LAMENSDORF MARKET
EDITOR: DICK STERN
+100%
75%
CIO: BRAD LAMENSDORF
50%
25%
0%
-25%
-50%
s
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
s The charts and graphs presented in LMTR’s newsletter are not produced by LMTR. The interpretation of the charts and graphs is only the opinion of LMTR and does not reflect the associated firms’ opinions.
Risk Reward Shows Market in Crapper for 2015 LMTR has consistently referred to four specific pillars that assist us in analyzing and prognosticating the market- sentiment, breadth, liquidity and valuation. Currently all four areas are in the “crapper”, so to speak. In this month’s issue we delve into all four pillars in order to provide our readers with an in depth intermediate-term analysis of what to expect during the first half of 2015.
1 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
2002-07-31 to 2014-11-18 (Log Scale)
S&P 500 Composite Index 1,998
(Updated weekly on Wednesday mornings)
Extremes Generated when Sentiment Reading: Rises above 61.5% = Extreme Optimism Declines below 55.5% = Extreme Pessimism
1,808 1,636
1,998
Average Value Of Indicator At: Optimistic Extremes (down arrows)= 68.2 Pessimistic Extremes (up arrows)= 46.9 Average Spread Between Extremes = 21.5
1,808 1,636
Sentiment must reverse by 10 percentage points to signal an extreme in addition to the above extreme levels being reached.
1,480
1,480
1,339
1,339
1,212
1,212
1,097
1,097
SENTIMENT 992 898
Arrows represent extremes in optimism and pessimism. They do not represent buy and sell signals and can only be known for certain (and added to the chart) in hindsight.
812 Ned Davis Research has created an intricate survey 735 to gauge 2015 expectation of665 S&P500 performance. Source: S&P Dow Jones Indices 25% of managers polled predict 2004 2005 the market will be up2003 0-20% over 75.7 the next 12 months. This suggests 75 73.5 complacency, 70 as there are just too 68.1 67.1 many bulls in the marketplace. 65 60 55
2007
Between 55.5 and 61.5
2008
2009
2010
2011
Extreme Optimism (Bearish) 71.9
70.5
69.6
72.2 69.8
69.5
2012
898 % of Time
2.7
41.9
8.7
20.7
10.0
37.4
2013
812 735 665
2014
2015 75
73.9
73.0
71.6
70.7
70.7
70
68.3
65
63.2
62.3
60 55.2
43.8
51.3
49.9
49.7
47.6
46.6
33.9 33.9
* Above 61.5
54.8
45
30
2006
51.9
35
% Gain/ Annum
58.1
53.5
40
NDR Crowd Sentiment Poll is:
Below 55.5
59.4
50
992
S&P 500 Index Gain/Annum When: 1995-12-01 to 2014-11-18
Extreme Pessimism (Bullish)
50.3 47.2
46.8
42.5
55 53.3
48.2
45 40
40.5 38.0
38.4
37.1 32.5
30.9
50
Source: Ned Davis Research, Inc.
35 2014-11-18 = 72.2
30
NDR Crowd Sentiment Poll S574
© Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/
This indicator, created by Goldman Sachs, was recently highlighted on zerohedge. com. The sentiment gauge is currently 100% bullish, which is extremely negative from a contrarian’s point-of-view.
© Copyright 2015, All Rights Reserved Goldman Sachs. Further distribution prohibited without prior permission.
2 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
The next chart, created by SentimenTrader.com, averages the percentage of respondents who are bearish on stocks. They tracked surveys going back at least 25 years recorded by Investor’s Intelligence, AAII, Market Vane and Consensus. The results show that in the 1,428 weeks of data available, only 27 weeks showed a figure of 25% or less. Clearly, this is a period of uncommon “un-bearishness.” Such readings have historically been present several quarters ahead of major corrections. Thus, market timing is often an exercise in patience. For instance, warning signs for the 2008 crash appeared as early as 2004-05.
© Copyright 2015, All Rights Reserved Investors Intelligence. Further distribution prohibited without prior permission.
The Dumb Money indicator includes the equity-only put/call ratio, the flow in and out of the Rydex series of index mutual funds and small speculators in equity index futures contracts. “Dumb Money” sentiment is presently at a 5-year high, which is extremely negative.
© Copyright 2015, All Rights Reserved www.SentimenTrader.com. Further distribution prohibited without prior permission.
3 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
This chart, produced by Chartcraft and calculated every Wednesday, polls newsletter writers for their current bullish or bearish prognostications. The indicator is currently positioned at a 41.5, which is extremely bearish. Since such a large percentage of the members polled are bullish, we view this as bearish due to its optimistic reading.
© Copyright 2015, All Rights Reserved Chartcraft. Further distribution prohibited without prior permission.
Profitable Long Trades: 94% Gain/Annum: 10.2% Buy-Hold Gain/Annum: 7.4% Latest Signal 10/11/2013 = 15237.11
(S0502)
* Above 69 Between 53 and 69
B B
Gloom & Doom!
