Dec 23, 2013

According to the Stock Trader’s Almanac, the two first years of the Presidential four-year cycle are usually the worst with the last two usually the best. Bear markets usually occur during the first two years. Since 2013 (the first year of this term) was so strong, historical odds for 2014 (the second year) to suffer a correction are pretty high. The chart above overlays four-year cycle lows on the SP 500 going back to 1990. The vertical bars show the last six bottoms occurring in 1990, 1994, 1998, 2002, 2006, and 2010. Earlier four-year patterns (not shown here) occurred in 1970, 1974, 1982, and 1987 (the cycle skipped 1978 while 1987 was a year late). Most of those bottoms took place during the second half of those years (mainly around October), and have coincided with midterm congressional elections. Assuming the four-year pattern repeats, the next bottom is due in 2014 and most likely during the fourth quarter. That carries both good and bad news. While the second year of a presidential term (like 2014) is usually the weakest, the third year (2015) is usually the strongest. If the 2014 presidential cycle holds true, the bad news is that it is likely to experience a noteworthy stock correction; the good news is that correction should lead to a major buying opportunity later in the year.

You might be wondering if every 2^nd year of a presidency is bad shouldn’t I exit stocks now.  My response is no, not yet.  Since we cannot predict the future and seasonality patterns are NOT guaranteed, it is important to wait for a signal before you take action. One thing I like to do is watch how stocks perform in January. Why?  Because a down January stock market serves as a warning – According to the Stock Trader’s Almanac, every down January for the S&P500 since 1950, without exception, preceded a new or extended bear market, flat market, or a 10% correction. 12 bear markets began, and ten continued into second years with poor January’s. When the first month of the year has been down, the rest of the year followed with an average loss of 13.9%. In most years, these declines later provided excellent buying opportunities. For example, 2008 was the worst January on record and preceded the worst bear market since the Great Depression. But 2009 proved to be one of the greatest buying opportunities in American history. For me until we get a signal otherwise, staying course with the primary bull trend makes sense but with a vigilant eye for some sort of a warning flag from the market is sensible.

Merry Christmas and Happy Holidays everyone. This will be my last post for 2013 so I wish everyone a warm, safe and prosperous 2014.

Dec 16, 2013

Last week I posted about the high probability of a bullish end to the year. In an effort to be balanced and show all sides, this week I would like to provide a look at the bearish view. Cullen Roche of the pragmaticcapitalist.com wrote a nice bearish piece that is worth reposting. I know it’s not fashionable to be bearish about anything these days, but I guess I just can’t kill the old risk manager in me. Given this predisposition, I wanted to highlight some potentially bearish indicators that have been popping up lately.  I’ll highlight three such indicators:

1)  The first indicator is from Thomson Reuters.  It shows the S&P 500′s negative-to-positive guidance trend.  According to TR the current reading for Q4 of 11.4 is at its worst level since they began recording the data.  Of course, this sets the bar low for Q4 earnings, but we have to wonder how much this will filter into 2014 earnings where analysts are currently expecting double digit growth.

2)  The second chart is the Investor’s Intelligence bull/bear difference.  This is a sentiment reading that tends to reach extremes when sentiment is heavily skewed in one direction or the other.  The current reading just shy of 40 has not been seen since summer of 2011 before the last significant sell-off.

3)  The last indicator is a potential indication of how stretched the two above indicators have become.  It shows the S&P 500′s year-to-date return broken down by actual earnings growth and multiples expansion. Earnings growth is what the actual growth in earnings while multiples expansion represents what buyers are willing to pay for this stream of earnings.  As sentiment has soared investors have become increasingly willing to pay for a reduced share of EPS growth.

The bottom line here is that from the recent 26.5% return on the SP500, only 17% was due to an increase in corporate profits. The rest is investor enthusiasm and willingness to pay higher prices to own stocks.  I don’t know about you but being the tightwad I am I prefer to not overpay for anything …. Even stocks.

Some food for thought….

Dec 9, 2013

Most human activities have seasonal cycles. The stock market too, has seasonal cycles that have been powerful trends to follow over the long term. You have heard me mention the fact I believe the balance of the year and into at least the first month of next should be good based upon seasonal patterns. What I am going to do this week is provide you the basis for part of that view by looking back at the year-end strength normally seen in stock prices in December, known as “the Santa Claus Rally”. While it is not perfect here is a look at some of the SP500 Santa Claus rally statistics from the last 20 years.

80% (16 years) of the time December 31^st ended higher than they started on December 1^st

20 % (4 years) of the time December 31^st ended lower than they started on December 1^st

The 4 years in which the index ended lower looked like this

1996 – a 1.6% loss

2002 – a 6.1% loss

2005 -  a 0.08% loss

2007 – a 0.74% loss

No one knows for sure but there are many reasons why this year-end rally might happen. Some things that may contribute include 1) during the holidays people spend more money on gifts which boosts corporate earnings 2) year-end optimism 3) fund and institutional money managers do tax loss selling and restructuring of their portfolios for the New Year.

