Stockmarket Update 31 August 2013

Just a quick end of month update for the month of August 2013.

The market has continued to pull back since my last update 10 August.  It would appear the Dow Jones Industrial Average was the "canary in the coal mine" as all the other indexes in the U.S. have joined the DOW in decline.  Refer to my previous update for cycle/seasonal discussion.

As far as "world markets" are concerned, the ACWI ETF (my benchmark/proxy for the Emirates Provident Scheme Equity funds) topped out 13 August with a daily sell signal generated on Thursday, 15 August.  Year-to-date the ETF has returned +7.61%.

As discussed previous, my expectation would be for markets to fall in Sept/Oct to near levels near the June lows.  Those levels would be around 48.61-49.91 on ACWI (a 6-9% decline from the summer peak).  At that point I expect the markets to recover and achieve new highs before this cyclical bull market ends in 2014-2015.


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ACWI Monthly:

For the month of August the ACWI index fell 2.29%  The monthly chart remained bullish at the end of August with all technical indicators in alignment.  The RSI (both 2 and 14 period) show a negative divergence and the stochastic has rolled over from overbought.  The MACD histogram displays a negative momentum bar when compared to the month of July (which had displayed a positive momentum bar compared to the month of June).  Price at the end of August did not close below either the 8 or 10 month simple moving average so the long term trend remains bullish.

A clear trend channel is present from the 2009 bottom with the bottom of the trend line currently near 46.00.   Prior to that is a strong area of support in the 48.38-48.67 zone.

The long term remains BULLISH.


ACWI Weekly 3 Year:

The ACWI weekly chart turned slightly bearish this week.  Price closed the week below the Bollinger Band mid-point yet most of the intermediate technical indicators did not corroborate the move.  As such, the indicators could be considered neutral.  Clear negative divergence is shown on the RSI (14), the Stochastic and the MACD.

An intermediate term price channel is shown with the lower channel currently near 49.50.  Also shown is the previous area of congestion (blue box) which could act as short term support over the next few weeks.  This area would be near my previously discussed level near 49.91 (the "6% pullback" scenario).

The intermediate term is NEUTRAL.


ACWI Weekly 1 year:

A closer look at the weekly chart shows levels of support expected during this decline.  The bottom of the previously discussed congestion zone is 48.61-49.26 (weekly close).

In addition I have added a Fibonacci Retracement scale.  During normal pullbacks it is not unusual to sustain a 38-50% retracement of the previous rise.  As shown, this would equate to a pullback to 49.73 (38.2%) to 48.67 (50%).  Note the 50% retracement would equal the previously discussed support area and would be in line with a 9% market decline.


ACWI Daily:

The ACWI daily chart signaled a sell signal 12 August.  As of yesterdays close, that signal remains in force with all technical indicators bearish.  Price has broken previous short term support at 51.70 as well as the 50 and 100 day simple moving averages.  It would appear price intends upon challenging the 200 day simple moving average next (currently at 50.01)

The short term is BEARISH.


Bottom Line:

As previously discussed, we are within a seasonal and cyclical weak period.  It would be expected a pullback of 6-9% would be expected from the top of 12 August on ACWI (concurrent with EK provident scheme equity funds).

It is still my contention we remain within a cyclical bull market (contained within a secular bear market).  I do not expect this bull market to end until 2014-2015.  This is backed up by numerous economic indicators I monitor which indicate the U.S. is nowhere near to entering a recession.  As such, it appears the U.S. (and as a result, the ROW) will continue a slow and gradual/weak and substandard recovery.

Market internals have weakened considerably going into this decline.  However, this bull market continues to be one where the "majority" are still non-believers.  As such, until the final "piling in" begins and the frothy market sentiment begins, there is enough money on the sidelines to support a continued gradual rise.

Ultimately I believe we top out of this pattern in late 2014-early 2015.  This bull market is already "long-in-the-tooth" based upon time but the slow rate of economic recovery would support a longer than normal bull market period.

It is still my contention once this current bull market ends we will experience another significant cyclical bear market decline (in the order of 40-45% decline lasting approximately 18 months) to finally end the secular bear market that began in 2000.  This final "washout" will hopefully decline to such a level that market valuations become attractive once again and usher in the beginning of a new secular bull market.  I expect this new secular bull market to begin in 2017-2018.

In the short term, I plan on increasing my equity exposure on any significant decline into Sept/Oct.  I do not expect that would extend beyond a 70% equity exposure given high market valuations.  My current model exposure within the A+B accounts remains at a tactical 50% equity/50% USD cash position as follows:


-Russell Global 90 Fund: 40%

-Fidelity International Fund: 10%

-Russell USD Liquidity II Fund: 50%


(Obviously actual percentage allocations will fluctuate based upon daily/weekly/monthly based price movements and ongoing monthly A+B account systematic equity purchases.  Please see previous discussions on dollar cost averaging/ongoing equity monthly purchases):

ECAM Investment Strategy Discussion


I have been watching bonds declining with interest.  While speculative due to low interest rates, I am seeing some value in bonds (especially corporate) for the 1st time in a long time (especially in non-US countries).  I expect to move some of my USD cash (no more than 30%) into bonds when it appears the short/intermediate term decline in bond funds has ended.