BULLS / (BULLS + BEARS) (10-Week Smoothing)
23. 3
7. 6
48. 0
12. 0
28. 7
2009
2008
2007
% of Time
1. 2
Smoothed 1/02/2015 = 78.1%
Extreme Pessimism
Source: Investors Intelligence
2006
2005
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
Extreme Optimism
2004
B
Source: S&P Dow Jones Indices
2003
53 and Below
2002
B
Gain/ Annum
2014
BULLS/(BULLS +BEARS) Is:
B
2013
B
B
20452 16174 12792 10116 8001 6327 5004 3958 3130 2475 1958 1548 1224 968 766 606 479 379
2015
DJIA Gain/Annum When: (9/04/1970 - 1/02/2015)
2012
B
1/02/2015 = 17832.99
B
B
2011
S
2010
S
S
B
B B
S
S
S
B
B
Signals Generated When Ratio: Rises Above 42% or 59% = Buy (whichever comes first) S Declines Below 67% = Sell
S
S
S
B
S
S
S
S
S
S
S = Switch into Commercial Paper Signal Dates: 9/18/1970 - 1/02/2015
1972
84 80 76 72 68 64 60 56 52 48 44 40 36 32
Weekly Data 9/04/1970 - 1/02/2015 (Log Scale)
Dow Jones Industrial Average
1971
The infamous Investor’s Intelligence bulls/ bulls+bears indicator includes data from Investor’s Intelligence-Chartcraft. Marty Zweig, a well-known market participant who is now deceased, tweaked the gauge. The current reading is at a 17-year high, which is a level not seen since the summer before the crash of 1987.
20452 16174 12792 10116 8001 6327 5004 3958 3130 2475 1958 1548 1224 968 766 606 479 379
84 80 76 72 68 64 60 56 52 48 44 40 36 32
Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.
4 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
BREADTH 2161 1937 1737 1557 1396 1251 1122 1006 901 808 724
Daily Data 12/31/1997 - 1/02/2015 (Log Scale)
S&P 500 Index Versus NDR Supply and Demand (1997 - Present)
Source: S&P Dow Jones Indices
Standard & Poor's 500 Index (Log Scale Left)
RS
S&P 500 Index Gain/Annum When: ( 12/31/1981 - 1/02/2015) Gain/ Annum
NDR Vol Demand
LS
% of Time
* Above NDR Vol Supply
11. 8
79. 3
Below NDR Vol Supply
-1. 4
20. 7
NDR Volume Supply ( NDR Volume Demand ( (Log Scale Right)
)
S&P 500 Index Gain/Annum When: ( 12/31/1997 - 1/02/2015)
H
Gain/ Annum
NDR Vol Demand
)
% of Time
* Above NDR Vol Supply
10. 6
65. 6
Below NDR Vol Supply
-6. 2
34. 4
55
3
54 53
4
52 51 50 49 48 47 46
1
NDR Multi-Cap Institutional Equity Series 10-Day Advances/10-Day Declines (Scale Left) Thrust
2.8 2.4 2.0 1.6 1.2 0.8 0.4
45
2
The NDR Volume Demand/Supply spread is used to judge underlying supply and demand trends. Over the last 18 months, the market has continued to hit higher highs. Concurrently the indicator has been very weak, tracing out a series of lower highs. This is a nasty looking negative divergence.
1/02/2015 = 1.27
Oversold
M J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S D
( D A V I S 1 2 5 A ) 19 9 8
19 9 9
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.
The number of negative divergences has piled up, suggesting that investors should be wary in the coming months.
© Copyright 2014, All Rights Reserved www.sentimenTrader. Further distribution prohibited without prior permission.
5 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
Weekly Data 10/01/1965 - 1/02/2015 (Log Scale)
Standard & Poor's 500 Stock Index Median S&P 500 % Returns ... Weeks Later
After Up Arrows
After Down Arrows
All Periods
4
2. 3
-0. 3
0. 9
8
2. 0
-2. 7
1. 5
13
3. 5
-1. 0
2. 2
26
7. 4
-1. 7
4. 4
39
8. 6
3. 6
6. 8
52
12. 0
4. 4
9. 4
S
Results Based on First Signal in 26 Weeks (26 Sell Signals & 17 Buy Signals)
S
S
S
S
S
S
S
S
B
S
S
S
S
S
S
B
B B
B
S S
S
S
S
S
B
S
B B
B
B
B
B
S
S
B
B
B
B
Signals Generated When High-Low Logic Index: Falls Below Lower Bracket = Buy Rises Above Upper Bracket = Sell
Source: S&P Dow Jones Indices
1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
B
SS
2493 1998 1601 1284 1029 824 661 530 424 340 273 219 175 140 113 90 72 58
1966 1967 1968 1969 1970
2493 1998 1601 1284 1029 824 661 530 424 340 273 219 175 140 113 90 72 58
JANUARY 2015
7.6 7.2 6.8 6.4 6.0 5.6 5.2 4.8 4.4 4.0 3.6 3.2 2.8 2.4 2.0 1.6 1.2 0.8 0.4 (S132)
Lesser of NYSE New Highs or New Lows Divided By Issues Traded 10-Week Exponential Smoothing
1/02/2015 = 5.5
Market Out of Gear -- Bearish
Market In Gear -- Bullish
Source: Barron's Newspaper
High-Low Logic Index
7.6 7.2 6.8 6.4 6.0 5.6 5.2 4.8 4.4 4.0 3.6 3.2 2.8 2.4 2.0 1.6 1.2 0.8 0.4
The Hi-Low Logic Index, created by Norman Fosback, is a proprietary indicator that judges the difference between the numbers of 52-week highs and lows in the market. This tool gauges internal weakness, and it is useful for spotting topping or churning. Low readings are bullish, while anything over 4.4 is negative. The current reading of 6.1 is at an intermediate sell signal.
