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Odds That Fed Will Provide QEIII Are Fading Fast!

  • Written by Syndicated Publisher No Comments Comments
    August 17, 2012

    Markets are still hoping for, and expecting, the Fed to provide another round of stimulus, as it did in each of the economic slowdowns of the last two summers.

    But the Fed took no action at any of its meetings since the economy began slowing again in the first quarter, slid even further in the 2nd quarter, and as the eurozone crisis worsened dramatically in the 3rd quarter.

    It was particularly surprising that it took no action at its last meeting when global fears had risen considerably.

    But as I kept pointing out, the Fed (and European central bankers) have only responded in the past when markets took the lead by first plunging on the concerns. The Fed waited in the summer of 2010 until the S&P 500 was down 16%, and waited last summer until it was down 21%, before taking action.

    This year the Fed again only promised it is monitoring the situation and is ready to take action ‘if needed’.

    The markets and financial media keep interpreting that to mean the Fed will push the button within days. And when it doesn’t,  they merely push the expectation for dramatic action out to the Fed’s next meeting, now expecting action at the September 13 meeting.

    However, in its statements after its most recent FOMC meetings the Fed acknowledged the worsening economic slowdown, and said it was particularly concerned about the employment situation and consumer spending. But obviously neither was dismal enough to have it feel that action was needed. So it did nothing.

    (Actually, I believe it did nothing because the S&P 500 was only down 7% on the concerns. And it spiked back up just on the hope the Fed would soon act. Why provide action if just words have the same effect?).

    But let’s take the Fed at its word and look at what it says are its areas of concern, employment and consumer spending.

    The latest employment report two weeks ago was a big upside surprise, showing 163,000 new jobs were created in July, after three months of sub-100,000 numbers.

    The four-week moving average of unemployment claims, has declined to well under the 400,000 level that is considered the dividing line between worsening and improving employment. This morning it was reported that new weekly claims rose by 2,000 to 366,000 last week. But the more important 4-week m.a. of claims fell by 5,500 to 363,750.

    On consumer spending, it was reported Tuesday that retail sales were up an unexpected 0.8% in July, after declining 0.7% in June.

    Economic reports in other areas that have been so dismal and negative for several months have also turned mixed. So far this week it’s been reported that Industrial Production was up 0.6% in July after rising only 0.1% in May and June. This morning it was reported that new housing starts were down 1.1% in July, but permits for future starts were up 6.8%.

    So, if the Fed did not think further action on stimulus was warranted at its last meeting when there were no rays of sunshine poking through the gloom, how could it possibly be expected to think more stimulus is needed now, with fairly dramatic improvements showing up in employment, retail sales, and housing?

    (That is, as long as the S&P 500 doesn’t decline by double-digits, which I believe is where the Fed has been getting its actual guidance the last few years).

    A Big Thank-You To:

    Alan Newman, editor of Alan M. Newman’s Stock Market Crosscurrents (www.CROSS-CURRENTS.NET).

    Here’s what Alan (who coined the phrase ‘Dead Zone’ for the market’s unfavorable season), had to say about the market’s annual seasonality:

    “Since 1990 and at least twice a year, we have paid homage to a system that has beaten the pants off every professional investor for six decades plus. Yale Hirsch and Norman Fosback discovered the remarkable effects of the market’s good and bad seasons, and our colleague Sy Harding took the knowledge one giant step further, devising the most incredible money making system in history. Our job has been to ensure the phenomenon gets the recognition it deserves. Despite the coinage of the aphorism “Sell in May and Go Away” many years back, the market’s bad season still gets little or no respect. . . . .

    Not only is there some mighty decent logic behind seasonality, its persistence for so long has passed all statistical conditions for proof. Seasonality works. The months from May through October have been home to catastrophe at worst and lost opportunity at best and are net losers back to 1950. The hopelessness of the market’s poor season has clearly been a factor in the secular bear market that commenced with the bursting tech bubble in March 2000. The dichotomy is startling. . . . Not only does the seasonal aspect remain visible all these years later [since 1950], the dichotomy between the two seasons  is becoming more pronounced as time passes. . . . While we have passed the halfway point of the Market’s Dead Zone for this year, the worst is yet to come.”

    But Most Investors & The Media Still Don’t Get It!

