Sunday, August 13, 2017

MSR Performance Review

Following is the 2014-2017 weekly performance of the MSR total stock/ETF portfolio based on all buy/sell trading recommendations in the Momentum Strategies Report. The performance graph pictured here was updated as of Aug. 7, 2017.


Recommendations made in the Momentum Strategies Report are based on a combination of technical analysis, fundamental analysis, relative strength analysis and investor sentiment analysis.  Recommendations are only made in what are deemed to be high-probability, low-risk, low-volatility trading opportunities. 

All trades are initiated once a “buy” signal is confirmed by the price line of the stock or ETF in relation to its 15-day moving average, along with other pertinent technical confirmation (e.g. relative strength, internal momentum, etc.).  Conservative stop-loss recommendations are given and continually updated with each trading position.  The average length of the trades made in MSR is approximately two months, but can sometimes be longer. 

MSR rarely recommends short selling (only in confirmed bear markets) and prefers a 100% cash position whenever faced with a dearth of potential high-probability buy candidates.


In the vast majority of cases, there are only 1-2 stocks/ETFs in the model portfolio at any given time.  Rarely are more than three positions recommended at one time.  This allows us to concentrate all our attention on a few positions without being distracted by having to worry about multiple positions.  This also limits draw downs.  Most recommended positions involve low-volatility, actively traded NYSE stocks and ETFs.

The preceding graphs reflect only entry and exit signals, not profit-taking advice.

[Note: Performance graph is updated each Friday based on change in portfolio value from previous Friday.]

Friday, July 21, 2017

Prepare for a 30-year bull market

Heading into 2017, Wall Street was excited by the prospect of a U.S. president who sympathized completely with business.  His promised tax and healthcare reforms were widely cheered by investors in the wake of his election.  Yet the Congress has so far failed to deliver on those promises and investors are no longer giving the Trump administration a free pass based on the assumption that tax breaks are on the way.

This loss of enthusiasm is reflected in the long periods of dullness the market has experienced since March.  While the bull market leg which began with the November election remains intact, the market has proceeded in a halting fashion and has gradually lost some of its erstwhile momentum.  The following graph illustrates this principle. 


Along these lines, a number of Wall Street economists have expressed the belief that if Trump’s promised reforms fail to materialize, the stock market’s current valuation precludes a continuation of the bull market.  There are a number of reasons why this statement is likely false, however, not the least of which is that the market doesn’t need a political excuse to rally.  Indeed, if that were the case then China’s equity market, in view of the country’s Communist government, would forever be stuck in neutral.  The pace of innovation and productivity in countries with a market-driven economy is consistently high enough to always provide some justification for higher valuations and stock prices, regardless of the political climate.

Writing nearly 200 years ago, Alexis de Tocqueville observed that in America no matter how much the tax burden increased, American ingenuity and resourcefulness always found a way to counteract its malignant effect.  He stated:

“It is certain that despotism ruins individuals by preventing them from producing wealth, much more than by depriving them of the wealth they have produced; it dries up the source of riches, whilst it usually respects acquired property.  Freedom, on the contrary, engenders far more benefits than it destroys; and the nations which are favored by free institutions invariably find that their resources increase even more rapidly than their taxes.”  [Democracy in America]

Tocqueville understood that America is unique among the nations in that its people and commercial spirit are strong enough to countervail even the most strenuous attempts by politicians at slowing commercial progress.   This principle is as true today as it was then, perhaps even more so.

While many analysts are concerned by currently high market valuation indicators, the reality is that valuations can climb considerably higher before the market is in imminent danger of a bear market.  The S&P 500 P/E ratio may be high at 26.13 by historical standards, it’s still a ways from those high levels in the late 1990’s/early 2000’s which preceded the death of the powerful ‘90’s bull market.  Moreover, price/earnings alone isn’t a reliable measure of how undervalued or overvalued a market is.  One must also take into account the investor sentiment backdrop, levels of participation among retail investors, and other technical and monetary policy factors when forming a final determination as to whether or not the market is truly “overvalued.” 


