Where to start?

It has been some time since my last update. The reasons for this are numerous and unprecedented since I began the blog site and are because of the following:

1) I experienced some personal medical issues that resulted in some hospital time, followed by

2) A month of annual leave back in Mexico (where I still do not have Internet access at my villa), followed by

3) Attending the A380 transition course (officially classified as a “CCQ” but for all intents and purposes it should be classified as a complete course given the incredible differences between the A330/340 and the A380 and the amount of work involved).

As a result of the above, I have had very limited time to write a market update since my last update of Sept 15. C'est la vie.

I am now near the end of the course and am able to devote much more time to the markets. Note that during this entire period I have been keeping tabs on the market daily as I continue to manage the ECAM Asset Allocation Fund on a daily basis but my Provident Fund investments have been somewhat neglected (but safe) over the past several months.

Enough of the house keeping and on to the markets.

As you may (or may not) know, my approach to investment is a combination of technical analysis, market cycle theory and historical backdating. I spend very little time on the fundamentals of the market other than to assess whether, in the big picture, the markets are undervalued, fair valued, or overvalued in comparison to historical norms. All this will be all discussed in this post.

Going back to my last blog post (15 Sept), I was very specific that I was torn between two opposing forces:

1) a bearish bias given my historical data going back to 1950 that indicated September was historically the worst performing month for stock market returns of any month of the year. This was combined with the fact that the month of October was historically the 2nd worst performing month and the month with the most significant corrections/crashes, and

2) a bullish bias given my technical indicators were all still bullish in the short/intermediate and long term.

This placed me in a dilemma in deciding what to do with my Provident Fund accounts. I knew that the month of Sept was already up 7% as of mid month (VERY UNUSUAL) and my internal market breadth indicators were negative. I also was very aware of the seasonal tendency for the months of Sep and Oct to be the worst 2 months in any given calender year as shown in the graph below:


SPX Historical Yearly Return by Month (1950-2009):




Given historical rates of return, the poor internals in the market and the fact I was already up 7% for Sep, I felt it best to become defensive and moved my portfolio into a risk-underweight 25% equity/75% cash position.

The month of Sept took everyone by surprise. It rose 8.8%; the highest Sept monthly return since 1939. This was followed up by an additional 3.7% rise for the month of October. Should I have anticipated this and stayed long (given my technical indicators were bullish) or should I have played the odds given the historical returns and seasonality? When it comes to the Provident Fund (where buy/sell transactions are limited and time delays in switches can be costly), I decided to play it safe.

One of the old Wall Street sayings I always remember is “it is better to be out of trade and wishing you were in than to be in a trade and wishing you were out”. The 1st results in an opportunity lost; the 2nd results in real money losses. I’ll take the 1st over the 2nd anytime.

That brings us to today’s update. Here is the view as of the market close on Friday, 12 November.

Short Term: Bearish
Intermediate Term: Bullish
Long Term: Bullish

We have moved beyond the “danger zone” of Sept/Oct unscathed and into the "sweet spot" in the yearly market calender from Nov-Apr each year (see the graph above). However, the markets have run up way too far/way too fast. They are in need of a retracement and that is what has taken place the past week.

See my comments on the individual charts below:

CLICK ALL CHARTS TO ENLARGE


Short Term Charts (bearish):

SPX 60 minute:



Price has entered a corrective down trending channel from the 1227 high. A nice bounce off short term support @ 1194-1196 was experienced on Friday.

The short term 21 and 34 EMA's on the 60 minute chart have crossed into a bearish alignment. The short term MACD and 144 Stochastic (bottom chart on the graph) have both broken below their trend line support that has held previous short term declines during this current market advance. This tells us there is more strength behind this selling than any other selling during the current rally.

It is clear this is a bearish correction but it is has not confirmed the beginning of a significant decline (yet?). The dotted red line is the last "higher low" and it would take a 60 minute price print below there (1183.42) to change the trend to a confirmed downtrend. We are not there yet.
The 60 minute chart is currently BEARISH.


SPX Point and Figure (1 box):



The 1 box point and figure went bearish on Friday when price completed a price print of 1204.

The 1 box PNF chart is BEARISH.


SPX daily:



The daily chart went on a short term buy signal the 1st week of Sep and has continued to remain bullish.

As of Friday all the indicators remain short term bullish and price held the upper Bollinger Band.

Until all the indicators indicate otherwise, the daily chart remains BULLISH.


Intermediate Term Charts (bullish):


SPX Point and Figure (traditional):



The Point and Figure (traditional) chart remains BULLISH and has a price target of 1590.


SPX weekly (standard):



The weekly chart turned bullish in late Aug when price closed the week above the 20 week moving average (Bollinger band midpoint) combined with RSI, Stochastic, MACD and Force Index confirmation (as shown on the chart).

The weekly chart remains BULLISH.


Long Term Charts (bullish):

SPX weekly (13/34 ema):



The weekly 13/34 ema chart is one that has great importance in determining the long term.

