Readings, Announcements

First off, I have a new affiliate which is run by none other then Mebane Faber, author of The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets (must read).

He is now running an ‘AlphaClone’ service which I think we will find of use in future portfolio studies…I will be highlighting some uses of the service in the near future.

AlphaClone – test and apply the stock ideas of the world’s top fund managers.

Also, I’m experimenting with with public chart lists at so you, the reader, can follow charts of portfolio ETFs real-time. The link is here. This service costs money, so in order to keep me adding upgrades like this to the blog, please click on a link or try a free service such as INO’s Free Trading Videos, which does not require a credit card, just an email address. For 4 FREE Videos for INO TV, Click Here


John Mauldin discusses our ‘Uncomfortable Choice‘ (pdf) and predicts another recession in our future:

I could go on and on, but I think you get the point. The time for good choices was a decade ago. It would have been more difficult at the time, so that is not what we did. And now we wake up and are faced with a set of choices, none of them good…

We will be faced with a choice this fall and early next year. If you take away the government spending, the potential for falling back into a recession is quite high, given the underlying weakness in the economy. A few hundred billion for increased and extended unemployment benefits will not be enough to stem the tide. There will be a groundswell for yet another stimulus package. Another 10% of GDP deficit is quite likely for next year…

If we do not maintain high deficits, it is likely we fall back into recession. Yet if we do not control spending, we risk running up a debt that becomes very difficult to finance by conventional means. Monetizing the debt can only work for a few trillion here or there. At some point, the bond market will simply fall apart. And it could happen quickly. Think back to how fast things fell apart in the summer of 2007. When perception of the potential for inflation changes, it changes things fast.


Jim Jubak gives us three ways to invest in water’s future, LNN, TTC, and Jain Irrigation Systems (not traded on a US exchange).


Doug Kass says that Sooner or Later, the Piper Must Be Paid:

My view is that investors will shortly see through the current sugar high and the better-than-expected earnings cycle and will begin to look over the valley at the chronic and secular issues that have emerged from the past cycle and from policy decisions aimed at returning the domestic economy toward self-sustaining growth.

My view is also that there is no free lunch to remedying past indiscretions in leverage, borrowing and lending; in the fullness of time, a price must be paid.


Rosenberg: Equities Overvalued

Is he beating a dead horse? It’s still worth listening to what David Rosenberg has to say. In this morning’s update (pdf) he summarize the market as follows:


Indeed, we caught this in yesterday’s Short View in the FT — even based on so-called normalized earnings, the S&P 500 is overvalued to the tune of 23%. That is indeed the level (sub-850) that would get Mr. Market thinking “well, no, maybe 4.0% growth is too high for the coming year and something more like 2.0% is more appropriate.”

What we have on our hands is a liquidity-induced and technically-strong equity market, and as Bob Farrell has been known to say, these types of rallies quite often “go further than you think” but they do not generally correct by “going sideways”. Even if the recession is over, the market usually is up 20% from the time of the bottom to the end of the downturn. By the time we are up over 50% on the S&P 500, what is “normal” is that we are heading into the second year of recovery (recession being over isn’t even a debate), the economy has shown an ability to expand without the need for government assistance and GDP would have risen nearly 5.0% by now and helped create about 1 million jobs. In other words, after the market has jumped over 50% from the low, we have moved beyond hope and into reality.

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A High Ranked Momentum Portfolio

I have partnered with Zacks Investment Research to start providing some additional screens to my readers of Scott’s Investments. They have agreed to let me share some of the potential of their premium service for free on Scotts Investments, on a continual basis. Since we have already examined in previous posts the potential for momentum strategies either using moving averages, 52 week or all-time highs (for more posts on those strategies click here or here), or returns over the past year, I thought the readership of this blog may prefer a twist. Here’s what I’ve done using the stock screener in Zacks Premium service. I’ve screened for stocks trading within 5% of their 52 week high (in other words, strong momentum) and also having the highest rating from Zacks, a 1, and also having positive earnings surprises the past two quarters. Zacks ranks stocks on a scale of 1-5, with 1 being a ‘strong buy’ and 5 being ‘strong sell’. How well has there rating system performed? By identifying stocks with upward revisions in earnings estimates, the Zacks #1 Rank List has generated an annual average return of 27% since 1988. The list of returns is below.

