Category Archives: Level I

January 2016 – Monthly S&P Market Strategy Update


Welcome to 2016!

And what a start it was. All negative of course, as you know.

In the first day of trading in 2016 the Chinese market sold off 7% and their regulators closed the market. And all this occurred before the opening bell on European and North American markets for 2016. China giving its version of Adele’s “Hello It’s Me” to the rest of the world.

And so everyone, globally, hitting the sell button for the rest of the week…save for Friday…giving us a day of rest not knowing what to expect in the following weeks.

Being in the financial business I hate and bored by the hundreds of financial predictions that will occur for the forward-looking calendar year. Back in the old days, when financial news was very hard to come by, predictions from ‘old sages’ (Bob Farrell and the like) seemed to have good value and laced ‘nuggets of gold’ giving myself a good reason to endure ink stained fingers for a day or two. Now I have to hear millennials giving predictions based on regressed data that has as much nutrients as a fast food meal.

The only prediction I can make is that the financials markets will be open this coming year and stuff will happen. And the market will telegraph whether the economic fundamentals will be improving or getting worst. Yes, that’s right. The market will tell you what’s going on…and it communicates through Model Price Theory [MPT] and all we; as users of MPT, have to do is observe. Prediction is easy however it occurs all year round and not just at the end of December/beginning of January.

The other observation I will make is we are entering the 7th year, marked by March 9, 2009 S&P 500 market bottom, of the financial crisis. Central banks, including the US Federal Reserve, have been experimenting with monetary policy trying to get the global economy back on track of pre-financial crisis global aggregate demand. The preferred policy tool of choice has been printing money or quantitative easing (QE). Asset prices have been boosted including equity valuations and real estate. And I have to admit this is a good thing. The business press is filled with what I call the ‘liguidationists’, who would like asset prices to fall to some 1930s level, so a very small minority, could benefit. This policy response would certainly skew income inequality even more than it is today.

As the US Federal Reserve increased interest rates in December, the market seemed to take this policy action in stride. The financial press and the man on the street was focused, of course, on the 25 basis points increase in Fed Funds. What they don’t see, and is critical, is the ‘reverse repro’ financial mechanism that was introduced at the same time. The New York Fed has been testing this financial instrument for the last two years. Not to get too technical but the Fed through this new instrument will start to drawdown the excess reserves sitting on the banks balance sheets. Estimates range from $3.5 to $2.5 trillion of excess reserves the Fed pumped into the banking system during the financial crisis, that the banks, collectively, have been sitting on and the Fed wants to take some of this back. Of course, they will start slowly at first, say $300 billion or so, but the important thing is the Fed is starting this process.

So over the last year or so, the US Federal Reserve has stopped QE and are in the process of withdrawing excess bank reserves. This is healthy and signs of the US economy returning to normal. Yes, good news…but you won’t hear this anywhere else.

So let’s look at our Model Price Chart of the S&P 500 Index.

sp500.n234

S&P 500 Index with weekly price bars and EBV Lines

As a reminder we aggregate all companies in the S&P 500 Index into one chart on a market capitalized basis (like the S&P 500 Index itself), so we can see where the market – S&P 500 – is trading relative to its EBV lines.

As you can observe the US equity market, as defined by the S&P 500 closed Thursday, January 7th at 1943.06. If the market rallied to EBV+4 (2208) this would represent a gain of some 14%. If the market corrected back to EBV+3 (1766) investors would be suffering Index losses of almost 9%.

For people new to Model Price Theory [MPT] the index value or equity price can move within an EBV zone with no real consequence. However when a transit occurs – index value or equity price crosses one of our parallel lines – our EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectively.

What is our Model Price chart saying?

Simple, we are in the zone between EBV+3 and EBV+4, as we have been for a year and a half, and nothing much as changed. Yes, within the S&P 500 Index itself, stocks are winning and losing, based on their top line and earnings growth estimates. And this has occurred, cyclical and secular rotations, since public markets were invented.

As I have said previously we could trade down to EBV+3 some 9% lower. But would this be the end of the world? Not according to Model Price Theory. It would suggest, if we were to go there, more upside potential than downside and obviously a good reward/risk scenario for investors.

Is there anything in our Model Price chart that is worrisome? Not that I can see. As you can see the S&P 500 fell to 1867 back in the last week of August 2015. And by the end of October we were within 4% of an all time high!

