October 2016 Investor Letter

Strategy Performance

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +11% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

Gold Trader and Gold PowerTrader focus on capturing the strongest and weakest parts of gold's daily cycles, buying daily cycle lows, selling daily cycle highs and holding for 10-15 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5% to 6% profit per trade while risking 2% each time and has a win rate in excess of 70%.

Executive Summary

My Technical Trend Indicator has triggered a Sell Signal for the first time since October 2014. This, at a time when equity valuations are stretched, US corporate earnings are declining and fund managers are fully committed, holding their lowest allocation to cash in over 20 years. The bull market is ageing and stock market leadership is narrowing. Investors also must contend with the fact that 86% of recessions in the United States have occurred either in the year of or the year following an election.

Government bond yields have backed up in recent weeks but I expect the trend lower to resume shortly, particularly if coupled with a bout of selling in equities. Meanwhile gold is consolidating ahead of another big move which I expect will start next month. Gold has returned +19% year-to-date for Euro investors. I expect strong double-digit annual returns for the precious metals over the next 3-5 years. Gold Trader closed out Trade 9 with a small profit this week and will look to enter another long position in 5-15 trading days at the end of the current daily cycle, which should also coincide with the intermediate cycle low (ICL). I remain defensively positioned for now with 20% equities / 40% bonds / 30% precious metals / 10% cash.

Stock Market Update

The current bull market in stocks, now the third longest in history, has run 7 years and 5 months, from March 2009 to August 2016 (2,193 on S&P 500). In second place is the bull market of the roaring twenties (1921-1929) which lasted 8 years and 2 months. It was followed by a spectacular -88% collapse in the Dow Jones Industrials Average and the Great Depression. The 9 year rally from 1991 to 2000, which culminated in the technology bubble and subsequent bust, with the S&P 500 falling -53% and NASDAQ plunging -83%, remains in top spot and will likely never be surpassed in either duration or valuation terms.

So, unless the current bull market is set to break records, it is probably in its final inning or may have already topped out. Stock market performance in US election years has tended to be positive (2000 and 2008 being notable exceptions). Post-election years however, have not been kind to investors. 9 of the last 14 recessions in the United States for example, have started in the year following an election, with 3 others beginning during an election year. Taken together, 86% of all recessions in the United States over the last century have started either in the year of or the year following an election. Adding fuel to the fire, my Technical Trend Indicator has just triggered a Sell Signal for the first time since October 2014.

This, at a time when equity valuations are stretched, US corporate earnings are declining and fund managers are fully committed, holding their lowest allocation to cash in over 20 years.

There is a growing complacency that Hillary Clinton will win the race to the White House on November 8th (Paddy Power has already paid out on a Clinton victory). Odds are against Trump, but if he causes an upset, expect a post-Brexit type reaction in equity, bond and currency markets. Irrespective of who wins the Presidential Race, 2017 should be quite a challenging year for investors. The Active Asset Allocator will look to navigate volatile markets and take advantage of opportunities as they arise. However, today I remain in defensive mode with an asset mix of 20% global equities / 40% EU bonds / 30% precious metals / 10% cash.

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

The US budget deficit increased by $150 billion from $440 billion to $590 billion in the year ending September 30th 2016. Over the same period, the total gross federal debt of the United States increased by $1.4 trillion. The trend is similar in Europe, the UK, Japan and China. Despite record government debt-to-GDP ratios across the developed world, calls for fiscal stimulus are growing to replace the increasingly ineffectual monetary policy madness that has become the norm in recent years. Fiscal stimulus means more debt, higher taxes and slower GDP growth. This should drive interest rates and government bond yields lower, not higher in the months ahead. So, while bond yields have moved higher in recent weeks, particularly in the US and UK, following a near vertical plunge in 2016, I expect the trend lower in bond yields to resume shortly. I don't think the bond bull is dead yet.

In the Eurozone, the ECB is running out of government bonds to buy and will likely relax its minimum purchase requirements next month. There is still plenty of demand for EU bonds, which should keep a lid on EU government bond yields for the foreseeable future. The Active Asset Allocator currently holds a 20% allocation in fixed interest government bonds along with 15% in inflation linked bonds and 5% in EU aggregate bonds. The 20% allocation is the most sensitive to interest rates changes and one I am most focused on near-term. I expect government bonds to rally on the next stock market decline.

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Gold Market Update

Gold looks like it still has some work to do before making its next big move higher. Gold Trader avoided the $70 drop in gold earlier this month and entered a long position at $1,260 with the expectation of capturing the start of a new medium-term investor cycle. The rally never really got going, so Trade 9 was closed this week at $1,267, booking a small profit. Gold Trader will look to enter another long position in 5-15 trading days at the end of the current daily cycle, which should also coincide with the intermediate cycle low (ICL). Gold should finish the year with a strong move higher and deliver another solid performance in 2017 as the bull market reignites.

For more information on my gold market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or 086 821 5911.

May 2016 Investor Letter

Strategy Performance

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +11% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

Gold Trader and Gold PowerTrader focus on capturing the strongest and weakest parts of gold's daily cycles, buying daily cycle lows, selling daily cycle highs and holding for 10-15 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5% to 6% profit per trade while risking just 1.5% each time and has a win rate in excess of 70%.

Executive Summary

The Active Asset Allocator has returned +6.3% YTD versus +0.0% for the average multi-asset fund. My Technical Trend Indicator has triggered a buy signal, yet stocks have not made much progress since. I remain defensively positioned for now with 20% equities / 30% bonds / 30% precious metals / 20% cash. Over 40% of equities on the NYSE have already declined -20% or more, classic early bear market behaviour, though the large-cap indices appear unconcerned for now. This standoff should resolve itself shortly.

Meanwhile, bonds continue to rally while yields head towards zero or lower. This month I explain why I think we are finally approaching an inflection point in fixed income and the potential end to the 35+ year bull market in bonds. Calls for helicopter money are getting louder and investor confidence in central bank policy is about to be tested. I also discuss the World Gold Council's latest report on trends in the sector including a +122% increase in investment demand for gold year/year.

Stock Market Update

In 2016 year-to-date, global equities have returned -0.3%, EU government bonds +5.2%, EU corporate bonds +2.7%, gold +11.3% and silver +14.4% in euro terms. Over that period, the Active Asset Allocator has delivered a positive return of +6.3%, with just 20% invested in equities and 20% still held in cash, versus 0.0% for the average multi-asset fund. Last month, I noted that my technical studies triggered a buy signal for the stock market for the first time since September 2013 and that buy signal remains in place today. Price hasn't made much progress since the buy signal triggered and I continue to maintain a defensive position for now in the Active Asset Allocator. 