The one blemish is 2008. How can an investor avoid a drawdown like that? One idea I had was to only purchase the top rated stocks if the underlying index (S&P 500) was trading above a long term moving average such as the 200 day moving average. This could potentially reduce some upside gains, but could also reduce drawdowns.

Following the Zacks Rank has proved to be very profitable. Since 1988, a portfolio constructed of Zacks #1 Rank stocks has generated an average annual return of 27%. Comparatively, the S&P 500 has only returned 9% over the same period.

Zacks Rank – Annual Returns

Zacks Rank Performance Summary – Monthly Rebalancing
Year #1 Rank #2 Rank #3 Rank #4 Rank #5 Rank S&P 500
1988 37.46% 29.69% 20.79% 19.13% 18.39% 16.20%
1989 36.09% 26.84% 15.85% 9.55% -5.10% 31.70%
1990 -2.97% -13.69% -21.32% -23.85% -34.71% -3.10%
1991 79.79% 56.80% 45.98% 36.60% 34.35% 30.40%
1992 40.65% 29.63% 18.04% 12.24% 17.31% 7.51%
1993 44.41% 26.86% 14.78% 8.59% 9.54% 10.07%
1994 14.34% 5.15% -3.56% -11.14% -10.90% 0.59%
1995 54.99% 46.84% 30.63% 17.35% 9.11% 36.31%
1996 40.93% 28.60% 16.07% 7.71% 8.02% 22.36%
1997 43.91% 33.87% 22.93% 10.17% 3.05% 33.25%
1998 19.52% 12.92% -3.47% -8.77% -14.84% 28.57%
1999 45.92% 35.53% 31.02% 18.46% 17.69% 21.03%
2000 14.31% -1.47% -17.75% -19.52% -3.95% -9.10%
2001 24.27% 11.70% 14.09% 17.93% 20.20% -11.88%
2002 1.22% -14.51% -19.39% -23.50% -17.59% -22.10%
2003 74.74% 71.02% 66.69% 57.34% 55.99% 28.69%
2004 28.79% 23.26% 18.51% 11.92% 16.63% 10.87%
2005 17.97% 12.01% 6.54% -1.31% -5.08% 4.90%
2006 23.69% 26.63% 18.09% 15.17% 16.88% 15.80%
2007 19.91% 5.42% -4.34% -13.06% -23.90% 5.49%
-41.13% -43.48% -48.70% -45.75% -50.95% -37.00%
2009* 31.52% 39.08% 35.37% 23.24% 23.73% 3.16%
Annual Average 27.39% 17.94% 8.84% 2.95% 0.92% 8.61%

Here’s my screen results below. It is top rated stocks with high momentum. There are a lot of results primarily because the market as a whole is trading on strong momentum so I would expect in future months this link may shrink. The average investor would not need to hold 45 stocks, but it may be possible to dwindle this list by adding additional search criteria and/or simply picking a small basket of stocks from within the list. In addition, one could overweight stocks in sectors that have the strongest momentum, or only purchase stocks in the strongest sectors (such as the list compiled here, which I update monthly)

I will be periodically updating this screen on approximately a weekly basis, however only with a Zacks Premium membership can you do this screen real-time in addition to virtually any number of any other screens and it is free to try:

