Moving Averages: Month-End Preview
by Chart School - October 31st, 2011 9:51 pm
Courtesy of Doug Short.
Here is a preview of the monthly moving averages I track before the market opens on the last business day of the month. Two of the three S&P 500 and two of the five Ivy Portfolio ETF monthly moving averages are giving a “buy” signal. The one Ivy change from last month is that VNQ, the REIT index, has flipped to “buy”. If we apply a 12-month simple moving average to the Ivy ETFs, then VTI, the total market ETF, has also flipped to “buy”. Some of the signals (highlighted in yellow) are close to a trigger value, so the Monday market closing prices could be difference makers
Note: The index updates are intended to illustrate the moving moving-average timing strategy. They also give a general sense of how US equities are behaving. However, followers of a moving average strategy should make buy/sell decisions on the signals for each specific investment, not a broad index. Even if you’re investing in a fund that tracks the S&P 500 (e.g., Vanguard’s VFINX or the SPY ETF) the moving average signals for the funds will occasionally differ from the underlying index because of dividend reinvestment.
The Ivy Portfolio
The top table previews the 10-month SMA timing signals for the five asset classes highlighted in The Ivy Portfolio.
I’m also included the 12-month SMA timing signals for the Ivy ETFs in response to the many requests I’ve received to include this slightly longer timeframe.
After the end-of-month market close, I’ll update the monthly moving average feature with charts to illustrate.
The bottom line, as we’ve pointed out earlier, is that these moving-average signals have a good track record for long-term gains while avoiding major losses. They’re not fool-proof, but they essentially dodged the 2007-2009 bear and captured significant gains since the initial buy signals after the March 2009 low.
Note: See the Timing Updates for interim updates throughout the month.
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DiggThe Dow Panic of 1907 and the 2008 Financial Crisis
by Chart School - October 31st, 2011 9:51 pm
Courtesy of Doug Short.
Note from dshort: During the summer I posted a set of charts illustrating the dramatic market behavior during the Panic of 1907 and the Financial Crisis of 2008. A century separated these two momentous market episodes, and the underlying causes were quite different. However, the overall volatility and general patterns of decline and rally are remarkably similar. In response to a request, I’ve updated the charts through October 28.
The first chart is a nominal view of the two periods showing the percentage declines over time from their peaks in 1906 and 2007.
Now let’s adjust for inflation, which had a significant impact on the earlier period. During the first half of the 20th century, episodes of high inflation and deflation were commonplace. See this chart for an illustration of those early inflationary/deflationary cycles.
Was the 1907 low the historic bottom for the Dow? Unfortunately, no. The secular bottom occurred nearly 15 years later — a year after Germany signed an armistice with the Allies to mark the official end of World War One.
Both periods involved a financial crisis. The pre-Federal Reserve 1907 Bankers’ Panic was dampened by a bailout of the system by J. P. Morgan, who put up his own money, and persuaded other New York bankers to do likewise. The Federal Reserve has introduced a number of tactics to shore up the modern banking system. Naturally there are many differences between the two eras. But one inference we can make from the earlier period is that secular bear markets can last for very long periods of time.
In fact, when did the real Dow permanently regain the 1906 high? In September 1985 — a few months shy of 80…
”Real” Disposable Income Per Capita Since 2000
by Chart School - October 31st, 2011 9:51 pm
Courtesy of Doug Short.
Shortly after the Bureau of Economic Analysis (BEA) posted the monthly Personal Consumption Expenditures (PCE) data, I posted my monthly update of the year-over-year change in the price index since 2000. My focus was on PCE data as a measure of inflation.
Now let’s look at the PCE data to understand what the latest numbers are telling us about a key driver of the U.S. economy: "Real" Disposable Income Per Capita.
The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000.
The BEA use the average dollar value in 2005 for inflation adjustment. But the 2005 peg is arbitrary and unintuitive. For a more natural comparison, let’s compare the nominal and real growth in per capita disposable income since 2000. Do you recall what you we’re doing on New Year’s Eve at the turn of the millennium? Nominal disposable income is up 46.4% since then. But the real purchasing power of those dollars is up a mere 13.5%.
In fact, real disposable personal income is at a level first attained in October 2006 and remains about 1.5% below the level at the beginning the 2007-2009 recession. Real DPI is just shy of flat for the past 12 months, down 0.5%.
The mainstream media focuses on nominal disposable income with little or no attention to population or inflation adjustment. The “real” story in the latest PCE data is one of continued economic weakness.
Note: My BEA data source is the National Income and Product Accounts (NIPA) Tables. Table 2.6 (Personal Income and Its Disposition, Monthly) is available here. A couple of hours after the BEA announcement, the St. Louis Federal Reserve posts the data in FRED (Federal Reserve Economic Data) with separate tables for the nominal and real per capita data: DPI Nominal and DPI in chained 2005 dollars.
