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Roger I. McNamara's  Instablog

Roger I. McNamara
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MBA, Finance, New York University, 1975 Chartered Financial Analyst --- 1986 30 yers experience in research, analysis, portfolio management and report generation in global markets for equities and fixed income instruments.
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  • A Real Live Bear - No Escape Route

    Its June 21, 2013 Summer Solstice close reduced the S&P 500 Index to 4.6% beneath its recently scored 52 Week and All Time Highs. On a chart of any material time length this would be noticeable only under a magnifying glass. Investor concerns should nonetheless be governed by a likelihood of more consequential markdowns set to unfold. Here are some reasons why, beginning with a few technicals and moving on to what are commonly accepted as fundamentals.

    U.S. Common stock Stock Indexes and Averages have now dipped slightly below 50 Day Moving Averages, a measure that has already or will soon begin to drop. Everything remains above 200 Day lines, but whereas these stretch points were not long ago on the order of 12-13% they enter this morning closer to 5 or 6%. What many commentators label as a Double Cross seems poised to unfold. Even the formerly sturdy Dow Jones Transportation Average --- DJTA --- having crested at a calendar year-to-date gain North of 20% has surrendered more than 5% of that largesse. Other market internals look uniformly anemic. In early May NASDAQ could boast of a 200 Day Moving Average Advances over Decliners atop 100, now a more humble 54 (and moving lower). Daily turnover --- anemic in any historical context over recent years --- has actually ticked up just slightly, boosted by 2 Billion + days both last Thursday and Friday. Its 90 Day Rate of Change computed on 200 Day Averages enters the week at 101.4, the strongest reading in this year's Opening Half.

    Optimists can pin hopes on actual Dividends and estimated Earnings. At $33.35 a share the S&P 500 throws off a Current Yield approaching 2.25%, to say the least competitive with Money Markets and in the same overall neighborhood as a 10 Year Treasury Note. Consensus 2014 Operating Earning estimates have been lifted a few pennies in recent weeks to $123.64. A resulting P/E of 13X or thereabouts certainly seems tolerable, and doubtless to some inviting. A few caution flags are again warranted, however. Comparable measures for both Mid and Small Cap aggregates are now 16-17 Times, providing much stiffer resistance. Revenue assumptions have meanwhile moved slightly but steadily lower to close in on $1160 a share, implying overall Profit Margins of 10.5-11%. There simply is insufficient juice in either domestic or world economies to support these outcomes. Odds instead favor recurring downticks in both Revenue and Earnings, both individual companies and market averages.

    How deep might the valley be dug? A 1420 closing SPX will leave it 15% under the former highs, not extraordinary in the context of the immediate three prior years, when levels at least had the courtesy to peak in April rather than intrude upon Summer vacations and National Birthday observances. Readers are advised to treat any episodic price recovery --- such as this past Friday --- as occasions to add to Put holdings, or short sales, or any mechanism designed to insure against a head on smashup. Assuming that 1400-1420 is reached late Summer or early Fall, the time (and price) will have then arrived to take an extended peek at the familiar basket of probable Revenue and Earnings outcomes, global economic health, and evolving fluidity of National and State fiscal arrangements. Until then it is best to stay out of the way. What has transpired so far should not be accorded the status of a Buying Opportunity.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

    Jun 24 1:21 PM | Link | Comment!
  • Volatility Comeback

    Over recent months it has rested quietly in a rear row corner of a darkened theater, but it has now begun a deliberate yet unmistakable move toward the center and back under the stage lights. The most commonly appealed to proxy for U.S. Stock Market Volatility --- the CBOE Volatility Index (VIX) --- will soon command a wider berth of attention. With the premise that any reading below 20 describes a quiescent market headed inexorably higher in price, consider its behavior over six month intervals ending the recent May 31. Readings are accompanied by a 200 Day Moving Average of percent changes from daily high to daily low on the Dow Industrial Average, its own closing level printed to the far right of the Table:

    Date VIX DJI - % DJI Close

    May 31, 2012 26.22 2.21 12393.45

    Nov 30, 2012 15.87 1.01 13025.58

    May 31, 2013 16.30 0.85 15115.57

    All seems within normal and rational expectations. A decline in daily volatility of the DJIA has been faithfully accompanied by a lower VIX, although in May's closing sessions (not shown here) each metric has come off its absolute low.