Index Concept Courtesy: Market Logic
Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.
The 52-week lows are beginning to expand. Bob Dickey, the technical analyst at RBC, points out that the number of 52-week lows has been expanding even while the market has been hitting 52-week highs. This is yet another indication that the strength of the indices is being carried by a narrowing list of stocks.
© Copyright 2015, All Rights Reserved StockCharts.com and RBC Wealth Management. Further distribution prohibited without prior permission.
6 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
The Hindenburg Omen is a combination of technical factors that attempt to measure the health of the NYSE and, by extension, the stock market as a whole. The goal of the indicator is to signal increased probability of a stock market crash. It is extremely rare to witness as many Omens occurring together as have been seen over the past 50 days. The last time such a level was reached was prior to the bear market in 2007, and the time before that was prior to the bear market in 2000. This table shows every time (since 1965) that 11 or more Omens were triggered within 50 days of each other.
© Copyright 2015, All Rights Reserved www.sentimenTrader. Further distribution prohibited without prior permission.
7 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
LIQUIDITY 1879 1545 1270 1044 858 706 580 477 392 322 265 218 179 147 121 99 82 67 55
Monthly Data 12/31/1965 - 11/30/2014 (Log Scale)
Standard & Poor's 500 Stock Index S&P 500 Gain/Annum When: Cash/Assets (%): Above 9.5
Gain/ Annum
% of Time
20. 1
15. 0
Between 6.9 and 9.5 * 6.9 and Below
6. 1
34. 4
3. 2
50. 6
NDR uses the following ICI categories to compute the cash/assets ratio: Domestic Equity = Capital Appreciation + Total Return
Source: S&P Dow Jones Indices
1970
1975
1980
1985
1990
1995
200 0
2005
1879 1545 1270 1044 858 706 580 477 392 322 265 218 179 147 121 99 82 67 55
2010
11/30/2014 = 3.3%
12 11
Excessive Cash
Extreme Pessimism
12
Bullish
11
10
10
9
9
8
8
7 6
5.9
7
6.2
4 3 (S430)
6
5.3
5 Bearish
Low Cash
Extreme Optimism
3.8
Source: Investment Company Institute, www.ici.org
Source: Ned Davis Research, Inc.
5
The Stock Mutual Funds’ Cash/ Assets Ratio is hitting a 50+ year low. This leaves little room for any large redemptions that may occur in the marketplace. The ratio dipped as low as 3.5 in 2007, before the 2008 crisis hit. After the crisis, managers moved their cash allocation up to 5.3%. Seeing the ratio back below 2007 levels tells us that liquidity is running at low levels. Managers have scant reserves left to fund any future allocations or redemptions. The tank is empty.
4 3.5
3.1
3
Stock Mutual Funds' Cash/Assets Ratio
Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.
Because margin debt levels have reached record highs, it has become increasingly important to look outside the box for various tools in order to analyze and properly understand the situation. These two charts, produced by crosscurrents.com, are excellent tools for this purpose. Both charts analyze the same data- margin debt and mutual fund cash. Even though the data is manipulated differently in each chart, the output remains the same. Clearly, the marketplace is leveraged to the hilt.
© Copyright 2015, All Rights Reserved www.sentimenTrader. Further distribution prohibited without prior permission.
8 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
Quarterly Data 3/31/1952 - 9/30/2014
Household Financial Assets' (as a % of Disposable Personal Income) Potential Impact On Growth 515 510 505 500 495 490 485 480 475 470 465 460 455 450 445 440 435 430 425 420 415 410 405 400 395 390 385 380 375 370 365 360 355 350 345 340 335 330 325 (DAVIS155)
Gain/ Annum
Fin. Assets/DPI is:
% of Time
Gain/ Annum
Fin. Assets/DPI is: * Above 449%
% of Time
4. 5
16. 0
1. 4
16. 0
Between 348% and 449%
6. 0
66. 4
Between 348% and 449%
1. 7
66. 4
Below 348%
9. 7
17. 6
Below 348%
1. 9
17. 6
* Above 449%
515 510 505 500 495 490 485 480 475 470 465 460 455 450 445 440 435 430 425 420 415 410 405 400 395 390 385 380 375 370 365 360 355 350 345 340 335 330 325
Nonfarm Payrolls Gain/Annum When:
Nominal GDP Gain/Annum When:
% Well Above Income Growth
Source: Department of Commerce Bureau of Labor Statistics Federal Reserve Board
195 5
1960
1965
Well Below Income Growth 1970
1975
1980
1985
1990
1995
2000
2005
2010
Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.
9 W E S T P O R T, C O N N E C T I C U T [email protected]
Household financial assets as a percentage of disposable income have increased sharply since 2008. When analyzing this chart, one can see that current investment levels relative to income are sharply higher than those of 2000 and 2007. Not only are investors taking on more risk, but this data also suggests that the market has become very overowned. Media outlets have popularized the theory that the public has failed to become heavily involved in this market. However, this data proves otherwise.