size:78%;">Company Name size:78%;">Ticker size:78%;"> Zacks Rank size:78%;">Last EPS Surprise (%) size:78%;">Current Price size:78%;">Price as % of 52 Week High
size:78%;">Previous EPS Surprise (%)
size:85%;">CARDTRONICS INC size:85%;">CATM size:85%;">1 size:85%;">240 size:85%;">8.05 size:85%;">95.37 size:85%;">350
size:85%;">COCA-COLA ENTRP size:85%;">CCE size:85%;">1 size:85%;">31.37 size:85%;">20.9 size:85%;">100 size:85%;">300
size:85%;">EXPEDIA INC size:85%;">EXPE size:85%;">1 size:85%;">25.93 size:85%;">22.77 size:85%;">99.35 size:85%;">33.33
size:85%;">SOURCEFIRE INC size:85%;">FIRE size:85%;">1 size:85%;">200 size:85%;">19.35 size:85%;">95.5 size:85%;">42.86
size:85%;">FIRST LONG IS size:85%;">FLIC size:85%;">1 size:85%;">146.34 size:85%;">29.5 size:85%;">99.91 size:85%;">35
size:85%;">GYMBOREE CORP size:85%;">GYMB size:85%;">1 size:85%;">7.89 size:85%;">45.14 size:85%;">98.6 size:85%;">4.23
size:85%;">CENTRAL GARDEN size:85%;">CENT size:85%;">1 size:85%;">51.72 size:85%;">13.03 size:85%;">96.94 size:85%;">51.61
size:85%;">CLEARWATER PAPR size:85%;">CLW size:85%;">1 size:85%;">83.13 size:85%;">47.59 size:85%;">98.79 size:85%;">240
size:85%;">CORE-MARK HLDG size:85%;">CORE size:85%;">1 size:85%;">80.95 size:85%;">29.43 size:85%;">98.06 size:85%;">52.94
size:85%;">COMP SCIENCE size:85%;">CSC size:85%;">1 size:85%;">45.1 size:85%;">49.76 size:85%;">99.5 size:85%;">3.4
size:85%;">COGNIZANT TECH size:85%;">CTSH size:85%;">1 size:85%;">27.03 size:85%;">35.44 size:85%;">97.6 size:85%;">2.7
size:85%;">DELUXE CORP size:85%;">DLX size:85%;">1 size:85%;">3.64 size:85%;">17.25 size:85%;">98.27 size:85%;">47.37
size:85%;">DR PEPPER SNAPL size:85%;">DPS size:85%;">1 size:85%;">24 size:85%;">26.86 size:85%;">95.25 size:85%;">23.33
size:85%;">EMERGENCY MEDIC size:85%;">EMS size:85%;">1 size:85%;">28.85 size:85%;">46.16 size:85%;">100 size:85%;">14.29
size:85%;">EVERCORE PARTNR size:85%;">EVR size:85%;">1 size:85%;">100 size:85%;">25.3 size:85%;">100 size:85%;">400
size:85%;">PRICELINE.COM size:85%;">PCLN size:85%;">1 size:85%;">11.73 size:85%;">156.36 size:85%;">97.55 size:85%;">17.81
size:85%;">PATNI COMPUTER size:85%;">PTI size:85%;">1 size:85%;">60.71 size:85%;">17.41 size:85%;">99.65 size:85%;">21.05
size:85%;">PERFECT WORLD size:85%;">PWRD size:85%;">1 size:85%;">27.87 size:85%;">38.73 size:85%;">95.77 size:85%;">23.4
size:85%;">ROCK-TENN CO size:85%;">RKT size:85%;">1 size:85%;">61.8 size:85%;">51.58 size:85%;">100 size:85%;">3.03
size:85%;">ROSS STORES size:85%;">ROST size:85%;">1 size:85%;">N/A size:85%;">46.67 size:85%;">97.46 size:85%;">N/A
size:85%;">STANDARD MOTOR size:85%;">SMP size:85%;">1 size:85%;">92.86 size:85%;">12.9 size:85%;">100 size:85%;">16.67
size:85%;">SXC HEALTH SOL size:85%;">SXCI size:85%;">1 size:85%;">152.38 size:85%;">43.7 size:85%;">100 size:85%;">123.53
