7/29/2019 X-Factor Report 1/28/13 - Will The Market Ever Correct?
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DISCLAIMER: The opinions expressed herein are those of the writer and may not reflect those of Streettalk Advisors, LLC, Charles Schwab & Co., Inc.,
Fidelity Investments, FolioFN or any of its affiliates. The information herein has been obtained from sources believed to be reliable, but we cannot assure
its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Any
reference to past performance is not to be implied or construed as a guarantee of future results. See additional disclaimers at the end.
The Market Will Never Correct Again
[Special Note: We are migrating to a new backend for the website this
weekend. Therefore, to make life a little easier on Eric and Julia, the
webmasters extraordinaire that make everything work; this will be a very shorttechnical market update. I appreciate your patience but the effort will be
worth it.
In this regard we have some ambitious projects scheduled for the next few
months including:
1) Conversion to an HTML newsletter which will provide faster downloads,
search capability, sharing and more.
2) Podcasts with commercials removed and named by subject and date.
3) 1-2 minute video blogs in addition to the Daily Exchange
4) Web based investment seminars; and much more.
All in all, 2013 should provide for a much more robust development of the
website to make sure that you are getting the information that you need to
manage your money better.
Here is the cool part. All of these changes were spurred by you, our loyal
members, who submitted comments, criticisms and requests frequently
through the website. I read them all, archive them, and when I get enough
of the same request I take action to implement them if I am able. The entire
www.streettalklive.com website and community has been, and will continue
to be, built around your requests. So keep them comingand thank you.]
This past week my partner swung by my office and asked me: Lance, do
you think this market is ever going to correct again? While the question was
asked sarcastically; it summed up the attitude of the average investor who
has now plunged face firstinto the equity risk pool. The problem, of course,
is that it is the capitulation by investors who abandon caution out of fear of
missing the boat is what leads to their inevitable demise. When will the
correction come? That is the topic of todays shortened missive.
January 26, 2013
Inside This Issue:
Market Correction Coming?
Overbought And Bullish
Early Warning Signal
Bonds Tell The Story
Truth About Investing
Recommended Reading
Consumer Deleveraging?
LEI Revisions To Growth
Visible Hand Of The Fed
Economic Policy Uncertain
Richmond Fed Survey
Real Housing Recovery The Bond Bubble
401k Plan Manager
No Change This Week
Click Here For Current
Model Allocation.
Disclaimer & Contact Info.
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page 2
Over Bought and Extremely Bullish
One of the questions I received by email this past week was: Just how
overbought is the market currently compared to previous bull market peaks?
This is a great question. However, before I can answer it we need provide
some basic background for context.
Most investors fall into the trap of thinking that the market can move in one
direction for an indefinite period of time. When markets are rising it isassumed they will never correct again and vice versa. The reality is that
market prices, like the hound dog in the Foghorn Leghorncartoons, are tied
to a stake. The dog could chase Foghorn until he reached the end of his rope
and then whamhe was yanked back to earth.
(Click the picture, or link, to watch)
The chart below shows the S&P 500 as it ranges between its run of rope.The boundaries, represented by the blue lines, are where the current price
would be 2 standard deviations above, or below, the moving average, solid
green line, which is ouranchor point.
https://www.youtube.com/watch?v=8dKfiIgZmKQhttps://www.youtube.com/watch?v=8dKfiIgZmKQhttps://www.youtube.com/watch?v=8dKfiIgZmKQhttps://www.youtube.com/watch?v=8dKfiIgZmKQhttps://www.youtube.com/watch?v=8dKfiIgZmKQmailto:[email protected]?subject=X-Factor%20Suggestions%20&%20Commentshttp://www.streettalklive.com/rss/1-daily-x-change.htmlhttp://www.facebook.com/streettalkhttp://www.twitter.com/streettalklive7/29/2019 X-Factor Report 1/28/13 - Will The Market Ever Correct?
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page 3
RECOMMENDE
READING
Is The Consumer Rea
Deleveraging
The balance sheet recess
continues. Only mortgage de
is declining.
LEI Revisions Show Slow
Growth
The Conference Boa
released the LEI index with
full set of backward revisio
which showed that LEI h
been growing slower th
estimated since end of the la
financial crisis.