To illustrate how important it is to consider investor sentiment along with valuation, I reprint here the words of William Jiler, who wrote investment books in the 1960s.  Using International Business Machines (IBM) as an example, he wrote:

“How could [an investor] anticipate that IBM would sell as low as 12 times its annual profit in the late Nineteen Forties and at 60 times earnings in the late Fifties?  Obviously, ‘investor confidence’ went up sharply in the Fifties.  And obviously, the psychology of the market – that is, the sum of the attitudes of all potential buyers and sellers – is a crucial factor for determining prices.”  [How Charts Can Help You in the Stock Market]

The main consideration for stocks going forward is the level of participation among individual investors.  With investor sentiment still neutral and few small investors actively trading, the bull market still has plenty of room to run.  The informed investors who are keeping the bull market alive need someone to sell to when it finally comes time for them to unload their holdings.  That someone is the uninformed public which by and large has been afraid of owning stocks since the 2008 credit crash.  Until they rediscover the “joys of investing” the 8-year-old bull market will continue to age, all the while maintaining its vigor. 

History teaches that following a major financial crisis, a bull market lasting from around 20 to 30 years normally follows.  Such was the case following the Great Crash and Depression of the 1930s, the economic and political turmoil of the early 1970s, and in other eras in U.S. market history.  The last crisis in 2008-09 witnessed the birth of a new secular bull market which is already eight years old.  A generation is around 20-30 years, which partly explains why bull market typically last so long until the next great crash; it takes that long for the generation that experienced the last crisis to be replaced by an entirely new one which doesn’t remember it.  It’s only when the new generation has come of age that the mistakes which led to the previous crisis are repeated and the cycle begins anew.

Given that the current generation is still, nearly 10 years later, still averse to stocks to a large extent, the secular bull market has probably another 10-20 years to run before encountering the problems which always prove fatal to it.  I’m referring of course to the dangers of over-participation and excess enthusiasm.  Those dangers are nowhere in sight today.  We can therefore assume that the long-term bull market still has many more years to run before eventually reaching its terminus.   

Friday, July 14, 2017

Is the market all-knowing?

“The tape tells all” is a Wall Street bromide we’re all familiar with.  It neatly summarizes the belief that the major averages discount everything pertaining to the business outlook.  It’s also a basic tenet of Dow Theory.

Writing a century ago, Richard Wyckoff was one of the very first market pundits to put this belief in writing.  “The tape tells the news minutes, hours and days before the news tickers or newspapers and before it can become current gossip,” he wrote.  “Everything from a foreign war to the passing of a dividend; from a Supreme Court decision to the ravages of the boll-weevil is reflected primarily upon the tape.”

This sentiment was also eloquently summarized by author Robert Rhea over 80 years ago.  Writing in his classic book, The Dow Theory, Rhea observed:

“The fluctuations of the daily closing prices of the Dow-Jones rail and industrial averages afford a composite index of all the hopes, disappointments, and knowledge of everyone who knows anything of financial matters, and for that reason the effects of coming events (excluding acts of God) are always properly anticipated in their movement.  The averages quickly appraise such calamities as fire and earthquakes.”

The late Joe Granville took this a step further by suggesting that the stock market represents the sum total of a nation’s intelligence across many different fields.  He maintained that the market knows virtually everything worth knowing about the short-to-intermediate-term outlook.

Writing in September 2004, just after a devastating series of Florida hurricanes, Granville observed: “When the stock market turns down it is warning of trouble ahead.  It doesn’t matter what the trouble turns out to be…For a look at the future it was only necessary to follow the market instead of hurricane reports.”  In view of the vulnerable state of the market prior to the major hurricanes of 2005 and 2012 (Katrina and Sand), perhaps Granville was on to something.

Not all investors believe that Mr. Market reflects the sum of all wisdom as it pertains to the future outlook, however.  Proponents of Random Walk Theory in particular dismiss this notion with scorn.  But are they right to reject this proposition?

Experience has shown that Granville’s proposition is essentially correct, if overly simplistic.  To assume that the market always declines at the first scent of trouble would be the height of folly.  The collective wisdom of informed investors does tend to trace out its foresight in the charts, but it isn’t always blatantly obvious at first and sometimes is evident only in retrospect.  The market action of the year 2007 is instructive.  Consider that beginning in February that year the market commenced a series of volatility plunges as insiders first began to manifest their advance knowledge of the coming credit storm.