size:85%;">TREEHOUSE FOODS size:85%;">THS size:85%;">1 size:85%;">38.89 size:85%;">37.8 size:85%;">96.93 size:85%;">13.89
size:85%;">TRANSMONTN PTNR size:85%;">TLP size:85%;">1 size:85%;">31.11 size:85%;">27.18 size:85%;">100 size:85%;">14.63
size:85%;">WORLD FUEL SVCS size:85%;">INT size:85%;">1 size:85%;">25.64 size:85%;">46.16 size:85%;">95.5 size:85%;">16.46
size:85%;">IMPAX LABORATRS size:85%;">IPXL size:85%;">1 size:85%;">66.67 size:85%;">7.77 size:85%;">100 size:85%;">171.43
size:85%;">JO-ANN STORES A size:85%;">JAS size:85%;">1 size:85%;">66.67 size:85%;">27.84 size:85%;">95.22 size:85%;">172.73
size:85%;">JOHN BEAN TECH size:85%;">JBT size:85%;">1 size:85%;">54.17 size:85%;">17.65 size:85%;">95.24 size:85%;">46.15
size:85%;">J CREW GROUP size:85%;">JCG size:85%;">1 size:85%;">209.09 size:85%;">32.76 size:85%;">100 size:85%;">25.93
size:85%;">J&J SNACK FOODS size:85%;">JJSF size:85%;">1 size:85%;">23.08 size:85%;">44.22 size:85%;">100 size:85%;">56
size:85%;">LIFE TECHNOLOGS size:85%;">LIFE size:85%;">1 size:85%;">19.7 size:85%;">45.45 size:85%;">96.36 size:85%;">19.64
size:85%;">STARLIMS TECH size:85%;">LIMS size:85%;">1 size:85%;">233.33 size:85%;">8.7999 size:85%;">97.72 size:85%;">300
size:85%;">LENDER PROC DVC size:85%;">LPS size:85%;">1 size:85%;">23.88 size:85%;">35.3 size:85%;">100 size:85%;">4.92
size:85%;">LUBRIZOL CORP size:85%;">LZ size:85%;">1 size:85%;">N/A size:85%;">62.49 size:85%;">100 size:85%;">N/A
size:85%;">NEWMARKET CORP size:85%;">NEU size:85%;">1 size:85%;">57.23 size:85%;">84.65 size:85%;">98.24 size:85%;">70.91
size:85%;">INERGY HLDGS LP size:85%;">NRGP size:85%;">1 size:85%;">100 size:85%;">44.34 size:85%;">95.84 size:85%;">43.06
size:85%;">NBTY INC size:85%;">NTY size:85%;">1 size:85%;">78 size:85%;">37.1 size:85%;">97.86 size:85%;">12.12
size:85%;">NVR INC size:85%;">NVR size:85%;">1 size:85%;">67.24 size:85%;">690.95 size:85%;">100 size:85%;">30.74
size:85%;">WESTERN DIGITAL size:85%;">WDC size:85%;">1 size:85%;">181.48 size:85%;">34.81 size:85%;">100 size:85%;">172.73
size:85%;">WRIGHT EXPRESS size:85%;">WXS size:85%;">1 size:85%;">42.5 size:85%;">30.6 size:85%;">99.96 size:85%;">61.54
size:85%;">TNS INC size:85%;">TNS size:85%;">1 size:85%;">27.27 size:85%;">27.16 size:85%;">97.98 size:85%;">70.59
size:85%;">TRIQUINT SEMICO size:85%;">TQNT size:85%;">1 size:85%;">500 size:85%;">7.24 size:85%;">97.37 size:85%;">9.09
size:85%;">TUPPERWARE BRND size:85%;">TUP size:85%;">1 size:85%;">40.98 size:85%;">37.4 size:85%;">98.57 size:85%;">32.35
size:85%;">UNIVL FST PRODS size:85%;">UFPI size:85%;">1 size:85%;">93.02 size:85%;">43.79 size:85%;">95.63 size:85%;">71.43
size:85%;">VALSPAR CORP size:85%;">VAL size:85%;">1 size:85%;">26.42 size:85%;">27 size:85%;">98.13 size:85%;">2.86
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The Brainwashing of the American Investor?

