January 1st, 2010

Something Old, Something New

 OVERVIEW:  First, what’s new…of course there’s the year…Happy New Year! And then there’s the market closing near new 2009 highs - nice.  And there’s our website with a new look, but that only counts if you like a simpler way to do your market research. The recession that ended last summer is old news, nothing new there. The recession was not that unusual. Certainly its start and end were typical. You may remember the 8 indicators of recession shown in the August 2008 Letter all showed that a recession was on, and had been since the first of the year when on January 6th I e-mailed that "A recession is no longer approaching...it is here now". Later the National Bureau of Economic Research (NBER) determined the start had been December 2007. And yet as late as August 2008 the White House Budget Director was still claiming that “The U.S. has avoided a recession” – what a laugh.  The White House, the Federal Reserve, and the NBER notwithstanding, the recession was totally predictable. The recession was “in sight” for months ahead of time (see August 14^th, 2007 Letter).  Old news, old hat.

      The end of the recession was equally predictable. In the March 26^th, 2009 Letter “Getting Back on the Bucking Bronco” I suggested that job losses “could be looking at a pattern where the coming months show -600m, -500m, -400m, etc”. They actually came in after later adjustments at -652m, -519m, and -303m. As you can see from the chart below, there was then a one month increase to -463m the next month – those things happen! Keeping an eye on the “Big Picture” shows the positive trend continuing. In that same March Letter I also stated that “By this August (’09), job losses could be below the -175m of last August (’08)” and, sure enough, they came in at -154m. My point being that the ending of the recession and beginning of this recovery were basically the same as one would expect from a usual business cycle. Old hat, really. As you can see from this chart, the economy is moving toward positive job growth in this new year:

     The economic recovery may well be a so-called “jobless recovery”, that is to say the unemployment rate and non-farm payrolls may only slowly improve. But this is not unusual, the unemployment rate stood above 10% for 10 months in 1982-3 and yet the stock market had a pretty good bull market run from 1982 to 1987 when it rose over 250%!! As usual, the stock market, and my readers, got the picture in 1982 and in 2009. On August 11^th, 1982, the day before that bull market started, I wrote to the stockbrokers in my office that “The values are here and the markets will turn”. Two weeks later “Yes, tomorrow’s bull market is here today” and, a month later, that “This Bull Market should have a long way to go”. Sometimes its fun to look back into the Archives!  As for “what have you done for me lately”, one subscriber recently described his financial results to me: “I have never made so much money in such a short amount of time as this year, ever before in my life”. I hope that has been true for you.

 THE DOW THEORY:  This Indicator is in a BUY mode (GREEN) from March 23^rd, 2009 at 7775.86.  The Transportation Average (DJIA), which had a ‘triple top’ from September through November, finally ‘broke out’ in December to new highs to go along with the Industrials making new highs. When that happens, the market status is described as “in the clear”.  You have undoubtedly noticed that the Industrials have been ‘going nowhere’ for the last 6 weeks. They have been in what is called a “line”, a narrow range which when broken to the upside points to higher prices; and when broken to the downside points to even lower prices. The Transports upmove would seem to suggest that the Industrials will follow, but that is by no means assured.  It appears to have been the ‘pause that refreshes’, establishing a base for higher prices, but it’s really up to the market to tell us, rather than the other way around.  It should be an interesting January, let’s hope it’s not the shocker that last January was!

An upmove would confirm that there’s nothing to worry about (until it starts acting funky again).  The market is still a little ‘goosey’ about any increase in unemployment claims or disruptions around the world, but again, keep your eye on the “Big Picture”.  Speaking of pictures, thought you might be interested in three Dow Theorist’s differing results. My interpretation, which I contend is the correct one, is the only one currently in a Buy mode.

Charts are from Hulbert Financial Digest (Hulbert Interactive on MarketWatch).
The full results since 1998 for all three Dow Theorists are available at “Sweepstakes” under “The Dow Theory” tab on the entry page.

SCHANNEP ­TIMING ¯INDICATOR:  This Indicator is in a BUY mode (GREEN) from April 2nd, 2009 at 7900.00. Momentum is still positive and the monetary component is also favorable so there is nothing to indicate a change in this Indicator. I’d like to write something else about this Indicator but the short answer is that everything is A - O.K.