The Visible Hand Of The Fe
There is clear evidence that t
recent market push is driven
the Federal Reserve.
For those non-geeks reading this missive when prices reach 2-standard
deviations above, or below, the average price, statistically that movement has
encapsulated 95% of its normally distributed potential movement in that
direction (34.1%+13.6% / 50% = 95.4%).
The light blue shaded areas in the chart of the market above show when theS&P 500 has reached such EXTREMELY overbought levels AND is pushing
2-standard deviations above the mean.
At the beginning of these shaded areas the market is pushing higher and
exuberance is building in the market. The belief becomes that the market will
not correctanytime soon. Of course, it is generally not too terribly long after
the onset of such complacency that the market takes away a large bulk of the
gains and provides a much better entry opportunity for patient investors.
The next chart is the same chart as above but I have overlaid the Volatility
Index to illustrate the extreme complacency that sets in just prior to themarket correction.
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page 4
RECOMMENDE
READING
COTD: Economic Poli
UncertaintyThe problem is that wh
market participants ha
become wildly bullish in rece
weeks the economic data h
continued to either rem
weak or get worse.
COTD: Richmond Fed Surv
The latest release of t
Richmond Federal Reser
Manufacturing Survey show
little to excited about.
Real Housing Recovery Sto
While the belief was that t
Government, and Fed
interventions would ignite t
housing market creating
self-perpetuating recovery
the economy - it did not turn o
that way.
As you can see during these periods of exuberance the Volatility Index has
dropped to extremely low levels of fear. Today, the VIX is at the lowest level
since 2007.
Early Warning Signal
Back in early 2000 we began writing and warning investors of the crash and
the secular bear market that was coming. No one believed me then.
In December of 2007 I wrote that we were either in, or about to be in, a
recession. No one believed me then.
In February of 2009 I wrote an article entitled 8 reasons for a bull market. No
one believed me then either.
The reason that I wrote these things is simply because of the following chart
which has an incredible track record of seeing trend changes in the market
long before it is recognized by the media.
You will notice that the indicator WILL NOT get you out right at the top or in at
the bottom. However, it does tell you when the trend has changed for, or
against, you.
Currently, the market is still on a longer term buy signal and remains a buy
the dips market for now. However, it is the top part of the chart that is the
most important. When this indicator has reached extreme overbought levels,
as it is currently, it has signaled that the market was beginning to reach the
potential peak for the current cycle. It doesnt mean that the market is about
to imminently crash. This is a monthly chart so these topping processes can
several months. Nonetheless, it is a warning sign that is juxtaposed to the
many bullish analysts in the market right now predicting that we are entering
into a new secular bull market we arent.
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page 5
There are many similarities between the current market and previous market
peaks. But the chart below shows the greatest similarity yet.
This chart was featured in the article this past week entitled The Visible Hand
Of The Fed.
As I stated then: It is clear that the visible hand of the Federal Reserve is
firmly in control of the markets at the moment as liquidity flows are increased.
However, extrapolating the current advance indefinitely into the future
becomes somewhat dangerous. Each previous program cycle has ended
with a fairly nasty decline, in both the markets and the economy, as the
fundamental drivers were being supported solely by artificial interventions.
Those declines would have likely been far worse had they not been halted bythe next round of liquidity injected goodness.
While the Fed programs that we have witnessed since the financial crisis are
historically unique - liquidity driven markets are not. We have witnessed the
effects of excess liquidity in the bull market cycle prior to the 2008 financial
crisis. The only difference during that cycle was that, through government
intervention, real estate was turned into an ATM allowing mortgage equity
withdrawals to be the liquidity source for the economy and the markets. The
chart below shows the extremely high correlation between these two bull
market cycles.
There are many similarities between the peak of the market in 2008 andtoday. Investor sentiment is pushing extreme levels, the markets are
exceedingly overbought, earnings are weakening, complacency is higher,
multiples are expanding, the consumer is beginning to sputter and headlines
are beginning to push the boundaries of manic optimism.
One doesn't haven't to think back too far to remember that at the peak of the
markets in 2008 there was no recession in sight, even though it had already
started, as it was a goldilocks economy. Earnings were expected to continue
to grow into the coming year and equities were the only investment of choice.
