Market Update - 13th June 2014

We have no changes to the model portfolio at this time.

We remain cautious in our outlook for global asset markets and continue to recommend a defensive asset allocation in our model portfolio: 20% equities / 50% bonds / 20% gold / 10% cash. Euro zone government bonds are +10% YTD and gold is +7% YTD versus global equities only +5% YTD, so our defensive position continues to pay off.

The ongoing strength of this bull market in stocks has been impressive and, at 63 months, it has become the 4th longest stock market advance of the past 85 years (the long-term average is just under 4 years). However, we are starting to see some cracks in the technical strength of the market. As noted in our recent Investor Letter, fewer stocks are participating in this extended stretch higher as we move into the summer months and volume is not following price as it should. The Dow Jones Industrial Average, an index of America's 30 largest companies, continues to rally but on declining volume. A break below support of the triangle that is forming should mean a longer-term correction is likely to unfold.

The Nasdaq Composite, an index of technology stocks that typically leads the market higher, has failed to make a higher high for the move this month and is showing similar signs of fatigue as stocks in the Industrials sector.

 

Same story for small cap stocks; the Russell 2000 has made a lower high in June and is overbought in the near-term. 

European stock markets look a little better, more like the DJIA than the NDX, but nearly three years have past without at least a 10% correction in equities, which is why we remain in defensive mode. It's not all bad news! There are a couple of sectors of the market that have been beaten down badly over the past three years and are now breaking out. Get in touch and we will let you know where the next big move will likely occur.

We will leave you with a look as some of the stronger performing stock markets around the world over the past six months.


 
 

Market Update - 19th May 2014

We have no changes to the model portfolio this week.

We remain cautious in our outlook for global asset markets and continue to recommend a defensive asset allocation in our model portfolio: 20% equities / 50% bonds / 20% gold / 10% cash. With Euro zone government bonds +7% and gold +6% YTD versus global equities only +1% YTD, our defensive position is paying off.

Despite 2014 turning out to be a more challenging year for investors, last week stock markets delivered mostly positive returns, particularly in emerging markets. India rallied +4.9% following the election of the pro-business prime minister, Narendra Modi, who will hold a single party majority government for the first time since 1984. Many of the emerging markets had a positive week despite the political uncertainty surrounding Russia and the Ukraine.

Equity Performance for the Week Ending 16th May 2014:

 

Economic news was mixed last week. In the US, retail sales and industrial production were weaker than expected, though jobless claims also declined to a 7-year low. Consumer sentiment ticked lower, but the trend remains up over the medium term. 

Technical: From a technical perspective, the uptrend remains in place and all dips continue to be bought. Beneath the surface however, smaller cap stocks (Russell 2000) and the former momentum leaders (biotechnology, social media) of this 5-year bull market are lagging badly, falling -9%, -20% and -30% respectively from their recent highs. Under the cover of the popular large cap indices making new all time highs, the smart money is heading for the exits, a trait that always occurs near the end of every bull run in stocks. I expect the selling to accelerate later this year and we should be ahead of the game and see a clear breakdown in the technical trend ahead of time. For now, my technical trend indicator closed the week +38 points above the long-term trend. 

Strategy: Investor sentiment remains lopsidedly bullish and equity valuations are in the top 3% of all historic bullish readings. This is not a time to embrace risk. We maintain our cautious stance with an allocation in the model portfolio of 20% stocks, 50% bonds, 20% gold and 10% cash.

Market Update - 17th February 2014

We have no changes to the model portfolio this week.

Equities rallied last week recovering a significant amount of ground lost since the sharp declines experienced in January. Germany, Italy, Australia, China and Hong Kong all gained +3.0% over the last five trading days. Global equity markets are now showing only modest losses year-to-date, while EU government bonds are up approximately 3%-4% over the same period. Our model portfolio continues to perform well this year with an overweight position in bonds an underweight position in equities and a 20% allocation to gold, which has rallied +8% YTD in euro terms.

Equity Performance for the Week Ending 14th February 2014:

The strongest performing sector of the market last week was the gold mining sector, which continues to show very strong gains, signalling an end to the 2.5 year bear market in precious metals. Many of the gold mining stocks have already rallied 30%-50% in the last six weeks; a few have even doubled in price, and this is when gold has only rallied $150 off the December 2013 lows. Gold is still in a bull market and, in time, will take out the 2011 highs. Gold prices are destined to travel significantly higher and the mining stocks are leveraged speculations on the price of gold. This is an area of specialty for us at Secure Investments and we would be delighted to discuss the opportunities we see with you if you are interested.