I’ve cited Andrew Horowitz of The Disciplined Investor on a number of occasions. He has a great podcast (free) available on ITunes. He is also author of The Disciplined Investor: Essential Strategies for Success (another book on my list – has gotten good reviews on Amazon).

His guest for this week was Steve Selengut, author of The Brainwashing of the American Investor: The book that Wall Street does not want you to read!

On the Podcast he listed demons investors need to excise before becoming long term investors and I thought they were noteworthy to share and ponder:

1) The obsession with the calendar year when looking at returns, etc.

2) The focus on market value. He focuses on what he calls ‘working capital’. Not quite clear on this, I think he was stating to focus less on cost basis of your stock.

3) Comparing portfolio performance to a benchmark like the S&P 500

4) The idea that the Wall Street oracles and talking heads are what you need to be listening to.

5) Product addiction. Everything has to be in the form of a some sort of a product (as opposed to just stocks and bonds)

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Trading, and Profiting, Without Access to News

Would it be possible to trade the market without access to any news? Yes, if you relied on technical analysis. In this video, Adam Hewison gives some potential price targets on the S&P 500. He also shows in depth how Market Club’s Trade Triangles profited quite nicely on the S&P 500 over the past couple of years (similar to what I posted a couple of days ago).

Folks, this service is legit. It will help take the emotion out of your investment decisions. It is not free, but if you want to become a better investor and trader then I suggest you at least give it a try. At the very least, you can enter your email address to receive free trading videos with no obligation. I wouldn’t be affiliated with INO if I didn’t think they had something to offer. I personally use the service and will soon begin monitoring a small basket of securities using the Trade Triangle Technology on Scott’s Investments.

There is no need to register for this video and you can watch it with my compliments. Enjoy and don’t forget to leave your feedback.

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The AAII Stock Screens

CXO Advisory Group took a look at the stock screens available at The American Association of Individual Investors website. The screens are available if you join the association and pay an annual due (relatively inexpensive). CXOAG finds that trading frictions could significantly reduce performance of the strategies. In addition, the strategies, in general, will be affected by the overall stock market performance.

Two thoughts: I wonder if there is a way to reduce frictions and also add a basic qualifier to some of their strategies to limit exposure (such as the 200 day moving average).

Question for the reader: Would you find it worthwhile for me to track some of the AAII portfolios on this blog?

Here is CXOAG’s full take:

A reader asked:

“The American Association of Individual Investors (AAII) has a lot of strategies they have been paper-trading over the the last 11 years at AAII StockScreens. Have you ever done an evaluation of those performance results? It seem like every strategy builds upon a well-known investing book or otherwise publicized strategy from the last 40 years.”

According to the AAII StockScreens “GettingStarted” introduction, the purpose of these screens “is to provide…access to a wide range of investment approaches. Some approaches follow the methods of well-know professionals, and allow you to implement their ‘style of investing,’ while other approaches implement time-tested techniques used to identify attractive stocks. These approaches run the full spectrum, from those that are value-based to those that focus primarily on growth. Some approaches are geared toward large-company stocks, while others uncover micro-sized firms. Most fall somewhere in the middle.” AAII provides descriptions, characteristics and performance statistics for the screens. What can investors/traders learn from this collection of investment approaches? Using monthly performance statistics for the 59 screening approaches and for various potential benchmarks during the 139 months spanning January 1998 through July 2009 (available from AAII via download), we find that:

AAII cautions that: “Unless otherwise stated, figures do not include dividends or transactions costs.” Since many of the screening approaches involve high monthly turnover of holdings, trading frictions (transaction costs plus bid-ask spread) can materially reduce net returns. Screening approaches that generate a relatively large number of holdings exacerbate the impact of transaction costs because the typical individual investor could take only small positions in each, such that transaction costs would represent a noticeable percentage of buys and sells. Screens that focus on small or micro capitalization stocks tend to further exacerbate the impact of trading frictions, because bid-ask spreads tend to increase as a percentage of stock price as firm capitalization decreases.

We therefore make the following assumptions to approximate the impact of trading frictions on returns for the screening approaches:

  1. Round-trip trading friction for the typical trade specified by the screening approaches is 1.0%. This assumption may be harsh (generous) for approaches that involve just a few relatively liquid stocks (many small stocks). Actual trading frictions depend on stock-specific bid-ask spreads, actual broker transaction fees and actual position sizes.
  2. Monthly portfolio turnover is the average monthly turnover reported in the AAII-generated performance statistics. Actual monthly turnover could vary considerably from month to month.

