Dow Theory, Volume, Correction, The Year ahead

Update on Dow Theory. Somebody posted a research paper on the Dow Theory the other day. In short it says Dow Jones Industrial and Transportation index need to confirm each other. We are in one of the largest (if not the largest, be conservative) divergence at this moment. DJIA is going higher. 13K level has only been seen in 2007 (and early 2008) in history. How about DJT? It is going lower since the beginning of this month, and it is still pretty far away from the highs. In fact it is below the 50 day moving average.
Why will this happen? I am seeking answer too. I guess it is because of the EURO crisis. Lots of money managers either in Europe or with international orientation are relocating to manage risk. Econ data are not too bad to exit equity, while currency risk is getting higher.  They moved their investments to US equity. This explanation could also explain Dow 30 is always leading. DJIA (large 30) > SPX (large 500) > WLSH. In a uncertain market, large cap help to preserve value. DJIA is so well know that if in hurry, people just go long these names. I observe name stock outperform as well. Apple is a big winner. Per the annual meeting material this morning, there are 216 funds holding AAPL shares.

In general this rally is not a typical one that I want to participate. The euro crisis broke lots of correlation. The market is getting low degree of predictability. In history if a divergence occurred, a correction to due. Usually it is to the down side.

Where the correction could be? Last night Doug Kass made an interview with CNBC. He is calling for a 5-6% correction. My calculation, it is 1300. They also discussed the missing volume. Pete says it's option market holding more vol. Instead of selling the stocks they are holding, people buying puts to hedge. Evidence, yesterday 1m spy puts were bot.





ZH reports, "Following Abysmal 2011, Only 10% Of Hedge Funds Are Outperforming The S&P In 2012"


As we discussed, the first month of 2012 is another dumb bull market. It is not easy to beat market if you are doing active management. 2009 is a good example for us. What's the famous word again? Buy the F...ing Dip (btfd). Lots of money managers missed 1330 to now. I guess they are herding to buy badly if there is any correction. I think Kass' number makes sense. My plan is to turn on DCA once we see the correction.

ADD: 1 thing need to know about Doug

Doug Kass is probably the last trader to be a bear. In late Dec he called for SPX all time high in 2nd half of 2012. I forgot his number, but definitely over 1520. After the past 2 months, I guess people are getting more serious about this call.

Simplicity is the ultimate sophistication. - da Vinci

Me a long term da Vinci fan. See my other post on that.
Today I saw this video on long term investments. I think it makes sense, and it is in line with my view on long term gold and monetary market.
Speaker of the video is Grant Williams, manager of Vulpes Investment Management based in Singarpore. He is also the author of "Things to make you say hmmm'.



Part 2

Here comes Barron's Cover

(If nothing bad happening,)

Even by conservative measures, the Dow Jones Industrials could top 15,000 in two years. Dow 17,000 is a 50-50 bet.

This is the cover story of Barron's, which I thought was a serious investment magazine. This illustrates why I don't feel comfortable. Couple numbers here, Dow historical peak was 14100 in Oct 2007. It spent 84 years to be at 13K. If that article is correct, we need 1000 point each year for 2012 and 2013. How many years in Dow history has gain over 1000? Other than 09-10, I found 2004 and 2007 marked as real estate bubble (05-06 being side way years), and the famous 1996-2000 internet bubble that almost tripled Dow Index. That's it. Dow 17K will require 2K gains back to back. Annual return over 2K happened twice in history, that's 2004 and 2009.
We had epic rally or recover from bottom since 2009. Dow gained 2000 points in 2009 and  2010, 700 points in 2011.  Bear in mind, that was sitting on the top of the biggest loss ever 2008 with a loss of 4650. So even with the huge recovery, we still shy of the peak.  In other words, other than the Y2K bubble, 09-10 was the only years with back to back greater than 1000 gains. If you follow econ news, we had 2 QE and TARP and all kinds of money pumping to get us there. In my opinion this is called money illusion. With record low Treasury return, record low mortgage rate, record high federal money, what can we do, other than just Buy The F..king Dip.

Am I too bearish? I will say I am not bearish at all. I just think the market needs correction. Dumb money needs to be wiped out. Once everything cools off, I will be a happy investor again.

Anyway, here is the link to the Barron's.

To make things even more interesting, the author thinks 17K target is conservative, because he also said

How high? The strongest annual rebound post-World War II was 28.7%, in the two years ended 1980. Grow the Dow 26.2% -- again, subtracting 2.5 percentage points for dividends -- and you get 20,120.