Gold Mining Equity Performance for the Week Ending 14th February 2014:

Economic: On the economic front, news was mixed. Newly appointed Fed Chair Janet Yellen reassured investors that Fed policy would remain accommodative for the foreseeable future, a key catalyst for the sharp move higher and music to equity investors' ears. While consumer sentiment held steady last week, factory output data in the US disappointed.

Technical: From a technical perspective, the uptrend remains very much in force and is accelerating higher (accelerations higher are typically ending patterns in stock markets). All short-term dips continue to be bought. We experienced little follow through selling pressure after the weak start to the year and so the technical picture has improved. My trend indicator closed Friday a solid +42 points above the long-term trend.

Strategy: Investor sentiment remains lopsidedly bullish and equity valuations are in the top 3% of all historic bullish readings. This is not a time to embrace risk. We maintain our cautious stance with an allocation in the model portfolio of 20% stocks, 50% bonds, 20% gold and 10% cash.

Market Update - 31st January 2014

We have no changes to the model portfolio this week.

It has been a difficult start to 2014 for stock markets, but we are well positioned in our model portfolio, which is overweight bonds (+2% YTD) and gold (+5.1% YTD) and underweight stocks (-2% YTD). The S&P 500 looks set to close the first month of the year with a -2.5% loss and is now trading -4% lower from recent highs. Defensive sectors of the stock market, including utilities and healthcare, are holding up better than the industrial and cyclical names, while transport and technology stocks are showing a mixed performance.

Outside the US, many of the European exchanges are ending the month -2% to -3% lower, while real pain is being inflicted across the emerging markets, where a full blown currency crisis is underway. The Hong Kong stock market is -5.2% YTD, Japan -7.9%, Australia -3.0% Brazil -8.3% and Turkey -8.0%. As the Federal Reserve puts the brakes on quantitative easing, the repercussions are being felt far and wide. Emerging markets benefited greatly as a result of Bernanke's loose monetary policies in recent years. That trend is now turning. Expect more pain if Janet Yellen continues on this course this year.

 Economic: On the economic front, news out of the US continues to be mixed. We had solid GDP growth of +3.2% in 4Q2013 and improving consumer confidence numbers (80.7 vs 78.1) in January. However, durable goods orders were disappointing (-4.3% vs +1.6% est.), jobless claims continue to disappoint (348,000 vs 330,000) and new home sales were weak -8.7%.

Technical: From a technical standpoint, although the uptrend is weakening, it remains intact for now. My technical trend indicator closed the week +15 points above its long-term trend. A break lower in my indicator will likely signify an acceleration lower across global stock markets.

Strategy: The stock market remains overvalued, and investor complacency has reached an optimistic extreme. We therefore maintain our cautious stance with an allocation in the model portfolio of 20% stocks, 50% bonds, 20% gold and 10% cash.

Next Update: Friday 7th February 2014

Market Update - 17th January 2014

We have no changes to the model portfolio this week.

Stock market volatility picked up last week despite a relatively quiet week of economic news. First quarter earnings season has begun in the US and companies are reporting mixed results. Retail stocks for example were impacted after Best Buy reported poor results and its shares were pummeled by -35%. In the Financial sector, shares of Citigroup (-4%) and Capital One  (-7%) declined, while Morgan Stanley bucked the trend, ending the week +7% higher. A more detailed summary is included in the following table. The S&P 500 closed the week with modest losses.

Outside the US, European stocks had a positive week with the DJ Eurostoxx 600 +1.8% and the French CAC +1.8%. Germany continued its recent strong performance +2.9%. In emerging markets, although Thai stocks rallied +3%, the majority of Asian and Latin American stock markets continued their declines. Mexico fell -2.9%, Malaysia dropped -1.7% and Brazil declined -1.0%.

The short-term trend remains bullish for stocks as confirmed by my technical trend indicator, which closed the week 32 points above the long-term trend. Longer-term, stocks remain overvalued and over-extended. The S&P 500 now trades at 25 times the average of the last ten years of inflation-adjusted earnings (below right).

TTI closed the week 32 points above the long-term trend.

Economic: On the economic front, news was broadly positive, with retail sales and various manufacturing surveys in the US coming in better than expected. 

 

Technical: From a technical standpoint, the uptrend remains intact. Despite equities being over-stretched near-term, we have yet to see any material selling pressure. In fact, the Advance/Decline Line, a measure of stock market breadth, recently made new highs, a positive development. The current run higher may continue for a while longer. However, once the market switches to sell mode, a significant correction should occur. We wait patiently for that to happen.

Chart courtesy of StockCharts.com

 

Strategy: The stock market remains overvalued, overbought in the near-term and investor sentiment has reached an optimistic extreme. We therefore maintain our cautious stance with an allocation in the model portfolio of 20% stocks, 50% bonds, 20% gold and 10% cash.

