I think I see the fat lady coming

My Tactical Asset Allocation portfolio is only 50% long right now, but I'm taking a speculative position in UCPIX today because of the mounting negatives. I'm going to use a pretty tight mental exit - the S&P 500 200 day moving average. Granted, if this much followed moving average is breached we're likely to see good follow through, but I'm up to the challenge.

The market negatives are:

• short term NASDAQ sentiment is OB
• intermediate term sentiment is becoming excessively over optimistic
• OB MACD during a presumed bear market
• NYSE relative volume has been low for the past several weeks
• option expiration week seasonality bias towards short term losses
• we're at the beginning of "sell in May" seasonality
• anything else?

Week of 5-11-2008

Timing Model = 0
50% long, 50% cash

Global allocation of long positions
MSCI EAFE Index 30%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 40%

Top U.S. Sectors
U.S. Oil Equipment, Services & Distribution 5.0
U.S. Oil & Gas 4.5
U.S. Biotechnology 3.5
U.S. Basic Materials 2.5
Precious Metals 2.5

Top Intl. ETFs
S&P Latin America 40 Index Fund 3
MSCI Brazil Index Fund 3
MSCI Taiwan Index Fund 1
FTSE/Xinhua China 25 Index Fund 1
MSCI Canada Index Fund 1
MSCI Emerging Markets Index Fund 1
MSCI Sweden Index Fund 1
MSCI Spain Index Fund 1
MSCI Singapore Index Fund 1
MSCI Austria Index Fund 1
MSCI Mexico Index Fund 1
MSCI Belgium Index Fund 1
MSCI South Africa Index Fund 1
MSCI Netherlands Index Fund 1
MSCI France Index Fund 1

Strategy 3
Money Market 16.7%
Agriculture 16.7%
U.S. Long Bonds 16.7%
Industrial Materials 16.7%
Energy 16.7%
Emerging Markets 16.7%
U.S. REITs 0.0%
EAFE 0.0%
Precious Metals 0.0%
U.S. Large Cap 0.0%
U.S. Small Cap 0.0%
Intl Real Estate 0.0%

Volume

Isn't the 10 day moving average 18.06% below the 200 day moving average or are my math skills totally in the toilet? I put in pink and green bands to correspond roughly to what Goefert used as break points. I don't have on this chart is the slope of the S&P 500, but I believe it's 200 day ma started to decend beginning in mid January.

Week of 5-4-2008

Timing Model = .5
60% long, 40% cash

Global allocation of long positions
MSCI EAFE Index 30%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 40%

Top U.S. Sectors
U.S. Oil Equipment, Services & Distribution 5.0
U.S. Oil & Gas 4.5
Precious Metals 4.0
U.S. Basic Materials 3.0
U.S. Biotechnology 2.5
U.S. Leisure Goods 2.0
Mid Cap Growth 2.0
U.S. Health Care 2.0

Top Intl. ETFs
S&P Latin America 40 Index Fund 3
MSCI Brazil Index Fund 3
MSCI Taiwan Index Fund 2
FTSE/Xinhua China 25 Index Fund 2
MSCI Canada Index Fund 1
MSCI Emerging Markets Index Fund 1
MSCI Sweden Index Fund 1
MSCI Spain Index Fund 1
MSCI Hong Kong Index Fund 1
MSCI South Korea Index Fund 1
MSCI Singapore Index Fund 1
MSCI Austria Index Fund 1

Strategy 3
Money Market 12.5%
Agriculture 12.5%
U.S. Long Bonds 12.5%
Industrial Materials 12.5%
Energy 12.5%
Emerging Markets 12.5%
U.S. REITs 12.5%
EAFE 12.5%
Precious Metals 0.0%
U.S. Large Cap 0.0%
U.S. Small Cap 0.0%
Intl Real Estate 0.0%

Don't Fight the Fed

The chart above is the Fed Funds target rate with the S&P 500 from 1980 to present. I marked the dates where the Fed made their "last cut" (after 3 or more successive cuts). Not all cases resulted in periods of terrific returns, however, '83-''84 seems to be the only period that put in an notably poor performance.

If today ends up as a "last cut", odds are in favor of a bull market.

Have Basic Materials Peaked?

The Basic Materials sector plummeted from my top U.S. Sectors ranks this week, so I decided to take a closer look at each model component. My U.S. sector model is heavily weighted towards momentum indicators, but I have built in several other indicators that act as a counterbalance.

Basic Materials have been a top performer over the past 90, 180, and 250 days. By those measures, this sector is a text book candidate to outperform other sectors over the next few months. However, the Basic Material sector also has several technical negatives to contend with.

First, this sector is overbought. Note the pink bands on both the short term and intermediate term TRIX in the chart above. Even in a bull market, overbought conditions usually signal a pause in upward ascent. What I can't show here is a chart from Jason Goefert of Sentimentrader.com (It's a subscription service). The Rydex Basic Materials sector fund assets represents 18.3% of all sector funds. That's pure irrational exuberance. Also, the charts on the Proshares Ultra Basic Materials and Ultra Short Basic Materials Assets illustrate sentiment extremes that don't exactly give a contrarian a warm and fuzzy for further gains.

Extreme optimism is only one reason to raise an eyebrow about Basic Materials. I've studied technical analysis for many years, and one of the few reliable indicators that signal market tops is a long term momentum divergence. In the chart above you can see the 60-130-45 Moving Average Convergence Divergence peaked last July. You can also see $DJUSBM continued to climb to ever higher heights. This is a technician's textbook example of a negative divergence - not exactly a bullish sign.

The last bearish tea leaf is seasonality. Historically, May is the beginning of poor performance for the Basic Materials sector. Given that many economist believe the U.S. is in or near a recession, basic materials doesn't seem to be a great place to be for the next few months.

I'd love to hear your thoughts.

Week of 4-27-2008

Timing Model = 1.5
80% long, 20% cash

Global allocation of long positions
MSCI EAFE Index 30%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 40%

Top U.S. Sectors
U.S. Oil Equipment, Services & Distribution 5.0
Precious Metals 3.5
U.S. Biotechnology 3.5
U.S. Oil & Gas 3.5
U.S. Real Estate 2.5
U.S. Leisure Goods 2.5

Top Intl. ETFs
S&P Latin America 40 Index Fund 3
MSCI Brazil Index Fund 3
MSCI Taiwan Index Fund 2
MSCI Mexico Index Fund 1
MSCI Canada Index Fund 1
MSCI Emerging Markets Index Fund 1
FTSE/Xinhua China 25 Index Fund 1
MSCI Sweden Index Fund 1
MSCI Spain Index Fund 1
MSCI Hong Kong Index Fund 1
MSCI Belgium Index Fund 1

Strategy 3
Money Market 12.5%
Agriculture 12.5%
Precious Metals 12.5%
U.S. Long Bonds 12.5%
Industrial Materials 12.5%
Energy 12.5%
Emerging Markets 12.5%
U.S. REITs 12.5%
EAFE 0.0%
U.S. Large Cap 0.0%
U.S. Small Cap 0.0%
Intl Real Estate 0.0%

My timing model continues to lose points as pessimism burns off from the bottom we saw in early March. Unless the S&P 500 and Value Line composite breach their 200 day moving average fairly soon, I expect my timing model to continue to shed exposure to equities.

U.S. REITs have just broke above their 200 day moving average and have earned a long postion in strategy 3. Let's see how long that lasts.