In between, and immediately after, the market plunges in February and August ’07, however, the S&P made new highs.  This was either a consequence of the recoil rallies going too far, or was the result of manipulation to disguise insider selling.  The lesson here is that while Mr. Market will usually provide advance warning signals for trouble on the horizon you must often pay close attention to discern those signals, for it isn’t always obvious. 

If the tape does indeed tell all, what is it telling us now?  The major indices and the NYSE breadth indicators have been in good shape for most of the year.  By the same token, cumulative trading volume has been subdued because of diminished participation among individual traders as passive ETF investing has gained popularity.  The major averages have been buoyant, but not lively, in recent months.  This has been reflected in the economic news for most of the year, and there have been no crisis events to speak of.  The market, in short, has been dull and listless in reflection of the lack of bad news news.  You could even say that the market has predicted the lethargic U.S. political/economic scene of recent months by its own lack of excitement. 

If the tape indeed tells all (and I believe it does), then it’s telling us that there are currently no major worries among informed investors and insiders about anything that might torpedo the U.S. ship of state and disturb the country’s equanimity.  Developments of this magnitude take time to develop and the traces of these dangers always eventually manifest in the stock market long before making an announcement anywhere else. 

This is not to say that the market will necessarily continue to experience smooth sailing for the balance of the year, as short-term volatility tends to be erratic and isn’t always predictable.  But the tape doesn’t suggest anything calamitous on the horizon, contrary to the warnings of the perpetual alarmists.  The secular bull market which began in 2009 is still very much intact with lots of room to run before entering those tumultuous shoals which always mark the end of the line.  By the time that point has arrived, however, the tape will have long since whispered the danger to those who bother to listen.  

Friday, June 2, 2017

The silent economic boom

[Note: I was recently interviewed by Kenneth Ameduri who hosts the Crush The Street internet show.  In it I discuss my take on gold, stocks, Trump, the economy and Bitcoin.  The interview can be found here: https://crushthestreet.com/videos/live-interviews/economic-bubble-burst-trumps-watch-clif-droke-interview]

Though many Americans aren’t feeling it, the economy is quietly gathering forward momentum.  With consumers gaining in confidence and real estate heating up on both the commercial and residential levels, the U.S. economy is much stronger than it may seem at first glance.

One reflection of the strengthening economy is the equity market, which is in the eighth year of a bull market since the bottom of the credit crash.  The bromide, “As goes the stock market, so goes the economy,” is something that hardly needs explaining, yet so many investors lose sight of this cogent fact that it bears repeating.  Rising corporate profits and efficiencies in recent years have contributed in large part to the economic improvement. 

Another reflection of the recovery can be seen in our in-house New Economy Index (NEI), which combines the stock prices of the leading U.S. retail and business service stocks.  The graph below shows that NEI continues to hit all-time highs on almost a weekly basis and as such is reflecting a strong consumer retail economy.


With so many indicators pointing to a strong economy, why then are so many Americans acting as if recession is imminent?  That’s the question we’ll address here.

Ed Hyman is one of the most respected, and accurate, economists.  As Barron’s recent observed, he has been voted Wall Street’s top economist for 36 of the past 41 years in Institutional Investor’s annual poll.

In an interview conducted by Barron’s editor Randall Forsyth, Hyman said he sees cities around the U.S. “booming,” including smaller ones away from the megalopolises on the coasts. His conclusion is that this will benefit Main Street more than Wall Street.

Hyman has a rather old-fashioned, yet highly effective, method of gathering data from which to make his forecasts.  His team of researchers simply contact companies such as employment agencies, truckers, car dealerships and home builders and ask, “How’s business?”  A rating scale of zero to 100 is used by respondents to describe business conditions and from this tally Mr. Hyman is able to get a good read on what’s happening in the economy. 

According to Barron’s, Hyman’s surveys were trending higher well ahead of last year’s election.  “At that time,”  quoting the Barron’s article, “his model was forecasting real growth in gross domestic product of about 1.5%, although not as ‘uplifting’ as the recent ‘soft data,’ such as confidence surveys, indicate.  Now, the model points to 3% growth, bolstered by indicators such as tight credit spreads and high consumer net worth, which accords with what he calls a ‘scientific method.’”

