Secular Hold IAU & XLF 4.24%
Condition Bear Market Rally
S&P Target 1020
Hedge XLU -2.44%
Position Date Return Days Call
SE 6/27/2011 15.08% 195 Hold
CLH 7/6/2011 18.66% 186 Hold
GCI 7/14/2011 0.81% 178 Hold
CSGS 10/3/2011 18.46% 97 Hold
NLY 10/25/2011 -2.07% 75 Hold
DD 10/27/2011 -4.80% 73 Hold
KBR 10/27/2011 -2.31% 73 Hold
VG 10/27/2011 -29.73% 73 Buy
TTM 11/30/2011 10.85% 39 Hold
BT 1/4/2012 -3.25% 4 Hold
S&P Annualized -8.24%
Mousetrap Annualized 5.36%
Hedged Annualized -1.86%
Secular Annualized 6.98%
The secular configuration is starting to get quite muddled, with whipsawing between stocks, bonds, and gold in the long term views (I use P&F ratio charts with 3% box sizes). As we are still in a secular bear, deflationary pressures are keeping interest rates far more suppressed than they would be in a normal market.
The key about deflation is that it turns everything on its head. What’s good is bad, and what’s bad is bad. The VIX itself becomes volatile, with wild swings between high and low volatility that can whipsaw people in both directions.
The sector configuration continues to support a cyclical bear as well:
XLY Cyclicals Bottom
XLK Technology Bull 1
XLI Industrial Bull 2
XLB Basic Industry Bull 3
XLE Energy Top
XLP Staples Bear 1
XLV Services Bear 2
XLU Utilities Bear 3 (WE ARE HERE)
XLF Finance Bear 4
I’ve adapted Sam Stovall’s sector rotation model to incorporate price momentum, acceleration, and money flow – and the combination of these three are pointing to a likely position of “Bear 3 (out of 5)” with 5 as the bottom. The CURRENT position is not the place to be invested in, of course. The model is SHORTING XLU and long XLF (the next position).
Since we have just now rotated into this position, we are a little less than halfway through a normal bear market rotation. Accordingly, a hedged position (right now shorting XLU) is strongly encouraged. While anything could happen, it would be NORMAL for the market to have another decline breaking the previous lows of 1099 set a few months ago. WHEN that happens is another matter.
The problem with “typical” behavior is made worse by the fact that this market is not driven by economic forces, but instead governmental reactions to those forces. The Fed has taken unprecedented action these past two years, and Europe is facing the need to do the same. The market is holding up as long as people consider it POSSIBLE for European leaders to behave in a responsible way. If that illusion is ever broken, the market would correct rather violently to the downside.
But the illusion is holding… for now.
The people who get hurt the worst are those trying to do market timing or using heavy leverage. The swings in both directions will cause both groups to lose money in each direction. If you don’t have a strong fundamental reason to be in a stock, or if you are heavily leveraged, you may be forced to sell at the worst possible time.
Tim