So, for example, if average monthly turnover for a screen is 50%, we debit the monthly return for that screen by 50% times 1.0%, or 0.5%. High turnover screens therefore suffer higher trading frictions than low turnover screens. Average monthly turnover ranges from 7% to 100% across all 59 screens.

We ignore dividends for lack of information. Some strategies involve stocks paying material dividends, and others do not. Portfolio turnover could disrupt qualification for dividends.

We also ignore the tax implications of portfolio turnover. Many of the screens considered would generate predominantly short-term capital gains/losses.

The following chart compares the distributions of average monthly returns for all 59 screening approaches over the entire sample period, before and after debiting for trading frictions. Points of interest are:

  • Incorporation of trading frictions moves the distribution to the left (of course), sharpens the peak and suppresses the right tail. Some of the highest-performing screens also have high average monthly turnovers.
    • The aggregate (equally-weighted) average monthly return for all 59 screens is 1.26% (0.86%) before (after) incorporation of trading frictions.
    • The maximum average monthly return among all 59 screens is 2.79% (2.22%) before (after) incorporation of trading frictions.
  • While both distributions exhibit positive skewness (right tail longer than left tail), they have shapes something like bell curves. One thing to consider is whether luck could account for the positions and spreads of the distributions. It is plausible that some or all of the aggregate outperformance implied by the distributions is a result of data mining bias. How many poorly performing screens have been “swept under the rug” in the processes of: (1) developing each of these screens, and (2) selecting this set of screens for consideration?

How sensitive is aggregate average monthly return of the 59 screens to the 1.0% trading friction assumption?

The next chart shows the variation of the aggregate average monthly return for all 59 screens with assumed round-trip trading friction. Included for reference (from the AAII data) are the average monthly returns over the sample period for all U.S.-listed stocks, the S&P Midcap 400 and the S&P Smallcap 600. The chart illustrates the importance of managing trading friction when using strategies that drive substantial portfolio turnover.

Do the best-performing screens exhibit stable performance over time?

The following two charts depict the monthly returns during January 1998 through July 2009 for the two screening approaches with the highest average monthly returns after including approximated trading frictions. The two screens are:

  1. O’Neil’s CAN SLIM, with average monthly return 2.22% (2.79% without trading friction).
  2. O’Shaughnessy Tiny Titans, with average monthly return 2.17% (2.59% without trading friction).

Each chart includes a best-fit linear trend line as a rough measure of the trend in monthly returns over the sample period, with trend indications as follows:

The monthly return trend line for the O’Neil CAN SLIM screen is flat, indicating steady performance. However, the performance record of this screen has one extremely influential month (June 2009). Without this one month, the average monthly return for the screen is 1.74% instead of 2.22%, and the return trend line slopes noticeably down over time.

The monthly return trend line for the O’Shaughnessy Tiny Titans screen trends noticeably down over time. The name of the screen suggests high trading frictions (bid-ask spreads). This screen has a drawdown of almost 50% during the three months September 2008 through November 2008.

A downtrending monthly return could indicate that:

  • The early part of the sample period contains data mining bias (good luck) due to discovery and selection via testing of many screens on the same data set.
  • Increasing use of the screen after discovery has depressed its outperformance as more and more investors/traders share its advantage. In other words, the market has adapted to the screen.
  • General market conditions have otherwise changed such that what worked earlier in the sample period does not work later.

It is difficult to test the first two of these potential explanations directly because the screens were likely discovered and promoted at different times. We can test the third one by looking at aggregate data.

The final chart shows the after-trading friction average of the monthly returns by month for all 59 screens, equally weighted, over the entire sample period. The trend line indicates that, on average, the effectiveness of the screens has declined over this time, with late 2008 through early 2009 perhaps decisive.

The trend line for the monthly return of all U.S.-listed stocks is very similar to this trend line, suggesting that general market conditions are decisive in the performance decline for the screens.

In summary, as illustrated using AAII’s StockScreens performance data, investors should consider especially the impact of portfolio turnover (trading frictions) and performance under different market conditions when evaluating stock screens.