    What about another Index and another way to scan the picture? The following table depicts a 200 day average of the absolute value of daily percent changes in the S&P 500. A slightly different visual angle points in the same direction:

    Date VIX SPX - % SPX Close

    Date VIX SPX - % SPX Close

    May 31, 2012 26.66 0.98 1310.33

    Nov 30, 2012 15.87 0.62 1416.18

    May 31, 2013 16.30 0.54 1630.74

    Thus has the recent bull market been largely of a single vector --- straight up. Not surprisingly has it fostered complacency in the minds and hearts --- and hopes --- of some.

    The contention is that a reversal is underway in both prices and volatility. At this writing the SPX is off less than 3.5% from its recently posted all time best. It shows signs of further toboggan rides down the slope. At the same time VIX has begun to percolate. Between today in mid-October investors are advised to look for as range of 1380 - 1420 on the S&P, accompanied by VIX poking its way again decisively to the North side of 20.

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    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

    Jun 06 4:00 PM | Link | Comment!
  • Errorr Committed --- Now Admitted
    The following is set forth not without a measure of embarrassment, but it is necessary under the circumstances.  Medicine is most often unpleasant on the way down, but if used properly strengthening in the longer term.

    Accordingly, some may recall that approximately one month ago --- it was Monday November 8 --- I occupied this space with an essay proclaiming that a stock market top of some consequence had been reached the previous Friday, when the S&P 500 took out the April highs to finish the day and trading week just shy of 1226.  Even more humiliating is the additional commentary in that piece to the effect of a test of 1100 or thereabouts, a 10% shaving had such a drop unfolded.

    Under no circumstances did I foresee a modus vivendi struck between the Administration and incumbent Congress on personal, corporate and estate marginal Federal income tax rates.  Mr. Obama campaigned both forcefully and effectively in 2008 on numerous topics --- none more so than two pillars of the then outgoing Bush Administration: a bilateral trade pact with South Korea and the schedule of income tax rates enacted in the 2004-06 time frame.  Now each has come to pass, and each the result of, among other things, exertions of Mr. Obama and his Administration.

    Permit me to suggest setting aside --- assuming that to be ever possible --- the immediately surrounding politics as to whether or not Mr. Obama can muster enough Congressional votes among his own party to continue the tax advantages for another two years beginning January 1 upcoming.  The agreements he has reached with the leaders of South Korea and Republican members of the United States Congress are --- here I must pause to breathe slowly and deeply --- unequivocally bullish for U.S. common stock prices. Even if rejected by either of the full houses both the free-trade agreement and tax extensions will be overwhelmingly enacted in the next Congressional session.  It is even conceivable that the tax code revisions will be made permanent come 2012-2013, but there remains plenty of time and opportunity to churn through that appealing possibility.  Even should end of year tax selling mesh with a host of other forces beyond my capacity to imagine to apply a lid on the remaining weeks of this year, 2011 figures to arouse those spirits capable of rewarding the longs while subtracting net worth from the shorts. Picture the S&P scraping 1450-1500 my mid Summer, which is to say plus 20% or so from current and within eyesight of the 2007 double top.   Most of today's publicly available consensus calls on next year economic growth are unduly tepid, destined for upward revisions as events unfold.      

    Along with it, an ongoing markdown in bond prices.  With little fanfare the redemption yield on 10 Year area Treasury notes as already punched through and over 3%, whereas not long ago numbers like 2.40 - 2.50 carried the day.  I believe this process will continue until a zone of 3.75 to 4.00 yield-to-maturity has been reached.  In the money market a resurgent economy should eventually notify Mr. Bernanke and Co. that 25 basis point rates are accomplishing nothing constructive, enabling them to rise to a more sober minded and mature range of 2.5-3.0%.    



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Dec 08 10:22 AM | Link | Comment!
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