Moving Averages: Month-End Update
by Chart School - October 31st, 2011 9:51 pm
Courtesy of Doug Short.
Valid until the market close on November 30, 2011
The S&P 500 closed the month of October with an impressive gain of 10.77% above the previous monthly close. This was enough gain for the 10-month exponential moving average (which is slightly skewed toward more recent performance) to trigger a buy signal. See the specifics here.
The Ivy Portfolio
The table below shows the current 10-month simple moving average (SMA) signal for each of the five ETFs featured in The Ivy Portfolio. I’ve also included a table of 12-month SMAs for the same ETFs for this popular alternative strategy.
Backtesting Moving Averages
Over the past few years I’ve used Excel to track the performance of various moving-average timing strategies. But now I use the backtesting tools available on the ETFReplay.com website. Anyone who is interested in market timing with ETFs should have a look at this website. Here are the two tools I most frequently use:
- Backtest an Individual ETF
- Backtest an ETF Portfolio
(requires a paid subscription)
Background on Moving Averages
Buying and selling based on a moving average of monthly closes can be an effective strategy for managing the risk of severe loss from major bear markets. In essence, when the monthly close of the index is above the moving average value, you hold the index. When the index closes below, you move to cash. The disadvantage is that it never gets you out at the precise top or back in at the very bottom. Also, it can produce the occasional whipsaw (short-term buy or sell signal), such as we’ve experienced this summer.
Nevertheless, a chart of the S&P 500 monthly closes since 1995 shows that a 10- or 12-month simple moving average (SMA) strategy would have insured participation in most of the upside price movement while dramatically reducing losses.
The 10-month exponential moving average (EMA) is a slight variant on the simple moving average. This version mathematically increases the weighting of newer data in the 10-month sequence. Since 1995 it has produced fewer whipsaws than the equivalent simple moving average, although it was a month slower to signal a…
Weekly Gasoline Price Update
by Chart School - October 31st, 2011 9:51 pm
Courtesy of Doug Short.
Here is my weekly gasoline chart update from Department of Energy data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump declined fractionally over the past week. On average, regular and premium were down a penny. However, WTIC has risen in price for the fourth consecutive week.
As I write this, GasBuddy.com still shows two states, Alaska and Hawaii, with the average price of regular above $4.
The price volatility in crude oil and gasoline have been clearly reflected in recent years in both the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE). For additional perspective on how energy prices are factored into the CPI, see What Inflation Means to You: Inside the Consumer Price Index.
The chart below offers a comparison of the broader aggregate category of energy inflation since 2000, based on categories within Consumer Price Index (commentary here).
The ‘Real’ Mega-Bears: Weekend Update
by Chart School - October 30th, 2011 9:51 pm
Courtesy of Doug Short.
It’s time again for the weekend update of our “Real” Mega-Bears, an inflation-adjusted overlay of three secular bear markets. It aligns the current S&P 500 from the top of the Tech Bubble in March 2000, the Dow in of 1929, and the Nikkei 225 from its 1989 bubble high.
The chart below is consistent with my preference for real (inflation-adjusted) analysis of long-term market behavior. The nominal all-time high in the index occurred in October 2007, but when we adjust for inflation, the “real” all-time high for the S&P 500 occurred in March 2000.
Here is the nominal version to help clarify the impact of inflation and deflation, which varied significantly across these three markets.
See also my alternate version, which charts the comparison from the 2007 nominal all-time high in the S&P 500. This series also includes the Nasdaq from the 2000 Tech Bubble peak.
Treasury Yields in Perspective
by Chart School - October 30th, 2011 9:51 pm
Courtesy of Doug Short.
Let’s have a look at a long-term perspective on Treasury yields. The chart below shows the 10-Year Constant Maturity yield since 1962 along with the Federal Funds Rate (FFR) and inflation. The range has been astonishing. The stagflation that set in after the 1973 Oil Embargo was finally ended after Paul Volcker raised the FFR to 20.06%.
Now let’s overlay the S&P 500 to see historical pattern of equities versus treasuries. This is a nominal chart, which significantly distorted the real value of both yields and equity prices.
Here’s the same chart with the S&P 500 adjusted for inflation and the annualized inflation rate subtracted from the yields. The impact of stagflation becomes much clearer. We can better understand the severity of the decline in equities from the mid-1960s to the bottom in 1982. And we can also see why high yields can be deceptive in periods of double-digit inflation.