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
VALUATION 1,995
Monthly Data 1964-03-31 to 2014-12-31 (Log Scale)
Standard & Poor's 500 Index
1,585
1,995 1,585
S&P 500 Gain/Annum When
1,259 1,000
S&P 500 Median P/S is:
794
* Above 1.53
631
Between 0.7 and 1.53
501
Below 0.7
1,259
% Gain/ Annum
% of Time
0.38
18.23
794
6.60
47.96
631
10.22
33.81
501
1,000
398
398
316
316
251
251
200
200
158
158
126
126
100
100
79
79 Source: S&P Dow Jones Indices
1965 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
+2 SD = 1.83
+1 SD = 1.36
Median = 0.89
-1 SD = 0.42
2014-12-31 = 2.07
Source: S&P Capital IQ Compustat
2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3
The S&P500 Median Price/Sales Ratio is the highest in history, trading at over 2. This is in “nosebleed” territory.
S&P 500 Median Price/Sales Ratio DAVIS208
© Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/
This graph exhibits the difference between the high-yield energy market and the general high-yield market. As one can see, spreads have exploded as energy prices have crashed. Since the environment has changed, the creditworthiness of the energy sector has been called into question. With the general spreads trading at 40-year lows, it would not be a reach to see the entire high-yield sector exhibit a similar move relative to government yields.
© Copyright 2015, All Rights Reserved Deutsche Bank. Further distribution prohibited without prior permission.
10 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
EXHIBIT A Along with oil, copper is breaking down and is at a five-year low. This does not bode well, as it shows weak economic activity.
© Copyright 2015, All Rights Reserved Bloomberg. Further distribution prohibited without prior permission.
EXHIBIT B The Emerging Markets Currency Index has basically been in free fall for the past year. This index just breached the low of 2008, and it could easily be the “canary in the coal mine.” The US Dollar hasn’t only been strong against the Euro, Yen and the Aussie. It has also absolutely hammered some of the emerging market currencies in recent months. The obvious one that comes to mind is the Russian Ruble, but many others have also suffered to a lesser extent. The equal-weighted emerging market currency index is currently breaking below its 2002 and 2009 bottoms. This has significantly impacted GEM equities (and ETFs such as EEM), when priced in US Dollars. © Copyright 2015, All Rights Reserved Federal Reserve. Further distribution prohibited without prior permission.
11 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
CONCLUSION Risk is running very high and the momentum indicators are beginning to wane. Commodity prices are in free fall in some cases, and long-term interest rates continue to trend lower. These negative economic developments are deflationary, which augurs poorly for the stock market. Simultaneously, a plethora of indicators are also flashing warning signs. Our subscribers received a notice on December 15, advising them to add 10% to their short position. We are currently at 50% short.
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DISCLAIMER Lamensdorf Market Timing Report is a publication intended to give analytical research to the investment community. Lamensdorf Market Timing Report is not rendering investment advice based on investment portfolios and is not registered as an investment advisor in any jurisdiction. Information included in this report is derived from many sources believed to be reliable but no representation is made that it is accurate or complete, or that errors, if discovered, will be corrected. The authors of this report have not audited the financial statements of the companies discussed and do not represent that they are serving as independent public accountants with respect to them. They have not audited the statements and therefore do not express an opinion on them. The authors have also not conducted a thorough review of the financial statements as defined by standards established by the AICPA. This report is not intended, and shall not constitute, and nothing herein should be construed as, an offer to sell or a solicitation of an offer to buy any securities referred to in this report, or a “buy” or “sell” recommendation. Rather, this research is intended to identify issues portfolio managers should be aware of for them to assess their own opinion of positive or negative potential. The LMTR newsletter is NOT affiliated with any ETF’s Nor any investment Advisors.
W E S T P O R T, C O N N E C T I C U T [email protected] Copyright © 2015 Lamensdorf Market Timing Report.
JANUARY 2015
BIO
Brad Lamensdorf, a seasoned money manager and market strategist, is the CIO of The Lamensdorf Market Timing Report, a newsletter designed to help investors improve performance via market timing by assessing the environment of the stock market using a variety of technical, fundamental and sentiment-oriented tools from powerful independent research firms. Many investors mechanically enter and depart the market without a true “game plan.” Studies have shown that retail investors, in particular, are very poor market timers, tending to invest at or near market peaks and sell at or near market lows. The newsletter is designed to provide risk parameters for both professional and retail investors around the short-term stock market environment, giving subscribers better insight about when to allocate assets into or out of the equity markets. Lamensdorf, a frequent guest commentator and analyst on major business networks including CNBC, CNN and Fox Business News, also serves as a Portfolio Manager and Principal of Ranger Alternative Management LP, a sub-advisor to the Advisor Shares Ranger Equity Bear Exchange Traded Fund (NYSE: HDGE). In this role, he conducts top-down technical evaluations of broader market liquidity, sentiment and breadth to help identify short and intermediate-term market trends, manage exposure and mitigate risk. HDGE was launched in 2011 and is the first and sole actively managed, short-only ETF in existence. Lamensdorf, also has managed investment portfolios for the Hughes family and was principal of Tarpon Partners, managing a long/short fund that was up more than 200% gross over six years. Earlier in his career, he was as an equity trader/market strategist for Taylor and Company, the Bass brothers’ trading arm, co-managing a short-only strategy in a derivative format with national exposure. He also served as the in-house market timing strategist for the entire internal and external network of Bass managers.
