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Armando Alizo
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Armando Alizo is a senior technology manager with over 20 years experience in the development of financial and trading systems. Mr. Alizo has a BA in Physics from Cornell University and an MBA from Nova-Southeastern University. Areas of expertise include: Development, testing, and... More
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  • 2014 Market Summary - The Bubble Continues To Grow...

    Market & Economic Outlook

    I'll admit it! I've been a bit lazy about posting anything on my blog over the past 12 months. This is probably because not much interesting happened (or at least that's my excuse and I'm sticking to it). I have been, and will continue to post all Buy/Sell signals for my Market Indicator (see below) via my StockTalks in Seeking Alpha.

    So what did happen in 2014? The US stock market continued generating gains as a result of the never ending monetary "stimulus" provided by the Federal Reserve. Though the rate of gains decreased substantially from the unsustainable rate seen in 2013, there is no doubt that the overall Trend is UP. As David Stockman and others have repeatedly pointed out, money-printing (QE) and zero interest rates (ZIRP) has primarily served to inflate asset prices on Wall Street, while doing little for the "real" economy.

    To those who would claim that the economy is finally taking off as evidenced by recent positive employment numbers, I would simply reply with the recent article by Jim Clifton, CEO at Gallup, titled The Big Lie: 5.6% Unemployment. To quote Jim, "There's no other way to say this. The official unemployment rate, which cruelly overlooks the suffering of the long-term and often permanently unemployed as well as the depressingly underemployed, amounts to a Big Lie." It's a great article and well worth reading. Adding to these concerns is the fact that the Weekly Leading Indicators released by ECRI (Economic Cycle Research Institute) are pointing towards a high risk of recession. The chart below is from a weekly update by Doug Short and it is clear that we are at levels that have resulted in economic slowdowns in the past.

    However, as I've said on other occasions, traders cannot be dogmatic, and must be able to deliver good returns in all markets, no matter the valuations and no matter what the Fed or the Government may be doing. So where are we today?

    • Market tops and bottoms can only be identified in hindsight. Trying to pick tops or bottoms is a fools' game.
    • Given the above, it is critical to follow the Trend. Yes, you can use countertrend strategies that "buy the dip", but only in a rising market. Similarly you can "short the rally" but only when the overall market is in a downtrend.
    • The US stock market remains in an overall uptrend. The long-term market rally in place since the market bottomed in 2009 remains intact. Hence, the benefit of the doubt must be given to the ongoing Bull Market until proven otherwise. Over the past couple of years many market players have been burned trying to guess when this bubble will burst. Don't be a market casualty - stick with the Trend, whether that Trend is UP as it is today, or DOWN as it will inevitably be sometime in the future. Just don't jump the gun!

    2014 Performance

    Diversified Portfolio

    As of 31-Dec-2014 my Diversified Portfolio gained along with the overall market and closed the year up +5.54%. Since inception in June 2006, the portfolio has beaten the overall market on a Risk Adjusted Basis. While my portfolio has returned since inception +60.6% vs. +64.64% for the S&P 500 Index, this return was obtained with less than half the risk of the S&P 500 (as measured by Maximum Daily Drawdown and the Ulcer Index).

    AMI (Alizo Market Indicator)

    My Market Indicator (AMI) was developed in 2008-2011 to serve as a timing tool for Large Cap US stocks. As can be seen on the Timertrac website, the AMI gained +40.83% in 2013, and +3.57% in 2014 (assuming use of the RYNVX - Rydex Nova Fund as the investment vehicle).

    The AMI is only one of multiple trading systems I use in my Diversified Portfolio. I am currently providing the AMI's signals in real time via Seeking Alpha (click here).

    You can see full details (including risk/return stats) for both the Diversified Portfolio and AMI on the Timertrac website. The site can be accessed using the links above.

    Happy trading, and be careful out there!
    ______________________________________________________________
    DISCLAIMER: We take care to assure accuracy of contents but accuracy is not guaranteed. My posts express my opinions, and are provided solely as a supplement to your own further research. It is each reader's responsibility to decide which, if any, opinions or recommendations are suitable for their own situation, and in what manner to use the information. Past performance is not a guarantee of future results.

