Nothing’s Perfect

Nothings Perfect

On September 21, the Apple iPhone 5 made its debut simultaneously on four continents. Its first weekend saw over five million in sales! And, of course, we all saw the long lines at Apple stores around the country (although I do love Android’s contra-ad with the young people in line and one with a Galaxy 3 saving a place for his parents!). And the current inventory was sold out within a week – a perfect product introduction.

Well…not quite. Soon articles like “iPhone 5′s Biggest Problems” started showing up, talking about scratching, chipped exteriors, lens flares and others. Then there were complaints about its faulty Maps application that even drew a rare corporate apology last week. It just proves the point of this week’s Hotline: Nothing’s Perfect.

In last week’s Hotline, I pointed out a great piece of research about the week having the worst seasonal history for performance. It came true, as did the previous week’s discussion of down Mondays. But the mention of the recent record of strong Fridays certainly did not come to pass, and today seems to be shredding the weak Monday pattern as well.

Our September 4th Hotline was more of the same. Most of the writers that week had been bemoaning the fact that Septembers were the worst stock market month, with declines, on average, registering over the last 20, 50 and 100 years. But we pointed out that Septembers were usually up in years when stocks had already run up more than 10% by August 31. The results are in: the S&P gained 2.4% in September.

gold 6 months

Similarly, our September 4th Hotline predicted that the Fed would act with a new round of Quantitative Easing and that, based on the market action after the last two QE’s, gold would rally strongly. Both came to pass. Yet we also thought there was a good chance stocks would advance after the Fed’s announcement. But over the last two weeks stocks have trended lower. Nothing’s perfect.

As you can imagine, in the profession I’ve chosen for life, these ups and down, these brushes with perfection turning quickly into errors, are fairly commonplace if you dare to give your opinion on a regular basis. It does enforce a sense of humility with the task at hand – advising investors on what to do in the financial market each and every day.

To that end we’ve tried to develop some strategies to guide us, to take the subjective decision making out of the hands of mere mortals and put it squarely in a quantitative box – our technology. Most of our clients and financial advisors buy into the logic behind this. They’ve seen the results of emotional investing causing people to buy at the top and sell at the bottom of the seemingly endless market cycles.

Check out the latest index of bullish investor sentiment from the American Association of Individual Investors:

AAllbullish

When sentiment is most bullish and money is pouring into stocks, a top is often near (red horizontal ovals); and vice versa, when bullish opinions are few and far between, the market usually wants to turn upwards from a bottom (the vertical green ovals). Currently, sentiment is low- to mid-level bullish after a recent turndown. We are nearer a low than a high and this is one of the reasons, together with our “Don’t fight the Fed” argument from our early September Hotline, why we are still bullish on stocks.

This middle-of-the-road condition, however, is why calling the market direction day to day is so difficult for most individuals. That is especially so for those who have a life apart from the financial markets.

Take, for example, economic indicators. Most investors, if they care, just watch the direction of the economic indicators as reported mainly by the government. Are they improving or getting worse? While this is useful, we’ve found that greater guidance comes from watching whether the reports over achieve or disappoint. Yet that fine tuning isn’t perfect and, at times, isn’t even decisive.

Over the last six months, for example, five of the six months, including September, saw reports getting worse, while August was the lone exception with a majority being better than the year before. Then, again, this week the number of disappointing reports outnumbered “better-than-expected” reports by an eleven to six margin!

And one of those reports, Consumer Confidence, further confounds analysis. It seems that despite six months of mostly disappointing reports (a full six months of disappointment if you look just at reports of manufacturing activity), the Consumer Sentiment readings had their greatest positive jump since February.

Most commentators leapt to the conclusion that this was a show of confidence for the President. Yet further analysis of the numbers was not so conclusive. Seems that those consumers most likely, according to other polls, to be supporting Romney (those with incomes over $50,000) were most enthusiastic, while those with incomes below that level who have been characterized as more likely to support the Democrats, actually showed declining confidence. Go figure!

What does that mean for the stock market? Well, I think it means that investors can’t just watch one set of indicators or follow just one investment strategy to achieve success in today’s market. Yet following multiple, often divergent, indicators and many strategies is nearly impossible for most investors or even their financial advisors. I’ve got over forty years trying to judge these markets and I can’t do it alone. But with our computerized strategies and over 70 personnel, we do a pretty good job of it.

Speaking of indicators, I note that yields continue lower and supportive of higher stock prices, and we do have an upcoming earnings reporting season just weeks away that will likely confirm or change expectations. Seasonality also changes from a negative September baseline reading to a more positive October forecast.

Most Octobers bring higher prices – although all of the recent major tops came in October and there were those nasty losses in 1929 and 1987. Yet traditionally, October has been up around 60% of the time, and in the last twenty years, the percentage has crept up to 70%, making it the third best month of the year during that period.

Similarly, the fourth quarter is easily the strongest quarter of the year. Gains have been achieved 67% of the time over the last 100 years, and 76% of the time during the most recent 50 years. Over 20 years, the returns have been best of all, with positives in 80% of the years, posting average gains of over 5% for the final quarter.

Of course, we can try to catch the same magic as we caught in September and point out further that when the S&P is up more than 10% this late in the year (as it is this year), the market has gained in its final quarter 80% of the time. And in election years, it has always soared higher – averaging a 6.2% gain.

Speaking of the election, I’ve shown this Bespoke Investment Group chart below of the historical pattern of the S&P during Presidential Election year (thank you also to Bespoke for all the great seasonal stats cited above). The Bespoke Election Year chart, like our own Political Seasonality Index, featured here last week, suggests that the market weakness we have seen of late should reverse around the tenth of this month.

S&P 500 average

As you can see, the chart has been very accurate. Major highs and lows have occurred within plus or minus four or five trading days of the chart’s peaks and troughs. Now it’s pointing to another low point on October 10th, suggesting a beginning date for a fourth-quarter rally between the 3rd and the 7th, if the pattern holds.

As we have all learned, these dates are approximate and have often just been wrong. But then again…nothing’s perfect.

All the best,
Jerry

Election Year Update: 

National Polls:
RealClearPolitics two-month average: Obama +3.5% Down .2% from last week
Average of Likely Voter polls: +3.5 % Down .4%
On this date in 2008: Obama 5.3%
On this date in 2004: Bush +5.4%

14 Battleground State Polls (10 reporting since conventions):
RealClearPolitics two-month average: 11 Obama/3 Romney, Up 1 for Romney
Last State poll: 11 Obama/3 Romney, Same
Improving over average poll: 6 Romney/8 Obama, Up 3 for Romney

Generally a good week for Romney, although he is coming from behind. Surging Romney Gains 6 Pts in Gallup Poll.

While it’s rare, perhaps the debates will matter this time around. Don’t forget to watch Wednesday night, 9 pm EST. 

 

Disclosures

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