+100%
75%
CIO: BRAD LAMENSDORF
50%
25%
0%
-25%
-50%
s
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
s The charts and graphs presented in LMTR’s newsletter are not produced by LMTR. The interpretation of the charts and graphs is only the opinion of LMTR and does not reflect the associated firms’ opinions.
Risk Reward Shows Market in Crapper for 2015 LMTR has consistently referred to four specific pillars that assist us in analyzing and prognosticating the market- sentiment, breadth, liquidity and valuation. Currently all four areas are in the “crapper”, so to speak. In this month’s issue we delve into all four pillars in order to provide our readers with an in depth intermediate-term analysis of what to expect during the first half of 2015.
1 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
2002-07-31 to 2014-11-18 (Log Scale)
S&P 500 Composite Index 1,998
(Updated weekly on Wednesday mornings)
Extremes Generated when Sentiment Reading: Rises above 61.5% = Extreme Optimism Declines below 55.5% = Extreme Pessimism
1,808 1,636
1,998
Average Value Of Indicator At: Optimistic Extremes (down arrows)= 68.2 Pessimistic Extremes (up arrows)= 46.9 Average Spread Between Extremes = 21.5
1,808 1,636
Sentiment must reverse by 10 percentage points to signal an extreme in addition to the above extreme levels being reached.
1,480
1,480
1,339
1,339
1,212
1,212
1,097
1,097
SENTIMENT 992 898
Arrows represent extremes in optimism and pessimism. They do not represent buy and sell signals and can only be known for certain (and added to the chart) in hindsight.
812 Ned Davis Research has created an intricate survey 735 to gauge 2015 expectation of665 S&P500 performance. Source: S&P Dow Jones Indices 25% of managers polled predict 2004 2005 the market will be up2003 0-20% over 75.7 the next 12 months. This suggests 75 73.5 complacency, 70 as there are just too 68.1 67.1 many bulls in the marketplace. 65 60 55
2007
Between 55.5 and 61.5
2008
2009
2010
2011
Extreme Optimism (Bearish) 71.9
70.5
69.6
72.2 69.8
69.5
2012
898 % of Time
2.7
41.9
8.7
20.7
10.0
37.4
2013
812 735 665
2014
2015 75
73.9
73.0
71.6
70.7
70.7
70
68.3
65
63.2
62.3
60 55.2
43.8
51.3
49.9
49.7
47.6
46.6
33.9 33.9
* Above 61.5
54.8
45
30
2006
51.9
35
% Gain/ Annum
58.1
53.5
40
NDR Crowd Sentiment Poll is:
Below 55.5
59.4
50
992
S&P 500 Index Gain/Annum When: 1995-12-01 to 2014-11-18
Extreme Pessimism (Bullish)
50.3 47.2
46.8
42.5
55 53.3
48.2
45 40
40.5 38.0
38.4
37.1 32.5
30.9
50
Source: Ned Davis Research, Inc.
35 2014-11-18 = 72.2
30
NDR Crowd Sentiment Poll S574
© Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/
This indicator, created by Goldman Sachs, was recently highlighted on zerohedge. com. The sentiment gauge is currently 100% bullish, which is extremely negative from a contrarian’s point-of-view.
© Copyright 2015, All Rights Reserved Goldman Sachs. Further distribution prohibited without prior permission.
2 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
The next chart, created by SentimenTrader.com, averages the percentage of respondents who are bearish on stocks. They tracked surveys going back at least 25 years recorded by Investor’s Intelligence, AAII, Market Vane and Consensus. The results show that in the 1,428 weeks of data available, only 27 weeks showed a figure of 25% or less. Clearly, this is a period of uncommon “un-bearishness.” Such readings have historically been present several quarters ahead of major corrections. Thus, market timing is often an exercise in patience. For instance, warning signs for the 2008 crash appeared as early as 2004-05.
© Copyright 2015, All Rights Reserved Investors Intelligence. Further distribution prohibited without prior permission.
The Dumb Money indicator includes the equity-only put/call ratio, the flow in and out of the Rydex series of index mutual funds and small speculators in equity index futures contracts. “Dumb Money” sentiment is presently at a 5-year high, which is extremely negative.
© Copyright 2015, All Rights Reserved www.SentimenTrader.com. Further distribution prohibited without prior permission.
3 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
This chart, produced by Chartcraft and calculated every Wednesday, polls newsletter writers for their current bullish or bearish prognostications. The indicator is currently positioned at a 41.5, which is extremely bearish. Since such a large percentage of the members polled are bullish, we view this as bearish due to its optimistic reading.
© Copyright 2015, All Rights Reserved Chartcraft. Further distribution prohibited without prior permission.
Profitable Long Trades: 94% Gain/Annum: 10.2% Buy-Hold Gain/Annum: 7.4% Latest Signal 10/11/2013 = 15237.11
(S0502)
* Above 69 Between 53 and 69
B B
Gloom & Doom!
