Wednesday, January 04, 2012

Year End Update and a Look into 2012

The year 2011 will go down in history as one of the most frustrating, unpredictable and difficult investment periods in decades.

It is amazing to think that after a year of natural disasters (Japan earthquake/tsunami/nuclear reactor meltdowns) and man-made disasters (European debt meltdown) the S&P 500 index finished the year EXACTLY where it began.

As we finished 2011 I have had an opportunity to reflect upon how the markets performed over the past year.  In short, it was a "U.S.-FLAT; rest of the world-DOWN" sort  of year.

CLICK ON ALL IMAGES TO ENLARGE:


The U.S. markets (as measured by the broad based Wiltshire 5000 Index of the 5000 largest companies in the U.S.) closed 2011 with a loss of 1.38%.  This was a comparable "outperformance" when viewed in terms of other major world markets (as shown on the above bar graph).  Europe was hard hit but even worse were the previous outperforming emerging market countries (India down -24.21%, China down -20.3%, Brazil down -18.11%)

The MSCI World Country Index closed 2011 with a loss of 7.61% (the benchmark used by most multi-country equity funds including those within the Emirates Provident Fund).  This index is best represented by the iShares MSCI ACWI Index Fund (ACWI) which closed the year at a similar -7.82% loss:




As can be seen, the year was essentially divided into 2 parts; bullish up to the end of July, 2011 and bearish to the end of December 2011.  The low for the year was reached in Oct/2011 (down 17.85%) and from that point the market has worked its way higher.

Within the U.S. markets, the leader was the Dow Jones Industrial Average (up 5.53%) with the S & P 500 Index unchanged (down 0.0028%) and the NASDAQ having a losing year (down 1.8%).

As noted in the Wall Street Journal:

The three main U.S. stock indexes offered something for bulls, bears and the indifferent this past year: the Dow was up, the S&P was flat and the Nasdaq was down.
And the ride from the beginning of the year through Friday was volatile and filled with uncertainties and the unexpected.

It came down to the wire, but in the final minute of 2011 trading, the Standard & Poor's 500-stock index closed the year virtually unchanged from where it closed in 2010. The S&P 500 closed Friday down 5.42 points, or 0.43%, to 1257.60. The full-year decline of 0.04 point, or 0.0028%, was the smallest annual move since at least 1947, according to preliminary S&P calculations. S&P Indices scrambled after the close of trading to determine an extra decimal place in the 1947 data to figure out which was the slimmer move of the two years.

The Dow Jones Industrial Average fared better in 2011. The Dow finished down 69.48 points, or 0.57%, to 12217.56 on Friday, but closed the year up 5.53%. The blue-chip index closed the fourth quarter up 12%, its biggest quarterly percentage jump since 2003.

The technology-heavy Nasdaq Composite fell 8.59 points, or 0.3%, to 2605.15, and closed the year down 1.8%.
It was a very difficult year to "trade" the markets with some of the largest hedge funds down losing -40% or more.  In fact, the SPX had a total point variation of just over 5000 points with a close back to where it began at the beginning of the year.  In addition, there were 35 trading days where price moved +/- 2% in one trading day; a new record year for volatility in the SPX.  Overall a very frustrating year for everyone as there was never any long term trend established that would allow a long term investor to make a directional bet either bullish or bearish.

As a result of the past year, I maintained a very neutral 50% USD cash/50% equity position in my Provident Fund for most of the year.  Looking back on my comments during 2011, I felt at times like a broken record describing how things could go "either way".  Unfortunately that is the current investment climate we are within.

I had numerous emails from subscribers asking how they could "do better" in their Provident Fund positions.  Unfortunately my response was always the same.  Until a defined uptrend or downtrend is established the best position was to "sit on the fence" with a 50% allocation to both cash and equities.  You cannot squeeze blood out of a stone and, while many investors are in a position in their lives where they feel they require a large increase in the value of their portfolios to meet future retirement needs, the market does not recognize (nor care) about your individual financial situation.  As such, taking excess risk to try to meet your own requirements in an investment environment that is unequivocally undecided is a very unwise choice.

On the currency front the story of the year has to be the resilience of the Euro in the face of unprecedented country default risk.  It is astounding the Euro only lost -2.48% on the year given the headwinds it faces.


Once again (for the 11th year running) Gold has been the star outperformer with a return of +11.3%.  The USD managed a gain of +0.83%, outperforming all other major currencies with the exception of the Japanese Yen.

When viewing the available investment vehicles within the Emirates A/B accounts, the winner for the year was International Bonds (as defined by the SPDR Barclays Capital Int'l Treasury Bond Fund) with a return of +4.62% with International Equities (as defined by the Dow Jones World Stock Index) the worst performer with a loss of -9.71%.  The currency winner was the USD (+0.83%) followed by the British Pound (+0.71%), the Australian Dollar (+0.52%) and then the Euro (-2.48%).



