Fortune Watch

Technical Analysis — Blinded By The Math

Without too much of a stretch, it could be documented that the Investment Grade Value Stock (not just “value stocks”) bubble of 1987 was caused by investor focus on company fundamentals. It would be a piece-of-cake to prove beyond any doubt at all that blind faith in technical analysis created the dot-com bubble at the turn of the 21st century.

More recently, blame for the late 2007 through early 2009 “financial crisis” could easily be nestled down at the feet of big government, misguided regulators, and maniacally creative Modern Portfolio Theory (MPT) practitioners, not to mention their ROTF-LOL institutional mentors. What’s next?

Pick a day, any day, where the DJIA is up or down by more than 100 points. Take a look at the “most advanced” or “most declined’ listings and note the shortage of plain vanilla common stocks. What you see is a pari-mutuel spreadsheet listing of the most popular derivative betting mechanisms, adjusted day-to-day, depending on the direction of their wagers.

With index ETFs significantly outnumbering the companies whose prices they are attempting to keep track of, isn’t it even less likely than in the past that technical analytics can be useful? Aren’t these numbers simply the result of demand for casino-esque sector funds and their seemingly limitless varietals?
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A Stock Market sell off may be about to begin which could take the Index lower  for the full year. These six reasons demonstrate why one of the most impressive stock market runs may have ended:

1. Markets can’t rise all the time. This probably is obvious to most people. A significant is what a market requires to go higher for a market which has more than doubled in two years. Recent economic news shows that support to be lacking. The S&P has risen to more than double from 683 in March 2009 to almost 1,400 two months ago.

2. Corporate earnings have been pressured by an economic slowdown and margin drops. Many companies in the retail, transportation and manufacturing sectors counted on low commodities prices back in 2009 and 2010 to help profits. That help is gone. Oil has rallied from below $50 in mid-2009 to almost $100 recently. The price is down from $110, but it is still historically high. Prices on cotton and many agricultural commodities have also risen in the same period. The result: The cost of making and moving goods is higher, and margins on items like clothing have dropped.

3. Consumer sentiment has faltered. Recent data from from the Conference Board said “Consumer Confidence Index, which had declined in May, decreased again in June. The Index now stands at 58.5 (1985=100), down from 61.7 in May.” Many retailers have posted slow same-store sales. Activity at the world’s largest retailer, Walmart (WMT), has been down on a same store basis for its U.S. operations.
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The “Bargain Stock Monitor” is one of three market statistics used as performance expectation analyzers for portfolios that are designed and managed using the Market Cycle Investment Management (MCIM) methodology.

It is derived from the month end Investment Grade Value Stock Index (IGVSI) “watchlist” screening program, which identifies IGVSI companies that are trading at least 15% below their 52-week highs.

The “15% down” break-point allows you to keep your eye on “Bull Pen” items. (You really need to be familiar with the selection rules to get the most from the BS Monitor – chuckle – and from the Watch List program.)

The fewer IGVSI equities at bargain prices, the stronger the stock market and the more “smart cash” you should be accumulating in the equity asset allocation “bucket” of your investment portfolio. As the list of bargain stocks grows (indicating market weakness), portfolio “smart cash” should be finding its way back into undervalued securities.

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