If not too conservative, his target is 20K by applying the growth rate of 26.2%from 1980 which was the all time high in history. I guess 1 big thing he forgot is the real economy growth. For the 2 year period ended in 1980, US GDP growth was 21.5% nominal (check data here), which is a good support to the 26% gain in the stock market. (Let's just forget the double digit inflation for both years.) Where we at now? Average consensus says 2% each year for the next 2 years. 2% growth with 26% equity return? Life is great.

Obama is speaking at Wisconsin now when I am typing. If I catch him correctly, he just said,

I don't want America to be a nation that is primarily known for financial speculation, and racking up debt buying stuff from other nations.

I will say this guy got elected for reasons. If you want to understand a little bit of economy, ask the President but not some economist / magazine seller trying hard to manipulate demand supply curve by throwing out stupid numbers.
God bless America.

Be My Valentine (Anti crisis Girl)

Happy V-day.

AAPL now bigger than Google plus Microsoft

Why has the S&P 500 rallied over 19% in the last 120 days

In the past 3 months, SPX recorded 20% rally since Thanksgiving. I got in at the right time but chicken out too early. It's time to review move and study why I could not hold the chips.

Kimble made a very interesting point. The RYDEX money market assets as % of total assets hit 150% in early Oct. This is suggesting people putting all money in cash (100%) and then starting to short the market. Since the margin requirement is 50%, this is the rational max point a porfolio can go. In real world it actually hit 200% in early 2009. What's next if you shot all bullets, or you used all money you can get to short the market? The stats says it will reverse.

This is a very good contrarian play. It happened 9 times in the past 15 years, including 1998-Russian Debt concerns....2002/03-9/11 fallout, recession... 2009 Financial Crisis...2011 European concerns.

I should learn this earlier. I add this weapon to my arsenal. Let's see how it works.

On the other side of the trade, how about if everybody is in equity?

I have my reason for not jumping into the water where everybody else is there. No herding for me.

2011 Performance Review

I just saw the line below from some ads. Not sure if it is correct, but it is very interesting.

Equity Mutual Funds lost 6% in 2011, according to Lipper Research Services.
Hedge funds lost 5%, according to COO Connect.
Hedge funds suffered their second-worst year on record in 2011, according to an index maintained by Eurekahedge, an independent research firm that specializes in hedge fund data. Some of the world's largest and best-known hedge funds suffered huge losses, down 20% to 50%.

LMP - Feb 2012

Since Yahoo monthly data is on the beginning of every month, I am going to give update at the close of the first day of each month.

Market pulled back a little bit, but still booked a surprising month, +5.5% from 12/30 close price. It is stronger than I expected. The monthly high was 1330, 10 points above my expected range. The long waiting wave 3 down is not happening.

As I mentioned in the post waiting for wave 3, I am holding 20% Gld (Gold), 20% UUP (US Dollar) and 60% Bond products last month. Gold had a very good month, with 11.6% gain, LTPZ the Bond ETF in my portfolio also booked 3.2% return, while UUP lost 2% value. Overall, the LMP recorded a return of 3.6%. Below is a table for comparison. LMT beats 3 normal strategies, but lost to the all equity strategy.

	12/30/2011	2/1/2012
TLT / (BOND)	121.25	119.18	-1.71%
SPY / (Equity)	125.5	132.47	5.55%
		Percentage
Bond		100%	60%	40%		0%
Equity		0%	40%	60%		100%
Total		100%	100%	100%		100%
		Return
Bond		-1.71%	-1.02%	-0.68%		0.00%
Equity		0.00%	2.22%	3.33%		5.55%
Total		-1.71%	1.20%	2.65%		5.55%

For the new month, I have everything on buy side.

The 5 IVY portfolio components are 

• SP 500 (Risk ON)
• MSCI EAFE (The Most Famous International Index) (Risk ON)
• U.S. 10-Year Government Bonds (Risk ON) / USD (Risk ON)
• NAREIT (U.S. Real Estate Index) (Risk ON)
• SP GSCI (Goldman Sachs Commodity Index) (Risk OFF)/ GLD (Risk ON)

As I mentioned couple times, this is not a market that I can comfortably holding longs. Even though buy signal everywhere, I still want to be very cautious at this moment. I had some research on real estate. I believe I can invest now. From the Chinese data last night, I think China got soft landing. The entire emerging market may be safe. I want to hold off on the US equity portion for another couple weeks.

In summary, my holdings after the rebalance are (roughly):
20% Emerging Market
20% Gold
20% Bond
20% Real Estate
20% USD (to decide when to invest in US equity)