Bullish Case vs. Bearish Case

March 27, 2015

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Video

Risk Management Contingency Plans

March 26, 2015

As noted on March 24, the stock market has been in a volatile sideways pattern for nine months.

Our approach is concerned with being properly allocated for the next big move (7% to 30%), rather than the next small move within an ongoing series of whipsaws (2%-4%). Therefore, it is best to remain as patient as possible within the context of the model/rules until the market begins to more clearly tip its hand, either to the upside or downside.

Managing Based On Facts, Rather Than Fear

It is uncomfortable for all human beings when markets are weak. However, decisions based on fear or the desire to reduce short-term anxiety tend to hurt long-term performance. Significant damage to portfolios can occur during prolonged stock market corrections and bear markets. Significant damage does not occur in a few days or within a trading range (see last nine months).

Correction/Bear Not Possible Without A Lower Low

We know with 100% certainty that a three-month correction or three-year bear market cannot begin until the S&P 500 makes a lower closing low below 2039 (see chart below). Therefore, as long as the S&P 500 remains above 2039 (on a closing basis), some patience remains in order.

Click here for a larger version of the chart above.

Ugly Markets Can Rally

Q: Why should we remain patient? A: It is possible that the S&P 500 never closes below 2039 and instead rallies 20% in a bullish fashion. It is easy to take a weak market and extrapolate to the downside. It is much harder to remain prudent and patient. Under our system, there is no need to guess, forecast, or anticipate based on fear.

Rules Require Weekly Review

Regardless of where the S&P 500 is trading late in Friday’s session, our rules require that we check our allocations before the end of the week relative to the hard and observable evidence tracked by the market model. A Friday close below 2039 would most likely require some type of defensive action, but the facts will govern our actions.

The More Important Levels

As noted in a recent video (view clip), the pink, orange, and green lines (1988, 1980, & 1972 below) are the more important bull/bear lines of demarcation.

If and when action needs to be taken to protect our hard-earned capital, we will take action based on the rules, without hesitating. If the facts and rules call for patience, we will continue to be patient.

Most Recent Comments via Twitter

March 25, 2015

You can access them here (@CiovaccoCapital). You do not need to know anything about Twitter to view our comments or use the links to view charts.

Expect More Uncertainty Related To Fed

March 24, 2015

Fed Speaker Leaves Many Doors Open

In a speech Monday to the Economic Club of New York, Federal Reserve Vice Chairman Stanley Fisher tried to shift focus away from the first rate hike and toward the process of rate normalization. From Reuters:

Much of his speech to the Economic Club of New York focused on the period after rates rise from near zero, which Fischer said could be “June or September or some later date or some date in between.” Afterward, he said, the Fed would tighten or even loosen on a meeting-by-meeting basis based on economic data and unexpected geo-political risks. Explicit policy promises, he said, would play less of a role. “Whatever the state of the economy, the federal funds rate will be set at each FOMC meeting,” Fischer said of the policy-making Federal Open Market Committee.

Indecisiveness Remains

It is typical for markets to become a bit fussy when the Fed is on the verge of shifting policy. The stock market has been following the indecisive script. As shown in the chart below, the broad NYSE Composite Stock Index has been quite volatile and moving sideways for nine months.

Risk-Off or Risk-On?

As the Fed postures, market participants have been jumping back and forth relative to their preference for more-conservative fixed income instruments (TLT) and growth-oriented stocks (SPY). If I invested in TLT in July 2013 and you invested in SPY, there would be no winner as of March 2015 (see below).

Investment Implications – The Weight Of The Evidence

The wild swings between risk-on and risk-off are part of the interest rate cycle equation. Our approach is to implement a “less is more” strategy until the market calms down a bit. Less is more refers to making fewer adjustments to our allocations during binary periods of risk-on and risk-off. Our market model governs our allocations and at some point action is and will be required. For now, we continue to hold an equity-heavy allocation with some offsetting exposure to bonds and currencies. As noted in a March 23 article, the big picture does not align with “a bear market is imminent” scenario, which allows for some patience with growth-oriented positions.

Image of doors from Tim Green via Flickr.

Bear Market Risk – A Realistic Assessment

March 23, 2015

Bad Weather To Blame?

Recent economic numbers and earnings projections have come in on the soft side. If the rationale below holds water, we have nothing to worry about. From MarketWatch:

Once again, the U.S. economy appears to have slowed in the first quarter. And once again the fault has fallen on several major snowstorms and periods of frigid temperatures that afflicted much of the country in late January and February. That kept consumers away from retail stores during typically busy shopping hours and prevented builders from starting new construction projects, among other things.

Objective View Of Market Risk

There are many ways to attempt to quantify risk in the stock market. Regardless of whether or not you believe in technical analysis, we know one thing with 100% certainty…we cannot start a new bear market until stocks make a lower high and a lower low. For example, the weekly moving averages shown below made a discernible lower high (near point A) followed by a discernible lower low (near point B) when the S&P 500 was still trading over 1,400 (it eventually fell to 666).

How Does The Same Chart Look Today?

Instead of making a lower low, the same moving averages recently broke above a downward-sloping trendline (near point A below), made a higher high (point B), and last week posted another higher high (point C). Recent market action tells us the aggregate opinion of all market participants is much more favorable today than it was in late 2007.

A More Detailed Look

This week’s video looks at the stock market from numerous perspectives to assess risk and potential reward.

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Video

Video

Investment Implications – The Weight Of The Evidence

Our market model will begin to reduce equity exposure when the hard data and observable evidence begins to deteriorate. The lower low in December 2007 is an example of observable bearish evidence. Based on the evidence in hand, we continue to hold an equity-heavy allocation. With inflation data, durable goods, and GDP coming later this week, we will observe with a flexible and open mind.

Bear image from SteFou! via Flickr.

Video Is Up - Bears To Be Left Behind?

March 20, 2015

You can find it here.

Rate Dialogue Is About Bubbles, Not Inflation

March 17, 2015

Is Inflation A Threat?

While the Federal Reserve likes to talk about the rising threat of inflation, global central bankers are more concerned about low inflation or deflation.

The Real Concern Is Asset Bubbles

Inflation can rise quickly if wages begin to gain traction, but the Fed’s real concern is about letting the stock market get too far ahead of the central bank’s zero-rate policy. Alan Greenspan helped usher in two booms and busts (dot-com and housing). Will Janet Yellen put bubble management at the top of her to do list? Only time will tell.

Key Levels For Fed Reaction

This week’s stock market video covers key market levels for equity risk, along with some surprising pockets of relative sector strength.

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Video

Video

Investment Implications – The Weight Of The Evidence

Prior to Wednesday’s Fed announcement, the bulls still had an edge over the bears, but weak momentum tells us to remain open to all outcomes after the FOMC statement is released.

Nearing Bull/Bear Demarcation Line

March 14, 2015

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Link To Video

March 13, 2015

It should be posted sometime between 10:00 pm and midnight ET Friday. It will cover many useful charts. You can find it here.

Most Recent Comments Via Twitter

March 10, 2015

You can access them here (@CiovaccoCapital). You do not need to know anything about Twitter to view our comments or use the links to view charts.