    Tags: SPY
    Feb 09 11:20 PM | Link | Comment!
  • 2013 Market Summary - A Surprisingly Good Year!

    Market & Economic Outlook

    If someone had told me 12 months ago that the S&P 500 would rally close to 30% during 2013 while setting new records, I would have been extremely skeptical. Yet that is exactly what happened! Which simply goes to show that just as a declining market can always continue falling, a rising market can always continue rocketing up - regardless of valuation or any other rational factor.

    As I've mentioned in previous commentaries, I'm an admirer of John Hussman and his approach to analyzing the economy and markets. Dr. Hussman is the manager of the Hussman family of mutual funds, and publishes a Weekly Column that is extremely informative for anyone interested in the economy and financial markets. As Dr. Hussman has explained, to be of any value any method of market valuation must have a demonstrated track record of predicting future returns. Many of the so-called valuation approaches pushed by Wall Street are simply marketing tools that have no relationship to future returns, but do serve as a way to "sell" customers on the idea of a never ending Bull market.

    I won't repeat here Hussman's very insightful discussion on the topic of valuation (do check out his website for the details), but suffice it to say that the market is currently priced to deliver close to zero real returns over the coming decade. However, as Hussman himself has noted, analyses of market valuation (even when done properly) have essentially no bearing on short or intermediate term returns (i.e. 1 to 5 years out), and can only be used to accurately predict market returns 8-12 years in the future. In the intervening period practically almost anything can happen (and has)! This brings me back to my previous point: Declining markets can always decline further and rising markets can always rise further, independent of any rational factors. Hence, the critical importance of focusing on the use of a Trend Following approach if you want to be a successful trader. This where I believe I part company with Hussman. In large part due to his insistence on limiting market exposure due overvaluation and overbought market technicals his primary growth mutual fund (MUTF:HSGFX) not only missed out on 2013´s gains but is in the middle of a multi-year drawdown that has it down close to 30% from its highs in 2008.

    While I do believe that Hussman has refined his approach and should outperform the S&P 500 over the long-term (next 5 to 10 years), his severe underperformance in recent years should serve as a cautionary lesson. As traders we cannot be dogmatic, and must be able to deliver good returns in all markets, no matter the valuations and no matter what the Fed or the Government may be doing. This does not mean that we will beat the performance of indices like the S&P 500 every year or even most years, but we should not be down significantly in a year in which the index was up 30%.

    2013 Performance

    Diversified Portfolio

    In 2013 my Diversified Portfolio (see graph below) gained along with the overall market and closed the year up +15.09%. Although it has had its ups and downs, since inception in June 2006 my Diversified Portfolio has beaten the overall market as measured by the S&P 500 and returned +51.38% vs. +43.16% for the index. This enhanced return was obtained with less than half the risk of the S&P 500 (as measured by Maximum Daily Drawdown and the Ulcer Index).

    AMI (Alizo Market Indicator)

    The AMI was developed in 2008-2009 to serve as a timing tool for Large Cap US stocks, and was up +40.83% in 2013 (assuming use of the Rydex Nova Fund - RYNVX, as a trading vehicle). The AMI was up +9.8% in 2012 (again, using RYNVX). The AMI is only one of multiple trading systems I use in my Diversified Portfolio.

    You can see full details (including risk/return stats) for both the Diversified Portfolio and AMI on the Timertrac website. The site can be accessed using the links above.

    The AMI (Alizo Market Indicator) remains on the BUY signal published on 5-Jan-14 when I said on StockTalks:

    "ALERT: Oil price increases have now moderated triggering a renewed AMI BUY signal as of the close of 3-Jan-14. Going to 100% Invested!"

    Since that date the S&P 500 and the overall market have declined, as a result the short-term uptrend is close to being "broken" triggering a sell signal.

