It is a fairly well known fact that stock market performance is often very seasonal. Over the very long haul stocks tend to outperform in the six months from November through April and underperform from May through October. Stock Trader's Almanac came up with the saying "sell in May and go away". They have long documented the seasonal disparity between the two six month periods.
We know of traders who use the seasonal disparity as one of their main trading tools. We are less inclined to use it when markets are in "secular bull" formations. Our base case remains that U.S. stocks are in such a market. There are signs that European and Asian markets are approaching "secular bull" status as well.
The problem for all investors is that markets are highly distorted by the super intervention of central banks around the world. There is absolutely no way for us to tell what levels various equity markets would be trading at in the absence of trillions of stimulus. Everyone believes they would be lower than current levels.
Charts of stock markets around the world indicate we should continue to own stocks (stay long). Yet fear that "all this could end very badly" keep us nervous and far from fully invested in the tactical models (Mendocino and ORCA). We still hold substantial cash in both models.
Peter Bookvar is Chief Market Analyst for The Lindsey Group. He is a popular and thoughtful market commentator followed by many investors. He pointed out earlier today that the stock market has been supported by three pillars. They are central bank stimulus, low interest rates and rapidly increasing earnings since the bottom of the cycle in 2009.
He worries that the U.S. Fed is ending its stimulus programs and approaching the first interest rate increases in years. He asks out loud if "earnings" will be enough to sustain the stock market going forward.
We know that Peter knows, "if it were only that simple", but it is not. While the U.S. Fed is on hold the Chinese are intervening in markets almost weekly. The Europeans are increasing stimulus. The Japanese are pouring it on! We also believe that the U.S. Fed will hold off increasing short term interest rates until 2016. We mentioned this in our 2015 outlook which we wrote in January.
Calamos Investments agrees with us. They published their updated 2015 outlook today. You can find it at http://www.calamos.com/campaign/2015/q2/outlook
Here are the opening comments:
Soft economic data, low inflation, and a strong dollar will cause the Fed to delay hiking U.S. short-term rates until late 2015, at the earliest
Global and U.S. GDP will grow by 2.0-2.5% for 2015
Accommodative monetary policy, M&A activity, and share buybacks will help stocks advance further
In the U.S., the environment is reminiscent of the growth regime of 1995-1999
Given the huge amount of skepticism that envelopes stock markets it seems almost "pollyannaish" to believe they can hold up, let alone trend higher. But as we have said at least a 1000 times in the past, "the market has done nothing wrong yet". Daily volatility is clearly on the rise again. The Dow Jones Industrial Average has trended no where so far this year, yet the ride up and down seems like being on a wild roller coaster.
In the end, U.S. stocks have essentially trended sideways for four to six months, depending on which index you are tracking. The S&P 500 closed at 2090 on December 29, 2014. It opened at 2084 today. Bears are absolutely convinced that this period of sideways consolidation will end with the market breaking down. Bulls think the market is taking a rest and will resume an upward trend when the consolidation is complete. Technicians (like us) don't know.
When the market breaks one way or the other we will finally know. In the meantime it is a "traders" market in the U.S. We have to be patient to see which way it resolves and then react to the markets next move.
European, Japanese and Chinese stocks have all advanced significantly in 2015 after solid increases in 2014. No one would argue that Chinese stocks are cheap at this point. But we are still seeing lots of commentary that Japanese and European equities are relatively cheap, particularly compared to their U.S. index counterparts. The Nikkei (Japan) has only recently broken out of a 25 year downtrend. From a purely technical perspective it is quite possible that the Nikkei is in the early stages of a new long-term bull market.
The European market looks to be trying to breakout above its old highs recorded in 2000 and 2007. This chart looks just like the S&P 500 chart did back in early 2013. The S&P 500 broke out then and has not really looked back since. John Murphy, founder of StockCharts.com, thinks the same is about to happen to European stocks.
We are the first to admit that U.S. stocks are very expensive by historical standards. The Shiller P/E (price to earnings ratio) currently exceeds its 1929 and 2000 peaks. Both peaks were followed by market crashes. But the market has yet to show any signs of breaking down. Consolidation does NOT equal a market breakdown! Therefore we would rather concentrate on finding alternative investments rather than trying to "short" U.S. stocks in an attempt to anticipate a market top. We believe we will know when to start shorting stocks. The time has not yet arrived.
We showed you a version of the following table in our 2015 forecast. It is updated monthly by Gurufocus.com and shows estimated returns for various equity markets over the next twelve months.
The forecasted return for U.S. equities is now only .02%, but as you can see many other markets are expected to do much better. Therefore we are looking to diversify our tactical models into markets that may outperform the U.S.
We are also looking at other assets classes for the models as well. Almost all commodity prices have collapsed in the past few months. The crash in oil prices has grabbed all the headlines, but almost every commodity represented in the CRB Thomson/Reuters commodity index has imploded. There are 19 of them in the composite index.
