But first, Josh’s Christian Brothers JV team was not as luck
as the varsity and fell to Jesuit last Saturday. It was a
great game though, even though it was 102 and the CB side
was facing directly into the sun. Actaully they were two
great games. Maybe you caught it?
Upcoming TV interview - See Keith on CBS13 this Friday at
6
Catch Keith this Friday on the 6 o’clock news, “On the
money” segment where I am interviewed by Investigative
Producer Mike Luery on the state’s financial situation and
proposed building sales.
What’s Happening Today – Good news/Bad news
The good news is that earlier today the Bureau of Economic
Analysis (BEA) reported Personal Income rose +0.2% for
August, which was slightly ahead of the +0.1% consensus
forecast and equal to the revised July increase of +0.2%.
BEA also released Personal Spending for August which was
+1.3% over July. This is the largest one month increase in
consumer spending since 2001. The surge in spending is good
news for the economic recovery, given the fact that 70% of
US GDP is consumer related. (However, a large portion of the
jump in spending was due to the “cash for clunkers”
program). The data also revealed that the personal savings
rate (savings as a percent of disposable income), which had
been rising recently, fell back to 3% in August compared to
4% in July and 6% in March. The BEA reported that the PCE
Deflator Index (personal consumption expenditure), which is
a very broad gauge of inflation, was up only +0.1% in August
and decreased -0.5% on a year over year basis.
However the bad news is that Initial Jobless Claims for the
week ending September 26th were 551,000 up +17,000 over the
previous week. The jobless claims figure was slightly ahead
of the consensus forecast of 535,000 and serves as a
reminder that US labor markets are still weak. Conversely,
continuing jobless claims were down -70,000 from the
previous week and -80,000 less than the consensus forecast.
Overall, today’s economic data was mixed. The rise in
consumer spending is very positive for the economy, if it
can be sustained (which it can’t) but slightly negative for
fixed income markets as rates if the economy surges. The
reality is that the lack of improvement in the labor markets
will continue to inhibit a robust recovery, and will
presumably cause the Fed to keep rates low.
Market Update – Risk level raised to opaque
Several things have me getting a little nervous, causing me
to raise my threat risk color level to opaque. I admit, I
don’t have a color system like Homeland security, but it’s
not a bad idea. Although I do not think the rally is over,
the change in color from the sanguine beige is warranted and
a top could be in place at any time. Nothing has changed to
make me feel that this rally is anything but a bear market
rally and bear rallies are to be rented not owned. Since I
went positive in early March, the biggest threat would be
increased complacency.
(Investment Lesson 102: Investor Sentiment) The best
indicators for this are investor sentiment numbers. The
figures are a contrary indicator so when investors are
negative the market goes up, and when they are positive the
market goes down. The theory goes that as people become more
positive and bullish, there are less people left to get in
to continue to fuel a rally. What made me bullish in early
March was the overwhelming pessimism, and it worked like a
charm. Well the investor sentiment figures have been inching
up and they are now at the highest levels since the rally
began.
Futures traders appeared especially sanguine about the
market’s ability to dodge a meaningful pullback. Both the
Market Vane and Bullish Consensus poll figures showed high
percentages of bulls, at 51% and 56%, respectively. This is
the highest bullish percentage reading in the Bullish
Consensus poll since June 5 and the highest bullish reading
in the Market Vane poll since late May ’08, which marked the
end of the first substantial bear market rally since the
Oct. ’07 top. Individual investors are more bearish,
according to the latest American Association of Individual
Investors poll, showing 44% bears to 39% bulls. Those
figures are neutral, at best. Short term traders also appear
less than intimidated by the prospects for a further
sell-off, as the CBOE equity put/call ratios have been
generally in the mid to low .50’s the past few days,
readings verging on overbought levels. Institutional hedging
is increasing, however, as indicated by the S&P 500 put/call
ratio of over 3.2 (put volume to call volume), well above
the 21-day average of 1.7.