Today, over 40% of stocks trading on the NYSE are already down 20% or more (56% of small caps, 30% of mid-caps and 16% of large-caps) - classic early bear market behaviour. This fact has been disguised by the continued strong performance of a handful of names in the market-cap weighted S&P 500 and Dow Jones Industrials, which are driving those indices back towards their old 52-week highs. Volume has also been lacklustre on the recent rally in stocks. While the S&P 500 is not too far off breaking out to new highs, volume does not look like it will confirm the move higher. 

Last month, I highlighted the prior instances in 2000 and 2007 when the S&P 500 peaked and turned lower, followed shortly thereafter by a bearish cross of the 50WMA below the 100WMA. This coincided with the onset of a bear market in equities and a declining trend in US corporate earnings. At the time of writing my April Investor Letter, the 50WMA had not crossed below the 100WMA. That has changed with the bearish cross now in effect, though price is still holding above both long-term moving averages. A sustained break below 2,024 on the S&P 500 in the weeks ahead will increase the odds that a bear market in stocks has arrived. Conversely, if the stock market can consolidate recent gains despite the bearish cross, it should clear the way for higher prices later this year and I will adjust the Active Asset Allocator accordingly. For now, I remain patient.

Volatility is on the rise and there is no shortage of events this year that could drive equity volatility significantly higher including the Brexit vote next month, a potential hard landing in China, political and economic chaos in Brazil and Venezuela and of course the possibility of Donald Trump in the White House. The Vix Index below captures the trend in volatility of the stock market and this trend is on the rise. The multi-year basing pattern is similar to that experienced in the lead up to the last bear market in stocks and reinforces my belief that the stock market is in the process of topping.

It will be interesting to gauge the reaction of the Federal Reserve, ECB, Bank of England and Bank of Japan if a bear market in stocks gets going later this year. I believe they will panic and react by doing things that will appear increasingly crazy to many people, like helicopter money or some version of fiscal or monetary stimulation. I believe this will precipitate a crisis of confidence in paper currency, which is why the Active Asset Allocator continues to hold a 30% allocation to precious metals.

For more information on my stock market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or at 086 821 5911.

Bond Market Update

From 1952 to 2000, it took $1.70 of non-financial borrowing to generate a dollar of GDP growth. By 2015, that number had more than doubled to $3.46. At the margin, an additional dollar of borrowing is losing its impact. Total debt to GDP across much of the developed world has now reached mind-boggling levels: 370% in the United States, 615% in Japan, 350% in China and 457% in the Eurozone. Meanwhile, GDP growth is decelerating. 

Central banks, in their capacity as lenders of last resort (and buyers of last resort of government bonds), have supported the explosion higher in debt in recent years and central bank policy will be responsible for the eventual debt bust. It is just a question of timing. I believe we are approaching an inflection point, potentially in the next 12 months, where markets will call central bankers' collective bluff... and then central bankers will panic.

What could be the catalyst? Perhaps wide scale debt forgiveness by the Japanese Central Bank, the largest owner of Japanese government debt or the Federal Reserve swapping Treasuries for 100 or 200 year bonds paying a 0.05% or 0.10% coupon or perhaps the introduction of helicopter money by one or more central banks. 

In fact, calls for 'helicopter money' are already on the rise today. Former Fed Chair, Ben Bernanke and more recently Bill Gross, fixed income manager at Janus Capital, have both touted helicopter money as a legitimate monetary policy tool still available to central banks in times of crisis. A search for "helicopter money" on Google Trends also confirms a growing interest from the public in this most unorthodox form of central bank intervention.

Experiments with helicopter money do not end well. The risks are high and consequences severe if badly managed. James Grant of Grant's Interest Rate Observer sums it up best:

“Does the deployment of helicopter money not entail some meaningful risk of the loss of confidence in a currency that is, after all, undefined, uncollateralized and infinitely replicable at exactly zero cost? Might trust be shattered by the visible act of infusing the government with invisible monetary pixels and by the subsequent exchange of those images for real goods and services? ......To us, it is the great question. Pondering it, as we say, we are bearish on the money of overextended governments. We are bullish on the alternatives enumerated in the Periodic table. It would be nice to know when the rest of the world will come around to the gold-friendly view that central bankers have lost their marbles. We have no such timetable. The road to confetti is long and winding.”

— James Grant, Grant's Interest Rate Observer

For more information on my bond market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or 086 821 5911.

Gold Market Update

So long as gold and silver hold above their respective long-term 20 month moving averages, it is safe to assume the bull market in precious metals has returned. The key numbers today are $1,173 for gold and $15.60 for silver. YTD, gold is +11% and silver is +14% for euro investors.

I expect a declining US dollar will provide a nice tailwind for the next leg higher in the precious metals bull market. The US Dollar Index looks to have formed a multi-year top. The last time this occurred was in 2002 and coincided with the start of the gold bull market. I expect an equally powerful move higher in gold and lower in USD once the trends are set in motion.

The World Gold Council has published its first quarter 2016 report on demand trends in the industry and highlights some interesting developments in the sector this quarter. Overall, gold demand grew +21% in Q1 2016 to 1,290 tonnes, the strongest first quarter advance on record. While jewelry demand declined -19% due in large part to the recent surge in gold prices, investment demand more than doubled surging +122% year/year.

Inflows into precious metals ETF's accounted for 364 tonnes, the highest since Q1 2009. Also, of note, central banks continue to accumulate gold and added 109 tonnes during the most recent quarter. They are less vocal about their gold accumulation policy but are consistently one of the largest acquirers of gold each quarter.

The United States remains the top holder of gold bullion based on the World Gold Council's latest reported data with in excess of 8,000 tonnes, followed by Germany, the IMF, Italy and France. China reported 1,798 tonnes of gold reserves at 31st March 2016. 

For more information on my gold market analysis, please get in touch. You can reach me at brian@secureinvestments.ie or 086 821 5911.

October 2015 Investor Letter

Active Asset Allocator Performance

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns  over time with a strong focus on capital preservation. We follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. We always invest with the primary trend of the market and do not follow a benchmark. Instead, we manage the market risk for our clients. Our strategy has returned 12% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. Our active asset allocation approach is best illustrated in the following chart.

Executive Summary

The Active Asset Allocator is on track to deliver another solid return in 2015 +5.8% YTD in what has been quite a volatile market so far this year. Our proprietary investment tools have helped us navigate the market uncertainty with a degree of confidence. The technical set up of the stock market has improved in recent weeks, though we continue to advise caution in the near-term. Financial engineering has put a gloss on corporate earnings that we believe is unsustainable. 

Despite record low yields, we believe there is still room for government bond yields to fall over the next 12 months. We also provide our updated views on inflation and inflation-linked bonds this month. Rising inflationary pressures have not been lost on the precious metals market and we believe gold is waking up from a four year slumber. Gold has a tendency to move in 7-8 year cycles and we could be about to embark on a new multi-year bull trend for precious metals. 