Next Update: Friday 24th January 2014





Market Update - 10th January 2014

We have no changes to the model portfolio this week.

Equity markets have started 2014 in muted fashion. Investors, keen to book solid year-end gains, sold stocks right out the gate on the first trading day of the year and we have spent this week attempting to recover some of those losses. The Federal Reserve in the US is playing with fire as they attempt to cut back on their monthly QE purchases as their economy continues to struggle to find its feet.

The trend remains bullish for stocks in the short-term, as indicated by my technical trend indicator (below left), but stocks are expensive. The S&P 500 trades at 25 times the average of the last ten years of inflation-adjusted earnings (below right). We continue to believe that the risks are elevated that a downside break in markets will occur in the not too distant future.

 As of Friday, the technical trend indicator is 36 points above its long-term moving average.

As of Friday, the technical trend indicator is 36 points above its long-term moving average.

Shiller pe.jpg

Economic: On the economic front, the ISM Services Survey in the US indicated that business activity in the services sector remains in growth mode, although new orders have slowed. The US unemployment rate was reported at 6.7% on Friday, a positive percentage on the surface. However, the labour force participation rate of 62.8% is now at the lowest level since 1978. This means that 91.8 million unemployed Americans are not included in the unemployment rate calculation. If included, the UE rate is closer to 11.5%. Also reported on Friday, only 74,000 jobs were added in December versus expectations of 200,000. 

Weekly Market Update.JPG

Technical: From a technical standpoint, although the trend is still positive, the Advance/Decline Line continues to flatline, unable to keep pace with the recent stock market rally. In the short-term, stocks are drifting as buying power and selling pressure have stalled. 

Strategy: The stock market remains overvalued, overbought in the near-term and investor sentiment has reached an optimistic extreme. We therefore maintain our cautious stance with an allocation in the model portfolio of 20% stocks, 50% bonds, 20% gold and 10% cash.

Next Update: Friday 17th January 2014

Market Update - 20th December 2013

We have no changes to the model portfolio this week.

The S&P hit a new 52-week high this week but fewer than 70% of stocks in the index closed above their 50 day moving average. This has happened 55 other times in the past 15 years. Two months later, the S&P was positive only 24% of the time with an average return of -3.9% (max gain +2.4%, max loss -7.2%).

The rally in stocks was driven by news that the Federal Reserve would begin a modest tapering of their monthly bond purchases starting in January 2014. Instead of printing $1,020BN next year, the Fed will print $900BN. Fewer buyers of US Treasuries will likely result in higher US government bond yields, exactly what the Fed is trying to prevent.

Although the trend remains bullish for stocks in the short-term, stocks remain expensive and trade on a multiple of peak earnings. The S&P 500 for example trades at 25 times the average of the last ten years of earnings, adjusted for inflation (chart below right). We continue to believe that the risks are elevated that a downside break in markets will occur in the not too distant future.

Economic: On the economic front, data releases were generally positive this week in the US. Although the Manufacturing PMI came in behind target (54.4 versus 55.0 expected), industrial production (+1.1% versus +0.4% estimate) and capacity utilisation (+79.0% versus +78.4%) both beat expectations in November. Revised estimates for 3Q GDP growth showed that the US economy grew at an annual rate of 4.1%. Economic growth is expected to pick up in the US in 2014 from +1.5% to +3.0% and in the EU from -0.6% to +0.9%. Ireland is also forecast to growth next year by +1.5%.

Technical: From a technical standpoint, although the trend is still positive, the Advance/Decline Line continues to flatline, unable to keep pace with the recent stock market rally. In the short-term, stocks are drifting as buying power and selling pressure have stalled. 

Strategy: The stock market remains overvalued, overbought in the near-term and investor sentiment has reached an optimistic extreme. We therefore maintain our cautious stance with an allocation in the model portfolio of 20% stocks, 50% bonds, 20% gold and 10% cash.

Next update: Friday 10th January 2014.

Market Update - 13th December 2013

The S&P 500 made a new 52-week high at 1,814 on 29th November 2013, then tried but failed to make a higher high this week before falling -2% by week-end. This may be little more than noise as we entry the light volume holiday period, or perhaps the strong momentum move of the past five years is starting to wane. We will learn more in the weeks and months ahead.

In the meantime, although the technical trend remains bullish (chart below left) 20 points above the long-term moving average, stocks remain expensive. The S&P 500 for example now trades at 25 times the average of the last ten years of earnings, adjusted for inflation (chart below right).