    As Alan Newman noted, in spite of the very long proven record of seasonality, the phenomenon still gets little or no respect.

    I recently wrote an article about seasonality, which appeared in a number of respected financial publications and websites. I included the findings of several independent academic studies that found the phenomenon existed in markets in the U.K. as far back as the 1700’s; how it held true in 36 of 37 countries at least back to 1970 when their data began; and in 48 of the 49 industry sectors in the U.S.

    I quoted the studies which said that “The effect is robust over time, economically significant, unlikely to be caused by data-mining, and not related to taking excess risk.”

    And yet on the websites that allow comments, the comments were almost all along the lines of these:

    “Just look how the market went up this week, and we’re in the so-called unfavorable season?”

    “Sure, the market has been down the last couple of summers, but that was due to money velocity not seasonality.”

    “Something as simple as seasonality may have worked in the old days but can’t possibly work when the market is controlled by the Fed.”

    The facts are just totally ignored. As Alan Newman noted, seasonality has actually been more pronounced since 2000.

    Just this morning on CNBC Joe Kernan and a Wall Street trader agreed that Sell in May is just a silly slogan.

    Our Seasonal Timing Strategy (STS) since introduced 13 years ago. Includes dividends and interest on cash.

    YEAR

    NASDAQ

    S&P 500

    DJIA

    STS using
    DJIA Index Fund

    1999 (Bull Market) + 85.6%

    +20.1%

    +26.8%

    + 35.1%

    2000 (Bear)

    –39.3%

    - 9.1%

    - 4.6%

    + 2.1%

    2001 (Bear)

    –21.1%

    - 11.9%

    - 5.3%

    + 11.1%

    2002 (Bear)

    – 31.5%

    - 22.1%

    - 14.7%

    + 3.1%

    2003 (Bull)

    + 50.0%

    + 28.7%

    + 27.6%

    + 11.2%

    2004 (Bull)

    + 8.6%

    + 10.9%

    + 5.5%

    + 8.1%

    2005 (Bull)

    + 1.4%

    + 4.8%

    + 1.6%

    + 0.6%

    2006 (Bull)

    + 9.5%

    + 15.4%

    + 18.5%

    + 14.2%

    2007 (Bull)

    + 9.8%

    + 5.4%

    + 8.6%

    + 11.2%

    2008 (Bear)

    - 40.5%

    - 36.1%

    - 31.3%

    - 3.6%

    2009 (Bull)

    + 43.8%

    + 22.4%

    + 18.8%

    - 4.2%

    2010 (Bull)

    + 16.9%

    + 12.8%

    + 11.0%

    + 12.0%

    2011 (Bull)

    - 1.8%

    (unchgd)

    + 5.5%

    +15.8%

    1-Year Return

    - 1.8%

    (unchgd)

    + 5.5%

    +15.8%

    3-Year Return

    + 65.1%

    + 38.1%

    + 39.1%

    + 24.2%

    5-Year Return

    + 7.8%

    - 7.0%

    +3.8%

    + 33.2%

    10-Year Return

    + 33.6%

    +25.0%

    +43.5%

    + 89.6%

    12-Year Return

    - 36.0%

    + 0.1%

    + 29.6%

    + 115.1%

    13-Year Return

    + 18.8%

    + 20.3%

    + 64.4%

    +190.6%

    NOTE that there were only two minor down years even through two of the most severe bear markets of the last 100 years, compared to serious losses by the market.

    And in the years when STS fails to beat the market it does not have big losses but just smaller gains, while in years when buy and hold doesn’t work it often results in big losses that can take several years of rising market just to get back to even.

    Another interesting observation can be seen in the table that doesn’t have anything to do with seasonality. That is that in spite of spectacular gains by the Nasdaq in some years, the stodgy old Dow outperforms the Nasdaq and even the S&P 500 over the long-term. Showing that market-timing is even more important when investing in the tech and smaller cap stocks.

    Subscribers to Street Smart Report: In addition to the information in the premium content section of this blog this morning, there is an in-depth Market Signals and Recommendations report from yesterday in the subscribers’ area of the Street Smart Report websiteAnd there will be an in-depth ‘Gold, Bonds, Dollar, Inflation/Deflation’ report there later today.

    To read my weekend newspaper column’ click here: Will Speculators Rescue Housing- August 10, 2012. [rate]

    Images: via Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

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