Stock Market Update

Our Technical Trend Indicator (TTI) has kept us on the right side of the primary trend of the stock market and cautioned when to step aside ahead of major stock market corrections. The TTI has been an invaluable tool in our investment toolbox. A history of TTI buy and sell signals are overlaid on a chart of the S&P 500 Index below.

Today, our trend indicator (lower left) is still in defensive mode, but has worked its way back towards neutral with the recent rally in the stock market. The number of advancing versus declining stocks has turned up recently, driving some of the improvement in the technical set up of the stock market, though the longer-term trend still remains down. 

The number of stocks making new highs minus those making new lows has also turned positive for the first time in many months. A consistent positive trend here will allow us to become more constructive on the stock market, but we need to see more data before making that call.

In addition to the above indicators, we pay attention to the percentage of stocks trading above their 200 day moving average to gauge the overall health of the market. In rising markets, at least 50% of the stocks trading on the NYSE trade above the 200DMA. When this percentage falls below 50%, stocks tend to struggle. Today, we only have 36% of stocks trading above their 200DMA. This chart needs to repair itself quickly or the path of least resistance will turn lower again shortly.

While it is possible that stocks consolidate their recent gains in the weeks ahead and break out to new highs, this is not our current expectation. US companies reporting third quarter 2015 earnings are not delivering much in the way of positive news. Alcoa for example recently kicked of earnings season in the United States with somewhat disappointing news and their shares were clubbed for -10%. Walmart, considered a bellwether for the US economy, also provided a reality check for those with a bullish bias, delivering quite a sobering outlook for 2016 on their quarterly analyst conference call. WMT shares have plunged -36% so far this year. Financial engineering has put a positive gloss on corporate earnings in recent years but that trend can only last for so long. 

Regular readers will know that we are watching the performance and chart pattern of the FTSE All World Equity Index with interest. This global equity benchmark for fund managers around the world continues to track the 2007/8 stock market top in an eerily similar fashion. We have experienced a sharp selloff in the stock market and are now rallying off the August lows. The bulls will argue we have had our 10% correction and come through October relatively unscathed, so it's off to the races for the rest of the year. We take a more sanguine view. Given that the global economy is slowing and corporate earnings have been relatively disappointing, there is quite a disconnect in the market today between expectations and reality. We remain defensively positioned in the Active Asset Allocator for now, 20% equities / 30% bonds / 30% gold / 20% cash.

For more information on our stock market analysis, please get in touch. You can reach Brian Delaney at brian.delaney@secureinvest.ie or 086 821 5911.

Bond Market Update

You have to pay the German government 0.26% per annum to take your money for two years and can earn just 0.57% per annum on a 10 year German bond. A 1% rise in German bond yields will eat up over a decade's worth of income. Irish 2 year government bonds are also sporting a negative yield, despite an economy that is growing at a rate of 6% in 2015. Today, Germany, France, Finland, Ireland and Sweden all have negative government bond yields out to four years. 

Despite record low yields, we believe there is still room for government bond yields to fall and prices to rise. By the time the ECB has finished its QE government bond buying programme, we could see negative 10-year yields across many of the core EU government bond markets, while government bond yields in the EU periphery move closer to zero. EU government bonds should also benefit from the flight-to-quality trade on the next stock market correction. As always, we will be guided by the price action of the fixed income markets we follow. 

In our active asset allocation strategy, we have begun to rotate away from long duration government bonds - reducing the allocation from 30% to 20% in November 2014 - into a mix of shorter duration EU government and corporate bonds (+5%) and EU inflation-linked bonds (+5%) and will continue this process in 2016. Given the collapse in crude oil prices in 2015, inflation expectations are relatively benign this year but many market forecasters are increasing their inflation estimates for 2016. JP Morgan for example is expecting inflation to rise in Europe from 0% this year to 1.0-1.5% in 2016.

The iShares Euro Inflation Linked Bond ETF has begun to price in a more inflationary environment for 2016, rallying +4% from the July lows. Inflation linked bonds should outperform fixed interest rates bonds in periods of rising inflation and deliver positive returns should inflation rates increase at a faster rate than anticipated by the market. We are well positioned to capture this trend with allocations to ILB's and precious metals in the Active Asset Allocator.

For more information on our bond market analysis, please get in touch. You can reach Brian Delaney at brian.delaney@secureinvest.ie or 086 821 5911.

Gold Market Update

Slowly but surely the gold market is waking up from a four year slumber. Euro gold rallied +28% from the November 2014 low, then corrected by -17% earlier this year. Euro gold has added another +10% in recent months and we believe this uptrend is just getting started.

Gold has a tendency to move in 7-8 year cycles and we could be about to embark on a new multi-year bull trend for precious metals. Certainly, the combination of a weakening global economic growth outlook, zero-to-negative interest rates, record loose central bank monetary policy, rising political tensions in between West and East and rising demand for a scarce resource that has been considered money for thousands of years, all combine to set the stage for an explosive rally in the precious metals sector.

While gold in US dollars has rallied +9% since the July 2015 lows, the gold mining companies have reacted much more favourably, which should be expected as the miners really are leveraged plays on the price of gold. The most popular ETF of gold mining stocks, GDX is +27% over the same period while certain mining companies have performed even better: Agnico Eagle (AEM), Yamana (AUY), Novagold (NG) and New Gold (NGD) to name a few. Caution is warranted however. We have seen this movie many times before over the last four years. Miners need to continue their current form for quite a few months yet before we can be confident that the bear market in precious metals is behind us.

For more information on our gold market analysis, please contact Brian Delaney at 086 821 5911 or brian.delaney@secureinvest.ie.

June 2015 Investor Letter

Active Asset Allocator Performance

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns  over time with a strong focus on capital preservation. We follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. We always invest with the primary trend of the market and do not follow a benchmark. Instead, we manage the market risk for our clients. Our strategy has returned 12.6% per annum net of fees since inception. Our active asset allocation approach is best illustrated in the following chart.

Executive Summary

Stocks are little changed since our last Investor Letter but under the hood, we note a deteriorating picture. The FTSE All World Index looks to be tracing out a topping pattern, while our own studies show that the technical trend is breaking down. Opportunities in fixed income may present themselves later this year in both fixed and inflation linked sectors if yields continue to back up over the summer. Meanwhile gold continues to frustrate the bulls and bears alike and sentiment for the precious metals is as bad as I have ever witnessed. Despite this picture, gold in Euro terms is +7% YTD. 