Economic: Data releases were relatively light this week. Initial jobless claims were 368,000 versus 320,000 est. while retail sales were slightly better than expected (+0.7% versus +0.6%). Economic growth is expected to pick up in the US in 2014 from +1.5% to +2.5%-3.0% and in the EU from -0.6% to +0.9%. Ireland is also forecast to growth next year by +1.5%. While the economic news is encouraging, much has already been priced in to the stock market.

Technical: From a technical standpoint, the trend is still positive, though the Advance/Decline Line is showing some weakness, unable to keep pace with the recent stock market rally. In the short-term, stocks are drifting as buying power and selling pressure have stalled. 

Strategy: The stock market remains overvalued, overbought in the near-term and investor sentiment has reached an optimistic extreme. We therefore maintain our cautious stance with an allocation in the model portfolio of 20% stocks, 50% bonds, 20% gold and 10% cash.

Next update: Friday 20th December 2013.

Market Update - 6th December 2013

Following eight consecutive weeks of stock market gains, we experienced a mild sell off this week with some recovery on Friday due to stronger than expected non-farm payrolls data in the US (203,000 versus 180,000 expected). It is difficult to fault this continued momentum move for stocks in the short-term as market participants continue to chase performance targets through year-end. The technical trend indicator remains in positive territory (chart below left) 27 points above its long-term moving average. One area of concern is that fewer stocks are participating in this equity market rally, as can be seen in Large Cap Breadth Index (chart below right).

Once the baton passes from Bernanke to Yellen next month and the Fed is forced to either begin tapering their monthly bond purchases or desist from talking about it, market volatility should pick up. In the meantime, with valuations (S&P 500 trades at 19.7x 2013 earnings) and confidence running high, risks of a downside break in markets continue to exist.

The TTI remains in bullish mode +27 points above the long-term MA.

Large cap stocks have not confirmed the recent highs in the major stock market averages

Economic: On the economic front, data releases were broadly positive. The ISM Manufacturing Index beat expectations (57.3 versus 55.0 est.); US November vehicles sales were strong (16.4M vs 15.7M est.); 3Q2013 GDP came in at 3.6% versus 3.0% est.; initial jobless claims were 298,000 versus 325,000 est. and non-farm payrolls were ahead at 203,000 versus 180,000 est., leading to a reduction in the overall US unemployment rate to 7.0% from 7.2%.. Only the ISM Services Index disappointed (53.9 versus 55.0 est.). 

Technical: From a technical standpoint, the trend is still positive, though the Advance/Decline Line has stalled, unable to keep pace with the recent stock market rally. There remains little urge to sell as momentum investors continue to chase performance through year-end.

Strategy: The stock market remains overvalued, overbought in the near-term and investor sentiment has reached an optimistic extreme. We therefore maintain our cautious stance with an allocation in the model portfolio of 20% stocks, 50% bonds, 20% gold and 10% cash.

Next update: Friday 13th December 2013.

Market Update - 2nd December 2013

Stock markets continued to move higher last week though volumes were light due to the Thanksgiving holiday in the US. My technical trend indicator remains in bullish mode, a solid 47 points above the long-term moving average, thus continuing to confirm the bullish trend, though the rally is very stretched in the short-term. The US Federal Reserve is providing additional fuel for the rally by printing money at a mind-boggling pace. The adjusted monetary base in the US is now approaching $4 trillion, +360% in five short years. With valuations (S&P 500 trades at 19.7x 2013 earnings) and confidence running high, risks of a downside break in markets loom large.

Economic: Consumer confidence data was mixed with the Consumer Confidence Index posting a decline for November but the University of Michigan Consumer Sentiment Index rising.

Technical: From a technical standpoint, the trend is still positive, though the Advance/Decline Line has stalled, unable to keep pace with the recent stock market rally. There remains little urge to sell as momentum investors continue to chase performance through year-end.

Strategy: The stock market remains overvalued, overbought in the near-term and investor sentiment has reached an optimistic extreme. We therefore maintain our cautious stance with an allocation in the model portfolio of 20% stocks, 50% bonds, 20% gold and 10% cash.

Next update: Friday 6th December 2013.

Market Update - 22nd November 2013

Stock markets paused this week, consolidating recent gains. A number of divergences have begun to appear that may be signalling equity markets are running out of steam. This is a momentum driven market so it is troubling to see fewer stocks participating in the rally.  While the S&P 500 reached a new 52-week high this week, less than 10% of stocks in the index confirmed the upside breakout. This contrasts with prior rallies in the S&P when over 25% stocks in the index were able to break out. So, we are watching to see if this non-confirmation is the start of something more serious for stocks. We think it might be. 