Obviously the world is focused on China right now. For the last thirty years China has been nothing short of a major economic miracle. From a poor fourth world economy to a $60 trillion dollar economic behemoth and will soon rival the US for economic supremacy. Their next stage of economic development is to transition their economy from an investment lead economy to one of a middle class and consumption. In the history of the world this has not happened to any nation without a deep recession/depression. However, China is doing this transition with large amounts of foreign reserves and the best economic brainpower on the planet. As Bank of England head, Mark Carney said to Charlie Rose in an interview several years ago, it’s in everyone’s interest, globally, that this transition happen without economic repercussions for the rest of the world and every central bank is willing to help China with this transition.

The reason I mention this China has a big decision to make in relation to their currency. They have been pegged to the US dollar and have been feasting or reaping the economic benefits as the US dollar has been low compared to other currencies especially the Japanese Yen over the last few decades. However the US dollar has been rallying because, as I have said previously, the US is emerging from the financial crisis and their currency is appreciating against all other currencies worldwide. So what is China to do here? Because of the currency peg the renembi (RMB) is stronger than most of their competitors (i.e., Japan, South Korea and the like) and putting downward economic pressure on their economy.

The Chinese have been trying to devalue their currency slowly and intermittently against the US dollar over the last few months and this is causing everyone concern. Thus your seeing panic selling in the Chinese markets with ripples out to the rest of the world. For if China devalued the RMB, say 30 to 40% against the US dollar, this would send a wave of deflation out to the rest of the world as China’s manufacture goods would be competitively priced compared to other exporting countries.

And what if the US dollar rallies higher from these current levels? As readers will know I’m predicting a large and secular rally for the US dollar against all global currencies over the longer term 5-7 years. If China is having a tough time at these present levels…what happens if the US dollar rallies substantially higher?

So you can see why there is cause for concern by global investors and they are re-pricing asset prices/valuations in case things go badly.

Conclusion

As last Friday’s job numbers have pointed out the US is finally emerging out of the financial crisis that started nearly seven years ago. The problem at this particular time is much of the global economic world is monetarily out of sync and is either losing their economic strength (China and the emerging economies) or have been mired in very slow growth (Europe) over the last several years. These ‘macro’ considerations have taken over the narrative in global financial markets leaving all participants to be cautious and worried.

Hopefully this ‘marco’ narrative changes in the coming weeks as US companies start reporting their 4th quarter financial results with guidance for the rest of 2016.

Yes, the market could fall to EBV+3. And, yes the S&P 500 Index could rally up to EBV+4 and make all-time highs for the S&P Index. Good companies, will show their stuff in the coming weeks and we will see how the market reacts to possible forward fundamentals.

 

February 2015 – Monthly S&P 500 Market Strategy Update

Are the global central banks playing chess or checkers?

January saw an unprecedented amount of central bank activity. By Zero Hedge’s count a total of 14 independent national central banks, including Canada, eased interest rates in the first month of 2015. So the market focus was not on equities per se but on the global macro view that any experienced market watcher would have to admit is cloudy to say the least.

Central banks are the elephants in the global finance circus and their actions have significant consequences to global fund flows and ultimately asset pricing. So to have the absolute number and the actions of so many of these institutions is unprecedented.

However have a look at our model price chart for the S&P 500 and you see an equity market that is patiently waiting for all the fireworks to die down and a hair’s breath under all time highs set in December.

S&P 500 Index with weekly price bars and EBV Lines (colored lines).

S&P 500 Index with weekly price bars and EBV Lines (colored lines).

 

As a reminder we aggregate all companies in the S&P 500 Index into one chart on a market capitalized basis (like the S&P 500 Index itself), so we can see where the market – S&P 500 – is trading relative to its EBV lines.

As you can observe the US market, as defined by the S&P 500, is still in the middle of the zone bookmarked by EBV+3 and EBV+4. If the market rallied to EBV+4 (2196) this would represent a gain of some 6.5%. If the market corrected back to EBV+3 (1756) investors would be suffering losses of almost 15%.

For people new to Model Price Theory [MPT] the index value or price can move within an EBV zone with no real consequence. However when a transit occurs – index value or price crosses one of our parallel lines – an EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectfully.

So what are my observations for the month of January 2015?

The U.S. equity market is waiting. It’s being patient. Central banks the world over are doing stuff…mainly lower interest rates and quantitative easing…and the U.S. market is waiting for the impact or the result of all these actions.

No big deal….