Ad Ed travels around the country, he’s finding that “every place is booming,” he told Barron’s.  “Every major city, Chicago, Minneapolis, Kansas City, they’re doing great.”  Smaller cities are also outperforming, he says.

Hyman also reports that “millennials are coming on like locusts,” as they emerge from years of living in their parents’ basements.  “They’re getting jobs and apartments,” he told Barron’s.  “Millennials’ employment is growing at 3% while everything else is growing 1%.”

Hyman also pointed out that many observers have undervaued the extent to which central banks around the globe “are still flooding the system every week” with liquidity, with the Bank of England and the ECB having purchased more than two trillion euros’ ($2.14 trillion) worth of bonds in less than three years.  Meanwhile the BOJ and the Federal Reserve, along with the ECB, hold $13 trillion in assets, which has lowered interest rates around the globe.  This, he says, explains how the Fed funds rate at just 0.80% while U.S. companies are doing so well.

If Hyman’s macro optimism is to be believed – and our indicators strongly suggest he is right – then 2017 may prove to be the year that the U.S. economy finally takes off and leaves investors with no doubts as to its latent strength and momentum. 

Wednesday, May 31, 2017

Crush The Street Interview

I was recently interviewed by Kenneth Ameduri who hosts the Crush The Street internet show.  In it I discuss my take on gold, stocks, Trump, the economy and Bitcoin.  The interview can be found here:

Saturday, May 20, 2017

The bull market and Donald Trump's death knell

In the minds of many investors, the election victory of Donald J. Trump to the United States Presidency was nothing short of a miracle.  Following his shocking victory, expectations were high that Trump would, with the help of Congress, fulfill his promises of tax reform and infrastructure spending.  The lifting of the heavy penalties associated with Obamacare was another hope that investors cherished.  Many hailed his victory by declaring that it was “morning in America” again.  But after only six months since the election, Trump's presidency has hit a potentially fatal obstacle and he now faces the growing possibility of impeachment. 

By now the particulars of the political onslaught against President Trump are well known and there is no need to recount it.  Impeachment in the wake of recent developments has become an increasing likelihood, and it is said that even the Trump White House is preparing for it.    It now appears that the president will be investigated by a Congressional inquiry with the possibility of eventually being replaced by his vice president.  The powers-that-be, it seems, have decided they've seen enough of Trump's muscular leadership and controversial America-first plans. 

How did America come full circle so quickly?  What started as a widespread hope that a president who fully understood the needs of commerce and would do everything in his power to further America's economic future now faces an ignominious ending.   Can this be chalked up to voter's remorse or the volatile temper of the American voter?  Or is it simply a case of Trump's ideological opponents taking an aggressive approach to derail his ambitious reform plans? 

A more likely answer is that Trump's election was a fluke and that it was never intended that a man of such convictions could ever be allowed to lead today's left-leaning society.  There are a few basic principles which can be addressed here.  One is that the leader of a free country is generally a reflection of the people he represents.  Is it credible to assume that today's average American favors the type of free-enterprise capitalism championed by Trump?  America's shift to the left of the political spectrum has become pronounced in the last two decades and the long-term trend is conducive to more socialist activism, not less, in government.  France has only recently been reminded of that and the U.S. is now being faced with that lesson. 

If anything, Trump's election victory was an aberration – a counter-trend rally in financial market terms.  It was born of deep frustration among middle class voters.  After the painful experiences of the Great Recession and years of stagnation, Main Street America was in a rebellious mood.  Donald Trump represented a radical departure from Washington-as-usual and, unlike the other candidates, he addressed middle class concerns in the most vigorous terms.  Voting for Trump was essentially an act of defiance, a way of rejecting the Establishment which professed concern for the plight of the middle class but did nothing to help it.

Indeed, Trump's election was tantamount to a full-scale middle class revolt.  As with all revolutions, however, this one appears destined to end at the point of origin with no net progress to show for it.  (A revolution, after all, consists in making a full circle according to a literal rendering of the word.)  Since his election victory was against the primary trend toward socialism, Trump's eventual replacement as president will almost certainly be in line with the status quo, and the middle class will once again be ignored.