Are collapsing commodity prices reflective of lack of demand and potential global deflation? Are they signaling bigger trouble ahead? That is quite possible. Noted market analyst and timer Charles Nenner thinks that may be the case. He believes that investors are woefully unprepared for a deflationary environment. Simply being aware and tracking commodity prices will help us prepare should deflation actually take hold.
Here is a monthly chart of the CRB Commodity Index. You can see that prices are approaching 2009 levels. They are grossly oversold, but we need some consolidation through time and price before aggressively taking positions. If you are buying in the commodity space right now, you had better place tight stops under your buy prices. If that blue support trend line breaks there is no telling how low this index could go.
In the meantime interest rates are going no where fast. The 10 year U.S. Treasury yield was 2.03% in early 2009. It is 1.89% now. Long term interest rates are glued to the floor the world over (except Greece). Short term rates are glued to a lower floor.
It seems that everyone is poised for U.S. interest rates to rise. We actually think the path of least resistance is for long term rates to move lower in the U.S. We have already made it clear that we don't think short term rates are going anywhere.
When you compare bond yields in the U.S. to rates outside this country our rates are high in comparison. UBS issued a report today in which they refer to "The ever more bizarre government bond market".
Here is an excerpt:
Last week, Switzerland issued a 10-year government bond with a negative interest rate, the first nation ever to do so. Since the Swiss franc floor was lifted on 15 January, the whole Swiss yield curve up to 16 years has been in negative territory. Germany is not far away, having sold a five-year government bond with negative yield a month ago, and seeing its 10-year interest rate hovering just above 0.1%.
Even more "problematic" countries like Spain or Italy are experiencing historical low interest rates. And by history, I don't mean the last fifty years. In Italy, Genovese interest rates in 1664 and 1665 stood at 1.23%, their historical low point. This floor was broken on 10 March. Meanwhile 10-year Italian government bond yields have rebounded to a still very low 1.30%. This is a country with a public debt-to-GDP ratio of 132%.
Asset bubbles are usually based upon extreme optimism or pessimism. Optimistic bubbles are the ones which rely on a narrative of the unknown. Emerging markets or new technologies are prone to these. Investors have repeatedly fallen for tales of Eldorado at the other end of the World (from the South Sea bubble in the 18th century to the Asian crisis) or of technological grails (from 19th-century canals and trains to the dot.com bubble).
Pessimistic bubbles, by contrast, rely on a narrative of scarcity. Commodities and real estate are particularly prone to this. Investors have often believed that some raw material would run dry or that a certain real estate market could only go up because everyone wanted to live there.
Neither narrative explains the present government bond market. Government bonds are not neither exotic nor new and hence prone to misevaluation due to ignorance. Nor are they scarce (although governments might want us to believe that).
Economic Nobel Prize laureate Robert Shiller, one of the true and rare economists who foresaw both the 2000 dot.com bubble burst and the 2007/8 financial crisis, recently wrote an open editorial called "How scary is the bond market." His sober conclusion, "not too much," meaning not too scary, is somewhat mitigated by "It is true that extraordinarily low long-term bond yields put us outside the range of historical experience.
The simple point here is that while many are seeing "bond bubbles" everywhere, Shiller is not exceptionally worried. We aren't either--yet! There may come a time when we will be, or should be, but we don't think it is at hand in the U.S.
At times like this, when markets seem very confusing, we are deluged with solicitations from managers offering "alternative investments". We have always looked at "alternatives" and have offered them to our clients from time to time. We remain wary of long illiquid holding periods associated with many "alternative investments" and will therefore continue to shop only for the best possible offerings. Real estate remains our favorite particularly in Northern California. Trends also seem to be good in Florida and Texas.
Gold is acting like it is trying to put in a bottom. It was priced at $1179 per oz. in U.S. dollar terms in May 2014. It is at $1193 today. It has almost a year of price consolidation in its chart pattern. That is even more interesting given that the U.S. dollar has rocketed up in the past nine months. Given the extreme appreciation of the dollar it would have been reasonable to expect gold to collapse over the same time period. The fact that it hasn't may be a real tell that gold prices are working on turning back up.
As this chart shows the trend for gold is still down, but price has stabilized for now. This is clearly one to watch.
One of the hardest lessons for money managers is not to anticipate market moves. It is one thing to anticipate, jump in, get lucky and therefore look smart. It is another thing to watch for a real trend change and buy on confirmation of the trend change. The former method is called gambling. The latter method is called investing.
Our friend "JK" says that the "playbook for successful investing in the age of unprecedented central bank intervention has not been written yet". We totally agree. None of us knows how this is all going to work out in the end. We are in uncharted territory. But we also know from decades of experience that trying to anticipate major moves in markets is a fool's game. We will react constructively to trend changes as they actually happen.
As far as we are concerned we would rather "sell and go away" when stock markets start exhibiting traits that took us to cash in late 2007. We have seen nothing like that yet. Therefore we are not intending to sell in May. We certainly aren't "going away".
All the best,
MANAGING MEMBER & CHIEF INVESTMENT OFFICER
5T Wealth Management
(707) 603-2672 Office
(707) 486-7333 Cell
Disclosure and Disclaimer - Updated last on July 23, 2012 by Paul Krsek:
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