Stock Market Update

We continue to experience pockets of strength in certain regional stock markets around the world - Japan, the Eurozone and China to name three - but the broader picture is one of consolidation and range trading. Japanese and Eurozone stock markets continue to rally following sharp currency declines (JPY -40%, EUR -25%) and the Shanghai stock market trades as if on steroids, +158% in 12 months, before declining -13% last week (That could be it for the Shanghai stock market for 2015). The bigger picture however, is less certain.

The S&P 500 continues to trade in a tight range and has corrected by just 3 points or -0.1% since last month's investment update while the FTSE All World Index (below) has fallen just 2 points or -0.7% over the same period. This global stock market benchmark continues to track the 2007-2008 market top pattern with uncanny similarity - marginal new price highs combined with slowing momentum and weaker internal market strength. We continue to pay very close attention to this chart formation, particularly as stock market valuations are quite stretched and investor confidence is running high, a dangerous combination. This chart may repair itself with price breaking higher on strong volume, but until this happens, we remain guarded.

In tandem with the potential topping pattern in the FTSE All World Equity Index, some of our own studies also show that the technical trend is potentially breaking down here. Our Technical Trend Indicator is once again trading below its long-term moving average while our Large Cap Breadth Index has been in a downward trend since April.

Valuation is not a timing tool but any sensible valuation metric today indicates that, after a 200%+ run, stock market valuations have entered elevated territory. The value of US corporate equities for example relative to the value of the US economy has stretched to two standard deviations above the long term mean, as illustrated in the next chart. Now is not the time to be swinging for the fences. So, we remain defensively positioned for now in the Active Asset Allocator 20% equities / 30% bonds / 30% gold / 20% cash.

For more information on our analysis, please get in touch. You can reach Brian Delaney at brian.delaney@secureinvest.ie or 086 821 5911.

Bond Market Update

Following a sharp appreciation in price and decline in yields across government bond markets in 2014, yields have begun to rise in 2015 in a mean reversion trade. The trend higher may persist a while longer but we do not anticipate the recent spike in yields to be the start of a strong persistent uptrend.  Sub-par economic growth and a multi-year debt deleveraging cycle should keep downward pressure on bond yields for some time to come.

Before the credit crisis, 10-year Eurozone nominal government bond yields traded in the 3-4% range while inflation was running at approximately 2% per annum. Real yields (nominal yields minus inflation) therefore were positive 1-2%. As interest rates were pushed lower after the financial crisis below the rate of inflation, real yields turned negative. In this environment, inflation-linked bonds have delivered positive returns.

Today, nominal government bond yields are 1-2% and inflation remains sticky at 2% so real yields have broken below zero. We anticipate this trend in negative real yields will accelerate over time as nominal yields are kept low via continued central bank buying, while inflation rates begin to rise, a byproduct of years and trillions of dollars, euros and yen of QE. Real yields have the potential to fall by 3-5% over time, which would deliver a 20-35% return on an inflation linked bond fund with a duration of 7 years. We will look to increase the allocation to inflation linked bonds later in 2015 if real yields climb a little higher than current levels.

Gold Market Update

Gold has a tendency to move in 8 year cycles. Gold declined in price from 1993 to 2000 before the secular gold bull market began in earnest. Gold traded aggressively higher from 2000 to 2007 before correcting and consolidating as the tail end of the equity bull market before we had the financial crisis. Gold's next eight year cycle began in 2007 and is getting long in the tooth. Gold may already have bottomed or we could be set for one final push lower this summer before the next eight year cycle commences.

The almost four year correction in precious metals has certainly taken its toll. Sentiment is as bearish as I have ever seen it in my 12 years analyzing and investing in this sector. I can't find a single gold bull no matter where I look (apart from the good folks at GoldCore in Dublin). Share prices of the Gold mining companies have fallen by 70-90% in many cases and a growing number are facing bankruptcy. Despite the negative sentiment, gold has delivered a better return than either equities or bonds since before the financial crisis. Gold has actually only had one negative year since the bull market started in 2000.

Where to from here? Of course, I cannot guarantee that the bottom is in and we may experience lower lows this summer in USD terms. In fact, the 50% retracement of the entire bull market from $250 in 2000 to $1,923 in 2011 is $1,088, about -7% below the current gold price.

If gold breaks lower and trades down towards $1,088, I would expect to see an equivalent rally in EUR/USD, from $1.12/€1.00 towards parity. Euro gold investors would gain on the currency what they lose on the asset price decline and thus experience a minimal drawdown. For now, I will continue to hold a 30% allocation to precious metals in the Active Asset Allocator as I expect we are close to, if not already past, the 8 year cycle low. Of course, I continue to monitor the situation closely.

For more information on our gold market analysis, please contact Brian Delaney at 086 821 5911 or brian.delaney@secureinvest.ie.

October 2014 Investor Letter

Model Portfolio Update

Executive Summary

Without an immediate about turn in the stock market, we will get an "All Market Sell Signal" on Friday for the first time in over a year. Stocks are now trading at their second highest ever reading based on Warren Buffet's favourite valuation tool. Stock market volatility has picked up recently, and in the short-term, equities are oversold and should bounce. In fact, there have been six other times the Vix Index has jumped 60% or more in three days. Every time, stocks rallied over the next two days. In four of the six times, the rally marked the end of the decline. However, in the other two instances, stocks rallied for 5-7 days and then rolled over to new lows. Our best advice is to continue to follow our Active Asset Allocator Model which is defensively positioned 20% equities / 30% 5+ year Eurozone government bonds / 30% absolute return bonds. / 20% gold.

Equity Market Update

This is a big week for the stock market. My Technical Trend Indicator (TTI) will deliver its first "All Market Sell Signal" in well over a year this Friday unless stocks do an immediate about-turn. Risks are running high as equities enter their sixth year of rising prices without a meaningful correction (we typically experience a 20% correction in stocks every 3.8 years on average). Investors must now contend with an overvalued stock market, overly bullish investor sentiment, the end of the Federal Reserve's latest round of money printing (QE3), which has provided $1 trillion of support to the capital markets this past year and a technical trend change in the market.

We have come a long way since the 2008/9 stock market lows and that is now reflected in equity market valuations. A Warren Buffet favourite valuation tool: US corporate equities are now valued at 127% of US nominal GDP, the second highest reading in history.

The S&P 500 has traded for 475 consecutive trading days above its 200 day moving average - the longest stretch in history - but closed below key support on Friday. While the most popular stock market indices (Dow Jones Industrials, S&P 500 and Nasdaq) are holding up reasonably well so far this year, the smaller cap indices in the US and many key European stock markets have been trading much weaker recently.