BULLS / (BULLS + BEARS) (10-Week Smoothing)
23. 3
7. 6
48. 0
12. 0
28. 7
2009
2008
2007
% of Time
1. 2
Smoothed 1/02/2015 = 78.1%
Extreme Pessimism
Source: Investors Intelligence
2006
2005
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
Extreme Optimism
2004
B
Source: S&P Dow Jones Indices
2003
53 and Below
2002
B
Gain/ Annum
2014
BULLS/(BULLS +BEARS) Is:
B
2013
B
B
20452 16174 12792 10116 8001 6327 5004 3958 3130 2475 1958 1548 1224 968 766 606 479 379
2015
DJIA Gain/Annum When: (9/04/1970 - 1/02/2015)
2012
B
1/02/2015 = 17832.99
B
B
2011
S
2010
S
S
B
B B
S
S
S
B
B
Signals Generated When Ratio: Rises Above 42% or 59% = Buy (whichever comes first) S Declines Below 67% = Sell
S
S
S
B
S
S
S
S
S
S
S = Switch into Commercial Paper Signal Dates: 9/18/1970 - 1/02/2015
1972
84 80 76 72 68 64 60 56 52 48 44 40 36 32
Weekly Data 9/04/1970 - 1/02/2015 (Log Scale)
Dow Jones Industrial Average
1971
The infamous Investor’s Intelligence bulls/ bulls+bears indicator includes data from Investor’s Intelligence-Chartcraft. Marty Zweig, a well-known market participant who is now deceased, tweaked the gauge. The current reading is at a 17-year high, which is a level not seen since the summer before the crash of 1987.
20452 16174 12792 10116 8001 6327 5004 3958 3130 2475 1958 1548 1224 968 766 606 479 379
84 80 76 72 68 64 60 56 52 48 44 40 36 32
Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.
4 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
BREADTH 2161 1937 1737 1557 1396 1251 1122 1006 901 808 724
Daily Data 12/31/1997 - 1/02/2015 (Log Scale)
S&P 500 Index Versus NDR Supply and Demand (1997 - Present)
Source: S&P Dow Jones Indices
Standard & Poor's 500 Index (Log Scale Left)
RS
S&P 500 Index Gain/Annum When: ( 12/31/1981 - 1/02/2015) Gain/ Annum
NDR Vol Demand
LS
% of Time
* Above NDR Vol Supply
11. 8
79. 3
Below NDR Vol Supply
-1. 4
20. 7
NDR Volume Supply ( NDR Volume Demand ( (Log Scale Right)
)
S&P 500 Index Gain/Annum When: ( 12/31/1997 - 1/02/2015)
H
Gain/ Annum
NDR Vol Demand
)
% of Time
* Above NDR Vol Supply
10. 6
65. 6
Below NDR Vol Supply
-6. 2
34. 4
55
3
54 53
4
52 51 50 49 48 47 46
1
NDR Multi-Cap Institutional Equity Series 10-Day Advances/10-Day Declines (Scale Left) Thrust
2.8 2.4 2.0 1.6 1.2 0.8 0.4
45
2
The NDR Volume Demand/Supply spread is used to judge underlying supply and demand trends. Over the last 18 months, the market has continued to hit higher highs. Concurrently the indicator has been very weak, tracing out a series of lower highs. This is a nasty looking negative divergence.
1/02/2015 = 1.27
Oversold
M J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S D
( D A V I S 1 2 5 A ) 19 9 8
19 9 9
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.
The number of negative divergences has piled up, suggesting that investors should be wary in the coming months.
© Copyright 2014, All Rights Reserved www.sentimenTrader. Further distribution prohibited without prior permission.
5 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
Weekly Data 10/01/1965 - 1/02/2015 (Log Scale)
Standard & Poor's 500 Stock Index Median S&P 500 % Returns ... Weeks Later
After Up Arrows
After Down Arrows
All Periods
4
2. 3
-0. 3
0. 9
8
2. 0
-2. 7
1. 5
13
3. 5
-1. 0
2. 2
26
7. 4
-1. 7
4. 4
39
8. 6
3. 6
6. 8
52
12. 0
4. 4
9. 4
S
Results Based on First Signal in 26 Weeks (26 Sell Signals & 17 Buy Signals)
S
S
S
S
S
S
S
S
B
S
S
S
S
S
S
B
B B
B
S S
S
S
S
S
B
S
B B
B
B
B
B
S
S
B
B
B
B
Signals Generated When High-Low Logic Index: Falls Below Lower Bracket = Buy Rises Above Upper Bracket = Sell
Source: S&P Dow Jones Indices
1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
B
SS
2493 1998 1601 1284 1029 824 661 530 424 340 273 219 175 140 113 90 72 58
1966 1967 1968 1969 1970
2493 1998 1601 1284 1029 824 661 530 424 340 273 219 175 140 113 90 72 58
JANUARY 2015
7.6 7.2 6.8 6.4 6.0 5.6 5.2 4.8 4.4 4.0 3.6 3.2 2.8 2.4 2.0 1.6 1.2 0.8 0.4 (S132)
Lesser of NYSE New Highs or New Lows Divided By Issues Traded 10-Week Exponential Smoothing
1/02/2015 = 5.5
Market Out of Gear -- Bearish
Market In Gear -- Bullish
Source: Barron's Newspaper
High-Low Logic Index
7.6 7.2 6.8 6.4 6.0 5.6 5.2 4.8 4.4 4.0 3.6 3.2 2.8 2.4 2.0 1.6 1.2 0.8 0.4
The Hi-Low Logic Index, created by Norman Fosback, is a proprietary indicator that judges the difference between the numbers of 52-week highs and lows in the market. This tool gauges internal weakness, and it is useful for spotting topping or churning. Low readings are bullish, while anything over 4.4 is negative. The current reading of 6.1 is at an intermediate sell signal.
