Market Technicals and Fundamentals Converge
Investors in stocks have the wind at their backs. The long-term increase in technology and productivity rewards the owners of companies as well as the workers.
When "Mr. Market" seems unaware of this progress, the potential investor gets an opportunity for a bargain. At "A Dash" we believe that there are several positive fundamental factors:
- The obsession with recession has created an extremely negative investing climate;
- The actual earnings results, outside of financials, have been solid;
- Financial issues, while a special case, show some signs of bottoming;
- Forward earnings from companies and the analysts that follow them look pretty good;
- Forward earnings ratios, when compared to various bond yields, are quite attractive; and therefore
- Stock prices are already pricing in a recession.
- Meanwhile — the impact from the Fed rate-cuts and the stimulus package will hit in the next few months….
For us, fundamentals means prospective earnings versus alternative asset allocations.
For our technical analysis we avoid the subjectivity of interpretation through our use of carefully-tested models. The systems all use technical criteria — no fundamentals (an interesting topic for another day). We are getting several bullish indications.
The Gong Model
The Wall Street lore is that no one rings a bell at the bottom. Our modeling guru, Vince Castelli, has worked on this problem, with some interesting results. His "Gong Model" starts with the hammer gradually pulled back — an oversold condition — and ends with the explosive release. It is not a perfect signal. Those seeking such things are expecting too much, and getting a model that is "overfit" to be perfect in hindsight. Our Gong Model gave a meaningful signal on January 25th with the S&P 500 at 1330 and the NASDAQ at 2326. The market has moved a little higher since then, albeit with greater volatility. There is still plenty of time to play this signal, which reflects risk reward over a time frame measured in months. (Send us an email for a copy of the report).
The TCA – Index Model
Each Thursday we discuss the current results from our Trend, Cycle, Anticipation (TCA) model as applied to ETF trading. We also use the TCA approach to evaluate the major index ETF’s — SPY, DIA, and QQQQ. We use the results from this analysis to make sure our accounts are "leaning" the right way. If the signal is negative, we actually hedge positions with the short ETF’s.
The TCA – Index signal is our principal broad market indicator, and we use it to determine our weekly vote in the Ticker Sense Blogger Sentiment Poll. This has been neutral for some weeks (Negative TCA, Positive Gong Model). Last Friday, the TCA model flashed a "buy" signal for both DIA and QQQQ. We switched our market forecast to bullish on that basis.
Since it is Thursday, our regular model reporting day, we will also provide some bonus information: The model gave a "buy" signal on SPY as of tonight’s close. The model does not know about tomorrow’s employment report. It is based strictly on technical criteria. The recent signal history is shown in the chart below. It is clear from the chart that the model is making a "cycle" signal, not one based upon the trend.
Perhaps in a future article we shall delve into this more completely, but the chart does provide an idea of the major factors and the trading history.
The final bullish component is the TCA-ETF model. We report on this every Thursday. We hope that those interested in sector ETF trading are finding it useful. (We have a free report on this model, also available by email).
The recent market volatility has caused a lot of switching from sector to sector, but there has been an interesting trend. The number of sectors with a "buy" signal has steadily increased. We view the percentage of sectors in the "buy" range as an important indicator. Tonight’s run showed an increase to 26, from the 21 reported in the table. (Results delayed by one day).
The key fundamental and technical factors have come into alignment. Obviously, there are no guarantees in investing. There are times when the reward/risk ratio is particularly attractive. Each person’s circumstances are different. Having said this, the average investor we meet is grossly under-invested in stocks compared to other assets.
Shown below is the TCA-ETF summary as of last night.