The character of the market is changing and this can be seen in the spike in volatility measured by the Vix Index (below) that has coincided with the recent decline in the stock market. In the short-term, stocks are oversold and should bounce from here. In fact, there have been six other times the Vix Index has jumped 60% or more in three days (19/10/1987, 13/10/1989, 8/6/1990, 27/2/2007, 6/5/2010 and 8/8/2011). Every time, stocks rallied over the next two days. In four of the six times, the rally marked the end of the decline. However, in the other two instances, stocks rallied for 5-7 days and then rolled over to new lows. If we get a relief rally that fails over the next week, watch out below. We remain defensively positioned in our Active Asset Allocator Model.

High yield bonds are also signalling renewed stress in the credit markets for the first time in over three years and equity investors definitely don't like it when junk bonds are plunging to new lows as they are today.

So, what's an investor to do? The technical trend indicator has navigated the market turns like a professional. Our Active Asset Allocator investment strategy has switched to defensive mode ahead of every significant stock market decline and reverted to bullish mode to capture each medium-term rising trend since inception. Note: the Active Asset Allocation Strategy switched to defensive mode in June 2013 due to our concern over the ageing equity bull market and has since benefited from an overweight position in bonds.

For more information on our analysis, please get in touch. You can reach Brian Delaney at brian.delaney@secureinvest.ie or at 086 821 5911. 

Bond Market Update

US and EU government bond yields are turning lower again but have yet to make new all time lows. Even if they do, there is limited room for yields to fall. We will likely stay in this low yielding environment for quite some time, particularly if equity market volatility picks up over the next 12 months. Only a bout of inflation or a currency crisis will cause yields to spike.

High yield bonds also look unattractive for yield seeking investors, particularly following their recent break lower. So, for investors in search of safety in a low yielding fixed income world, we are left with short duration government debt, emerging market debt and/or absolute return bond strategies. We have an allocation to two of these strategies currently in our Active Asset Allocator model and are happy to discuss in more detail.

For more information on our bond market analysis, please contact Brian Delaney at 086 821 5911 or by email at brian.delaney@secureinvest.ie.

Gold Market Update

Commodities as an asset class remain totally out of favour. The CRB Index, when measured against the S&P 500, has returned to 15 year lows, quite unbelievable when one considers the trillions of newly printed notes circulating in the system. We could start to see a rotation into this asset class if equities start to turn lower.

Gold continues to hold up quite well here, particularly gold priced in euros, which is +11% YTD. Despite gold's resilience to hold above $1,200, I am not hugely excited about the triple test of $1,180 by USD gold in recent months. These support zones tend to become targets for active traders and there are probably plenty of stops placed just under those levels. We could head back below $1,180 on the next decline for gold. That said, this bear market in gold is getting long in the tooth. 2015 could be the year for precious metals to shine once again as one of the remaining true safe haven stores of value in a fiat currency world. In the meantime, continued patience is required.

For more information on our gold market analysis, please contact Brian Delaney at 086 821 5911 or by email at brian.delaney@secureinvest.ie.

September 2014 Investor Letter

Model Portfolio Update

Executive Summary

Our model portfolio overweight position in bonds has worked well this year but the time has come to bank some profits and shorten the duration of the bonds we hold. The end of this multi-decade bull market in bonds is finally coming into view. German 10 year yields have reached 0.89%, while Dutch 10-year yields are trading at 500 year lows. There simply is little room left for yields to fall and therefore limited upside for bond prices. As a result, we are making the first change to our model portfolio in quite some time, introducing a 30% allocation to absolute return bonds. To fund this position, we are reducing our existing bond allocation by 20% and also investing 10% from cash. The model portfolio is now invested 20% equities / 30% 5+ year Eurozone government bonds / 30% absolute return bonds. / 20% gold.

Equity Market Update

Equities continue to trade in almost bullet proof fashion, ignoring all negative news, from QE tapering in the US to increasing political instability across much of Europe. The US stock market is leading the charge and the S&P 500 today is making new all time highs. Investor complacency is running high. Despite an ageing bull market, there are some short-term reasons for optimism, albeit largely technical in nature. For example, our Technical Trend Indicator continues to give the all-clear for stocks. Every touch of long-term support has been met with more investor buying. As long as this trend continues, equity investors should reap the rewards. However, with equity market valuations running high and investor sentiment quite frothy, equity investors should remain on red alert for any sign of deterioration in the technical trend of the market. 

In another positive development, our Most Active Stocks Index Advance/Decline Line remains firmly in bull mode and our Large Cap Breadth Index Advance/Decline Line could be breaking out to the upside again, reaffirming the recent strong trend higher for stocks.

However, despite the above short-term positive developments, we remain defensively positioned and patiently await the next correction in risk assets to take effect. While timing the next market decline is always difficult, a study of market history suggests that we may not have too long to wait.

• Historically, 5% corrections happen in stock markets every 7 months. The last one happened in January 2014, 8 months ago.

• Historically, 10% corrections occur every 26 months. We witnessed the last 10% correction in April 2012, 29 months ago.

• Historically, 20% corrections occur every 45 months. The last 20% correction ended in March 2009, 66 months ago.

The latest Investors Intelligence Sentiment Index is also revealing in that it has reported the lowest percentage of investment strategists with a bearish outlook since 1987, with a reading of just 13.3% bears. Investor sentiment readings also reinforce our defensive position for now.

As we enter third quarter earnings season in the United States, companies reporting earnings will also have to contend with a strongly appreciating US dollar, which will negatively impact profits earned abroad, when translated back to the domestic currency. The US dollar has rallied +6% versus the euro in the last three months and has experienced a similar sharp appreciation versus the Japanese Yen and Australian dollar. For now, we are happy with our current allocation in the model portfolio.

For more information on our equity market analysis, please contact Brian Delaney at 086 821 5911 or by email at brian.delaney@secureinvest.ie.

Bond Market Update

Our overweight Euro zone government bond position in the model portfolio has worked out very well this year. With no growth or inflation in sight, EU bonds have rallied sharply in 2014, driven higher by defined benefit pension schemes across the continent seeking to buy long duration bonds to match their ever-growing pensioner liabilities and also by EU banks leveraging up customer deposits and buying bonds in a reach for yield. 

However, the time has come to cut this position and shorten the duration of the bonds we hold. We don't want to outstay our welcome. The end of this multi-decade bull market in bonds is finally coming into view. German 10 year yields have reached 0.89%, while Dutch 10-year yields are trading at 500 year lows. There simply is little room left for yields to fall and therefore limited upside for bond prices. As a result, we are making the first change to our model portfolio in quite some time, introducing a 30% allocation to absolute return bonds.

For more information on our bond market analysis, please contact Brian Delaney at 086 821 5911 or by email at brian.delaney@secureinvest.ie.

Gold Market Update

As long as equities continue their cyclical bull market, there will likely be little interest in or demand for insurance in the form of gold. That has been the case since late 2011 and gold delivered its first negative return last year for euro investors in thirteen years! Gold's time has not yet come but it will and when it does I expect fireworks in this sector. Until then, we must remain patient.