As we enter 2012 I can still make a case for an equally bullish and bearish scenario:

-on the bullish side we can take comfort the markets held up fairly well in 2011 given all the disasters (natural and man made) that occurred in the year.  If I had known in advance these 2011 events would occur my "guess" would have been a stock market decline of -25% or more.  That we finished basically flat-to-slightly down is encouraging.

-on the bearish side we still need to understand the European debt crisis is only in its early stages.  The market has to-date given the Europeans the benefit of the doubt that they can sort out a way around the current malaise.  However, the stock markets are a very fickle beast and not forgiving to being disappointed.  Any sense over the next few months that things are not being sorted out and there is a strong possibility we go down in a very big way.

As I have spoken about numerous times in the past, I am a strong believer that all information that is currently available to identify whether we are in a bullish or bearish investment environment is built into current market price action.  As such, technical analysis does the best job of attempting to decipher the truth from the B.S. and allow us an opportunity to be on the right side of the trade.

It became obvious in 2011 that the U.S. has clearly decoupled itself from the rest of the world (remaining neutral while the BRIC and European markets declined substantially).  Should the current world wide malaise continue it is hard to image the U.S. can "go it alone" and continue upwards while the rest of the world continues to decline.  As such, I will apply technical analysis in this report to the ETF that most closely matches the MSCI World Stock Index (the benchmark used by most international fund managers).  This ETF is the iShares MSCI ACWI Index Fund (ticker symbol ACWI) and most closely depicts what is happening from an overall world-wide equity perspective.



Monthly Chart:

ACWI monthly

The ACWI monthly chart turned bearish at the end of August, 2011 when price closed below the 10 month simple moving average along with the associated technical indicators turning bearish.

While there are 3 early technical indicators suggesting the worst may be over (StochRSI > 50, Full STO %K crossed above %D, and MACD histogram showing positive divergence), at the end of 2011 we still remained within at world wide bear market.  As such, it is still too early to become overly aggressive with equity positions.

The monthly chart remains BEARISH.


Weekly Chart:


 The ACWI weekly chart:



ACWI weekly
The weekly chart can currently be described as neutral.  Price is in a well established down trending channel and right at a strong area of price resistance.  Several of the technical indicators have turned bullish but the ADX has yet to confirm the move.

The weekly chart is NEUTRAL.

Daily Chart:

ACWI daily
The daily chart is leaning bullish.  Most of the technical indicators are bullish but one bothering non-confirmation is the breadth indictors (On balance Volume (OBV) and the Accumulation/Distribution indicators) remaining negative.  Many times this non-confirmation is an indication the "smart money" is not buying into the current rally. 

There is an unfilled gap at the 200 day moving average level (red box and green line) at 44.31.  Two daily closes above this level (along with a recovery in the OBV and Accum/Dist) would have me leaning bullish medium term.  Until the non-confirmation of the breadth indictors is corrected, it is still too early to call the daily chart bullish.

The daily chart is NEUTRAL.


Provident Fund:

I have used ratio charts for some time now to help determine the best asset allocations within my provident fund.  I use a monthly chart (ratio above/below the 10 month simple moving average), weekly chart (ratio above/below the 40 week simple moving average) and daily chart (ratio above/below the 50 day simple moving average) of International Stocks, International Bonds and USD to help with strategic asset allocation.

Provident Fund Ratio Charts:



Monthly Ratio Chart
 The monthly ratio chart favors the USD on a long term basis (since the end of Sept, 2011).

Weekly Ratio Chart
The weekly ratio chart favors the USD on an intermediate term basis since Oct, 2011.
Daily Ratio Chart
The daily ratio chart favors stocks on a short term basis as of 03 Jan 2012.


Bottom Line:

The long term charts remain bearish with the intermediate charts neutral and the short term charts leaning bullish.  It is still too early to make a longer term directional call one way or the other but my study of my charts (300+) has me leaning slightly bullish intermediate term.  However, I think the 1st 2 weeks of Jan 2012 will be a good indicator has to how we go the rest of the year.

Ideally I would like to see a pullback in the 1st week followed by a strong 2nd/3rd week.  That would be a nice set up for a long play in the provident fund.  Conversely, a strong 1st week will have me worried the dumb money is chasing stocks only to be brought down into the end of the month.

Technically we are still in a bear market but glimmers of hope on the daily price charts and ratio charts have me watching closely.  Given the recent short term strength, I am comfortable holding my 50% cash/50% equity positions for the next few weeks to see how the beginning of the month pans out.


Emirates Provident Fund:


As of Wednesday, 04 January 2012 I remain in a strategic 50% equities/50% USD cash weighting as follows:**

-BlackRock US Dollar Cash Portfolio Fund: 50%

-Russell Global 90 Fund: 15%

-Fidelity International Fund: 10%

-BlackRock Equity Portfolio Fund: 25%


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


Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility. The author is not licensed as an investment advisor in the UAE and therefore cannot provide individual account advice to individuals and/or institutions.

For further information please use the following email address and I will do my best to get back to you when able.

ecamquestions@gmail.com

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