And as far as answering the question of which board game the central banks are playing? I’m not sure, and willing to bet that central bankers have to improvise and modify what they are doing in different time periods as the economic analysis indicates. My point is that US equity markets seem happy to be patient and don’t really care which game their playing. And if the US equity markets are happy so am I.

Bank of Canada Lowers Interest Rates by 0.25%

Sorry folks I saw this coming a mile away.

Want some proof? I will reblog a blog post I did on March 24, 2014 titled “What if?” quoting extensively from a speech from our recently appointed Bank of Canada Governor, Mr. Stephen S. Poloz.

Mr. Poloz was telling everyone and anyone, almost a year ago that Canada was not going to be the hotbed of growth – far from it – for the foreseeable future. And he made these comments well before the price of crude oil crashed in the last few months of 2014 that will negatively impact both Canadian government budgets and growth prospects (capital spending) for 2015. Mr. Poloz back on March 18th, 2014 took the opportunity to speak plainly to all of us who were willing to listen.

And to add insult to injury, according to Bloomberg, no Canadian economists polled forecasted a downward change in interest rate policy for the Bank of Canada for the first few months of 2015.

So have a read (or reread) of my reblog, especially in the light of today’s news, and I think you will come to the same conclusion as I did…that the next move on interest rates from the Bank of Canada was going to be DOWN (that happened today) and this was telegraphed almost a year ago.

And I will also reiterate, as I did in my “What if?” blog, that the Bank of Canada reduced its bank rate from 1% to 0.75% – obviously by 0.25 basis points – leaving another 0.75 basis points to zero matching all the other major central banks in the world today.

 

“What If?”

I’m still in mourning over Mark Carney, the former Governor of the Bank of Canada, leaving us for the Bank of England.

So I haven’t focused at all on our new Governor of the Bank of Canada – Mr. Stephen S. Poloz.  So on Tuesday, March 18th, 2014, I was heading to our office kitchen, for my one cup of Earl Grey tea I allow myself, through our trading and technology office space when Mr. Poloz was on our trading floor big screen television and said three words that made my head spin around.

“Blah, blah, blah, … lower interest rates, blah, blah”!

Nursing my whiplash, I know one thing about ‘Central Bankers’; they would never say these three words in any context without thinking through its communication value.

So I went to the Bank of Canada website to read his speech, “Redefining the Limits to Growth”, he delivered to the Halifax Chamber of Commerce, in obviously Halifax, Nova Scotia.

Let me say, every Canadian investor should read this speech!  For a central banker this speech is direct, forthcoming and has huge implications for your investments – not to mention the future for your kids and grandchildren.

Mr. Poloz is giving everybody a very direct assessment of the Canadian economy and its not very good.  Down right scary as a matter of fact.

The highlights include:

1)        Five years after the financial crisis the world economy is still stuck in a period of slow growth – say 2% annual growth, if we are lucky.

2)        For the first time in 50 years, and starting in 2011, the growth rate of the population of working-age Canadians crossed below that of the overall population.  As a way of comparison the US still has 0.2% – 0.3% growth in hours worked – a small but still growing population of working-age people.

Why is this important?  Mr. Poloz explains in his speech, “Long-term economic growth is driven by two factors: 1) growth in the supply of labour, which is connected to population growth and changes in its composition, or what we call “demographics;” and 2) productivity growth, which is economists’ shorthand for how efficiently we produce goods and services. For illustration, if we had 2 per cent trend growth in the supply of labour and 1 per cent trend growth in productivity, trend growth for the economy would be about 3 per cent.

So the growth rate of the population of working-age Canadians will be negative for the seeable future, say negative 0.1% – 0.2% annually.

Therefore our only growth influence in the Canadian economy will be the nebulous and hard to pin down productivity growth that economists calculate.  Mr. Poloz stated “Productivity growth fluctuates around a long-term trend, tending to be weak during recessions and the early stages of a recovery, and stronger in periods of economic expansion. It follows then that the weakness in productivity growth since the financial crisis may be a symptom of a post-crisis hangover. Indeed, in Canada, the latest data show a pickup in productivity in the second half of 2013, to around 2 per cent, which is very promising.”

Really!

Let’s look south of the Canadian border to look at long-term trends of productivity growth in the US.  According to Jeremy Grantham, of the money management firm GMO, for forty years after WW II economists calculated productivity growth of around 1.8% per year.  Unfortunately the following thirty-year period saw US productivity growth slowing to 1.3%.  With some economists seeing a trend of lower productivity growth in the foreseeable future.  This is in the United States, the most productive and inventive society on earth.

