Market at a Glance
Psychological: Deteriorating. Consumer confidence has fallen to a 10-month low lead by sharp declines in present conditions and expectations. Winter weather and “broken” government could be responsible, but in all likelihood the slow pace of recovery and the lack of credit for small businesses and households is what are actually dampening everyone’s mood. Trust and confidence were dealt a serious blow by Toyota’s missteps. Who can the consumer trust anymore? Not the banks, not the car markers, and certainly not the government (they are too busy trying to keep their jobs to actually have time to do them).
Fundamental: Sloppy. Earnings reports have been better than expected (expectations too low?), but labor market continues to languish, shedding a further 20K jobs in January and weekly initial jobless claims are on the rise again, up 22K today. A jobs bill is in the works and perhaps it can put the labor market back on the road to recovery, or at least back to less bad.
Technical: Formidable Resistance. For six months the 50-day moving averages stood as solid support, but are now proving to be resistance after plunging through them in mid-January. 200-day averages remain well below current levels and were never threatened during the correction. MACD flashed buy signals in early February, but have begun to flatten out setting up a potential sell confirmation.
Monetary: Tightening? Emergency liquidity programs are expiring, mortgage-backed security purchases are winding down and the discount rate was hiked by 0.25% to 0.75%. Money is still historically cheap for an elite few, but the masses did not reap any of the benefits as their borrowing costs have continued to rise. As the Fed begins tightening, what will the cost rise to for the average consumer?
Seasonal: Favorable. Two months remain of the Best Six and four remain in the Best Eight and March is the third best month for S&P and NASDAQ in midterm election years. Further improvement in economic data is needed for the Best Months to finish on a positive note.
March 2010 Strategy Calendar
Emotion Has No Place in an Investment Strategy
By Bill Staton, MBA, CFA
BANK ON IT: “Individuals who cannot master their emotions are ill-suited to profit from the investment process.” — Benjamin Graham (Economist, investor, Securities Analysis 1934, The Intelligent Investor 1949, 1894-1976)
Since last March 2009 when both the Dow and S&P 500 sank to levels below where they were at least 10 years earlier for the first time since 1974, both have produced the steepest stock-market rally since 1933. Unfortunately, the vast majority of investors lost as much or more than the market on the way down, and they also failed to enjoy the huge rally that, thus far, is still underway.
What happened? First, as the market indices plunged into the first quarter of last year, U.S. individual investors moved several-dozen billion dollars out of equity funds and injected more than $300 billion into bond funds of all sorts – corporate, municipals and Treasuries. Treasuries suffered a terrible year in 2009, the worst 365 days in more than three decades. Their negative emotions were in control of their money.
According to quantitative analysis from Dalbar Inc., a firm that continuously monitors investor behavior, the S&P 500 garnered an annual total return of 8.35% for the 20 years ended 12/31/08. The Barclays Aggregate Bond Index gained 7.43% a year while inflation grew at 2.89%. An individual who simply bought an index fund geared to the S&P 500 on January 1, 1989 and held through all the ups and downs earned a real (after-inflation) return of 5.5% each year for two decades.
But Dalbar concluded that far too many investors tend to buy at highs (the greed emotion) and won’t or don’t buy more at the lows. When they sell, they generally do so closer to the lows (the fear emotion) than the highs. So, for those 20 years Dalbar concludes that the average mutual-fund investor earned a paltry 1.87% annually in stock funds and 0.77% in bond funds, both rates fell well under the 2.89% increase in the consumer price index.
Is it any wonder so many people question investing, especially over the longer term, when in fact it’s not so much the markets but their own emotions that do them in. If they really want to know why they do so poorly, all they need do is look in the mirror.
Quote of the Month
“I want to be very, very clear: too big to fail is one of the biggest problems we face in this country, and we must take action to eliminate too big to fail.” — Federal Reserve Board chairman Ben Bernanke in TIME, December 28, 2009 (2009 TIME Person of the Year)
On 12/16/2009 The Wall Street Journal wrote, “The top four banks have combined assets of $7.4 trillion, or 56% of the U.S. banking sector's total. A decade ago, the top four’s $2 trillion of assets accounted for 35% of the total. In the past 30 years, large banks have facilitated significant increases in leverage across the economy and stretched their own balance sheets. Financial-sector debt reached 118% of gross domestic product at the end of 2008, up from 18% in 1978.”
Our opinion: If Chairman Bernanke is so concerned about too-big-to-fail in the banking sector, he and Congress better get to work pronto. (So far they’ve done nothing but talk.) The big continue to get even bigger.
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February ETF Lab & Tables
By Christopher Mistal
The ETF Lab is now available in the Almanac Newsletter section of the Stock Trader's Almanac Web site. Please visit the Almanac Newsletter section at http://www.stocktradersalmanac.com/sta/getNewsletters.do and login to access the February 2010: ETF Lab.