Come to think of it - that is what we heard in 1999 as well.
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page
Bonds Tell The Same Story
If you dont believe any of the analysis above then maybe you will listen to the
bond market. When stocks begin to reach extreme levels it is the
exuberance that sucks investors out of bonds and into stocks. Therefore, a
good indicator to watch is the ratio of stocks to bonds as shown in the chart
below.
Historically, when this ratio has reached the extreme levels that are currently
present it has been coincident with a market peak. Currently, as shown withthe stock market above, the ratio is pushing 2-standard deviations of its mean
as investors sell bonds to buy stocks.
Of course, this is exactly the emotionally driven behavior that you would
expect to see for average individuals that get sucked into to panic buying
market peaks and selling market bottoms.
The chart on the next page inverts the ratio above to bonds versus stocks.
This creates a clearer buy/sell indicator. When the lower indicator reaches
extremely oversold conditions the SELL indication is given when it turns
sharply up.
While the indicator would have gotten you out very early in 2011, leaving you
to be regularly chastised for such stupidity by the media for next several
months, it would have saved you from the near 20% plunge that following
summer. The same held true this past September as QE3 was introduced.
Conversely, when this indicator peaks and turns back down that has given
a clearbuyindication as well.
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page
The Truth About Stocks And Investing
Despite all of the ink spilled on value based investing, fundamentals,
earnings, etc. in todays world of high frequency trading, position seeking
algorithms and programmed trading, fundamental analysis now takes a back
seat to price analysis.
Today, 90% of the price movement in any stock is dictated by the overall
movement of the stock market. While fundamental analysis still serves a
valued purpose in helping to avoid potential bankruptcy issues in the long run it is price analysis that rules in the short term.
This is important to understand, comprehend, accept and adopt because
investors are no longer long term oriented. The markets, overall, are
focused on the next day, week and month and buy/sell decisions are
evaluated as success, or failure, within minutes of the transaction.
This is why we spend so much time focused on the price movements of the
market in this weekly missive to evaluate our buy/sell recommendations
accordingly.
However, the management of risk, through understanding price movement is
essential for long term success. Here are some real stats for you:
Fact: 3 out of 4 stocks eventually decline 75% or more from their IPO
prices before they go bankrupt. While underperforming the indexes,
all of them spend a lot of time on the 52-week low list.
Rule: Dont buy 52-week lows because you think they are
cheapthey arent.
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page 8
STREETTALK
ADVISORS
What makes us different?Its really pretty simple. W
believe that managing risk
the key to long term succes
Conserve the principal and t
rest will take care of itself.
Risk = Loss
Seems like a simple concept
yet most people take way t
much risk in their portfolio whi
is fine as long as the mark
goes up. The problem comwhen it doesnt.
Managed Risk = Returns
By applying varying levels
risk management to a portfo
of assets the potential for larg
drawdowns of capital
reduced thereby allowing t
portfolio to accumulate retur
over time.
Total Return InvestingWe believe that portfolio shou
be designed for more than ju
capital appreciation. There a
times when markets do not ris
During those periods we wa
income from dividends a
interest to be supporting t
portfolio.
If you are ready for somethin
different then you are ready f
common sense approach investing.
Get Started Today!
Fact: Yes, occasionally, a stock will have a massive comeback from
its 52-week lows. These are the exceptions and not the rule.
Rule: Dont buy bounces of bottoms until trends confirm a return to
sustained positive price action. This will be when they hit a new 52-
week high following a proper basing process.
Fact: Only 1 in 4 stocks outperform the S & P 500 during their lifetime. The biggest winners spend the majority of their time on the 52-
week high list.
Rule: These are the stocks that you generally want to focus on
buying. However, all trends end and generally when there seems to
be nothing in the world to stop it. AAPL is the most recent example.
Fact: Tops are clear only in hindsight.
Rule:As shown in the charts above the market usually gives plenty
of signs of a trend change and enough time to exit. You just have to
be willing to pay attention and set aside the greed factor.
Fact: Not every breakout to a new 52-week high is a valid buy signal.
Only the ones from proper technical setups are.
Rule: Pay attention to the details and not the media hype.
