Tomorrow belongs to...

TED Spreeeeeeeeeaaaaaad

Today (Intraday) chart. Did we hit the wall yesterday?
TED Spread 1 year chart through yesterday:TED Spread since 1985. We already blew past the 1987 peak.
Bloomberg's Ted Spread Chart

Week of 9-28-2008

Timing Model = -1.0
30% long, 70% cash

Global allocation of long positions
MSCI EAFE Index 20%
MCCI Emerging Markets Index 10%
Russell 3000 Index - U.S. 70%

Top U.S. Sectors
Small Cap Value 4.0
U.S. Biotechnology 3.5
U.S. Health Care 3.0
U.S. Consumer Goods 2.5
U.S. Banks 2.0
U.S. Real Estate 2.0

Top Intl. ETFs
MSCI Canada Index Fund 1

Strategy 3
Money Market 50%
U.S. Long Bonds 50%

Strategy 4
U.S. Long Bonds 25%
Energy 25%
U.S. Small Cap 25%
Agriculture 25%

Two of the four sentiment models I watch have shown signs of reversal from pessimistic levels - that's a good sign. However, I still need to see improvement in the tape before my timing model can signal more exposure to equities. I'll be watching the Value Line Composite index and it's relationship to the 200 and 75 day moving average this week.

Timing Model update - 9-23-08

My timing model is currently at -1.5 or signalling 20% long. The only active indicators right now is the Value Line Composite and it's relationship to it's 75 and 200 day moving averages. The index and it's 5 day moving average closed below both the 75 and 200 dma. The thing to do right now is watch the tape, particularly the $VLE.

My best guess is we'll muddle for a couple weeks before moving higher. There is a lot of historical precedent in the volatility indicators I watch that is suggesting higher prices. That said, this is no time to make huge bets.

Week of 9-21-2008

Timing Model = .5

60% long, 40% cash

Global allocation of long positions

MSCI EAFE Index 20%

MCCI Emerging Markets Index 10%

Russell 3000 Index - U.S. 70%

Top U.S. Sectors

Small Cap Value 4.5

U.S. Oil & Gas 3.0

U.S. Banks 2.5

U.S. Consumer Goods 2.5

U.S. Biotechnology 2.5

U.S. Real Estate 2.0

Top Intl. ETFs

MSCI Brazil Index Fund 1

MSCI Canada Index Fund 1

Strategy 3

Money Market 25%

U.S. Long Bonds 25%

U.S. Small Cap 25%

U.S. REITs 25%

Strategy 4

U.S. Long Bonds 25%

Energy 25%

U.S. Small Cap 25%

Agriculture 25%

My timing model continued to gain points on Friday and is now at +.5, or 60% long. Frankly I believe traders over-did it on Friday and I expect we'll see some profit taking in the coming week. That said, the panic selling we saw on Monday and Wednesday is very typical of a bottom formation - which doesn't mean we won't retest the lows.

Despite all the ugly headlines of the past week I'm seeing more evidence the bear market MAY be nearing an end game. I emphasize the word "may", because predicting such things is futile. The evidence:

• Panic: Last week's panic selling is very typical of bottom. Jason Goefert of Sentimentrader.com discussed a study of his Panic Button indicator - signals are extremely rare and have historically indicated low risk, higher prices over the subsequent 6 months.
  
• Small Cap strength: Small cap value stocks have historically outperformed other styles during economic troughs, and small cap growth is the leader at the beginning of new bulls. The chart below clearly illustrates and series of higher lows since March for small caps - which are momentum leaders. Whether we see a big breakout to the upside remains to be seen.


• Banks and Real Estate indexes showing signs of improvement - The chart below is an overlay of the Dow Jones U.S. Real Estate and Banks Indices. Both hit bottom back in July. If they can head into Q4 without taking out their lows, this would be a good sign for the market.


• Tis the season - We're heading into a period of positive seasonality for stocks.


• Duration and losses are within historical bear market norms - An average bear market loss is 30% and the average duration is 15 months (not including the '29-'32 bear). This bear's max loss has been 26% and we're coming up on 12 months. Averages are, well... averages. In every bear market I've lived through, the conventional wisdom has been "this one will rank amongst the great depression". That has never been the case.

I'm not saying this bear market is over, but every investors should be aware that bear markets do end - and usually things look absolutely the worst at the bottom. Personally, I'm more comfortable (and used to) trading the intermediate cycle, so identifying big bull/bear cycles doesn't really matter much to me. If we go into another intermediate upleg, a "feel good rally", I'll trade it. Every new bull market starts with what many call just another feel good rally, and usually, investors miss a huge chunk new bull markets before they see it for what it is.

A Bottom?

We may have just witnessed another intermediate term bottom - similar to what we saw in March. All four sentiment indicators I follow are now in oversold territory and prices are on their way to confirming a positive divergence (chart below), usually a good sign that selling has exhausted.

So is this time to go all in? I think not, but I'll be watching my timing model very closely over the next few weeks. The downward trend in prices has yet to reverse and the only compass we have is panic readings that, in the past, have led to higher prices. My guess is we'll retest the low sometime soon.

Timing Model Update

Timing Model = -1.5

20% long, 80% cash

Enough sentiment indicators have retreated to levels to signal allocating 20% to stocks. Also note the chart below. It appears a bottom may be in the making, however it's still a bit early to tell.