The COMPOSITE Timing Indicator:  This Indicator is in a BUY mode (GREEN) from March 23^rd with an average BUY level of 7445.32.  As we enter the New Year our Indicators are all in favorable modes – all GREEN lights.

ÞThe BOTTOM LINE:  Welcome to the year 2010! Remember the hullabaloo when the year turned to 2000? Can you believe that has been 10 years and four bear markets ago? It’s true, most would think of two but take a look at the "Historical Record" under the “Bull & Bear” tab and you’ll see them. Of course some people think we have been in a continuous bear market since January of 2000 because the market is still below that high of 11,722.98. That doesn’t make sense to me since we’ve been higher at 14,164.53 two years ago in October of 2007.  If there was a secular bear market, I’d say it ended at the lows last March at 6,547.05.  Of course, we won’t be able to prove it until the market exceeds the all-time highs.  Even then, I can tell you there will be those who won’t believe it or accept it as a new secular bull market. There are those who cannot adapt to these rapidly changing times. You’ll recall that is one of the reasons I wrote my book, to explain that things are happening faster in the 21^st Century and in order to keep up with the times, the old rules for the Dow Theory needed to be updated.

    Speaking of my book…. I am sure some of you felt like it “was all Greek”, but in fact the only language it has been published in besides English is now Chinese. If you have any interest (what, why?) you will find it at YesAsia.com    About the only words in English are the title “Dow Theory for the 21^st Century –Technical Indicators for Improving Your Investment Results” and my name. Makes a great conversation piece!   This Chinese New Year 2010 will be the year of the tiger – not sure what that implies, but at least it’s not a bear!  

     As we enter 2010 the first thing to look for is a market low in January, unlike last year. Where’s that come from, you say?  You’ll recall from the Special Report “The Single Best Day to Buy Each Year….Usually” is in January.  38% of all 60 Januarys since 1950 have been the month of the low for the year.  In fact, 15% of the annual lows have been on the first trading day. The statistics improve when January starts within a bull market as all 23 that marked the low month did. So if this bull market continues, as expected, the percentage chance of this January being the low month for the year increases to 48%. That’s really an amazing percentage given that the chance of any one month of the 12 being the low (or high) is just 8.3%.  The rationale is that bull markets have a rising trend to them, so should go higher from January through December. We’ll probably know soon enough about the first day of the year being the low, but may have to wait to see about the month.

       This bull market is not yet one year old, nonetheless I expect it will successfully complete its first year in March.  You know from the Special Report on Bull Markets of the 20^th-21^st Centuries that only a little over half (54%) of all bull markets complete their second year successfully, however 2/3rds of those that complete their first year go on to complete their second. Those second years are typically not that robust, averaging just a +12% gain. On the other hand, there really is nothing wrong with that, we can’t expect the market to reach its previous all-time high quickly. The market may reach those levels before this bull market is over, just not in 2010. All of our Indicators are still in Buy mode and the odds favor an up year, but the fact is there is no iron-clad way of knowing such things.  Certainly the economic expansion should carry throughout the New Year and drag along the market with it. At this point there is no reason to start anticipating the next recession while the last one is still barely behind us.  All in all, it should be a   Happy New Year.  ☺

                                                                         Sincerely,   
                                                                          
Dow Jones:     10,428.05
S&P 500:          1,115.10
NYSE:              7,184.96

       I use three Exchange Traded Funds (ETFs): Diamonds (DIA), Spiders (SPY), and “Apples’, the NYSE Composite (NYC) in the following real-time, real money (Roth I.R.A.) conservative portfolio for serious major-trend investors. It is both the recommended ‘core’ portfolio of this Letter and also a bench-mark for your own investment results. More aggressive investors might use other more speculative investment vehicles such as the ‘Large Cap Bull 3x’ shares in an attempt to improve on these results but I have chosen Exchange traded major-market ‘Index’ funds and ‘Cash’ funds as the best ‘pure play’ vrs. Buy & Hold. Less aggressive investors might not go to either 100% invested or 100% in cash, depending on their tolerance for risk. This is a tax-exempt account so taxes are of no import. As you know, I do not make individual stock recommendations as each of you have different risk tolerances and investment goals and, unfortunately, I do not know each of you individually, so that would be inappropriate. Instead, I concentrate on the “big picture”, the trend of the major stock market indices which usually influence the price direction of most individual stocks.

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