Mr. Poloz points to a short-term spike in productivity in the Canadian economy over a certain period of time but no one – at least not me – really believes that Canada will out do the US in terms of productivity growth.  And remember productivity growth is really hard to measure, if at all.

So, do the math.  The CDN labour force is contracting say, 0.1%-0.2% per year.  Productivity growth, let’s just say, it’s the same as the US – big assumption, in that productivity is growing 1.3% per year.  So the maximum growth rate in Canada over the foreseeable period of time will be 1% per annum – if we are lucky!

Going one-step further inflation in Canada has been falling like all industrial countries all over the world.  Inflation last year in Canada according to Mr. Poloz was 1.2%.  The goal of the Bank of Canada is to have 2% annual inflation.  So there will be no real growth in Canada for the foreseeable future!

Mr. Poloz states “the global economy may not be just suffering through a hangover from the financial crisis. There are other, longer-term forces at work as well. Some analysts are suggesting we may be facing a long period of secular stagnation. On this alternative view, the economy could perform well below normal, leaving many out of work or underemployed for a long time to come.”

Candid hard-hitting stuff!

3.         Mr. Poloz cites the Club of Rome!  “Over 40 years ago, the Club of Rome published a book entitled, The Limits to Growth. To the global think tank, those limits were about finite natural resources and the environment. Although the timing remains uncertain, its arguments remain relevant today.”

 

This, my friends is jaw dropping.  For a central banker to cite the Club of Rome, in a public address is unheard of.  If Janet Yellen, the new Chairperson of the US Federal Reserve, had made this reference, and maybe she will in the future, the US would be in a full-scale panic with both public and private debates on how the US economy can exceed these “Limits to Growth” and reference the presidential years of one Jimmy Carter.

4.         There are other items in his speech that are interesting.  Including statistics on where Canadians are allocating an ever-increasing and significant portion of their wealth over the last 10 years.  Interested?  My lips are sealed in hopes that you will read the speech.

Conclusion

Shocking speech and a must read.  Mr. Poloz wasn’t on my radar screen but he is front and center now.  The investment implications of this speech are quite real and should be considered by all investors.

So “What if” Mr. Poloz is right?

My interpretations are:

1.         The Bank of Canada rate – similar to the Fed Funds rate – is still around 1%, leaving Canadian chartered bank prime at 3%.  The US Fed Funds rate is 0 – 0.25%.  The Bank of Canada still has room to drop interest rates, if need be.  When, not if according to this speech, the Bank of Canada starts to reduce short-term rates look for GIC’s and other short-term debt instruments to follow suit squeezing retirees and savers even further.

2.         We have already seen a decline in the value of the Canadian dollar under 90 cents to the US dollar.  The weakness is probably making Mr. Poloz happy, in that a weak CDN dollar is giving the Canadian economy, especially Ontario; a must needed boost (cheaper exports) and higher short-term import inflation.  The economic impact of the lower CDN dollar does take time.  I’m sure the Bank of Canada will be monitoring export growth, import inflation and interest rates very carefully in the future however this speech is confirmation to me we are probably in the early stages of a secular decline in the CDN dollar vis-a-vis the US dollar.  (Something I have been professing over a year and a half ago.)

3.         Interest sensitive Canadian equities will probably have another bull rally to valuations higher than their previous stated valuation highs – EBV Levels – as income investors scramble for higher dividend and income returns that are lacking elsewhere or when the Bank of Canada starts to reduce the Bank of Canada rate.

4.         Canadian companies that have any growth, say high single-digit or low double-digit growth, in any Canadian or international economic market sector will have a high valuation (EBV Level) as investors will pay any price – valuation – for growth in a no-growth country (maybe world).

5.         Assuming all the above happens, this will increase the valuation of the S&P/TSX Composite from currents levels to EBV+3.  See chart below.  This will imply an upside of approximately 35% from current levels.

S&P/TSX Composite Index with monthly price bars and EBV Lines (colored lines).

S&P/TSX Composite Index with monthly price bars and EBV Lines (colored lines).

If the S&P/TSX Composite did achieve this valuation level, EBV+3, in any future time period this would represent full value for this Canadian Index and much needed caution for Canadian equity investors.

Just a normal weekend my friends, alone with my investment thoughts!

“What if?” indeed!

December 2014, S&P 500 Market Strategy Update

I guess everyone sees what is going on in the global equity world.

The US equity market, by all consensus including everyone at a cocktail party I went to last Saturday night, is the global equity market of choice. Yes, of course everyone is bullish and I’m sure investors are shifting portfolio allocations as I write this.