The most interesting series in the charts is the FFR red line. We can see how the Fed has used rate to control inflation, accelerate growth and, when needed, apply the brakes. Unfortunately, the FFR has been virtually zero since December 2008, so it is no longer available as a tool to stimulate the economy. Incidentally, I annotated the top chart with the tenures of the last three Fed chairmen so we can see who was managing the various FFR cycles since the summer of 1979.
The next chart is based on daily data and adds some additional Treasuries for a close look at yields since 2007.
I update the long-term charts each weekend and the last chart more frequently, depending on yield volatility.
Treasuries Update: The October Selloff
by Chart School - October 30th, 2011 9:51 pm
Courtesy of Doug Short.
Note from dshort: Here is an update on Treasury yields. As we would expect, the rally in equities has been accompanied by a major selloff in Treasuries. The S&P 500 is up 13.58% thus far in October. The yield on the 10-year note is up 42 basis points for the month and 62 basis points from its historic closing low on September 22.
The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed’s website for the FFR.
Here’s a closer look at the past year with the 30-year fixed mortgage added to the mix (excluding points).
Here’s a comparison of the yield curve at two points in time: 1) today’s close and 2) the daily close on the market’s interim high on April 29th. The S&P 500 is down nearly about 12.7% since then.
The next chart shows the 2- and 10-year yields with the 2-10 spread highlighted in the background.
The final chart is an overlay of the CBOE Interest Rate 10-Year Treasury Note (TNX) and the S&P 500.
The final chart shows the percent change for a basket of eight Treasuries since the initiation of the second round of quantitative easing on November 4th, 2010.
For a long-term view of weekly Treasury yields, also focusing on the 10-year, see my Treasury Yields in Perspective.
World Markets Weekend Review: The Huge Relief Rally
by Chart School - October 29th, 2011 9:51 pm
Courtesy of Doug Short.
Talk about relief! The S&P 500 closed the week with an impressive gain of 3.78% — and it was the worst performer in our international gang of eight! The Hang Seng takes the blue ribbon with an astonishing gain of 11.06%, with the Shanghai, DAX and SENSEX in a near dead heat for second place, all with 6% plus gains. The massive bounce was, of course, predicated on the assumption that the Eurozone has its act together with an agreed and practical strategy for its sovereign debt crisis. Will next week be a continuation of the rally? Some consolidation? Or some serious second thoughts about the path ahead?
The tables below provide a concise overview of performance comparisons over the past four weeks for these seven major indexes. I’ve also included the average for each week so that we can evaluate the performance of a specific index relative to the overall mean and better understand weekly volatility. The colors for each index name help us visualize the comparative performance over time.
The chart below illustrates the comparative performance of World Markets since March 9, 2009. The start date is arbitrary: The S&P 500, CAC 40 and BSE SENSEX hit their lows on March 9th, the Nikkei 225 on March 10th, the DAX on March 6th, the FTSE on March 3rd, the Shanghai Composite on November 4, 2008, and the Hang Seng even earlier on October 27, 2008. However, by aligning on the same day and measuring the percent change, we get a better sense of the relative performance than if we align the lows.
A Longer Look Back
Here is the same chart starting from the turn of 21st century. The relative over-performance of the emerging markets (Shanghai, Mumbai, Hang Seng) is readily apparent.
Check back next weekend for a new update.
Recession Still Likely Despite Bump In GDP
by Chart School - October 29th, 2011 9:51 pm
Courtesy of Doug Short.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Consumers Gone Wild! I have this image in my head of shoppers running about frantically over the last quarter shelling out dollars at everything that isn’t nailed down to the floor. That was the general consensus Friday after the GDP report came out showing a lift from 1.3% to 2.5% primarily on the back of the consumer, as shown in the chart. However, the real question is where did the money come from?
If we dig down into both the GDP release on Thursday and the Personal Income and Consumption report on Friday, we find several very disturbing trends that are becoming much more dominant. However, before we get into that, let me provide you with a quick reminder that the first estimate of GDP released by the Bureau of Economic Analysis is tied closely to the consensus estimate of economists, as there is incomplete information about the various subcomponents to make a more accurate estimate. Therefore, it should really come as no big surprise — given the shocks that hit the economy from the debt downgrade, political infighting over the debt ceiling and the Eurozone crisis — that the release was EXACTLY in line with the consensus estimate of 2.5% growth yesterday. The reason I point this out is that it is VERY rare that the consensus is EVER spot on to the first decimal point with the release. I find this very suspect.
Of course, the release was immediately met with the resounding stampede of analysts and media mavens throwing in the towel on any recessionary calls they might have had and assuming that all is well in world. Unfortunately, these are also the same ones who have generally been wrong when there are upticks in GDP during the initial phases of a move into a recession.
We pointed this out earlier this week in our post on the GDP release with this table. The same analysts and economists who are currently throwing in the towel on the recession…
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