In the short-term, euro investors in gold are getting some reprieve from the strong rally in the US dollar versus the euro, as year to date, euro gold (black and red line on chart below) is +9% while gold in USD is just +1% higher (grey line on chart below). 

For more information on our gold market analysis, please contact Brian Delaney at 086 821 5911 or by email at brian.delaney@secureinvest.ie.

November 2013 Investor Letter

Model Portfolio Update

Executive Summary

If you strip out the impact of inflation, US stocks are as expensive today as they were just prior to the tech bubble bursting in 2000 and the housing bubble bursting in 2007. You would have to go all the way back to 1982 to see the last time that the stock market was truly undervalued. Investor appetite for high flying tech stocks with no earnings (Twitter) is a great barometer of the current mood. Margin debt, which measures hedge fund borrowing to invest in the stock market just hit a new all time high of $401 billion. The extent of the borrowing is now higher than the two prior peaks in 2000 and 2007.

Bonds have been a great safe haven every time stock markets have corrected. That safe haven status may be coming to an end, though it is a little too early to tell just yet. If bonds fail to rally in a meaningful way on the next big correction in stocks, I will be taking action in the model portfolio, by reducing the allocation and duration of the bonds held. I have already identified a better home for the capital and will be sharing that with you in due course.

Gold continues to search for direction. Gold bottomed in June 2013 at $1,180, rallied to $1,400 over the summer and is now in the process of testing the prior lows. A successful re-test will signal a trend change for gold investors and a strong indication that the 2 year bear market in precious metals is at an end. 

Equity Market Update

Equity market cycle count

"We are in the middle of a kind of bubble market and when they prick the bubble, there will probably be a pretty bad reaction. "

Julian Robertson, hedge fund manager, October 2013.

A few months back, Leon Black, founder of private equity firm The Apollo Group, told investors he was selling everything that wasn't nailed down. This month, retired hedge fund manager Julian Robertson of Tiger Management also passed judgement on the bubble-like characteristics of today's stock market, as did Paul Singer of Elliott Management, another kingpin of the investment industry. Singer noted last week that:

"the recent trading environment has felt like walking into a place and having a sense that something is wrong and dangerous but not knowing exactly what will happen and when. QE Infinity has so distorted the prices of stocks and bonds that nobody can possibly determine what the investing landscape would look like, or what the condition of the economy and financial system would be, in the absence of Fed bond-buying. 

It is also not clear whether stock prices, which are still on a tear and at all-time nominal highs, are at these levels because of optimistic economic prospects, QE, or the beginnings of a loss of confidence in paper money causing a shifting of capital out of fixed income and into purportedly “real” assets. It appears to us that the Fed is basically paralyzed and afraid to reduce, much less eliminate, its bond-buying. In this environment, plain-vanilla ownership of stocks or bonds represents a highly conjectural bet on government-manipulated markets."

Those that continue to hold an overweight position in stocks please take note. 

There is no doubt that equities are expensive today. If you strip out the impact of inflation, US companies as measured by the S&P Composite Index, are as expensive today (Fed bubble) as they were just prior to the tech bubble bursting in 2000 and the housing bubble bursting in 2007. As you can see in the chart below, the stock market has only reached fair value (grey line) once since the mid-1990's and that was briefly in 2009. For the entire remaining period, the stock market has been expensive (red line) relative to corporate earnings. You would have to go all the way back to 1982 to see the last time that the stock market was truly undervalued (green line).

More stocks are trading above 3 times their book value today than at the stock market bubble peak in 2000.

Investor sentiment is also approaching a bullish extreme. Investor newsletter writers for example have rarely been more bullish about the future outlook for stocks than they are today. Every time investor sentiment got this stretched, a correction was not far ahead.

A great example of the extent of the current level of investor optimism is captured in the following chart. Here we show margin debt reported by the NYSE, which has now reached a new all time high of $401 billion. Margin debt is a measure of borrowings by hedge funds and speculators to invest in stocks. The extent of the borrowing is now higher than the two prior peaks in 2000 and 2007.  

Margin debt used by hedge funds and speculators has reached a new all time record of $401.2 billion. 

Retail investors are also getting in on the act. Recent data from the Rydex family of funds shows that Rydex cash fund holdings have fallen to very low levels today, while money is pouring into the stock market. Lipper data recently showed that investors have contributed a net $41 billion to equity funds and ETF's over a three week period in October. Going back to 2002, that exceeds the prior three-week record inflow by more than 17%.  

So, we have a quite a dangerous combination of an overvalued and overbought stock market with overly bullish investor sentiment. The uptrend can of course continue in the short run as momentum feeds on itself and in the short-term, the stock market still looks bullish. Despite being overvalued, overbought and sentiment being overly bullish, we have yet to experience any real selling pressure. 

What could trigger a selloff in the stock market? A medium-term peak in corporate earnings could be the tipping point. Corporate earnings peaked in 1999 in the midst of the tech bubble and peaked again in 2007 as the Fed-inspired housing bubble burst. It could be third time unlucky for equity investors as corporate earnings mean revert once again. This time however, there will be no support from central banks to lower interest rates. Short-term interest rates are already 0% in the US, EU and Japan.

S&P 500 real earnings growth has recovered since the 2008 financial crisis.

Equity market volatility has been on the decline since 2009. That trend appears to be changing.

The Vix Index, a measure of stock market volatility, is preparing for a breakout.

Bond Market Update

Bond market interest rates

Is QE losing its effectiveness? Despite the Federal Reserve printing $500 billion since May and using the proceeds to buy US government bonds, US 10 year government bond yields have risen  by 140 basis points from 1.6% to 3.0% in September before backing off a little last month. If money printing at the current extreme is no longer working to keep interest rates at record lows, then the bond bull market / bubble, which has been in effect for over 30 years, may be at a serious inflection point. Despite the record money printing, the bond market may have begun to price in a more inflationary outlook in our future. 

I want to see how bond markets react on the next big down move for stocks, which I continue to believe is directly ahead. Bonds should benefit as capital moves back to safe haven assets. If bonds fail to rally in a meaningful way, I will be taking action in the model portfolio. In any event, early in the new year, I will be looking to reduce the allocation and duration of the bonds in the model portfolio. I have already identified a better home for the capital and will be sharing that with you in due course.

Gold Market Update

Gold market cycle count

Gold bottomed in June 2013 at $1,180, rallied to $1,400 over the summer and is now in the process of testing the prior lows. A successful re-test will signal a trend change for gold investors and a strong indication that the 2 year bear market in precious metals is at an end. 

Although the past two years have been trying for the gold bulls, the fundamental case for owning gold continues to get stronger. I believe the bull market in precious metals is still intact. We are experiencing a vicious bear market within a bigger bull market. The current bear market is resetting sentiment, which will provide the fuel for the next big move higher. When will it happen? Nobody knows for sure, but I think we are getting very close now.

