Table 1 shows the monthly chart of the MSCI World ETF, called IQQW (Saxo ticker) and is listed in one of the European exchanges. It gives a fairly accurate prediction of major turning points in the ETF. On 1 Mar 2009, it indicated a turnaround in trend, which we all know started a bull rally that lasts until today. There was a "dead cross" on 1 Apr 2010, which subsequently resulted in a deep correction that began from May 2010 to Aug 2010. Around 1 Sep 2010, 4 days after QE 2 was announced, a bullish crossover occured. The ETF rallied rallied a further 20% from 1 Sep 2010 to 1 Feb 2011. From then on, warning signs were aplenty that the world's stock indices could have reached its peak and start a long descend downwards. Most trend followers started shorting around March 2011. Most indices crashed below their 200 day MA in late Aug, indicating the end of the bull run. However, another important criteria must be fulfilled before we can call for the start of a bear market - the index must remain below the 200 day MA for 3 consecutive months with no breaks above it.
Table 1
It is often only possible to identify a bear market 6 months after the event, because like in 2007 Nov, the MSCI World did not break below the 200 day MA until Jan 2008 and there was a break above the MA in Apr 2008 and again briefly in Jun 2008. Trend followers would have suffered some whiplashes along the way, largely shorting the MSCI World since Jan 2008 with brief periods of long positions, but largely avoiding the plunge in Oct 2008.
Back to the recent events: Most indices broke above the MAs around Nov, less than 3 months after they were breached from above. It meant that the stock markets may have avoided a bear. However, they were still forming lower highs and lower lows. On 1 Nov 2011, the monthly stochastics had a bullish crossover. I covered most of my shorts by mid Oct 2011 and went long by late Oct 2011.
Here was what I wrote back on 9 Oct 2011, stating that we are probably in a bear and rebound of 10% or more may be possible, so I adviced investors to refrain from panic selling.
http://musingsonwallstreet.blogspot.com/2011/10/we-are-in-bear-that-may-last-till-mid.html
On the same day, I released another post justifying why there may be rebounds and chances of exiting on a high up to 7-8 months after the start of a bear.
"Conclusion:
My take is that we usually have better exit points for equities up to 7 to 8 months after the highest point. But if those chances are not taken, we could suffer huge falls. Our experience in 1987 showed that it could not be avoided because the crash took place over 3 days. But the crashes in 2000, 2008 and now will probably give us opportunities to exit with around 10% losses.
Get out early, get out on rebounds. If unsure, stay sidelined and do bonds, do CTAs. "
http://musingsonwallstreet.blogspot.com/2011/10/why-i-think-rebound-of-10-or-more-may.html
By Nov 1, when the monthly stochastics turned bullish, but the MSCI World remained below 200 d MA, I turned cautiously bullish. I decided that no shorting should be done, and any long positions should be small because we are still in a bear zone, although the momentun has turned positive.
Since 1 Dec 2011, the S&P500 has pierced above the 200d MA and so did the MSCI WOrld. We went into bull territory and I added more long positions. Usually, if the monthly stochastics turned positive, I would expect momentum to continue for at least 2 months. I expected the rally to end by end January. 2012 at the earliest.
Fundamental issues
But before Christmas, the ECB announced a EUR489 billion bazooka plan. Come February, another bazooka will be announced. Together, the amount of quantitative easing may reach EUR1 trillion, which is around US$1.3 trillion, more than twice the QE2 amount which pushed S&P500 up by 30% between Aug 2010 - May 2011. European banks began snapping up European bond issues, earning "risk free" spreads of between 1.5 - 4% for 3 year tenors. This form of QE is not just a liquidity boost, but a fiscal stimulus as well because it keeps the European governments' public programs running. The effects could last as much as a year on the stock markets. As for the real economy, the impact could range from marginal to effective.The banks in Europe are still deleveraging and socialist region of EU is still in austerity with no major reforms.
Sentiment
On 4 Jan 2012, I said I was tempted to be bullish. Too many analysts are bearish and the majority are usually not right. Many money managers have stayed on the sidelines, trying to talk down the markets via TV interviews. It also means stocks won't fall too much because the liquidity is waiting to dip back into stocks.
http://musingsonwallstreet.blogspot.com/2012/01/prelude-to-2012-outlook.html
How long has the can been kicked down the road?