And yes, this is making me extremely uneasy.

We calculate a six-year total rate of return on our US equity mutual fund, Acker Finley US Value 50, on the front screen of our website, here. And on selected days we are up 250% over a rolling six-year period on recent days the market closes, handsomely outperforming our benchmark, the S&P 500 Total Return Index in Canadian dollars. Can we do any better? I don’t think so.

In other words, the fundamentals of the US economy, especially with falling energy costs and ever increasing US dollar, haven’t been this good for a long time. As my cocktail banter shows people see what’s going on here. Yes, the U.S. equity market has figured out this good news a while ago and has accordingly priced these improving fundamentals with ever increasing share price valuations while the market bears were yelling “Bubble!” And people being people they are lining up for the returns that have already happened!

As usual in these monthly blogs, let’s have a look at our Model Price chart on the S&P 500 Index to see what is going on.

S&P 500 Index with weekly price bars andEBV Lines (colored lines).

S&P 500 Index with weekly price bars andEBV Lines (colored lines).

 

As a reminder we aggregate all companies in the S&P 500 Index into one chart on a market capitalized basis (like the S&P 500 Index itself), so we can see where the market – S&P 500 – is trading relative to its EBV lines.

As you can observe the US market, as defined by the S&P 500, is still in the middle of the zone bookmarked by EBV+3 and EBV+4. If the market rallied to EBV+4 (2206) this would represent a gain of some 7%. If the market corrected back to EBV+3 (1764) investors would be suffering losses of almost 14%.

For people new to Model Price Theory [MPT] the index value or price can move within an EBV zone with no real consequence. However when a transit occurs – index value or price crosses one of our parallel lines – an EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectfully.

Squeezing Up to the Top of EBV+4

The next few quarters are usually very strong, seasonally, for US equity share prices. And I do expect the S&P 500 Index to squeeze up to EBV+4 giving equity participants more equity gains over the next little while. This shouldn’t be hard to imagine as worldwide investors (especially Japanese and European investors) evaluate rates of return on global assets and seeing their portfolio equity returns in US dollars will simply say to their respective financial advisors, “Gimme more of that!”

Risk versus Return

As I have said previously, the S&P 500 Index can float between EBV+3 and EBV+4 without consequence according to Model Price Theory [MPT]. However there is a big difference in the risk/reward scenarios if the Index is closer to EBV+3 than EBV+4. I would caution U.S. equity investors’ that as the S&P 500 Index pushes closer to EBV+4 the more investment risk investors are taking with their US holdings.

Conclusion

Everyone now sees the US equity market as the market of choice, in terms of rates of return, for the next few quarters at least. At the same time as the S&P 500 Index pushes towards EBV+4, investors are taking on an increasing amount of risk with limited upside return, assuming EBV+4 is the maximum valuation level this market will achieve (and this will be a future blog post for sure!).

For investors who have been in the US market since the market bottom of March 6, 2009, it has been one hell of a ride. (From EBV+1 to a little under EBV+4, so far!) Unfortunately new investors hoping to capture any of these huge index gains of the past will be sadly disappointed. I’m not predicting doom and gloom here but just pointing out the obvious…returns will be lower with a much higher risk levels for those first timers eagerly throwing their capital in US equities at this time.

I’m on Market Call!

On Wednesday, December 3rd, 2014, I will be on Market Call on BNN (Canadian Business Show) 1:00 pm – 2:00 pm (eastern standard) with Mark Bunting.

 

Take this opportunity, open our Model Price Facebook application and follow along while I’m on the show answering viewer’s questions about individual stocks.

 

Would you say anything different based on your interpretation of Model Price Theory [MPT] and chart? You can make your comments via Facebook.

 

Should be fun!

November 2014, S&P/TSX Composite Market Strategy Update

My friends this Canadian Index is far more interesting to talk about!

The last month and a half has been brutal to all commodities especially gold. As I have noted in previous blogs the sub-index sectors of Energy and Materials (which includes gold stocks) represents 36% of the Canadian Composite Index weightings compared to 13% of the S&P 500 Index. With such a large weighting in commodities obviously the S&P/TSX Composite Index has been adversely impacted.

Model Price Chart of the S&P/TSX Composite Index

 

S&P/TSX Composite Index with weekly price bars and EBV Lines (colored lines).

S&P/TSX Composite Index with weekly price bars and EBV Lines (colored lines).