While it is not perfect the historical patterns suggest one should be fully invested in November positioned for a potential rally.  Even in the down years, the worst case scenario was a 6% loss. Even in two of the greatest bear markets, 2000-‘01 and 2008-’09 the markets took a pause from a severe downtrend to hammer out a positive return.

Nov. 25, 2013

Relocating in retirement is brought up often when we’re working with retirees, especially here in California, where the cost of living is much higher than the country average. The article below does a great job of breaking down things to consider from a taxation standpoint. Beyond your federal tax burden (which usually stays the same no matter where you live if you use the standard deduction) there are state, local, sales, property and inheritance tax variables also to wade through. So if you’re thinking about relocating in retirement -- in hopes of enjoying milder weather and lower expenses -- before you make a move, it pays to assess the overall tax burden of your future home. ---------------------------

No matter where you live, your federal taxes will be about the same if you take the standard deduction. But you'd be amazed at how much your state and local tax burden may vary from one location to another.

People planning to retire often use the presence or absence of a state income tax as a litmus test for a retirement destination. That's indeed one factor for retirees to consider. But higher sales and property taxes can more than offset the lack of a state income tax.

Seven states -- Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming -- have no state income tax. Two states -- New Hampshire and Tennessee -- tax only dividend and interest income that exceeds certain limits. But many of the remaining 41 states (and the District of Columbia) that impose an income tax offer generous incentives for retirees. If you qualify for the breaks, moving to one of these retiree-friendly areas could be cheaper – tax-wise -- than relocating to a state with no income tax.

Here are five other key tax factors to consider when comparing states as possible retirement destinations:

Taxes on retirement-plan distributions

Although most states that impose an income tax exempt at least a portion of pension income from taxation, they often treat public and private pensions differently. For instance, some states exclude all federal, military and in-state government pensions from taxation. Other states go even further, exempting all retirement income -- including distributions from IRAs and 401(k) plans.

Some states that tax pension income offer special breaks based on age or income. At the other end of the spectrum, several states are particularly tough on retirees, fully taxing most pensions and other retirement income.

Taxes on Social Security benefits

Depending on your income, you may be required to include up to 85% of your Social Security benefits in your taxable income when filing your federal return. But in recent years, many states have been moving away from taxing Social Security benefits. Fourteen states now tax Social Security benefits to some extent.

Sales taxes

Don't forget to include state and local sales taxes in your personal budget analysis. Some states exempt food and medicine; other states famously have no sales tax at all, while some will tax every dime you spend.

And keep in mind that the sales-tax pain doesn't always stop at the state level. Most states allow cities and counties to assess their own sales taxes.

Property taxes

Property taxes are a major cost factor, particularly for retirees living on a fixed income. The median property tax paid in the U.S. on the median U.S. home value of $185,200 is $1,917, according to the Tax Foundation.

Tax rates vary significantly from state to state and among cities in the same state. But many local jurisdictions offer property tax breaks to full-time residents, some based on age alone and others linked to income.

Check to see how the local jurisdiction generates property-tax bills. There are two key numbers to evaluate: the percentage of a home's assessed value that is subject to tax and the property tax rate. Note that, depending on the tax rate, a home taxed at 100% of its assessed value could have a lower tax bill than a property that is taxed at only 50% of its assessed value. For example, on a $100,000 property taxed at 100% of its assessed value with a 2% tax rate, the property-tax bill would be $2,000. If instead the property is taxed at 50% of its assessed value with a 5% tax rate, the tax bill would be $2,500.

Estate and inheritance taxes

In addition to the federal estate tax (only relevant to estates valued at $5.25 million or more in 2013), some states levy their own estate tax. Many of these taxes kick in at levels lower than the federal threshold. Wealthy retirees need to make sure their estate plans take into account both federal and state estate taxes, which can eat into the amount passed on to heirs.

In a handful of states, heirs have to pony up. States that levy an inheritance tax require heirs to pay taxes on inherited assets.

Nov. 18, 2013

A good market technician will ignore all the fundamental arguments of why an investment should go up or down and focus solely on price. The basis for this is that all “fundamentals” should be built into the price of an investment.  In today’s world where information is available, almost instantaneously in fact, this reasoning has a sound foundation. I have been preaching fundamentals for years and have found out while they do matter in the long run, the short term on-the-other-hand can provide a completely different outcome. Starting with no bias or fundamental beliefs, thus weekend I took a long term look at two US stock indexes, SP500 and the Nasdaq and the results surprised me.

Below is the SP500 index sporting a very nice looking slanted inverse head and shoulders pattern which has a projected target of 2111, which is an increase of 19% from last Friday’s closing price

The NASDAQ has the exact same setup but a projected target of 4433 which is 11% higher from here.

While I am by no means predicting the future, I wanted to take an objective look at “possibilities” for the chance for further upside and if it existed, how much further.  What I discovered is the market has much more upside than I thought possible, so I need to adjust my views accordingly. By no means if we push higher and hit my targets or even go beyond do I believe it will be a straight moon shot there. I would expect to see the normal ebbs and flows of prices with the possibility of a short term correction (10% or less) between now and then.  In spite of the gamut of negative fundamental arguments (most of which I have addressed before), price says we have more upside.