14 March 1999
I guess this is a bull market. After all, the DJIA, S&P500, and even the NYSE Index set new records last week. The market was up 1.4%, a very good week certainly. What's a bit troubling is the pattern of the advance. The market is going up in almost random fits and starts. A huge day like March 5 should be followed by a rush of buying, a string of high-volume advances as the bears cover their shorts and the crowd on the sidelines jumps in to avoid being left behind. That didn't happen last week. No one seemed overly concerned about being left behind in a market approaching 10000 on the Dow.
Of course, I'm always more bearish than my models (they don't have a wife and kids who depend on them to make the right decisions). What are the negatives? Well, for starters, basically flat earnings. As Peter Lynch tells us in the Fidelity ads, strong earnings growth has been the basis of the big gains in the market over the past many decades. If we don't have strong earnings growth then the more traditional professionals are going to be cautious.
That doesn't mean that tulip-bulb mania can't send the market rocketing
to 14000 over the next year. It's happenned before. But do Americans have
the available cash this time, with the national savings rate having turned
negative in recent months? The loans from last year's buying binge do have
to be paid off...
5 March 1999
Finally, a chance to make some money! The models were negative day after day as the market declined from the big upward correction a week and a half ago. But as this past week progressed, an eerie quiet settled in, as each day's loss was less than that of the previous day. Volatility fell sharply, suggesting that the next move would be quite violent. The more aggressive models began signalling a possible change in the positive direction. Finally, on Thursday, all models shifted to a strong positive. What followed was the market's best day in a very long time, and a new record on the Dow Jones Industrial Average.
There could easily be more to come. The broader averages, such as the
NYSE Index, have a ways to go before they set a new record.
27 February 1999
February Standings: Mathcom Maintains Lead Over Market
| Index | February Gain % | 1999 Gain % |
| Model #3 | -1.06 | 1.51 |
| K.Farnham | -2.87 | 0.34 |
| Model #4 | -2.06 | 0.13 |
| Model #7 | -1.37 | -0.60 |
| NYSE Index | -2.33 | -1.57 |
| Model #0 | -3.06 | -2.02 |
| Model #5 | -4.37 | -2.22 |
February was a troubling month for the stock market, the models, and my actual trading. Twice I was unable to act upon signals from the models (due to the fact that I have a full-time job and can't watch the market all day every day). These misplays resulted in a loss of .3% and a missed gain of 2.0%. Had I been able to act on the signals, the month's loss would have been minimal, and my actual investing would be ahead by 3% for the year in a market that has lost 1.57%.
It's a rare month when the models are all down. The market was very
choppy all month, on rising volatility. This is not a great sign for the
future. A continued rise in volatility would suggest an impending bearish
phase.
25 February 1999
Bond Risk
A classic warning of an impending bear market is a sustained drop in bonds. This happenned in the early 70's as interest rates soared due to out-of-control inflation during the oil crunch, and it happenned in 1987. Is it happenning now too?
A year ago the 30-year Treasury bond was at 6%. In October it went as
low as 4.7%. Today it is back to 5.6%. That is an increase of 24% between
October and now. For professional investors who seek secure long term gains,
such an increase in bond yields is a strong incentive for switching out
of stocks and into bonds.
20 February 1999
Volatility has increased to levels matching those during the major bear
markets in the past 30 years. Does this portend another round of losses
similar to or exceeding last summer's? The fact that volatility now exceeds
it's pre-July-1998 levels suggests that the corrective sequence that began
last July may not have fully run its course. A study is underway...
8 February 1999
Ouch! For any mathematical modeling strategy that tries to determine the market's current trend, a market that goes up-down-up-down is trouble. So, last week was not a good one: I had my first losing trade of the year, and for the week I lost more than the market! Still, I'm up for the year, while the market (using the NYSE Index) is down.
Causes for concern:
Volume is suddenly up, but the market is churning rather than gaining;The latter two are one difference between now and last summer. A rising dollar and rising bonds last summer seemed to contradict the market's precipitous fall. We don't normally have bear markets when interest rates are steady or falling. But now we have rising interest rates (falling bonds). If the market goes into a tailspin, the result this time could be very different from what it was last summer.