Incidentally, the word revolution has more than one application here.  The long-term economic Kress cycle which bottomed around the year 2014 was described by the late cyclist Samuel J. Kress as the “Revolutionary Cycle.”  This observation was based on the cycle's tendency to usher in a new socioeconomic order when it bottoms (e.g. the transition of the U.S. from an agrarian to an industrial economy in the late 19th century).  Before his death, Kress forecast that the next bottom of the 120-year cycle around 2014 would witness the final transition from free-market capitalism in the U.S. to a much more aggressive socialist government.  His prediction proved prescient when one considers that the Affordable Care Act (a.k.a. Obamacare) was the first major legislative inroad to full-blown socialism since the New Deal of the 1930s. 


The revolutionary aspect of the long-term Kress cycle – which also answers to the Kondratieff wave, or K-wave – provides the context for the mass discontent we’ve seen develop in the U.S. and other countries in recent years.  From Occupy Wall Street to Arab Spring to Brexit, discontent has been widespread in the wake of the 2007-2012 economic malaise.  Students of behavioral finance are aware of the connection between financial market collapse and mass psychology.  After a major shock in the financial market/economy, it usually takes several years for the resulting psychological impact to fully disappear.  This is why revolutions are common occurrences in the years following such a shock, not during the actual shock itself.  Humans are reactive by nature and it takes them a while, in the aggregate, to psychologically process an economic shock, hence the delayed reaction to the economic event in question.

The mentality behind the above mentioned revolutions also resulted in Donald Trump’s presidential victory.  But since this revolutionary episode was against the grain of the prevailing political wind, its lifespan will likely be brief.  Many European countries are already rethinking their political reactions against the European Union.  Now America will soon be forced to decide whether it truly wants to commit to the path it chose last November. 

Free market capitalism can survive only when a country’s citizens are fiercely committed to preserving personal liberty and self-initiative.  It requires a healthy, but respectful, disdain of government interference and a reliance on one’s own ingenuity to thrive.  If the Obamacare debate was any indication, America lacks the internal strength and will to survive as a free-market economy.  For this reason and others, socialism will eventually reassert its sway in the U.S. once the wave of revolutionary fervor subsides.

Returning to the subject at hand, how would a Trump impeachment affect the markets?  Will the secular bull market in stocks continue if Trump were removed from office?  What about the potential impact on the price of gold?  A successful Donald Trump presidency replete with tax and Obamacare reform would not have been good for the price of gold.  Gold is primarily a barometer of investor fear and uncertainty.  Tax reform would almost certainly have benefited both corporate profits and the economy, and a booming economy isn’t normally conducive for a vibrant gold market (the exception being a war-time economy).  However, the uncertainty generated by an investigation and subsequent impeachment hearings would likely serve to buoy the gold price to some degree.  The greater the uncertainty surrounding the outcome of Trump’s trial by fire, the more likely gold will benefit.

As for equities, the secular bull market which began in 2009 for the S&P 500 is still alive and will likely remain intact even if Trump is impeached.  The stock market hasn’t been as vibrant in the last couple of years due to a variety of technical and fundamental factors, including the uncertainties surrounding the U.S. political outlook.  Yet throughout the ups and downs of the last two years, there has been one constant: the lack of interest among retail investors.  Americans by and large lost their appetite for equities several years ago and it shows little sign of returning to normal in the immediate future.  This factor alone will ensure the bull’s longer-term survival throughout the short-term uncertainties, for no major bull market can end until the informed “smart money” investors unload their holding on uninformed participants (“dumb money”).  The big money investors have to have someone to sell to as they can’t very well unload their stocks amongst themselves.  So until we see the return of equity mania, we can be assured of the bull’s continuance notwithstanding its reduced vigor. 

Saturday, April 8, 2017

What will finally break the market's lethargy?

To most individual traders, there is no bigger buzz kill than a narrow trading range.  It takes the wind out of the sails of breakout and momentum traders, and even expert stock pickers have a tough time finding the stocks which are bucking the sideways trend.

