The Market Mood

GoSign

THE MARKET MOOD

July 2016

The GO-sign indicator remains in the “on” position this month–and the market is touching all-time highs.  Still, with slowing global growth, European banks in the doldrums and interest rates at new lows, many people are quite nervous about where the market will go next.  But it is important to ignore the headlines and simply follow the system.  Now is the time to allocate most of your money towards stocks.  Of course it depends on how close you are t o needing the money you are investing.  Here are some simple rules.  First, if you have more than 15 years before retirement, put 60-100% of your money in stocks (whether through mutual funds or index-ETFs).  Second, if you have less than 5 years to retirement, you may increase your exposure from 0 to 25% stocks, but no more than that.  Third, anywhere in between 5 and 15 years then make your allocation between 25% and 60% depending on your tolerance for fluctuation.

Gordon Says:

Despite the Brexit, the Go-Sign indicator held through the month of June and looks to continue through the month of July.  At this moment it would take a full 6 weeks of bearish behavior in the markets to turn that signal around, so things look optimistic for the second quarter earnings season.  Investors simply aren’t fleeing to safety (with the exception of European currency investors), so the U.S. Stocks are likely to move higher from here.

Caution buys are a good idea right now.  Nobody wants to be positive, every investor seems to want to worry: this is exactly the condition in which a bull market likes to climb higher.

Toni Says:

Brexit is behind us (so far) and the market is bullish.  The S&P 500 Index has punched above 2140 and even moved above 2150 (July 12) making a new all-time high mark –a positive.  We are moving into Q2 earnings season, and that will rock the boats (indexes) higher and lower as large caps announce and we determine if earnings can keep steep with higher valuations.  When entering new positions, be careful not to choose stocks that are overbought, or have recently shot higher in a parabolic move that will soon succumb to profit taking.  Chose companies with reasonable valuations and steady earnings records.  and above all, keep green on your screen.

 

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ETF Lists

ETF Watch Lists for Investing

Here is a list of ETF groupings. Using this as your starting point for where to look in either a GO sign or STOP sign market condition

Level 1 ASSET CLASS Level 2

 

GO SIGN

SPY U.S. Stocks XLB, XLF, XLI, XLK, XLP, XLU, XLV, XLY, MDY, IWM
DBC Commodities DBA, DBB, GLD, JJC, OIL, KOL, UNG,
EFA Non U.S. Stocks

Developed

EWA, EWG, EWJ, EWS, EWU,EWP
EEM Non U.S. Stocks

Opportunities

EWZ, PIN, FXI, RSX, EWM, EPP, ILF
LQD Corporate Bonds HYG, JNK, CIU, CSJ

Go Sign Markets

  US Stocks Risk and Opportunity (Volatility)
SPY S&P 500 High
XLB Basic Material Production High
XLF Financial High
XLI Industrial High
XLK Technology High
XLP Consumer Staples Medium
XLU Utilities Medium
XLV Healthcare High
XLY Consumer Discretionary High
MDY Mid-size companies High
IWM Small-size companies High

 

  Commodities Risk and Opportunity (Volatility)
DBC Top-Traded Commodities High
DBA Agriculture Commodities High
DBB Materials Commodities High
GDX Precious Metals Mining Companies High

 

  Non US, Developed Markets Risk and Opportunity (Volatility)
EFA All Developed Markets High
EWA Australia High
EWG Germany High
EWJ Japan High
EWS Singapore High
EWU Great Britain High
EWP Spain High
EWH Hong Kong High

 

  Non US, Emerging Markets Risk and Opportunity (Volatility)
EEM All Emerging Markets High
EWZ Brazil High
PIN Russia High
RSX India High
FXI China High
EWM Malaysia High
EPP Pacific Rim (non Japan) High
ILF Latin America High

 

  Corporate Bonds Risk and Opportunity (Volatility)
LQD Investment Grade, Long-Term Corporate Bonds Fund
(safer, lower returns)
Medium
HYG High-Yield, Long-Term Corporate Bonds (riskier, higher returns) Medium
JNK High-Yield, Long-Term Corporate Bonds (riskier, higher returns) Medium
CIU Medium Term Corporate Bonds Medium
CSJ Short Term  Corporate Bonds Medium

 

STOP Sign Markets

Ticker STOP-Sign Investing Instrument Risk and Opportunity (Volatility)
  Government Bonds  
AGG All US Govt. Bonds Low
SHY US Govt. Bonds, 1-3 years Low
UUP US Dollar, leveraged two times Low
IEF US Govt. Bonds, 7-10 years Medium
TLT US Govt. Bonds, 20-year Note Medium
MUB US Municipal Bonds Medium
EU Eurozone Bonds Medium
EMB Emerging Market Bonds Medium
  Interest Rates and Inflation  
TBT Inverse US Govt. Bonds, 20-year Note, poised for rising interest rates Medium
TIP Inflation Protected Treasury Bonds. Medium
  Currencies
EUO Inverse Euro (very similar to UUP, but more leveraged) Medium
FXA Australian Dollar Medium
FXF Swiss Franc Medium
  Precious Metals  
GLD Gold High
SLV Silver High
  Inverse Funds  
SH Goes opposite to the S&P 500 High
SCO Goes opposite to the price of Oil, leveraged two times Very High
DZZ Goes opposite to the price of Gold, leveraged two times Very High
DXD Goes opposite to the Dow, leveraged two times Very High
QID Goes opposite to the NASDAQ 100, leveraged two times Very High
TWM Goes opposite to the Russell 2000, leveraged two times Very High