The ETF Trend Following Playbook.

Next up on my reading list might be from Tom Lydon, The ETF Trend Following Playbook: Profiting from Trends in Bull or Bear Markets with Exchange Traded Funds

Is anyone reading the book? I’d be curious as to a first take. From the backcover:

Millions of investors have been left to pick up the pieces and figure out where it all went wrong over the last couple of years. They’re furious with the “professionals,” and determined to regain control of their own investments. This book gives them the easy-to-use tools they need to do just that: simple tools based on techniques that have earned a 26.1% positive return over the past decade, while the S+P 500 was plummeting by 37.4%. For the first time, Thomas F. Lydon, Jr. brings together two of this generation’s most well-proven investment approaches: low-cost, flexible ETFs and powerful trend following strategies, along with basic technical analysis tools. You’ll learn how to quickly identify markets that are about to plummet, get out of the way, and how to identify markets that are headed up, and capture all the profit they’re getting ready to deliver. Lydon shows how to systematically remove the emotion from investing, and replace it with simple mathematical tools that work consistently well: tools like the 200-day and 50-day moving average, which are easy enough for any investor to utilize. By the time they finish this book, investors will know how to make a plan that works, stick to that plan, and reap the rewards, even as others are mourning their lost assets.

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Rosenberg Gives a Contrarian Take

A short update (pdf) from David Rosenberg with a contrarian take on some of the recent news in the market:

Yesterday, we witnessed some pretty fascinating things that were reported on bubble-vision. We were told how the equity market was rallying on the news that (1) Bernanke was reappointed; (2) the first increase (0.7% MoM seasonally adjusted terms) in the Case-Shiller home price index since May 2006 in June, and; (3) the seven-point jump in the Conference Board’s consumer confidence index in August, to 54.1 — taking it all the way back to where it was …. in May! Uncork the champagne.

1. Bernanke reappointed
We really fail to see how it could possibly be that the same central bank official, who, over a span of a decade, presided over two massive bubbles and their busts, can be viewed as being a positive force for the markets. Perhaps there is some solace in knowing that the same person who created this awesome and complex $2 trillion Fed balance sheet will be around to dismantle the largesse since he’s probably the only one that knows how.

2. The first monthly increase in the Case-Shiller home price index
As for the second point, there is a difference between a trendline and the noise around that trendline. Home prices are down a massive 31% from their peak and have been in a vertical-down pattern for nearly three years. Perhaps a respite is in order, but with the true underlying unsold inventory near 12 months’ supply, which is double what would typify a balanced housing market, it would seem like wishful thinking that we have suddenly achieved a fundamental low in residential real estate values (especially at the high end).

3. The seven-point jump in consumer confidence in August
With regard to point number three, we welcome any rise in consumer confidence but an honest appraisal of the data would show that 54.1 is still a very depressed level. In fact, the average index level during recessions is 73.0 — August’s reading was nearly 20 points below that. So, if the recession is indeed over and done, somebody forgot to tell this 70% chunk of GDP otherwise known as the consumer.
Now, what about Mr. Market, who is still in a most joyful mood. Well, the normal level of consumer confidence in the month in which the S&P 500 is up 55% from an oversold bear market low is 100. So, the stock market is behaving as if consumer confidence is twice the level it really is.

Look — nobody ever said Mr. Market was rational. Why, look at October 2007 when the market was trying to come up with new and exciting definitions of global liquidity. Little did Mr. Market realize that we were within two months of the onset of the worst global economic downturn in 70 years.

What caught our eye in that Conference Board survey was the investor sentiment segment. Those bullish on equities rose 8 percentage points to 36.5% and the bear-share slipped to 26.4% from 34.0%. That 10 percentage point gap in favor of the bulls is now the largest since … October 2007. Something to ponder about whether or not you share our contrarian streak.

17 Moneymaking Candlestick Formations You Can Use Today

Most investors have used Candlestick formations when charting a stock. However, they can be a more powerful trading tool then many of us realize.

In this new video Adam Hewison teaches a bit about Candlesticks and he gives away his most requested course, “17 Moneymaking Candlestick Formations You Can Use Today”.