Wall Street would much rather see a lively bull market when stocks are roaring and participation is widespread among all classes of investors.  But sometimes even a trading range-type market is good enough for the Street , provided stock prices are near all-time highs.  For even when prices are making no headway, the aggregate yield on stocks pays enough in dividends to make the lack of action worthwhile. 

There are indeed enough listed companies which pay a high enough dividend to make buying and holding in a lackadaisical stock market an attractive proposition.  This is one reason for the torpor which currently infuses not only the financial market, but the rest of the country as well.  Why worry when you can sit back and live off the interest?  Widespread lethargy breeds a range-bound stock market, but it also contributes to a sluggish economy.  As we'll discuss here, there is a reason for the public's lethargy and within that reason lies the solution to the problem. 

If you needed proof of the trading range-induced complacency out there right now, the public's response to the U.S. airstrike on Syria is a good example.  While there was a modicum of shock and anger, the response to the military action was mostly lethargic.  Even the stock market seemed unimpressed enough to rally, which underscores the extent of the public's complacency. 

Even Congress is infected with the conservation bug.  Even as President Trump touts his ambitious plan to cut taxes, the U.S. House majority leader is pouring water all over that plan by saying Congress will balance any proposed tax cuts by finding ways to increase revenues (read more taxes, but in different areas).  Thus the old "paying Peter by robbing Paul" syndrome has infused America's elected leaders, who seem to afraid to risk anything like general prosperity.

One certainly can't fault the President for trying to break the lethargy that has dominated the economy in the last two years.  His attempt at lifting the huge burdens imposed on the middle class by reforming Obamacare were spurned by Congress.  His latest move appears  aimed at stimulating the economy via military conflagration, a tried-and-true (short-term) economic palliative to be sure.

The subdued mood of the market can only be understood in terms of the long-term economic cycle, or K-wave.  This cycle is divided into four "seasons" of economic activity over a period encompassing roughly 60 years.  Each season approximates to 15 years.  The winter season of the cycle was between 2000-2014/15, with the last 60-year cycle bottoming at the end of 2014.  We're now in the early stages of K-wave spring, which should last until about 2029/30. 


So if economic spring has sprung, what is keeping the economy from flourishing?  The answer to that is best seen in a timely analogy.  Even as the Northern hemisphere experiences the early phase of spring in April, there are still lingering signs of the previous winter.  While most days are fairly warm, temperatures can still be sometimes chilly and even winter-like.  It takes a while for a new season to fully establish itself while the vestiges of the preceding season gradually fade away.  In like manner, it will probably take a few years for K-wave spring to become established -- especially given the severity of the K-wave winter season a few years ago. 

The question everyone is concerned with is what will it take to finally break the psychological shackles which have held back profligate spending and retail-level investing?  The answer to that question can be found in the previous paragraph: the immutable laws of the economic K-wave will eventually lay the foundation for a fundamental change in mass psychology. 

At some point in the current K-wave spring season the zeitgeist of contraction and fiscal restraint will give way to expansion and liberality.  Until then, expect to see occasional flare-ups of the winter mentality that predominated in the last decade.  These flare-ups should become more and more infrequent, however, as the K-wave spring season gradually warms the blood and increases the animal spirits. 

When K-wave spring finally hits full bloom, it will bring many economic benefits.  There will be a few signs to watch for to let us know that spring has fully arrived.  First and foremost, watch for higher yields on U.S. Treasury bonds.  There is no surer sign that the long-term economic cycle is accelerating than rising bond yields. 

As the new K-wave upward phase progresses we'll also see increasing real estate activity as prospective home buyers and commercial builders alike look to lock in still-attractive mortgage rates before they get too high.  As real estate timer Robert Campbell addressed in his latest newsletter (www.RealEstateTiming.com), U.S. home prices have broken out of a two-year doldrums phase and are rising at their fastest pace since 2014.  The momentum of real estate activity is on the upswing. 

Finally, look for speculative interest in both stocks and commodities to increase on a large scale.  Risk aversion is a lingering symptom of the contractionist psychology of the K-wave winter season.  When K-wave spring blooms in full, however, investment activity will pick up as participants shed their anxieties and trade them in for a more optimistic outlook.