On balance then, individual investors are neutral, traders
are optimistic and institutional investors are
hedging—probably not the ideal scenario for a new long term
bull market A red flag will be raised (unless I come up with
a better color) when (not if) individual investors become
more positive and thus complacent. For the time being, it
looks as though the rally will continue as the market is
absorbing the bad news very well. The pullbacks have been
moderate on a daily basis, and volume has risen only on two
of the down days so far for the past three weeks. If this
was a year ago, and the market had received some bad news,
the picture would have been entirely the opposite: we would
have had triple digit losses in the Dow on very high volume.
Another concern is the timing and level of this rally. The
initial drop in any Bear Market is often just a warning as
it is very common to have a big rally off the low, only to
make new lows. Right now we are at the 6 month point as well
as the 50% retracement level. This is coming during the
normally weak October season. This is important because in
1929, stocks first crashed by 48%, rallied back about 50%
over 6 months and then fell to be down 89%! The timing is
not an exact science of course but the outcome will be the
same. I will be on the lookout for the warning signs that
experienced technicians will notice, and right now the
market looks resilient and any correction temporary. In
fact, so much attention was focused on the negative
September – October, which was usually strong this year
because investors were talking about it, that it wouldn’t be
a surprise for the decline to occur after everybody felt the
danger was safely past and were on to the normally strong
November to February period.
It’s important to recognize the stages of any and every
market cycle. During the first stage of a primary market
advance from a major low, Buying Power usually rises
sharply, as buyers rush in to snap up bargains, and Selling
Pressure drops sharply, as potential sellers decide to hold
on to their stocks in anticipation of higher prices. This
stage of expanding Demand and contracting Supply, which we
call the “Primary Buying Zone”, usually represents the least
risky period of an entire primary trend. Important market
declines rarely occur during this first stage, and any
periods of market weakness typically serve as buying
opportunities. None of the “October Surprises” listed above
occurred during the first stage of a primary uptrend.
In the second stage of a maturing primary uptrend, Buying
Power continues to rise due to still strong Demand, but
investors begin to take profits, causing Selling Pressure to
reverse its earlier downtrend and begin to rise steadily,
essentially chasing Buying Power higher. During this second
stage of rising Demand and rising Supply, which we call the
“Holding and Upgrading Zone”, investors should become more
alert, since rising Selling Pressure shows that the
risk/reward ratio is changing. Four of the nine “October
Surprises” occurred during stage two.
As the primary market trend eventually nears its end, buying
enthusiasm begins to wane, causing Buying Power to gradually
turn down. At the same time, the initial profit-taking in
Stage 2 begins to morph into distribution, causing Selling
Pressure to continue rising. Thus, during the third stage,
which we call the “Distribution Zone”, the earlier positive
relationship between Buying Power and Selling Pressure
begins to weaken, showing that the risks are significantly
increasing. Five of the nine “October Surprises” occurred
during stage three.
Portfolio Strategy – Ride the wave, but keep your
life-jacket on Short term:
Even though the market likely has more to go in the shorter
term that could change on a dime! The longer term still
looks precarious at best and your portfolio must be
prepared. We have been taking a “pray for peace but prepare
for war” approach with our clients, investing to take
advantage of the upside but which provides considerable
downside protection. This is a bear market rally and they
are to be rented not owned. We are thrilled with our
strategy of focusing on high dividend stocks and alternative
investments and corporate bonds. Yields of over 10% are
still available, but it’s tricky and you have to know what
you are doing. When this market turns down, it will turn
down fast. Use this period of stability and calm to get a
professional review of your finances from someone that knows
what they are doing. If you like, we’d be happy to give
you a free 2nd opinion, so just ask. Our U.S.
trademarked Top-Down Tactical (click -
TDT™)
is built for today’s volatile markets.
For more information on
TDT™
and our unique proprietary process for building tax
advantaged portfolios for high net worth individuals,
contact us today.
Long Term: The longer term is actually easier to
predict, so you had better be ready for what is to come.
I've written enough for today, so next week I'll focus more
on the longer term outlook.
Let me know if you have any questions or if I can help with
something.
Cheers –Keith
916-925-8900
P.S. Be sure I am in your address book so these weekly email
newsletters do not get blocked.
Keith Springer is President of Capital Financial
Advisory Services, a registered investment advisor,
providing Wealth Management and Mortgage Consulting
Services. For more information on how to build and
maintain a solid retirement plan, please contact Keith
at
916-925-8900 or
Keith@KeithSpringer.com |