MarketClub is making available to you a very special PDF booklet on Japanese candlestick charting. The title of the booklet is “17 Moneymaking Candlestick Formations You Can Use Today”.

So enjoy the free video.

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Market Outlook
Week Ahead Magazine For August 17, 2014
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The Fallacy of Cash on the Sidelines

Good post from Trader Mark summarizing the fallacy of ‘cash on the sidelines’:

Below is a guest post from a money manager from the Great White North, who maintains the blog: Gestalt. No, I had never heard of that word either. In conversations with him he tends to use 3 and 4 syllable words found mostly on the SAT test (if at all), but thankfully as he is an avid contributor to our comments section he uses more simple 1 and 2 syllable wording that us Americans can handle. Please note, Canadians also misspell “center”, as do the British. They also like curling – please don’t let those shortcomings bias you as an American reader.

In this piece “Gestalt” argues that the commonly tossed around “massive amounts of money on the sidelines” just waiting to come into the market is a fallacy. At least if you include the money from traditional places that used to support the stock market. But it’s a new day and age in our subsidized economy / stock market. If instead you include the massive influx of money our Federal Reserve is pruning from it’s money trees and pumping into the banks (up from $90B to $900B in 18 months) – than we are talking about a whole ‘nother animal. Per some Bloomberg readings much of the money the Fed is handing to the banks (at 0 to 0.25% rates) is being turned around by the banks to buy US Treasuries. Do you see the shell game going on? Aside from the shell game portion this is basically a handout to the oligarchs – take from the people at 0 to 0.25% and invest at any Treasury over a 1 year note and make money. Magic. Another portion of this money is most certainly being used to speculate in the stock markets – many of our largest banks are now seeing a surge in “trading gains” the past 2 quarters, and I am not just talking about Goldman Sachs (GS) – check out Bank of America (BAC) or JPMorgan (JPM). It is good to be a financial oligarch – our feudal system is working like a charm.

Using that money the Fed is handing out to actually create loans? (chuckle) That is so old school… forget it. Why bother lending to high risk Americans when you can (a) buy “no risk” US Treasuries that certainly yield far more than 0 to 0.25% and get money for free and (b) speculate in the stock market with essentially free money.

Below are Gestalt’s views….

Merrill Lynch posted the results of its most recent Survey of Fund Managers for August this morning. The survey covered 204 fund managers in 80 countries who control $554 billion in assets, and the data dispels the myth of excess cash on the sidelines.

Barry Ritholtz at summarized the findings. Note that U.S. markets peaked in September 2007:

Cash balances plunge to 3.5%, lowest since July’07;

Highest equity allocation (34% from 7%) since Oct’07;

Bond allocation (-28% from -12%) lowest since April’07;

• Tech (28%) is the most favored sector everywhere.

Barry concluded, ‘While I keep hearing about cash on the sidelines, the professionals seem to be “All In.”‘

As an addendum to the Merrill Lynch survey (full release linked below), please see the attached chart of US commercial paper and Money Market assets. The chart was originally posted by using US Federal Reserve data. Annotations in red are my own.

Click image for larger version

Conclusion: Investable Money Market fund assets are no higher than at the peak of markets in September 2007. Retail holdings of MM funds have now retraced to the levels of Sept 2007. The spike in Institutional MM assets from Sept 2007 is exactly equivalent to the drop in CP assets over the same time period, offering compelling evidence that companies have simply moved treasury working capital out of CP and into IMM funds. This is NOT parked investment capital, and is unlikely to find its way into stocks.

Investors appear to be exactly as fully invested as they were in September 2007, at the peak of the bull market. This dovetails nicely with the Merrill survey.

That said, the Primary Dealers are swimming in reserves. Liquidity parked in Securities Open Market Accounts at Primary Dealers is also back at September 2007 levels (See PD Liquidity Chart). If the money-centre banks decided to leverage these reserves into the system, they could single-handedly push stocks, commodities and corporate bonds higher. It remains to be seen whether banks will hold these as reserves against ‘Level III’ assets on their balance sheets or put it to work speculating.

Click image for larger version

Original Press Release