 

The first very apparent observation you can make of the above model price chart is the negative transit of EBV+2 in the middle of October – annotated by the arrow.

This is significant.

Negative transits, as I have written about many times, indicates a change in fundamentals. Unfortunately, as longtime followers of Model Price Theory [MPT] know, negative transits usually corresponds to negative future economic fundamentals.

I have said numerous times Model Price Theory [MPT] is NOT ‘Technical Analysis’ in the traditional sense however because we extensively use price graphs to display mathematical fundamentals repeatable ‘graphical formations’ are inevitable.

Keen observers will note that this Composite Index closed above our EBV+2 line on the same week as the negative transit. Unfortunately this is a normal repeatable ‘graphical formation’ of negative transits and I’m speaking with 15 years of experience here.

The first negative transit is usually the market testing or whether the index belongs in a lower zone, in this case between EBV+1 and EBV+2. Again, in general, the market (I’m talking about indices here) usually rallies above the EBV Line it just negatively transited.

And sometime later – could be weeks/months/quarters another negative transit will occur confirming the initial negative transit.

THIS SECOND NEGATIVE TRANSIT WOULD CONFIRM THAT THE CANADIAN MARKET HAS ENTERED INTO A BEAR MARKET.

Do I have your attention!

Does this mean the world comes to an end? Of course not! It’s just that an investor/trader has to adjust their expectations. My most profitable trading has occurred in BEAR markets of the past. You just have to know what kind of market you are in (Bull market vs. Bear) when trades are initiated and rates of return are assessed.

CONCLUSION

The last couple of months in the Canadian market have been interesting and eventful from a Model Price Theory [MPT] prospective. The highly cyclical market weight portion of the S&P/TSX Composite has been “taken out to the woodshed and shot.” Because of the negative transit of EBV+2 in the middle of October, market participants in Canadian equities should be on guard for a second negative transit that would be a negative sign and possible signaling of negative markets in the future. (As of this writing if the S&P/TSX Composite Index fell below an index level of 14,329 a second negative transit would have resulted.) Can you make money in BEAR markets…absolutely. Model Price will lead the way!

November 2014, Monthly S&P 500 Market Strategy Update

Looking at what the US market did for the month of October, I reminded of what I would call a “Crazy Ivan”.

Yes, this is reference to the infamous movie, “The Hunt For Red October” where we were introduced to Russian submarine captains making aggressive maneuvers, turns, on a random basis to see if a US submarine was shadowing the aforementioned Russian sub.

Have a look at our model price chart below and see if you don’t agree.

S&P 500 Index with weekly price bars and EBV Lines (colored lines).

S&P 500 Index with weekly price bars and EBV Lines (colored lines).

 

As a reminder we aggregate all companies in the S&P 500 Index into one chart on a market capitalized basis (like the S&P 500 Index itself), so we can see where the market – S&P 500 – is trading relative to its EBV lines.

As you can observe the US market, as defined by the S&P 500, is still in the middle of the zone bookmarked by EBV+3 and EBV+4. If the market rallied to EBV+4 (2199) this would represent a gain of some 9%. If the market corrected back to EBV+3 (1759) investors would be suffering losses of almost 13%.

For people new to Model Price Theory [MPT] the index value or price can move within an EBV zone with no real consequence. However when a transit occurs – index value or price crosses one of our parallel lines – an EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectfully.

IS THERE ANY MEANING TO OCTOBER’S MARKET ACTION?

As I have said previously, any and all index moves within ‘the zone’ – between EBV Levels – is without consequence. What we try to do is measure risk levels intra-zone. In other words when the index level or stock price recedes to the lower EBV Line then investors are taking lower risk than if the index level or stock price closes in at the top or upper EBV Line. This should make some sense.

Transits are another matter. Any transit, index level or stock price piercing an EBV Level, is giving model price users information that the fundamentals are changing depending on the transit. If there is a positive transit, the index level or stock price increases through the upper EBV level, this signifies a positive change in fundamentals is occurring. The opposite is true if negative transits occur.

So as you can see from the above model price chart the US market as represented by the S&P 500 Index sold off in the first two and a half weeks of October, only to rebound to new highs in the second half of the month. This ‘high jinx’ in market action was certainly noteworthy however since all this action took place intra-zone no fundamental economic conclusions can be interpreted via Model Price Theory [MPT].

CONCLUSION

The market was certainly more volatile in the month of October than we have seen in awhile. However according to Model Price Theory [MPT] this volatility is par for the course because all the market action took place intra-zone – between EBV+3 and EBV+4.

