Global performance

S&P 500, EAFE, & Emerging Markets - 5 year performance (above).

S&P 500, EAFE, & Emerging Markets - bear market performance (above).

Typically there's a trade-off between performance and volatility, but this bear market has shown there was little benefit shifting assets from EAFE or Emerging Markets to the less volatile S&P 500. I would have thought the EAFE and Emerging Market equities would have taken a much larger hit over this period.

The question in my mind is; will foriegn equities continue to outperform the U.S. in the next bull market?

Where will the S&P 500 be 12 months from now?

Take the poll in the side bar --->

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?

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.

1400

I'm not a huge advocate of chart reading, but it seems the 1400 on the S&P 500 has developed special significance over the past 9 months. From August of last year to early January of '08, 1400ish was an area of support. However, since late January, 1400 has been unbreached. This is nothing more than a curiosity for me - I don't make timing decisions based on "support" or "resistance", but I do find stuff like this interesting.

The more important timing considerations are; how quickly will the excessive sentiment we saw in early March burn off? AND how quickly will the short term uptrend in the major indexes reverse?

I'm a follower, not a prognosticator. All I can do is follow the yin yang of my sentiment and trend tools.

The Secular Bear

The S&P 500 has been in a secular bear market since 2000 (8 years). The question is 'how much longer?' The secular bear that began in 1973 took almost 10 years before the market could sustain a break out.

U.S. recessions and commodity prices

The pink bands represent U.S. recessions as reported by the NBER. Will a U.S. recession put the brakes on rising commodity prices? Or is it different this time? I would argue most of the big exporters to the U.S. are the same nations who are driving demand for commodities and energy, and a pullback in U.S. demand for finished goods will have an impact on commodity prices.

Watching for a trend reversal

Yesterday the Value Line Composite Index closed above it's 75 day moving average. The 75 dma of the Value Line is one of four trend indicators in my timing model. If this index can stay above this level today it will raise my model reading from a +1 to a +2, suggesting a 90% allocation to stocks. The S&P 500 is still below it's 75 day moving average.

I point this out because my model is set up to defer to it's trend indicators as bullish (extreme pessimism) sentiment readings begin to lose strength/relevance. The trend indicators will either kick in or the model will begin to turn bearish. My guess is we will see some consolidation near term, but we will head to higher levels over the the next month or so. I also believe we are still in a bear market but my model has an intermediate term orientation, so it is possible to go heavily long.

Trend indicators are very sensitive and whipsaws should be expected. I usually deal with junctures like this by shifting some assets to a double long fund (such as ULPIX) instead of opening a new position in a sector or country ETF. By holding small positions in double long/short funds I can adjust to small changes to my model without generating a bunch of trades.

Here's an under the hood look at my TAA portfolio as of yesterday's close:

Week of 3-30-2008

Timing Model = 1
70% long, 30% cash

Global allocation of long positions
MSCI EAFE Index 20%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 50%

Top U.S. Sectors
U.S. Oil & Gas 6.0
U.S. Oil Equipment, Services & Distribution 5.0
Precious Metals 4.5
U.S. Basic Materials 4.0
U.S. Biotechnology 2.5
Composite Internet 2.0
U.S. Industrials 2.0
U.S. Semiconductor 2.0
U.S. Technology 2.0

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

Strategy 3
Money Market 20.0%
Agriculture 20.0%
Precious Metals 20.0%
U.S. Long Bonds 20.0%
Industrial Materials 20.0%
Emerging Markets 0.0%
EAFE 0.0%
U.S. Large Cap 0.0%
U.S. Small Cap 0.0%
U.S. REITs 0.0%

The sentiment indicators have single handedly pushed my timing model to a point where the equity allocation is now at 70%. I still believe we've seen the intermediate low for the cycle and the market is more likely to head higher over the next several weeks...maybe longer.

Classic bottom

Once again, I believe we're in the neighborhood of an intermediate low. The combination of sentiment models and momentum divergence gives a pretty strong case. Btw, I don't believe the bear market is over quite yet.

Is the bear tired?

I think so.

The combination of recent market action (multiple selling climaxes) and favorable sentiment readings (short term indictors are OS, and the intermediate term indicators are rising from OS) spell a rally based on my experience.

I just took a couple decent sized positions in 2x funds but will be using a mental stop 1% below the recent lows in case I'm wrong.

Is the bull market over? No, I don't believe so, but bear market rallies should be expected and can be taken advantaged of if you're both patient and nimble.

Bear Market Declines and Durations

Here is a table that illustrates the historical duration and depth of bear markets since 1929. On average, it takes five years to until the market surpasses it's previous peak.