Index Concept Courtesy: Market Logic
Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.
The 52-week lows are beginning to expand. Bob Dickey, the technical analyst at RBC, points out that the number of 52-week lows has been expanding even while the market has been hitting 52-week highs. This is yet another indication that the strength of the indices is being carried by a narrowing list of stocks.
© Copyright 2015, All Rights Reserved StockCharts.com and RBC Wealth Management. Further distribution prohibited without prior permission.
6 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
The Hindenburg Omen is a combination of technical factors that attempt to measure the health of the NYSE and, by extension, the stock market as a whole. The goal of the indicator is to signal increased probability of a stock market crash. It is extremely rare to witness as many Omens occurring together as have been seen over the past 50 days. The last time such a level was reached was prior to the bear market in 2007, and the time before that was prior to the bear market in 2000. This table shows every time (since 1965) that 11 or more Omens were triggered within 50 days of each other.
© Copyright 2015, All Rights Reserved www.sentimenTrader. Further distribution prohibited without prior permission.
7 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
LIQUIDITY 1879 1545 1270 1044 858 706 580 477 392 322 265 218 179 147 121 99 82 67 55
Monthly Data 12/31/1965 - 11/30/2014 (Log Scale)
Standard & Poor's 500 Stock Index S&P 500 Gain/Annum When: Cash/Assets (%): Above 9.5
Gain/ Annum
% of Time
20. 1
15. 0
Between 6.9 and 9.5 * 6.9 and Below
6. 1
34. 4
3. 2
50. 6
NDR uses the following ICI categories to compute the cash/assets ratio: Domestic Equity = Capital Appreciation + Total Return
Source: S&P Dow Jones Indices
1970
1975
1980
1985
1990
1995
200 0
2005
1879 1545 1270 1044 858 706 580 477 392 322 265 218 179 147 121 99 82 67 55
2010
11/30/2014 = 3.3%
12 11
Excessive Cash
Extreme Pessimism
12
Bullish
11
10
10
9
9
8
8
7 6
5.9
7
6.2
4 3 (S430)
6
5.3
5 Bearish
Low Cash
Extreme Optimism
3.8
Source: Investment Company Institute, www.ici.org
Source: Ned Davis Research, Inc.
5
The Stock Mutual Funds’ Cash/ Assets Ratio is hitting a 50+ year low. This leaves little room for any large redemptions that may occur in the marketplace. The ratio dipped as low as 3.5 in 2007, before the 2008 crisis hit. After the crisis, managers moved their cash allocation up to 5.3%. Seeing the ratio back below 2007 levels tells us that liquidity is running at low levels. Managers have scant reserves left to fund any future allocations or redemptions. The tank is empty.
4 3.5
3.1
3
Stock Mutual Funds' Cash/Assets Ratio
Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.
Because margin debt levels have reached record highs, it has become increasingly important to look outside the box for various tools in order to analyze and properly understand the situation. These two charts, produced by crosscurrents.com, are excellent tools for this purpose. Both charts analyze the same data- margin debt and mutual fund cash. Even though the data is manipulated differently in each chart, the output remains the same. Clearly, the marketplace is leveraged to the hilt.
© Copyright 2015, All Rights Reserved www.sentimenTrader. Further distribution prohibited without prior permission.
8 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
Quarterly Data 3/31/1952 - 9/30/2014
Household Financial Assets' (as a % of Disposable Personal Income) Potential Impact On Growth 515 510 505 500 495 490 485 480 475 470 465 460 455 450 445 440 435 430 425 420 415 410 405 400 395 390 385 380 375 370 365 360 355 350 345 340 335 330 325 (DAVIS155)
Gain/ Annum
Fin. Assets/DPI is:
% of Time
Gain/ Annum
Fin. Assets/DPI is: * Above 449%
% of Time
4. 5
16. 0
1. 4
16. 0
Between 348% and 449%
6. 0
66. 4
Between 348% and 449%
1. 7
66. 4
Below 348%
9. 7
17. 6
Below 348%
1. 9
17. 6
* Above 449%
515 510 505 500 495 490 485 480 475 470 465 460 455 450 445 440 435 430 425 420 415 410 405 400 395 390 385 380 375 370 365 360 355 350 345 340 335 330 325
Nonfarm Payrolls Gain/Annum When:
Nominal GDP Gain/Annum When:
% Well Above Income Growth
Source: Department of Commerce Bureau of Labor Statistics Federal Reserve Board
195 5
1960
1965
Well Below Income Growth 1970
1975
1980
1985
1990
1995
2000
2005
2010
Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.
9 W E S T P O R T, C O N N E C T I C U T [email protected]
Household financial assets as a percentage of disposable income have increased sharply since 2008. When analyzing this chart, one can see that current investment levels relative to income are sharply higher than those of 2000 and 2007. Not only are investors taking on more risk, but this data also suggests that the market has become very overowned. Media outlets have popularized the theory that the public has failed to become heavily involved in this market. However, this data proves otherwise.