Until evidence to the contrary, a negative transit of EBV+3, the bull market in US equities is still intact. So the US market did a “Crazy Ivan”, making some investors nervous and of course giving the permabears something to talk about in the financial press. But fundamentally and according to Model Price nothing has changed by October’s market action.

June 2014 – Monthly S&P 500 Market Strategy Update

What can one say about the US equity markets? No real volatility and hitting new highs everyday – it seems.

 

As usual let’s have a look at the model price chart of the S&P 500 Index.

 

S&P 500 Index with EBV lines

S&P 500 Index with EBV lines

 

As a reminder we aggregate all companies in the S&P 500 Index into one chart on a market capitalized basis (like the S&P 500 Index itself), so we can see where the market – S&P 500 – is trading relative to its EBV lines.

 

As you can observe the US market, as defined by the S&P 500, is still in the middle of the zone bookmarked by EBV+3 and EBV+4. If the market rallied to EBV+4 (2142) this would represent a gain of some 11%. If the market corrected back to EBV+3 (1712) investors would be suffering losses of the same 11%.

 

Getting ready for the ‘Dog Days of Summer’

 

Summer is finally here after a long and painful winter and iffy spring. One of the old quotes about the market handed down from one generation to the other is “never sell a dull market short”. I think this quote is apt because superficially the US market does seem dull. However on a daily basis all the major US indices seem to be a few points below their all-time highs until a late afternoon rally pushes them forward (up) giving the financial press and media urgency to report ‘all-time market highs’ to the distracted and disinterested.

 

“Does anyone really care?” I ask myself frequently.

 

So what is there to say? After a fairly slow economic report for the first quarter of 2014 – US GDP contracted 1% – everyone is looking for a reacceleration of economic activity for the rest of 2014. Equity values are still cheap (S&P 500 just over EBV+3) with lots of room to the upside.

 

So relax, take it easy because second quarter earnings are on the way and with September and October coming, these two months always seem to be eventful for one reason or another.

 

As always, see what happens.

Death to a ‘Tape Reader’ with a Happy Ending!

 

I dropped out of the ‘technology race’ in 2001. I couldn’t do it any more. I was on the edge of total mental and physical collapse. Or let me put it this way, either I was going to have a nervous breakdown or my office was going to look like this.

 

Hum…Certainly NOT the way I wanted to spend my working days in front of!

Hum…Certainly NOT the way I wanted to spend my working days in front of!

 

I needed to rethink how my company and I were doing business and how future gains would accrue to new and future clients.

 

The Art of ‘Tape Reading’ Dies

 

I used to be a ‘tape reader’!

 

All of us in the equity business who were any good – back-in-the-day – were, so called ‘tape readers’.

 

What is a ‘tape reader’ you ask?

 

Long before computers, stock trades were recorded on a long paper rolls about 1” in diameter. As an equity trade occurred the transacted price, number of shares and a company’s stock symbol were electronically sent to a mechanical printing type of machine that would sputter ‘clickety-clack’ sounds during market hours. Brokers would spend hours reviewing this long piece of paper looking for patterns in individuals stocks. Yes, one had to have a good memory but substantial gains could be deduced by looking for trading patterns especially when thousands of shares would trade in a ‘block’, suggesting either accumulation or distribution of shares by a large trust company or pension fund. This was laughingly an old fashion version of ‘front-running’ that Michael Lewis writes about in his book Flash Boys.

 

Alternatively if I were pressed we – ‘Tape Readers’ – were mentally connecting the dots or doing simplistic forms of Technical Analysis.

 

This paper tape was replaced with a wall mounted faux-digital tape that measured some 15 feet in length. During market hours as trades were displayed, men – never women (at least I never saw any), would sit for hours looking for trends – price movement – and block trades on hundreds of stocks with a transacted price. They would mentally piece together whether a stock was being accumulated or under distribution. Over a period of a few days one could get a feel of the market as a whole. If the equity markets were being accumulated all observed stocks would have positive price movement. One could ‘feel’ how ‘healthy’ or ‘sick’ the stock market was by observing individual trades.

 

I would make it a point when walking home from high school (early to mid 1970’s), unfortunately the long way home (when I didn’t have much homework) to pass by the picture window of a large storefront location where a brokerage firm (A.E. Ames) operated a wall mounted ticker tape with about twenty chairs positioned theatrically for their clients. Anywhere from 5 to 10 old men would sit transfix to the fast moving lime green letters and numbers moving right to left ignoring a curious passerby looking on with fascination.

