Are There Any Bears Left? Print
Friday, 17 December 2010 05:23

Today marks my official last day of work for 2010.  Depending on the events the final two weeks of the year and how much free time my six kids give me there may be a few more articles sprinkled in, but no promises.  Based on our own website activity this week as well as the continuing decline in market volume many people in our industry have already called it a year.  What a year it has been.

We'll likely include some sort of market review in our client newsletter in January, so I'll save the detailed recap for that article.  Barring a massive drop the final two weeks, people that look at only the year end number will think it was a nice, positive year for the stock market.  Having sat in the trenches all year, nothing could be further from the truth.  In fact, the reason we decided to launch this feature of our site was because of the extreme shifts the market experienced in 2010.  We wanted to arm our business partners with details of what was happening in the economy, the stock market, and our investment programs.

2010, The Year of the Schizophrenic Market

The main thing that jumps out at me when I look back at 2010 is the volatility.  We had periods of time (February, May-June, and August) where the economic data was clearly pointing to another recession.  The market reacted appropriately and lost a substantial amount of money during those periods.  Each time it looked like we would be heading towards another bear market, the government or Federal Reserve intervened and gave a temporary boost to the economy.  Whether it was "cash for clunkers", home buyer tax credits, paying banks to write down troubled home loans, Quantitative Easing, or a tax cut package, the United States free market economy continued to die a slow and painful death. 

Each time the free market economy was manipulated, buyers stepped into the market and pushed it higher.  As the impact of the manipulation ended or investors realized it was not having a long-term impact, the market would quickly sell off again.  The chart of the S&P 500 shows the extreme volatility this year.

In hindsight, it would have been simple to say we should have just stayed fully bullish all year or that we could have caught the bottom.  Too bad we can't trade using hindsight.

Too Bullish Again?

We are again approaching a point in the market where so many people believe it will do nothing but go higher that there is nobody left to buy stocks.  The market has stalled out around the 1245 level this week and volume continues to dwindle.  Consider some of these sentiment indicators:

  • The AAII Survey is approaching a Bullish % that is at the very high of the range.
  • Margin Debt is approaching peak levels as more people borrow money to buy stocks, confident that they will continue to rise.
  • The Put/Call ratio is near the bottom of its range as fewer people seek the protection of put options.
  • My favorite sentiment indicator, the Volatility index, is now at its lowest point since April.  This index shows how much fear market participants have.  Right now, they are pretty confident.

With Europe again bailing out troubled banks and their citizens rioting, it seems strange that investors would be throwing caution to the wind and buying stocks.  The market may not turn down these last two weeks, but this extreme confidence could make the beginning of 2011 a rocky one.


The Housing Depression Goes On

It is extremely rare for our economy to grow over the long-term without the housing market participating.  The latest numbers out of the housing market show that there is no sign of life, despite the trillions of dollars of money the Fed and government have already spent.

  • Housing Starts, while up in November when compared to October, are down 4% from a year ago.
  • Building permits fell once again in November.  They are now down 10% from a year ago and are at their lowest level since the May 2009 record low.
Limitless Reflections

-If you haven't checked out some of my miscellaneous thoughts on Taxes, Bonds, Politics, & More I'd encourage you to do so now.  Even if you have, I've noticed that when I go back and read these "thought dumps" that there are a few things that I had forgotten about.  I try to write everything off the top of my head to give us all perspective on things that may impact the market in the future.

-I learned back in the 90's when I was a fundamental analyst that I was often 18-24 months ahead of the trends.  Of course when you are managing money it can be dangerous to be that early, which makes me glad that I can share these thoughts and know that only the price action (technicals) are driving our investment decisions.

-The $858 Billion tax cut extension package has passed.  Great for the short-term, horrible for the long-term because it fails to address our country's biggest problem -- too much debt.

-Remember 'Pay As You Go', the legislation that is supposed to require every spending plan to be offset by an increase in revenue, or every tax cut to be offset by a cut in spending?  Apparently it only applies on things that are not politically popular.  How quickly Congress has forgotten their campaign promises.

-Why did the economy stall over the summer?  Partly it was because of so much uncertainty regarding the extension of the Bush-era tax cuts.  It's nice to see that Congress has kicked the tax cut extensions right back to the NEXT election cycle in 2012.

-Only 1/2 of our normal readers viewed the Bull-Bear debate between my inner-bull, Angus, and my inner-Bear, Smokey.  If you want to be able to address potential clients no matter which argument they throw at you, I'd recommend understanding both sides of the market tug-o-war that is going on right now.

-Brandi's fever broke yesterday afternoon and Toby seems to have bounced back from the flu bug.  Vitamin C, hand sanitizer, and Lysol continue to be heavily used as we fight the flu at our house for the first time in 5 years.  Not bad considering how many kids we have running around.

-I keep getting asked how Income Allocator (INA) can handle a rising rate environment.  Last I checked, the long-term Treasury Index is down over 13% this quarter and INA is up over 1.5%.  Not too bad.  (We actually discussed this back in our Spring Newsletter.)

-One key component in INA is our Long Bond System, which takes a position on the direction of interest rates.  After being short the Treasury Bond for most of the last 6 months, it again cut that short position in half yesterday.  Maybe Treasury Bonds are approaching a near-term bottom?

-What could make Treasury Bonds rally?  How about that flight to quality trade that will happen when the next wave of economic disappointment rolls around.

-Speaking of economic disappointments, EU leaders agreed to create a system to solve future debt crisis and Moody's downgraded Irish government bonds.  I thought both of those things happened earlier this year.

-Oh yeah, this is ANOTHER downgrade by Moody's to an even lower level & the EU plan is in addition to the nearly $1 Trillion "plan" they put in place earlier this year.

-In the past week, I have declared that Ben Bernanke is a liar, like George Costanza and that Quantitative Easing has been a massive failure and I haven't heard from one person that disagrees.  How much longer will this man be allowed to run our financial system into the ground?

-Finally, in case I do not write another article before Christmas, here are some videos for you to enjoy. (The first video was chosen specifically for LG since we talked about this last night).  Cool





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