Fundamental Case

Money printing by all the major central banks continues at a pace never before seen in the western world. The US recently raised the debt ceiling once again which will allow them to continue to fund their deficit by printing money. The recent appointment of Janet Yellen as next Fed Chair is also very bullish for gold longer term. The supply of fiat money is limitless; the supply of gold is finite (and falling). Bull markets are hard to hold on to. Gold acts as the ultimate foreign exchange, has no counterparty and physical bullion is difficult to tax by governments. Gold will have its day but investors have to remain patient.

Technical Case

Since the June low of $1,180 gold has rallied to $1,434 and fallen back to $1,275 so far. If gold can move higher from here it will have made a higher low and that is constructive; the first time it has happened in over 2 years. Ultimately gold needs to get back above the declining 200 day moving average to confirm the bull market is back on track. The 200 DMA is currently $1,440 and falling. We need to see continued strength here before burnt investors will start to wade back into the sector.

Sentiment

The pessimistic mood in the precious metals sector is unprecedented. The vast majority of investors have thrown in the towel. Many are calling the bull market over and shorting the sector now. All the big investment banks are confidently predicting much lower gold prices for years to come. There really are very very few bulls left. This level of negative sentiment sets the scene for the next leg higher. 

To learn more about the full range of investment services available at Secure Investments, please contact Brian Delaney by email at brian.delaney@secureinvest.ie. 

September 2013 Investor Letter

Model Portfolio Update

Executive Summary

We are approaching the latter stages of this four year bull market in stocks and it has been quite a ride. The multi-year equity market rally has done its job. Investors have stepped back from the brink and have returned to the market in their droves, buying equity funds at a record pace in recent months. The model portfolio remains defensively positioned with an asset mix of 20% equities / 50% bonds / 20% gold / 10% cash. While the short-term performance of the model portfolio has been impacted, the current position is warranted given that stocks remain expensive, sentiment is at a bullish extreme and my technical indicators are advising caution.

Please feel free to add your comments and questions at the end of this report and I will reply to all as best I can.

Equity Market Update

Investor sentiment is back to levels that have marked stock market tops in the past and valuations are also stretched - the S&P 500 currently trades at 19 times 2012 net reported earnings. Stocks are more expensive now than they were at the previous peaks in 2000 and 2007. Today, there is over $8.0 trillion invested in US equity mutual funds and equity ETFs, which is 3.5 times more than the amount invested in cash, a new all-time record looking back over the past 30 years. The last time investors were buying stocks with such abandon was May 2007. At the peak in August 2000, the ratio was 3.1 times. We are not in a new secular bull market for stocks, so I expect this ratio to top out shortly, along with the stock market. Investor appetite for stocks should start to decline in the near future. Now is not the time to be fully invested.

The ratio of funds invested in US stocks versus cash has reached a new all-time record of 3.5 times.

Permission granted from Sentimentrader to reproduce this chart.

Hand in hand with the above measure of investor confidence, we also see a strong desire among stock market participants to embrace risk once again. The Risk Appetite Index comprises a mix of indicators that track investor risk appetite including credit spreads, stock and currency volatility and the relative performance of different stock market sectors. We have seen a big rise in risk-seeking behaviour in recent months.

Investor risk appetite is back to levels coincident with prior peaks in the stock market. Permission granted from Sentimentrader to reproduce this chart.

Last month I discussed some initial signs of technical deterioration for stocks as measured by the Advance / Decline Line. That weakness continues today so I want to include an updated chart in this month's Investor Letter. A quick recap first: the Advance/Decline Line graphically displays the relationship between the number of stocks in rising trends versus the number of stocks in declining trends. In a healthy bull market, you should expect to see the majority of stocks in rising bullish trends (rising A/D Line). However, late in every bull market, the number of stocks participating in each rally falls (falling A/D Line) until such a time that the trend peaks and reverses. We experienced a negative divergence in the A/D Line for months prior to the stock market peak in 2007 as fewer and fewer stocks participated in the rising trend. We are seeing the same behaviour today.

The Advance/Decline Line has not confirmed the recent high in the S&P 500. Fewer stocks are participating in the rising trend, which typically happens close to bull market peaks.

In August for the first time in over a year, my technical trend indicator tipped over into the red, breaking support at the long term moving average. While the technical trend has recovered somewhat in recent weeks, any additional sustained selling will tip the long-term moving average into a downward trend. Investors should take note of this early warning signal that the uptrend in the stock market is deteriorating.

The Technical trend is weakening.

Bond Market Update

Bond yields should continue to trend higher over time but are due a rest in the short-term after doubling from the lows in May.

In May of this year, the Federal Reserve hinted that they may consider tapering their purchases of US Treasury and mortgage backed securities in an effort to bring this $85 billion/month QE experiment to an end. That was enough for skittish bond investors to sell. The 10 year yield on US Treasuries promptly doubled (almost) from 1.6% to 3.0% in four short months. In September, Bernanke backed off of his grand plan, but US Treasury yields have only backed off by a mere 0.40%. The bond market has started to sense that something is wrong and Bernanke is worried. He knows he will have to start the taper some day. The Fed just can't just keep on printing $1 trillion/year without something bad happening.

So what does this mean for bond investors today?  Well, return expectations should remain low for starters and short term-bonds should be favoured over long-term bonds. High quality government and corporate bonds should be the preferred choice where possible. After a doubling in interest rates in recent months, chances are that interest rates won't travel much further north from here in a highly leveraged global economy. In any stock market correction, bonds will continue to provide short-term shelter and the risk of capital loss in a high quality short-term bond will be a lot lower than the risk of loss from an equity investment, no matter the quality. It is for this reason that bonds remain a core holding in the model portfolio.

Gold Market Update

Gold Cycle Count

The gold conundrum continues. Following an epic 11-year run, gold reached a peak of $1,921 in September 2011 and has been in correction more ever since. The bull market for gold is not over, so we should expect $2,000 and higher (possibly much higher) at some point in the future once the current correction ends. Gold bottomed in June 2013 at $1,180 and has been rallying sporadically since, trading at approximately $1,300 at the time of writing. The bull market is doing its job, throwing off the majority of holders. Even the long-term gold bulls are jaded with the market action. 

I continue to believe that gold is building a strong base and in its own good time, when least expected, gold will resume its bull market. During the last gold bull market of the 1970's, gold corrected in price from $200 to $100, a -50% decline before surging higher to a peak of $850 in 1980 as inflation ran wild. While no two bull markets are ever the same, I am expecting a strong second half performance by the precious metals as investors finally lose faith in the paper currency system and trust is restored in the ultimate foreign currency. Patience will be rewarded.