    Here's how the various AMI sub-components stack up as of yesterday's close:

    INTEREST RATES: Unfavorable. Short-term rates are low, but long-term rates are in a general uptrend. The ongoing "Tapering" may continue to put pressure on long-term interest rates.

    COMMODITY PRICES & INFLATION: Favorable. Oil prices and precious metals have declined recently, and inflation remains muted.

    INVESTOR SENTIMENT: Unfavorable. Investor sentiment has gotten too bullish over the past few months. This is typically a harbinger of future declines.

    SEASONAL TENDENCIES: Favorable. We are right in the middle of the seasonally favorable period for the US stock market.

    MARKET TREND: Favorable. While the S&P 500 and other major indices are well above their long-term Moving Averages, the short-term trend is close to turning unfavorable. As usual, we won't jump the gun - instead we will allow the market to tell us where it is going!

    COMPOSITE: Favorable - On BUY Signal since 5-Jan-14.

    Happy trading, and be careful out there!
    ______________________________________________________________
    DISCLAIMER: We take care to assure accuracy of contents but accuracy is not guaranteed. My posts express my opinions, and are provided solely as a supplement to your own further research. It is each reader's responsibility to decide which, if any, opinions or recommendations are suitable for their own situation, and in what manner to use the information. Past performance is not a guarantee of future results.

    Tags: SPY
    Jan 31 12:16 PM | Link | Comment!
  • Portfolio & Economic Update - July 2013

    Yes, once again it is time for a periodic update on my Market Indicator, Diversified Portfolio, and the overall US stock market.

    The AMI (Alizo Market Indicator) remains on the SELL signal published on 3-Jun-13 when I said on StockTalks:

    "ALERT: The recent increase in interest rates has triggered an AMI SELL signal as of the close on 31-May-13. Going to 100% Cash!"

    After that date the S&P 500 initially declined, but then rallied in a straight line to maker new all time highs, and today sits about 50 points above my sell price.

    However, I am nowhere near getting a new Buy signal. As you'll see below, almost every market indicator EXCEPT the overall Trend (which is clearly upward, and has remained so since November 2012. Indeed as I point out below, even my Diversified Portfolio, which consists of a number of different trading strategies has been 100% in CASH for close to 2 weeks now. This is truly an unusual situation for me!

    Here's how the various AMI sub-components stack up as of last Friday's close (26-Jul-13):

    INTEREST RATES: Unfavorable. While short-term rates remain low, the more important long-term rates have jumped over the past couple of months. Mortgage rates have also jumped, and this is already reducing the overall affordability of housing (so much for the housing recovery). More importantly, this jump happened after the Fed merely suggested that they MIGHT start reducing their money printing (aka QE) later this year. Imagine what is going to happen when they are eventually forced to end QE? It ain't gonna to be pretty!

    COMMODITY PRICES & INFLATION: Unfavorable. Along with interest rates, the CPI has been trending higher. I think I can also safely say that we have all noticed the recent increase in oil and gasoline prices.

    INVESTOR SENTIMENT: Unfavorable. Investor sentiment has gotten too bullish over the past few months. This is typically a harbinger of future declines.

    SEASONAL TENDENCIES: Unfavorable. The market is well past the time to "Sell in May and Go Away". Although admittedly the market has continued to go up even during this seasonally negative period. But will the market still be higher when positive seasonality returns in October/November? Only time will tell.

    MARKET TREND: Favorable. The Trend is clearly VERY favorable. The S&P 500 and other major indices are well above their 100 and 200 Day Moving Averages, and making new multi-year highs. Unfortunately a positive market trend by itself, is not enough to produce a Buy signal.

    COMPOSITE: UNFAVORABLE - On SELL Signal since the close of 3-Jun-13.

    Although the market has continued to rise after the AMI SELL signal, I do believe that we are close to a significant top. Having said that, it is important to note that when it comes to market timing, one can only deal with probabilities - there are no certainties. The goal of any market timing approach is to improve risk adjusted returns over the LONG TERM. There is no way of knowing whether any given Buy or Sell signal will prove successful until after the fact (sometimes well after the fact). As John Hussman and other market commentators have repeatedly pointed out, overvalued markets can always become more overvalued, and there is no way of knowing when the current rally might end.

