to hedge funds and other subscribers that pay the group $1,700 a year for the exclusive service.

The early peek was worth the expense. The next day, after the bullish truck numbers were reported in the media, shares in truck makers surged, generating a tidy profit for investors who traded on the report in the late moments of the previous session.

Even as federal, state and congressional investigators examine the preferential release to investors of broad economic data—such as the University of Michigan consumer-sentiment survey—some investors tap numerous other more narrowly focused and less well-known industry indicators ahead of the rest of the investing public."

And here is my posted comment:

"Is this really about information for investing (i.e. longer term) purposes or is there the potential for collusion and short term profit by the use of the data that can serve as the justification for the short term market movements by those so inclined to be short term traders? For example, let's say that I am a short term oriented, story driven trader but I cannot, on my own, move a market but with a little help from friends can move a market, wouldn't I need some justification for action? And wouldn't I want that justification for action to serve as my legal cover? Enter the private service reports described in this article. As the article states, "The activity is widespread and legal. Federal securities law doesn't prevent investors from trading based on nonpublic information they have legally bought from other private entities.""

Investment Strategy Implications

Setting aside the misuse of the word "investors"*, this article describes an aspect of the financial markets as they function today but fails to connect the dots between the dominant forces in market action at the margin (short term trading), the nature of investors versus traders, and the points raised in the article. So, the larger issues here are (a) whether regulators have the insight and the authority to act on generally accepted market practices that are legal and (b) what is the longer term, lasting impact to the efficient functioning of the capital markets?

*Investors are longer term in nature. Getting the jump on a market is not what long term investors do. It's what traders do.

The Changed Market Structure is a new feature of this blog. Focusing on how the very structure of the capital markets have changed and the role financial innovation plays will be explored from time to time.

To learn more about Blue Marble Research Advisory and its integrated approach to investment strategy and decision-making, click here!

Thursday, July 11, 2013

Investment Life In The Easy Money Vortex

Since hitting its intra day high on May 22 (1687.18) and its closing high the day before, on May 21 (1669.16), the S&P 500 has corrected 7.52% and 5.76% (intra day high to low and closing price, respectively), which was reached on June 24.

The current move puts the S&P 500 right around its highs, doing so in the one month of the third quarter with a good performance track record - July. In the process, however, the momentum of the current move has shown a marked deceleration from its previous foray into record territory at the same time other global markets are not following suit. And all this takes place ahead of the two of the worst performing months - August (10th worst) and September (the bottom of the barrel at #12) and its most volatile month, October.

It is, therefore, quite probable that a meaningful decline in the equity exposure will be recommended in this week's report, particularly if a new high in the S&P 500 is achieved without confirming moves in other key indices tracked.

As to the more significant issue of whether this is all taking place within a market topping process, that will take more time (but not as much as one might think) to be fully formed.

To learn more about Blue Marble Research Advisory and its integrated approach to investment strategy and decision-making, click here!

Tuesday, July 9, 2013

Technical Tuesdays: History's Mysteries

The following is, in part, an excerpt from this week's "The Effective Investor". Information on the report and related research service can be found via the links at the end of this commentary.

What's an investor to do when two conflicting factors come into play? As the table* to your left illustrates, July has a bullish history on its side. While not exactly a rip roaring performer (the 7th month of the year is the 7th best performing month of the year), it still has a respectable average (+0.87%) and probability of being an up month (53% of the time). However, July just happens to fall within that time period that contains two of the worst performing months of the year (August and September, ranked 10th and 12th, respectively), which is then followed by the very average performing October (ranked 6th) with the worst extreme numbers by far (-21.8%).

Investment Strategy Implications

For investors (as opposed to traders), what happens in July is of minor importance. It's what happens throughout the third quarter that matters quite a bit, as the high probability of a sideways outcome from mid May into the fall will produce one of two major trend impacts: either sideways = the pause that refreshes and a resumption of the bull or, sideways = a topping process from which the bear emerges from hibernation.

Right now, the performance discrepancy between the US equity markets and the rest of the world (see chart* to your left) stands out as an early indicator that the latter will be the result.

*Source: Sam Stovall, S&P Capital IQ; click image to enlarge

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Technical Tuesdays is a service of Blue Marble Research Advisory and illustrates selected elements of market intelligence analysis. Market intelligence analysis - along with fundamental and thematic analyses - form the three-legged stool of the analytical approach employed by Blue Marble Research Advisory.

To learn more about Blue Marble Research Advisory services and its integrated approach to investment strategy and decision-making, click here.