To learn more about the full range of investment services available at Secure Investments, please contact Brian Delaney by email at brian.delaney@secureinvest.ie. 

August 2013 Investor Letter

Model Portfolio Update

Executive Summary

I reduced the allocation to equities in the model portfolio from 50% to 20% in the third week of June 2013 and continue to run with that asset mix today. 20% of proceeds were invested in 5+ Year Eurozone government bonds and 10% in cash. The current asset mix remains at 20% equities / 50% bonds / 20% gold / 10% cash. Given that stocks remain overvalued (the price/earnings multiple on the S&P 500 is 19 times based on 2012 net reported earnings), investor sentiment remains overly bullish, we are 4.5 years into the current equity bull market (compared to 3.8 years for the long term average) and a number of my technical indicators are tipping into bearish mode, I continue to recommend a defensive position for now.

Equity Market Update

Equity Market Cycle Count

Stock market tops are a process. After breaking 1,400 for the first time in July 1999, it took the S&P 500 another 15 months to hammer out a major top before plunging in October 2000. The second major bull market peak in recent times began to take shape in 2007. The S&P started to wobble at 1,450 in February 2007. Then, in October 2007, US equities experienced a sharp -20% correction from 1,576 to 1,257 in five months. The relief rally lasted all of two months before the wheels came off. All in all, coincidentally, it again took 15 months for the US stock market to complete the topping process before collapsing in 2008.

This time around, top-calling is a little trickier. The Fed has begun to talk about tapering their massive monthly purchases of treasuries and mortgage backed securities. However, talk is cheap. Mr. Bernanke has an unlimited monetary arsenal at his disposal and could resume his QE project at the drop of a hat if economic data start to soften again. More QE could mean ever higher stock prices. At some point though in the not too distant future - we could be there already - continued Fed intervention will be perceived by investors as the problem rather than the solution. Stock prices will stop going up Federal Reserve announcements of additional money printing. Then they will start going down and that will be a sight to behold. The tide has started to turn in my opinion, which means that the next 12 months could prove quite challenging for stock markets. 

Let's examine the stock market's technical setup for clues that the four year uptrend may be waning.

This week, for the first time in over a year, my technical trend indicator has tipped over into the red, testing support at the long term moving average. Investors should take note of this early warning signal that the uptrend in the stock market is deteriorating.

The technical trend has started to break down.

We can also see some initial signs of an overall weakening in this equity bull market by examining the Advance / Decline Line of all NYSE traded stocks. The A/D Line graphically displays the relationship between the number of stocks in rising trends versus the number of stocks in declining trends. In a healthy bull market, you should expect to see the majority of stocks in rising bullish trends. However, late in every bull market, the number of stocks participating in each rally falls until such a time that the trend peaks and reverses. For example, in 2007, we witnessed a negative divergence in the A/D Line for months prior to the stock market peak as fewer and fewer stocks participated in the rising trend. We are starting to see the same behaviour today.

The Advance / Decline has not confirmed the recent high in the US stock market. Fewer stocks are participating in the rising trend, which typically happens close to bull market peaks.

In addition to the initial signs of technical deterioration we see in the stock market, investor optimism has also reached a rather bullish extreme. Taken together, excessive bullish sentiment and initial signs of a technical breakdown in the stock market should provide food for thought for those with a bullish outlook. Last time we reached a similar low level of investor bearishness was just prior to the stock market correction in May 2011; before that was just before the wheels came off in 2008. Buyers beware.

Bearish sentiment has reached lows that have marked similar peaks in stocks in the past.

Permission was provided by Sentimentrader to post this chart.

Here is a longer term view of the same chart. There is still room for bearish sentiment to decline further (and stock prices to continue to rise), but a correction to reset sentiment is not far off. 

Long term view of investor bearish sentiment.

Permission provided by Sentimentrader to post this chart.

Like clockwork, and coincident with the low levels of bearish sentiment graphically shown above, investors are back in confident mood and returning to the stock market in their droves, with many going on margin (borrowing) to do so. Margin debt peaked at close to 2.8% of nominal US GDP in 2000 and again in 2007 as the S&P 500 was making a multi-year top in each instance. Margin debt levels are surging higher again and I fear the same result for stock prices in the months and years ahead.

Investors are as confident again now as they were in 2007 with a record number borrowing on margin to invest in the stock market.

Evidence is building that the current stock market rally is running into trouble. Stocks remain overvalued, investor sentiment remains overly bullish, and a number of my technical indicators are tipping into bearish mode. It is therefore prudent to continue to hold a defensive position for now as recommended in the model portfolio.

Bond Market Update

Global bond yields are rising. Central banks are losing control of their interest rate setting ability.

Long-term interest rates are rising across the world. US 10 year yields have risen 100 basis points from 1.76% to 2.76% in the past 8 months, despite the Federal Reserve printing $680 billion during that time to buy US government bonds. The bond market is signalling its discontent with Federal reserve policy of unlimited money printing. Rising interest rates will be the trend of the future, so investors that buy bonds should only do so for tactical reasons and always invest at the short end of the yield curve. 

Gold Market Update

Gold Cycle Count

After a 2 year correction, the gold bull is back. The gold correction lasted from the peak in September 2011 of $1,921 to a trough in June 2013 of $1,180, a steep decline of -39%. Now, I expect gold to make up for lost time and challenge the all time highs over the next 6-12 months. During the last gold bull market of the 1970's, gold corrected in price from $200 to $100, a -50% decline before surging higher to a peak of $850 in 1980 as inflation ran wild. This time round, following the $1,180 low in June, gold has already recovered $240 to reach $1,420. If I am right about gold, we should see a strong move higher over the next 3-5 years as the bubble builds momentum.

Gold price history

Despite gold's recent 20% rally off the June lows, investor sentiment relating to the sector remains in the doldrums. Investors have thrown in the towel and have been very slow to return despite the recent turnaround in performance. This behaviour is exactly what is required to drive the gold bull market higher over the medium-term. As you can see from the next chart, the popular Rydex Funds are showing no signs of investment inflows into their precious metals funds. We have a long way to go before fund inflows return to the levels of 2010 and 2011.

Fund flows into the Rydex gold funds suggest indifference to the current rally. this is exactly what is required to propel gold higher in the months and years ahead.

The gold mining stocks, after getting taken to the woodshed earlier this year, are also making a comeback. While gold has rallied +20% in 6 weeks, the gold miners as measured by GDX, have already tacked on +39% over the same period. It is too early to get excited yet, but the prospects are definitely looking better. It's always darkest before the dawn. Hold your gold position and add on weakness. The next three years are going to be very profitable for precious metal investors.

To learn more about the full range of investment services available at Secure Investments, please contact Brian Delaney by email at brian.delaney@secureinvest.ie.