 

Jim Cramer – ‘Tape Reader’ in Action

 

Want another example of ‘Tape Reading’?

 

The best example I can give is Mr. Jim Cramer on his CNBC television show Mad Money. When Jim does his ‘Lightening Round’ segment that’s a ‘Tape Reader’ in action and reminds me of the old days.

 

Jim has a prodigious memory (like all ‘Tape Readers’) combined with lots of energy to try absorb each and every trade. Jim regales his audience with theatrics and bluster but after 2000 – 2001 the equity market trading internals changed and his (and my) acquired skill of ‘tape reading’ went the way of the Dodo bird.

 

What Changed?

 

Two forces came together in 1998-2000 that rendered the art of ‘Tape Reading’, that ruled Wall Street for over 100 years, meaningless. The first was computer technology, fiber optics and instant mathematical analytics. The second was the frenzied volume and the hundreds of new companies ‘IPOed’ in the technology bubble of 1998-2000. If there was an old fashion wall mounted ticker tape the symbols, price and the amount of shares would zip by at such a lightening speed I doubt that any human being would be able to discern any information.

 

Like a proverbial caged hamster on his running wheel and unbeknownst to the hamster no amount of running speed the animal could ever expel would allow for the animal to keep up with the increasing speed of the wheeled contraption.

 

Jim gave up managing money and went into show business. I walked off the trading floor I built at Acker Finley and moved into a small office exhausted. All I had was an Internet connection and a burning desire to start over.

 

Starting Over or Act II

 

I like to compare the investment business to that of a miner. Everyone in the trading and equity analysis business tunnels down the same mineshaft. I reasoned back some 15 years ago this metaphorical mineshaft would lead to its ultimate conclusion. Where millisecond algorithmic trading by the fastest and most expensive technology wins at the end of the day. In this world, today’s world, first place wins everything second place goes bankrupt (Yikes!). As for Fundamental and Technical Analysis, nothing has changed in these two fields since the mid-sixty’s! Yes, you read this right.

 

As a miner – keeping with my analogy, I gave up digging where the rest of the industry was tunneling. Picked up my shovel and digging materials and started tunneling a new mineshaft of my own. We at Acker Finley just completed our math on Model Price Theory (MPT) about this time – 15 years ago – and I jumped in with both feet. What you see today on our Facebook App ‘Model Price’ is what I started with back in 2001.

 

Conclusion

 

All industries including the financial industry are impacted by technological change. Wall and Bay Street lived in a cloistered world for over 100 years where the ‘inmates’ tightly controlled everything to do with equity trading. This all changed in 2000. What is amazing and what I ask myself daily is did anyone notice this transition? Certainly by watching financial professionals on television I doubt whether substantial intellectual career transitions were made. At least Cramer is honest enough to know his market edge disappeared and transformed his career as a showman and NOT an investment professional.

 

Which mine shaft are you mining for your investment ideas or strategies? Today’s CFA or MBA and CMT (Chartered Market Technician) investment professionals think the road to riches is paved by relearning past financial concepts either in Fundamental or Technical Analysis. Really? Is there any more ore to be found at the end of this long and well-mined mineshaft? What is your advantage trading and investing in today’s equities?

 

(I write this blog NOT to be ‘preachy’, but if you are suffering from a string of investment and trading losses maybe this blog will give you something to think about.)

 

 

P.S. I thought I would include a picture of my trading station in 2014. What does your trading station look like?

I feel better sitting in front of this computer screen, anywhere in the world!  You?

I feel better sitting in front of this computer screen, anywhere in the world! You?

Shout Out to BNN – New Amazing Resource for Investors.

I have spent the last couple of weeks trying out BNN Go’s new service. (At least I think it’s new. Michael Hainsworth recently had a video link showing how to use this resource about a month ago on his Tweeter feed and is available on BNN’s website, here.)

 

Type in a company’s name or stock symbol in the search bar at the top of BNN’s homepage and BNN produces analytics and video links to your enquiry.

 

Canadian and US equity analysts and portfolio managers expound liberally on the fundamentals on any company of interest to investors on a chronological basis. I really like the focus on mid to smaller companies in the S&P/TSX Composite Index.

 

As Michael explains in the above link there is literally hundreds of thousands of hours of video content at your disposal. An amazing FREE ‘new’ service for investors and a perfect companion for Model Price Facebook users – myself included.

 

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