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Negative Indicators Pile Up
By Christopher Mistal
Daily news headlines are mostly noise. It is extremely rare to see a single headline that captures and conveys the “big picture” in a succinct manner. This problem is only compounded by the explosive growth of media sources that provide continuous breaking news alerts and updates 24 hours a day 365 days of the year. All of these sound bites are just pieces of a much larger picture, a picture puzzle.
Economic data and indicators work is the same fashion. Each report and release, from Agricultural Prices to Wholesale Trade and earnings releases from companies large and small, is just a tiny piece of the global economy. Recently, many indicators have been coming in below expectations and the outlook for 2010 has grown increasingly more uncertain.
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Winter Weather Cleanup Puts Floor
Under Crude Oil and Natural Gas
By John L. Person
February brought on some of the most severe weather in the northeast section of the United States. Airports were closed and Washington stood in a gridlock, not political, a literal traffic gridlock due to snow.
The severe weather was not just isolated to the U.S., northern China has felt the lowest temperatures in half a century and they have had their share of snow as well. Headlines read: “Temperatures in northern China may fall to the lowest in half a century as the Chinese capital recovers from the heaviest snowfall in almost six decades.”
Sound familiar? If you live anywhere in the northern half of the U.S., 2010 has brought on significantly colder and wetter than normal weather patterns. What does this mean? News broadcasts claim the weather will reduce productivity, retail sales will decline, but I have not heard about demand for fuel, used heavily in the cleanup process and as a source of heat, which could put a dent in supplies, thus cause a price spike in both crude oil and natural gas.
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January Barometer Review
By Christopher Mistal
On the close of January 29, the official January Barometer reading for 2010 was ready. In the days leading up to the close of the month there were numerous articles circulating throughout media outlets of all kind. With market sentiment at multi-year highs, frothy levels in fact; the vast majority of authors were already busy dismissing this year’s negative reading, even before it had been taken.
A common error throughout many of these articles was a lack of the basic fundamental reasons why the January Barometer exists, who is responsible for its creation and how to interpret it. Not a single article that I read explained why January is chosen, there are eleven other months in a year after all. So why is January the most important? Whose idea was it?
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That’s a Wrap—Time to Clear Out
By Christopher Mistal
Our annual Free Lunch Menu of yearend bargain stocks was emailed to subscribers on Sunday, December 20. This year’s list was compiled using the close of Friday the week before Christmas. This ensured healthy levels of market activity and afforded us plenty of time over the weekend to remove any questionable shares.
After filtering out all preferred stocks, new issues, closed-end funds, splits and any other non-regular common stocks we selected 25 stocks from the NYSE, NASDAQ, AMEX and Bulletin Board.
This is a short-term trading strategy. You get in and get out as soon as any outsized gain materializes. These stocks all behave differently and there is no automatic trigger point to sell at. Our standard trading rules do not apply to these trades. You should be out of all of these stocks by the beginning of March as small cap outperformance begins to wane (2010 Stock Trader’s Almanac, page 110). Advice a la G.M Loeb, never forget why you bought a stock.
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Portfolio Updates: Correction Euthanizes Weak Sectors – This Bull Still Has Legs
By Christopher Mistal
It was quite tense over the past several weeks as it appeared that another debt crisis, this time in Europe, was about to explode. From the recovery highs of mid-January, major indices corrected 8.5% on average to the lows of early February. Tensions have abated and the market has turned up.
This 8.5% correction is healthy and has restored sentiment indicators to much less frothy levels when compared to the readings taken the first week of the New Year. The number of bulls and bears is much more balanced and a positive amount of skepticism has returned. Seasonality also remains intact—although weakness did materialize earlier than usual as February is typically the weak link in the Best Six Months.
Some quick math shows us that there is an ample supply of historically positive months in front of us and time for the market to climb to our annual forecast high of Dow 11,000-12,000. There is stout overhead resistance in the Dow 10,500-10,800 range that could easily be pushed through with additional solid earnings reports and further upbeat economic news.
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Support Tested After Down January - But Two Horsemen Spook Stocks
By Jeffrey A. Hirsch
We hope you are enjoying the new e-newsletter and finding the bi-weekly article releases more effective. The March 2010 newsletter will be released on Thursday, February 25. These monthly newsletters will be released on the last Thursday of every month and contain a roll up of all the best articles throughout the preceding month, plus the Market At A Glance, the Monthly Almanac information for the coming month, including the Vital Stats and the Strategy Calendar. We are excited and pleased with the new system and service and as always welcome your candid feedback.
From mid-January through early February the stock market came under some heavy selling pressure. A negative January Barometer has us concerned for the coming months and the year as a whole. The Dow fell 7.6% on a closing basis from the January 19 high, piercing 10000 briefly before bouncing off support on February 8 at about 9900. As you can see in the chart below for the past two weeks the Dow has been attempting to regain the momentum it had from July through January above it’s 50-day moving average (pink line), but it has struggled the last few days and is threatening to fall below the current monthly pivot (blue dotted line) at about 10270.
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