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
VALUATION 1,995
Monthly Data 1964-03-31 to 2014-12-31 (Log Scale)
Standard & Poor's 500 Index
1,585
1,995 1,585
S&P 500 Gain/Annum When
1,259 1,000
S&P 500 Median P/S is:
794
* Above 1.53
631
Between 0.7 and 1.53
501
Below 0.7
1,259
% Gain/ Annum
% of Time
0.38
18.23
794
6.60
47.96
631
10.22
33.81
501
1,000
398
398
316
316
251
251
200
200
158
158
126
126
100
100
79
79 Source: S&P Dow Jones Indices
1965 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
+2 SD = 1.83
+1 SD = 1.36
Median = 0.89
-1 SD = 0.42
2014-12-31 = 2.07
Source: S&P Capital IQ Compustat
2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3
The S&P500 Median Price/Sales Ratio is the highest in history, trading at over 2. This is in “nosebleed” territory.
S&P 500 Median Price/Sales Ratio DAVIS208
© Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/
This graph exhibits the difference between the high-yield energy market and the general high-yield market. As one can see, spreads have exploded as energy prices have crashed. Since the environment has changed, the creditworthiness of the energy sector has been called into question. With the general spreads trading at 40-year lows, it would not be a reach to see the entire high-yield sector exhibit a similar move relative to government yields.
© Copyright 2015, All Rights Reserved Deutsche Bank. Further distribution prohibited without prior permission.
10 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
JANUARY 2015
EXHIBIT A Along with oil, copper is breaking down and is at a five-year low. This does not bode well, as it shows weak economic activity.
© Copyright 2015, All Rights Reserved Bloomberg. Further distribution prohibited without prior permission.
EXHIBIT B The Emerging Markets Currency Index has basically been in free fall for the past year. This index just breached the low of 2008, and it could easily be the “canary in the coal mine.” The US Dollar hasn’t only been strong against the Euro, Yen and the Aussie. It has also absolutely hammered some of the emerging market currencies in recent months. The obvious one that comes to mind is the Russian Ruble, but many others have also suffered to a lesser extent. The equal-weighted emerging market currency index is currently breaking below its 2002 and 2009 bottoms. This has significantly impacted GEM equities (and ETFs such as EEM), when priced in US Dollars. © Copyright 2015, All Rights Reserved Federal Reserve. Further distribution prohibited without prior permission.
11 W E S T P O R T, C O N N E C T I C U T [email protected]
LAMENSDORF MARKET TIMING REPORT
CONCLUSION Risk is running very high and the momentum indicators are beginning to wane. Commodity prices are in free fall in some cases, and long-term interest rates continue to trend lower. These negative economic developments are deflationary, which augurs poorly for the stock market. Simultaneously, a plethora of indicators are also flashing warning signs. Our subscribers received a notice on December 15, advising them to add 10% to their short position. We are currently at 50% short.
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DISCLAIMER Lamensdorf Market Timing Report is a publication intended to give analytical research to the investment community. Lamensdorf Market Timing Report is not rendering investment advice based on investment portfolios and is not registered as an investment advisor in any jurisdiction. Information included in this report is derived from many sources believed to be reliable but no representation is made that it is accurate or complete, or that errors, if discovered, will be corrected. The authors of this report have not audited the financial statements of the companies discussed and do not represent that they are serving as independent public accountants with respect to them. They have not audited the statements and therefore do not express an opinion on them. The authors have also not conducted a thorough review of the financial statements as defined by standards established by the AICPA. This report is not intended, and shall not constitute, and nothing herein should be construed as, an offer to sell or a solicitation of an offer to buy any securities referred to in this report, or a “buy” or “sell” recommendation. Rather, this research is intended to identify issues portfolio managers should be aware of for them to assess their own opinion of positive or negative potential. The LMTR newsletter is NOT affiliated with any ETF’s Nor any investment Advisors.
W E S T P O R T, C O N N E C T I C U T [email protected] Copyright © 2015 Lamensdorf Market Timing Report.
JANUARY 2015
BIO
Brad Lamensdorf, a seasoned money manager and market strategist, is the CIO of The Lamensdorf Market Timing Report, a newsletter designed to help investors improve performance via market timing by assessing the environment of the stock market using a variety of technical, fundamental and sentiment-oriented tools from powerful independent research firms. Many investors mechanically enter and depart the market without a true “game plan.” Studies have shown that retail investors, in particular, are very poor market timers, tending to invest at or near market peaks and sell at or near market lows. The newsletter is designed to provide risk parameters for both professional and retail investors around the short-term stock market environment, giving subscribers better insight about when to allocate assets into or out of the equity markets. Lamensdorf, a frequent guest commentator and analyst on major business networks including CNBC, CNN and Fox Business News, also serves as a Portfolio Manager and Principal of Ranger Alternative Management LP, a sub-advisor to the Advisor Shares Ranger Equity Bear Exchange Traded Fund (NYSE: HDGE). In this role, he conducts top-down technical evaluations of broader market liquidity, sentiment and breadth to help identify short and intermediate-term market trends, manage exposure and mitigate risk. HDGE was launched in 2011 and is the first and sole actively managed, short-only ETF in existence. Lamensdorf, also has managed investment portfolios for the Hughes family and was principal of Tarpon Partners, managing a long/short fund that was up more than 200% gross over six years. Earlier in his career, he was as an equity trader/market strategist for Taylor and Company, the Bass brothers’ trading arm, co-managing a short-only strategy in a derivative format with national exposure. He also served as the in-house market timing strategist for the entire internal and external network of Bass managers.