Successful trading, you are not an investor, requires attention to
details and the flexibility to move when necessary.
Let me repeat that last part. Despite what you think, or what you are told,
you are NOT AN INVESTOR. You are a speculator, a trader, who buys
electronic pieces of paper in a company that you neither have control or real
knowledge in order to sell those electronic pieces of paper at a higher pricethan where you bought them. Thats it. Everything else is Wall Street
marketing machine enticing you to keep you money invested for the long
termwhile they trade all around you at your expense.
If you dont believe that previous paragraph look at your annual profits
versus those of the major banks.
The Wall Street Casino is a huge business, and very much like going to Las
Vegas, you either learn to play by the rules or you become part of the profit
margin.
The market is extremely over bought, extremely bullish and much overvalued.
A correction is coming. It is just a matter of time and will likely be bigger
than you can currently imagine. While I am NOT recommending that you sell
everything you own on Monday and go hide into cash I am suggesting that
the risk is rising. As stated above the market will give us plenty of time to
liquidate our positions and move to cash the only question is whether, or
not, you will be paying attention.
Have a great weekend.
Lance Roberts
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page 9
401K Plan Manager
The ongoing rally since
the end of December
continued this past week.
Earnings season has
been less than positive
and on a comparative
basis is the second
weakest since 2011.
However, earnings
expectations are
extremely low and the
Fed pumping $85 billion a
month into the markets
the overbought nature of
the market can continue
for a while longer.
However, as stated in this
weeks missive above a
correction will come and
will likely be sooner than
most expect. We continue to recommend holding current allocations but not
increasing exposure to equities at this time.
If you need help after reading the alert; dont hesitate to contact me.
mailto:[email protected]?subject=Need%20Help%20With%20My%20401k%20Allocationmailto:[email protected]?subject=Need%20Help%20With%20My%20401k%20Allocationmailto:[email protected]?subject=Need%20Help%20With%20My%20401k%20Allocation7/29/2019 X-Factor Report 1/28/13 - Will The Market Ever Correct?
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page1
Disclaimer & Contact InformationDisclaimer
The opinions expressed herein are those of the writer and may not reflect those ofStreettalk Advisors, LLC., Charles Schwab & Co, Inc., Fidelity Investments, FolioFN, or anyof its affiliates. The information herein has been obtained from sources believed to bereliable, but we do not guarantee its accuracy or completeness. Neither the information norany opinion expressed constitutes a solicitation for the purchase or sale of any security.Past performance is not a guarantee of future results. Any models, sample portfolios,
historical performance records, or any analysis relating to investments in particular or as awhole, is for illustrative and informational purposes only and should in no way beconstrued, either explicitly or implicitly, that such information is for the purposes ofpresenting a performance track record, solicitation or offer to purchase or sell any security,or that Streettalk Advisors, LLC or any of its members or affiliates have achieved suchresults in the past. ALL INFORMATION PROVIDED HEREIN IS FOR EDCUATIONALPURPOSES ONLY USE ONLY AT YOUR OWN RISK AND PERIL.
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The information on this site is provided AS IS. Streettalk Advisors, LLC does not warrantthe accuracy of the materials provided herein, either expressly or impliedly, for anyparticular purpose and expressly disclaims any warranties of merchantability or fitness fora particular purpose. Streettalk Advisors, LLC will not be responsible for any loss ordamage that could result from interception by third parties of any information made
available to you via this site. Although the information provided to you on this site isobtained or compiled from sources we believe to be reliable, Streettalk Advisors, LLCcannot and does not guarantee the accuracy, validity, timeliness or completeness of anyinformation or data made available to you for any particular purpose.
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STREETTALK ADVISORS
Lance Roberts
Director of Fundamental & Economic
Analysis
Michael SmithDirector of Alternative Investments
Luke PattersonChief Investment Officer
Hope EdickCompliance Officer
Leah MillerOperations Manager
Lynette LalanneGeneral Partner Streettalk Insurance
Office Location
One CityCentre
800 Town & Country Blvd.
Suite 410
Houston, TX 77024
Tel: 281-822-8800
Web Siteswww.streettalkadvisors.com
Email (For More Information)[email protected]
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Brooke Sanders
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