In the meantime, the technical trend indicator remains in bullish mode, 34 points above the long-term moving average. With valuations (S&P 500 trades at 19.7x 2013 earnings) and confidence running high, risks of a downside break in markets are increasing.

Technical trend remains in bullish mode with little urge to date from investors to sell.

The participation rate of men in the US labour force has dropped to the lowest level since records began in 1940.

Economic: Retail sales in the US came in slightly ahead of expectations this week (+0.4% versus +0.1%) and jobless claims also improved at 323,000 versus an aggregate forecast of 335,000. However, the Philadelphia Fed Manufacturing Survey reported a weaker than expected result. It was also reported that another 775,000 men dropped out of the US labour force as the male labour participation rate hit its lowest level since records began. Although the US unemployment rate is not rising, the real number of unemployed Americans is much higher than actually reported. 

US Economic data 2009 - 2014E.

Technical: From a technical standpoint, the trend still looks okay, though market breadth has started to diverge. The Advance/Decline Line has stalled at new highs, unable to keep pace with the recent stock market rally. There is still little urge to sell as momentum investors continue to chase performance through yearend.

Strategy: The stock market remains overvalued, overbought in the near-term and investor sentiment has reached an optimistic extreme. We therefore maintain our cautious stance for now with an allocation in the model portfolio of 20% stocks, 50% bonds, 20% gold and 10% cash.

Next update: Monday 2nd December 2013.

Market Update - 18th November 2013

There are no changes to the Model Portfolio this week.

Technical trend continues to look favourable, though stock market valuations are now stretched.

Stock markets delivered another positive week as all the major indices reached new bull market highs. The technical trend still favours higher prices in the short term, though valuations are now stretched. The S&P 500 currently trades at 19.7 times 2013 real earnings.

Economic: It was a quiet week for economic news. Jobless claims continued to edge lower in the US and the unemployment rate has continued to decline from 8.1% in 2012 to an estimated 7.6% in 2013. The New York manufacturing survey weakened slightly.

Technical: From a technical standpoint, the technical trend still looks okay, though market breadth has started to diverge. The Advance/Decline Line has stalled at new highs, unable to keep pace with the recent stock market rally. There is still little urge to sell as momentum investors continue to chase performance through yearend.

Strategy: The stock market remains overvalued, overbought in the near-term and investor sentiment has reached an optimistic extreme. We therefore maintain our cautious stance for now with an allocation in the model portfolio of 20% stocks, 50% bonds, 20% gold and 10% cash.

Next update: Monday 22nd November 2013.

Market Update - 11th November 2013

 

There are no changes to the Model Portfolio this week.

This week the DJIA and DJTA reached new bull market highs despite the decline later in the week.  The industrial and transport stocks have now joined the broader S&P 500 in reaching new recovery highs, though the utilities continue to lag. 

Technical Trend

Economic: News on the economic front continues to be positive. 3Q2013 US GDP was ahead of expectations at 2.8%, while unemployment data was also positive. However, consumer confidence and sentiment declined in October.

Technical: From a technical standpoint, the technical trend still looks okay, though market breadth has started to diverge. The Advance/Decline Line has been unable to confirm the recent stock market highs and this bears watching in the weeks ahead. There is still little urge to sell as momentum investors continue to chase performance.

Strategy: The market is starting to look tired once again and remains overvalued, overbought in the near-term and investor sentiment having reached an optimistic extreme. We therefore maintain our cautious stance for now.

Next update: Monday 18th November 2013.

 

Equity market performance by sector.

Market Update - 4th November 2013

There are no changes to the Model Portfolio this week.

This week the DJIA reached a new bull market high confirming the highs recently set by DJTA, Nasdaq, S&P 500 and Russell 2000 equity market indices. 

Economic: From an economic perspective, the ISM Manufacturing Survey in the United States delivered better than expected results, while consumer confidence reported by the Conference Board in the US came in lower than expected. For the week starting 4th November, we look forward to updates on Factory orders for August on Monday,ISM Non-Manufacturing PMI for October on Tuesday, 3Q2013 GDP and initial jobless claims on Thursday and the US unemployment report on Friday.

Technical: From a technical standpoint, the indicators remain in a steady uptrend. Market breadth as measured by the Advance/Decline Line continues to confirm the recent price highs set by the main equity market indices. Also, market volume continues to expand on rallies and taper off on declines. There is very little selling pressure to speak of at present.  

Strategy: Despite the continued positive technical set up for equity markets, we continue to maintain a cautious stance in the model portfolio due to valuation concerns, stock markets being overbought in the near-term and investor sentiment having reached an optimistic extreme, 

Next update: Monday 11th November 2013.