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.

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

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Stockmarket Update 10 August 2013

We have now entered the "dog days of summer" where the majority of market players are now on holidays until the beginning of September.  Volume is down and the markets have drifted the past 4 weeks (since mid-July) in a narrow consolidation range.

Year-to-date world stock markets (as measured by the iShares MSCI ACWI Index Fund) have gained +11.6%  This contrasts sharply with the returns on the S&P 500 Index's return of +18.6% YTD and clearly shows the US has outperformed the rest of the world this year.

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Having spoken to and read updates from numerous asset managers recently, I have to say 2013 goes down as one of the most hated, misunderstood and non-participated rallies in years.  Given it appears we may be in a transition period towards weaker prices into the fall, I thought it would be interesting to look at some of the cycle charts to give us some clues as to what to expect historically.  In order to keep the charts equivalent, I will use the Dow Jones Industrial Average as my benchmark.


Annual Seasonal Cycle:

The 1st chart is the yearly seasonal chart of the DOW for the past 30 years:

As can be seen, seasonally over the past 30 years the DOW has entered a consolidation phase in April with a tendency to peak in price during the month of August and then fall back in Sept/Oct to a low below its April/June lows.  Near the end of October it resumes its uptrend into year end.

Contrast that with the below daily chart of the DOW as of today:

As can be seen, the DOW appears to have entered its yearly consolidation phase in mid-April as predicted, peaked at the beginning of August, and has signaled a daily sell signal as of Wednesday, 07 Aug.

Should history continue to show the way, it could be expected price will decline below the June lows (14551 inter-day/14659 daily close) between now and October.  This would be a decline of approximately 5% from current prices.


4 Year Presidential Cycle:

The second cycle chart is the post election year chart of the 4 year US Presidential Cycle (2013 is the post election year of Obama):

Once again it can be seen historically since 1897 markets in post election years tend to rise into August, consolidate, and then decline into October/November.  This is followed by a rise into year end.

Following that rise, 2014 will be the mid-term election year.  Historically since 1898 mid-terms have proceeded as follows:

It is interesting to note as we enter 2014 the DOW is not historically forecast to bottom until the end of Sept 2014 (choppy downward market action to Sept 2014).  As such, the weakest period of the 4 year Presidential Cycle is from Aug 2013-Sept 2014.

Putting the whole 4 year Presidential Cycle into perspective since 1896, we can see "historically" the average date of the market top in the post-election year is August 04 (i.e. 3 days ago) with a decline into September 30 of the mid-term year (averaging -4.1% historically).  This is followed by the strongest period of the cycle from Sept of the Mid-Term year (Sept 2014) into the  Pre-Election year (Sept 2015).

We have now entered the "window" of the weakest period of the 4 year cycle.  While I do not use this as a market timing signal; I am cognizant of the historical period we are within when making asset allocation decisions.


10 Year Decennial Cycle:

Since 1897 there has been a historical pattern of stock market performance associated with the year/decade.  As can be seen, historically the first 4 years of each decade are quite weak with price at the end of years ending in "4" returning to the same level as years ending in "0" with years 5-9 producing the bulk of the gains.

However, this current decade has been very much the opposite with a total return of +45% since Jan 2010.

This begs the question as to whether "this time is different" or whether it is possible historically we will maintain this well defined pattern.  If so, then we would expect a -45% decline from current levels by the end of 2014 to bring us back to the same level we started with in 2010.  Food for thought?


Ned Davis Research Cycle Composite:

Putting all the cycles together, the above is a composite cycle for 2013 composed of equal weightings of the yearly seasonal cycle, the 2nd year of the 4 year Presidential cycle, and the 10 year Decennial cycle.

Clearly this amalgamation indicates cyclically we could historically expect a top in the markets in July 2013 with a decline into Nov 2013.


Bottom Line:

It is clear my cautious approach to 2013 has thus far proved unfounded.  However, on a risk-reward basis I feel very comfortable having maintained a strategic 50% equity/50% USD cash position in my A/B accounts.  Ongoing monthly purchases of equities through dollar cost averaging has somewhat alleviated the loss of potential gains and I am pleased I was able to book some positive capital gains during this advance.

I still believe we are within the last part of a cyclical bull market (within a secular bear market).  As such, I am not inclined to call a market top at this point.  However, fundamentally we are approaching "expensive" valuations on stocks (depending upon which metric you use), we have entered the weakest period of the 4 year cycle, and we are within the weak period of the seasonal cycle.  As such, I see little reason to increase my equity exposure at this time as I see another bear market decline yet to come to end this secular bear market (my anticipation is a 50% decline from what ultimately is the cyclical bull market top).

My current exposure within the A+B accounts remains at a tactical 50% equity/50% USD cash position as follows:


-Russell Global 90 Fund: 40%

-Fidelity International Fund: 10%

-Russell USD Liquidity II Fund: 50%


(Obviously actual percentage allocations will fluctuate based upon daily/weekly/monthly based price movements and ongoing monthly A+B account systematic equity purchases).




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.

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