The dollar is falling (indicating foreign uncertainty on the strength of the U.S. economy);
Bonds and utilities are falling (a classic indicator of an upcoming stock market crash).
January Scoreboard:
mathematicalanalysis.com Trounces the Market, 3.3% to 0.8%!
31 January 1999
Applying the models in January resulted in a substantial outperformance of the stock market in January. My investments earned 3.3% as opposed to 0.8% for the stock market (NYSE Index). This despite the fact that I was in cash nearly half the month. The models got me into the market in time for some healthy gains and got me out in time to avoid the big dips. Profits were made in both stocks and bonds.
The models were hardly bullish on stocks in January: cash was my leading position for the month (47%), followed by stocks (37%), and bonds (16%). All four stock/bond trades were successful. Two stock trades closed with profits of 1.3% and 0.4%; the sole bond trade closed with a profit of 0.5%; the fourth position, a still-open position in stocks, had a 0.9% profit at month's end. Added to this was a 0.2% profit from the cash positions.
Meanwhile, the New York Stock Exchange Index gained 0.8%, in fairly
frothy trade (volatility was high this month). With only 37% market exposure,
my methods quadrupled the market's gains in January. Quite a nice start
to the investment year!
24 January 1999
A very odd week. For the first time in a very long time I found nothing to invest in, so I spent the entire week in cash. I was kept out of stocks early in the week by volatility fears. At the end of the week it was the expectation that the down move will continue. The trend in bonds did not look positive either. So I begin the upcoming week in cash, waiting for what appears to be a good opportunity to reveal itself.
Longer term--January is the month of big upswings normally, with all
the profit sharing money flowing into the market. Even with more money
than normal is flowing into it, the market is stalled. That's not a good
sign...
18 January 1999
Yes, there is cause for concern. Brazil isn't a minor situation. But the ravenous crowd remains hungry for stocks...
The models got me safely out of the stock market on Monday, and I was able to profit for the next few days in bonds. Friday was tough decision. The models had varying opinions
10 January 1999
The New Year brought with it a big rally, as often happens. The problem with this particular rally is that as the week progressed the gains were concentrated in fewer and fewer stocks--notably the big stocks and the Internet stocks. My moderate risk models considered the near-term outlook positive starting on Wednesday, so the biggest gain of the week was captured.
The problem with January rallies is that they're expected. Because they're expected, they're more likely to occur. This makes them less reliable predictors of what will happen later in the year. It is true that there is a correlation between the market's performance in January and its performance over the full year--most years when the market rises in January it rises for the full year. But this isn't very impressive as a statistic, since the market's normal direction is up anyway, and has been especially so for as long as most Baby Boom investors can remember.
My great fear is that what has happenned in Japan will be repeated here. The internet stocks are a good example of the Japan phenomenon starting to happen here. Right now, one of the Internet stocks that hasn't yet shown a profit has a market value that exceeds that of Delta Airlines. Similarly, the value of Tokyo's real estate in 1988 exceeded that of the real estate in the entire United States. Something was clearly out of kilter in the Japanese markets in 1988. Are the Internet stocks an example of that happening here?
The US market is at record levels--yet, have the problems from last July disappeared? Japan's market is sliding back down to its lows of last summer, to levels where many economists feel more banks will fail. Their problems have not been solved. If Asia's economic leader, one of our top trading partners, is on the verge of deflationary depression, can things really be so rosy for our economy?
For the longer term future, this is my fear: the stock market gets bid up and up and up until sometime toward the end of the next decade, when Baby Boomers begin entering retirement (or looking ahead to retirement). They begin to sell stock. The market begins to fall. At first, no one panics because everyone has learned that the stock market always recovers from dips and goes on to higher highs. But this time, the lack of new money flowing into the stock market makes that impossible. More people begin to fear they'll lose their retirement savings and pull more money out of the market. Professionals who claim to have known all along that this was going to happen start getting lots of attention. Stocks rose way beyond their true values in a huge speculative bubble that just had to burst, they say. Then, the stampede.
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