This market has gone nowhere since I last opened my mouth on August 8. As of this writing, Friday August 24 at 12:00 EST, the Dow Jones Industrials Index is at 13121, down 0.44% since 8/8, and the S&P 500 is at 1409, up 0.04%. But … as usual, when I look at the thirty individual components of the Dow, the standard deviation of relative returns is huge, at 4%. Over these two weeks, the best relative performers were Cisco (NASDAQ:CSCO), plus 12.2%, Home Depot (NYSE:HD), plus 8.4%, and Bank of America (NYSE:BAC), plus 6.9%. The worse performers were Hewlett Packard (NYSE:HPQ), minus 8.7%, Intel (NASDAQ:INTC), minus 6.1%, and Boeing (NYSE:BA), minus 4.8%. This is when the Dow Jones Industrials Model comes in handy - when nothing seems to be happening, it tells the inside story.
So I ran it today, to try and figure out whether this stalemate has a chance to break one way or the other. The good news seems to be on the side of the Bulls. For the most part of this week, the momentum indicators were waning. Today, they picked up. We were in a short-term downtrend, we are now back in a bottom formation, ready to resume the upswing. The Moving Average Convergence reads 1.27, and the Modified RSI Oscillator, our proprietary tool, reads 1.23, on a scale of 1 to 4 (1 being a potential bottom, 3 being a potential top). When combined with the Overbought/Oversold Ratio of 0.59, closer to the top of the Trading Range, this suggests that any further advance may blow the April high after this week's first test. This is somewhat counter-intuitive, since I revised 14 individual Trading Ranges down, and only 11 up -- the two that are unchanged are JPMorgan (NYSE:JPM) and Alcoa (NYSE:AA). But that's why the Model is helpful. Overall, the Dow Industrials Trading Range goes from 12888 / 13468 to 12815 / 13341.
Why would we break on the upside? If only I knew … I suspect this is the normal process by which we get to S&P 1600, as I have often written about since last October. However, to kind of look for a different argument this time, I dusted off my chart on Household Net Worth (HNW). The last data available from the Fed was published on June 7, and is that of Q1 2012. Guess where the S&P 500 was on March 31 - 1408!! I do not mean to imply that nothing has happened since, but it is quite a coincidence. Anyway, at the time, HNW stood at $62.9 trillion, with the Debt to HNW ratio at 21.3%. To put things in perspective, the high in Q3 2007 was $64.3 trillion, with the debt ratio at 21.9%. When the … hit the fan in 2008, HNW plummeted to $51.5 trillion by Q4, with a debt ratio zooming to 27.6%. To put the Debt to HNW ratio in historical context, from 1975 to 2000, it hovered in a range of 12.5% to 16% ... I am not going to rewrite my book here, but it's all in there. Suffice it to say that we are on the right track and with a bit of help from Stocks and Real Estate, we are going to feel like in 2007, pretty soon - without the speculative bubbles. Kumbaya! Or Goldilocks deja-vu? Now, I may still be early, but who says that investing brings instant gratification ...
In any case, since I act on my own advice, I am increasing the Net Long Stock position from 60% to 70%, but I still hold 20% Cash. On July 14, I went from 30% Net Long to 50%, when the Dow was at 12777. On July 28, at 13076, I nudged the position up to 60%. So far so good - pourvu que ca dure.
Disclosure: I am long ADES, AGM, EXH, FIATY.PK, GVA, IMAX, JOE, MXWL, PHM, ODP, PIKE, SANM, TMO, URI, VECO, WCC, WSBC, WWD, URS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.