It crossed bearish the 1st week of July, reversed bullish the 1st week of August, reversed bearish the 2nd week of August, and reversed bullish the 2nd week of September. This was very unusual for this indicator (and frustrating for me!) as it has an excellent track record of calling bull and bear markets with very little whipsaw. Unfortunately it had numerous whipsaws throughout the summer (that I documented in the blog). This emphasises the importance of not relying on just 1 indicator in determining market direction.

The weekly 13/34 remains BULLISH.


SPX 11 year monthly:



The monthly chart experienced the same gyrations as the 13/34 weekly over the summer (bearish at the close of June, bullish at the close of July, bearish at the close of Aug, bullish at the close of Sept).

The monthly chart remains BULLISH.



Cycles:

As mentioned previous, I keep cycles in mind when trying to decipher the messages within the market. Here are the 3 most important ones you need to keep an eye on:

1) Yearly Cycle

SPX Historical Yearly Return by Month (1950-2009):



As shown previous, the yearly cycle has the greatest market returns between the months of Nov-Apr.

We are in that "sweet spot" now.


Presidential Cycle (1953-2009):



Traditionally the 1st 2 years of a Presidents term is rocky with many bumps in the road. As such, the markets traditionally either decline or remain relatively flat for the 1st 2 years.

As can be seen in the chart (going back to 1953 through 14 Presidential cycles), the market remains flat until around the 22 month of the Presidency (red line). At this point the incumbent sitting president begins to look to his run at re-election 2 years into the future and develops plans to literally "buy" himself another term in office. This is done through fiscal stimulus, monetary stimulus, etc in the hopes to improve the economy enough that when it comes to election day the typical American "feels better" about his/her economic position and decides to re-elect the incumbent for another term.

We have now entered this phase and are in the "sweet spot" as far as the 4 year Presidential cycle is concerned.


Stock Market Decennial Pattern 1886-2009:



There is another strong stock market cycle known as the "decennial pattern". As shown in the chart, historically the greatest returns in the markets tend to occur in the "middle years" of each decade.

We are in year 0 currently (which has experienced an average decline of 6.94% over the past 123 years) and year to date we are up 7.33% on the Dow Jones Industrial Average. This is indicative of how exceptional the stock market has been this year so far.

Note years ending in "1" tend to be down as well and it is not until 2012 (based upon the decennial cycle) that we can expect to have a return to positive stock market performance based on history.


Bottom Line

The markets remain technically bullish over the intermediate/long term and bearish in the short term.

We have entered the best time of year to be in the market based upon the yearly cycle and the 4 year presidential cycle. On the other hand, the decennial cycle is bearish so it is important to keep an open mind and be prepared to reverse course if it turns out to be correct.

For now I need to give the benefit of the doubt to my technical indicators to keep my on the right side of the trade. They are telling me we have further upside in this market once the current correction completes.

Ideally I would like a 6-10% correction to bring price back down to more reasonable levels. It will be interesting to see if we get it or not.

The markets are not cheap. I believe we are entering a period where Bernanke/The Fed continue to provide unlimited liquidity to re inflate the stock market. It is obvious given the losses the Democrats took in the mid-term elections that there is very little room for Obama to use fiscal stimulus to pump up the employment numbers and give Americans the "feel-good" bump necessary to get him re-elected in 2012. As such, I believe his only outlet is to go the "monetary" route and use the money supply to push the stock markets up. This will create the "wealth effect" where the average American looks at his stock portfolio over the past 2 years and feels wealthier given it's huge rise (of course, priced in USD. This may not be the case priced in other foreign currencies; more on this in another blog).

Given the above, I see no technical reason for not being in the markets once the current correction completes. As such, once the short term charts have again turned bullish I will begin to re-invest back into equities in the Provident Fund. Until then, I will remain with my current safe positions and look for an opportune time to switch back into equities.


Emirates Provident Fund:

I made a switch in my provident fund as of Wed, 15 Sept (14 Sept closing price) into a strategic 25% equities/75% USD cash weighting as follows:**

-BlackRock US Dollar Cash Portfolio Fund: 75%

-Russell Global 90 Fund: 15%

-Fidelity International Fund: 10%

The strategic positioning remains unchanged as of 12 Nov 2010

**Actual positions will change daily based upon price action and market volatility.


ECAM Asset Allocation Fund:

The ECAM Asset Allocation Fund remains almost fully invested with a small cash reserve as follows:

-Core Equities: +30%

VTI (US Large Cap ETF) 10%
VB (US Small Cap ETF) 5%
VWO (Emerging Markets ETF) 15%

-Core Bonds: +15%

BND (US Domestic Bonds ETF) 10%
TIP (US Inflation Protected Bonds ETF) 5%

-Core Real Estate: +10%

VNQ (US Domestic Real Estate ETF) 10%

-Core Commodities: +15%

DBC (Commodity Basket ETF) 10%
DBA (Food Commodity ETF) 5%

-Core Managed Timber: +5%

CUT (US Managed Timber ETF) 5%

-Discretionary: +12.5%

VPU (US Utilities ETF) 5%,
UNG (Natural Gas ETF) 2.5%
YCS (Short Yen ETF) 5%

-Hedge +5%

VXX (SPX Volatility Index Calls ETF) 5%

-Cash +7.5%

UUP (Long USD ETF)



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dwaynemalone1@gmail.com