Lucky or Good?

I've been net short since the middle of last week and I feel like I've walked away from a car crash with only a scratch. This afternoon I backed off my 2x inverse position enough to get me in the 10% long neighborhood at the close (using Profunds). I expect to see a bounce soon but I'm not a gambler. I've witnessed many a knife catcher just before the '87 crash.

I also opened a couple small speculative positions in DBA and DBO on Monday both are panning out splendidly.

I can't say I expected the market turmoil this week - yes, I thought we were headed for a new intermediate low but I didn't expect the speed we've seen so far. I need to sit down tonight and take a closer look a the momentum and sentiment charts. This market is beginning to signs of a classic bottom like we saw in March. I'll re-calc my timing model tonight and post a report by tomorrow morning.

"This can’t be the reason not to vote for me"

Barack Obama apparently made these comments to a group in Pennsylvania on Sept 5th while on the campaign trail. I read a lot of political news sites and today is the first time I've read this:

"I believe in the Second Amendment, and if you are a law-abiding gun owner, you have nothing to fear from an Obama administration! I mean this has been this has been peddled again and again…

"I’ll be honest, and I’m sure there’s some NRA members here," Obama continued. "Their general attitude is 'Look, we don’t want anything, and if you even breathe the word "gun control" or "gun safety," then you must want to take away everybody’s guns.' Well, that’s just not true...

"The bottom line is this. If you’ve got a rifle, you’ve got a shotgun, you’ve got a gun in your house, I’m not taking it away. Alright? So they can keep on talking about it but this is just not true. And by the way, here’s another thing you’ve got to understand. Even if I wanted to take it away, I couldn’t get it done. I don’t have the votes in Congress."

“This can’t be the reason not to vote for me. Can everyone hear me in the back? I see a couple of sportsmen back there. I’m not going to take away your guns."

Politicians, especially those with law degrees, have an natural inclination to believe voters are stupid.

First, when you hear a Democrat talk about the second amendment, you'll hear words like "sportsmen" and "rifles" and "shotguns". You'll never hear the words "handguns" and "self defense" in the same sentence. You see, it's okay to use "guns" (rifles and shotguns) to shoot your next mooseburger, but it's totally improper to own or use a handgun for self defense.

Second, to say "Even if I wanted to take it away..." exhibits either a complete ignorance of our constitution (unless he's proposing revisiting the second amendment) or stupidity of the highest order. "Even if I wanted to..."??? If Sarah Palin made a similarly idiotic statement at a campaign event you could bet it would be a page one story.

Week of 9-14-2008

Timing Model = -3.5

0% long, 100% cash

Global allocation of long positions

MSCI EAFE Index 20%

MCCI Emerging Markets Index 10%

Russell 3000 Index - U.S. 70%

Top U.S. Sectors

U.S. Consumer Goods 4.5

Small Cap Value 4.0

U.S. Biotechnology 3.5

U.S. Health Care 2.5

U.S. Real Estate 2.0

U.S. Oil & Gas 2.0

U.S. Consumer Services 1.5

U.S. Pharmaceuticals 1.5

Top Intl. ETFs

MSCI Brazil Index Fund 1

MSCI Canada Index Fund 1

Strategy 3

Money Market 50.0%

U.S. Long Bonds 50.0%

Strategy 4

U.S. Long Bonds 25.0%

Energy 25.0%

U.S. Small Cap 25.0%

Agriculture 25.0%

Not much to report about equities since last week. Sentiment is a non-factor at this point and unless we see some significant gains in the stock indices my timing model will continue to indicate a high allocation to cash.

Agriculture and Energy appear to be forming intermediate term bottoms (see charts below). I've discussed divergences before, and although I don't incorporate them into any of my models, I find set ups like this to be a good opportunity for relatively safe speculation. I would caution to use relatively tight stops e.g. 1.5% below the most recent low. I also determine a reasonble exit strategy before entering trades like this and force myself to stick to it. Because I'm holding a high level of cash I'll probably open a couple small positions in DBO and DBA on Monday.

Week of 9-7-2008

Timing Model = -3.5
0% long, 100% cash

Global allocation of long positions
MSCI EAFE Index 20%
MCCI Emerging Markets Index 10%
Russell 3000 Index - U.S. 70%

Top U.S. Sectors
Small Cap Value 4.0
U.S. Biotechnology 3.0
Small Cap Growth 2.5
U.S. Consumer Goods 2.0
U.S. Consumer Services 1.5
U.S. Oil & Gas 1.5
U.S. Oil Equipment, Services & Distribution 1.5
U.S. Micro Cap 1.5

Top Intl. ETFs
MSCI Brazil Index Fund 1

Strategy 3
Money Market 33.0%
U.S. Long Bonds 33.0%
U.S. Small Cap 33.0%

Strategy 4
U.S. Long Bonds 25.0%
Energy 25.0%
U.S. Small Cap 25.0%
Agriculture 25.0%

My timing model is indicating high risk, being driven entirely by the equity indices which are in pretty bad shape. I wouldn't be surprised to see a rally next week, but this doesn't look like a base for significant gains. The key now is to watch the tape because the balance of the sentiment indicators are neutral.