When most analysts are bearish, you should be bullish because too much money is on the side. Valuations were also reaching 2008 levels. All these factors point to a good start to 2012.
Looking at the weekly chart of the MSCI World ETF (table 2), the ETF is at overbought territory and is due for a correction. Since it is reaching the Feb 2011 high, which is a big resistance, I would take some money off stocks by the end of Jan. The daily chart also showed heavily overbought levels (table 3). Another big indication of a correction is that the index is around 7% above the 200 day MA. The last time it reached that level was in Feb 2011 and it followed by a reversion back to the MA. But any correction will be minor because a lot of money is still sidelined. A lot of fund managers are waiting for a rebound to enter. That's why if we have entered the 1st of 5 waves up, the 3rd wave is usually the strongest following a pull back. Feb/Mar may be a better time to enter the market.
Table 2
Table 3
All this money printing will end in tears. the CPI of Europe is around 2.7% and in the US 2.4%. THe UK is already hitting over 4%, Singapore over 5%. Unless the EU reforms their archaic laws that stifle growth, aggregate supply will be constrained and we may see inflation reaching over 3.5% by end of 2012. I believe the US' CPI will be heading towards 3.5% too by end 2012.
We could have a dreadful 2013 indeed! More dreadful than if the markets have started crashing in 2011. The longer the bull run, the longer the crash. If interest rates do finally rise in 2013, the liquidity will be unwound from assets like property. Gold could collapse. This could be the final year of the secular bull run of gold.
Conclusion
I have increased my allocation to equities to 30% instead of 20% in my last 4 Jan 2012 post. But I will effet it only in Feb and not now. I will reduce alternative allocation down to 30%, mainly from Amundi Volatility as it has done very well in 2011 and volatility may be lower in 2012.
Equities 30% (mainly commodity related sectors, like First State Global Resource, JPM Natural Resources).
Gold 20% (mainly gold futures, not gold equities because the diversification benefits are lesser for the latter, Schroder Gold).
Alternatives 30% (mainly Amundi Volatility World and Winton).
High Yield Bonds 20% (mainly Templeton Total Return and Alliance Bernstein Global High Yield)
The sectors that look very cheap are: Energy, Materials and Industrials, in other words, cyclicals.
| Sector ETF Expectations If P/Es Revert To 1/1/2011 | ||||||
| P/E Growth | Profit Growth | Potential | ||||
| (Contract) | (Expect 2012) | Return ‘12) | ||||
| Utilities Select Sector SPDR (XLU) | 14.6% | 0.0% | -14.6% | |||
| Consumer Staples Select SPDR (XLP) | 7.4% | 8.4% | 1.0% | |||
| Health Care Select Sector SPDR (XLV) | 7.1% | 11.3% | 4.2% | |||
| Consumer Discretion Select SPDR (XLY) | -3.4% | 10.5% | 13.9% | |||
| Technology Select Sector SPDR (XLK) | -9.6% | 13.9% | 23.5% | |||
| Energy Select Sector SPDR (XLE) | -23.5% | 2.3% | 25.8% | |||
| Industrials Select Sector SPDR (XLI) | -14.9% | 13.6% | 28.5% | |||
| Financials Select Sector SPDR (XLF) | -21.8% | 12.7% | 34.5% | |||
| Materials Select Sector SPDR (XLB) | -32.9% | 8.6% | 41.5% | |||
| S&P 500 | -15.0% | 10.2% | 25.2% | |||
In terms of countries, emerging europe's valuations look very good in terms of ROE vs PTB. Latin America and China look cheap as well. I particularly like China now because their inflation is heading south and they are likely to cut rates. I am also particularly interested in looking at India as well because their economic data is so bad that it cannot get any worse according to the OECD Composite Leading Index.
Do not get carried away by the bullishness by May 2012 though. I believe as the bull run extends past its 3rd year and nears its 4th (March 2009 - March 2013), we could see a huge crash when one of the events occur:
1. US presidential election finishes in Nov 2012 and either Obama or the Republicans start to make the painful austerity measures needed to rein in fiscal deficit.
2. Greece finally decides to throw in the towel, resulting in a disorderly crash. I would only trade financials at this stage.
3. Inflation flares up quicker than expected and we enter a stagflationary stage.
4. War in the middle east involving Iran may cause oil price to hit USD150 / bbl.
I believe a meaningful secular bull rally won't start until 2014...