 

 

 

 

 

 

 

 

 

Risk & Opportunity Level Profit Price equals
entry price plus…
Loss Price equals

entry price minus…

Low 5 percent 10 percent
Medium 7.5% 15%
High 10% 20%
Very High 12.5% 25%

 

 

 

 

 

GO-Sign Market Primary List
SPY U.S. Stocks
DBC Commodities
EFA Non U.S. Stocks

Developed

EEM Non U.S. Stocks

Opportunities

LQD Corporate Bonds

 

Ideas for investing in times of rising interest rates

When interest rates rise, the market has a struggle.  The problem is that though bonds become attractive to new investors (since they begin to pay higher interest rates), the investors that have already bought the previous, lower interest-rate bonds are stuck in their previous arrangement.  To get out of that arrangement becomes expensive and those investors risk losing ground on the returns they have collected so far. That means bond funds become less attractive. Now people investing with their 401k or IRA accounts aren’t able to invest directly in bonds. They have to use bond funds. That means that in times of rising interest rates, moving money into bonds is a bad idea, because the prices of those bond funds will go down.

So what to do? Should you simply invest in stocks instead?  That’s difficult to tell because stocks sometimes go up and sometimes go down when interest rates rise. Generally speaking, you won’t expect to see stocks make significant gains over a longer period of time if interest rates are rising, so stocks aren’t the best idea at that time either.  The best idea is likely to be cash, or in the case of 401K or accounts it will be the money market funds. If you have a high risk tolerance, then you might consider putting half your savings in the money market fund and then allowing yourself to put money the other half in a mix of stocks and bonds.

In an IRA you’ve got a lot more options. You can purchase TIP, an inflation protected bond fund, or you can purchase TBT, an inverse fund that moves up when bond funds go down! You can also look around the globe to see what countries have a booming economy.  All you need to do is bring up a chart of these country-specific ETFs and compare it to SPY similar to the way the book talks about comparing the utilities index with the S&P 500.  Here are some country-specific ETFs to consider under those circumstances:

EWG – Germany

EWS – Singapore

EWZ – Brazil

EWP – Spain

EWC – Canada

EWH – Hong Kong

EWA – Australia.

If any of these stocks is going higher faster than the SPY, it will make a suitable replacement for the portion of your money you want to put into stocks.

Market Mood Answers

Chart 1 is a GO sign

Chart 2 is a STOP sign

Chart 3 is a GO sign

Chart 4 is a GO sign

Practice Reading the Market Mood

Here you can get practice reading the market mood for yourself. (If you want to see Toni and Gordon’s current read of the market, go here.)

Reading the market mood is quite simple once you get used to the charts. The two important conditions you must observe are as follows:

1) The comparison between the S&P 500 index and the Dow Jones Utility Stock index.

For this condition you are trying to answer this question: which group of stocks to investors appear to prefer more right now, utility stocks or regular stocks? You must compare the difference between these two indexes over the last two months on a chart that shows a year of data or more. The two possibilities are that either utility stocks are doing better or that the S&P 500 is doing better.

2) The general trend of market volatility.

This condition tracks whether market prices are changing with a greater degree of fluctuation. To determine this you will track the Average True Range (ATR). You must observe the general slope of the ATR and try to determine its trend over the most recent two months. The two possibilities are that the ATR is rising or falling.

Once you have identified these two conditions, then you can use the combination of them to tell you whether the market is giving a GO or a STOP sign.

GoSignGO sign (price has crossed above the 12-month moving average)

Condition 1: The S&P 500 index is outperforming the Dow Jones Utilities Index over the past two months

Condition 2: The ATR is falling over the last two months.

 

StopSignSTOP sign (price has crossed below the 12-month moving average)

Condition 1: The Dow Jones Utilities index is outperforming the S&P 500 Index over the past two months

Condition 2: The ATR is rising over the last two months.

 

Now for some practice.  Below are four sets of charts. See if you can determine whether each chart is showing a STOP sign or a GO sign.

Chart 1:

ChartPractice1

 

 

Chart 2:

ChartPractice2

 

Chart 3:

ChartPractice4

 

Chart 4:

ChartPractice3

 

Answers Button

 

Welcome Readers!

From the both of us, Toni and Gordon, we want to say thank you for purchasing this book. It has been a labor of love born out of our work with students over the years. We hope that in the pages of this book you will find low-maintenance ideas for growing your retirement savings over the years in a safe and sane manner. This book isn’t about playing the speculation game, it is about making your money grow on a steady basis. Please feel free to leave your comments on your impressions of the book.

We wish you all the best and hope that every investment you make is a winner!

Toni Turner and Gordon Scott, CMT.