    2012-2013 Portfolio Performance

    As of 26-Jul-13 my Diversified Portfolio has gained along with the overall market and is up +8.46% YTD, although as mentioned before it is now 100% in CASH. Although it has had its ups and downs, since inception in June 2006 my Diversified Portfolio has beaten the overall market as measured by the S&P 500 and returned +43.40% vs. +35.27% for the index. This enhanced return was obtained with less than half the risk of the S&P 500 (as measured by Maximum Daily Drawdown and the Ulcer Index).

    The AMI was developed in 2008-2009 to serve as a timing tool for Large Cap US stocks, and is up +27.08% YTD (assuming use of the Rydex Nova Fund - RYNVX, as a trading vehicle). The AMI was up +9.8% in 2012 (again, using RYNVX). The AMI is only one of multiple trading systems I use in my Diversified Portfolio.

    You can see full details including stats on the Timertrac website. The site can be accessed using the links above.

    Market & Economic Outlook

    There is no change in my view regarding the long-term prospects for the US stock market. I continue to view John Hussman's analysis as spot on, although admittedly the past couple of years have not been kind to his views. Although as Dr. Hussman has pointed out, valuations are only of importance over the LONG TERM (7 to 10 years out). Over shorter periods of time valuation is often irrelevant and other aspects (e.g. market trend, interest rates, etc.) are of greater significance.

    Dr. Hussman is the manager of the Hussman family of mutual funds, and publishes a Weekly Column that is extremely informative for anyone interested in the economy and financial markets.

    To quote his current views:

    "The coming 10-year period will likely include two or three bull markets, and two or three bear markets. Still, at the end of that decade, I expect that the S&P 500 Index will be little changed from its present level, having achieved an average annual total return of less than 3%, nominal, including dividends, with a number of deep interim market losses along the way. This isn't even a dire forecast. It's the central expectation based on valuation approaches that have a near-90% correlation with subsequent 10-year returns in close to a century of market data."

    Imagine what will happen to pension plans across the country (both public and private) if Dr. Hussman's prediction proves to be even partially correct! This thought comes to mind after seeing the recent bankruptcy of the city of Detroit, and as I read about the massive underfunding of pension plans in many other large cities.

    Many of those pension plans have made excessively generous promises to public employees while assuming portfolio returns north of 8% per annum, and even under those assumptions they are oftentimes grossly underfunded. Will they get Federal Government bailouts once reality sets in? Will the money to pay for the bailouts be borrowed, printed, or taxed into existence (with all the consequent economic damage), or will retirees be hit with the benefit cuts needed to balance these out-of-control accounts? There are no pretty answers to those questions.

    I should point out that neither the AMI, nor any of my other trading strategies rely on valuation metrics, or are affected by the concerns raised by Dr. Hussman. All of my trading strategies are mechanical (i.e. rules based) and have an underlying Trend Following component.

    Happy trading, and be careful out there!
    ______________________________________________________________
    DISCLAIMER: We take care to assure accuracy of contents but accuracy is not guaranteed. My posts express my opinions, and are provided solely as a supplement to your own further research. It is each reader's responsibility to decide which, if any, opinions or recommendations are suitable for their own situation, and in what manner to use the information. Past performance is not a guarantee of future results.

    Tags: SPY
    Jul 29 11:04 PM | Link | Comment!
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  • ALERT: The jump in the S&P 500 has reversed the short-term downtrend, resulting in a new AMI BUY signal. AMI is going to 100% invested!
    Oct 28, 2014
  • ALERT: This week's drop in the S&P 500 has broken the short-term trend, and triggered an AMI SELL signal. AMI is going to Cash tomorrow!
    Oct 9, 2014
  • ALERT: With last week's drop in oil and commodity prices the AMI is now back on a BUY signal. AMI is going to 100% invested on Monday!
    Jul 6, 2014
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