Market Climate and Weather Forecast

Market Climateand Weather Forecast

Presented by Herb Geissler, Managing Director of The St.Clair Group

Rational Investing/VectorVest Special Interest Group of Pittsburgh AAIIFebruary, 2012

Three Time Horizons

• Secular Overview to determine best Secular Overview to determine best broad investing strategies over yearsbroad investing strategies over years

• Cyclical Climate over next year or so Cyclical Climate over next year or so for specific strategies to get good gainsfor specific strategies to get good gains

• Current Weather Conditions for what to Current Weather Conditions for what to do over next few weeks and monthsdo over next few weeks and months

Most of Us Are Not Enjoying This Ride

Simple Buy & Hold Not Likely to Be Productive

for the next dozen years

Kuznets’ Infrastructure cycle averages 17.6 years for each bull or bear phase

Ten-fold, 15-20 year

Big Bull Market

15-20 yearConsolidating Bear Market

Demographics Dictate Destiny

20 year slope-shifts in the M2Y ratio match Kuznets’ cycle

Only halfway through to trough-bottom in 2017

GDP Stagnates During Next Several Years

GDP Rebound Has Turned Down

Consumptive Spending leaves little over for future users and for economic growth

Private Consumption Demand, plus Gross Fixed Investment Spending, plus Government Consumptive Spending (all

levels)

Plus/minus exports and imports

Gross Domestic Product consists of:

US Government SpendingSqueezes Private Sector Growth and Consumer

Spending

Chrushing Consumers, while neglecting growth

priorities

Corporate Profits Generally Track Growth in GDP

Although Exogenous Events can “put a thumb on the scale”

Oil Crisis

Asian Crisis

Credit Crunch

Long Term GDP Growth depends on Fixed

Investment Component• Residential Fixed Investment is mostly private

and rental housing. Is very cyclical:• Birth rates and aging• Employment income levels• Low mortgage interest rates

• Non-Residential Fixed Investment is primarily production facilities and distribution infrastrure• Spending is based on expected future returns

from profitably filling economic needs

Economic Growth Driven by Economic Growth Driven by “Permanent” Investments “Permanent” Investments

Latest Readings4Q/11 +2.8%

3Q/11 +15.7%

Huge Surge in Unemployed,14 million looking for a job (duration double

norm),despite 3.2 million recorded job openings

Massive Structural Unemployment

9% jobless rate actually closer to 20% Low-cost countries displaced US workers Technology is obsoleting many jobs

USPS cut 110,000 jobs in past 4 years and must cut 220,000 more from 572,000 in next 5 years

Austerity requires doing more with less Education systems are geared to yesterday

Siemans’ US 70,000 employees plus 3,000 open Spiral: less income means less demand

Secular Challengesduring this decade

Increasing structural unemployment Declining GDP means less output and

fewer jobs Massive global debt requires austerity

and write-offs Global politicians unwilling to resolve

problems, kicking can down road Lacking confidence in political

leaders, both industry and consumers retrench

To Correct Structural Unemployment and Economic

Malaise

1. Pay-down U.S. debt to sustainable level through austerity first and then economic growth

Slicing less painful than slivering over several years

2. Create 10 million “new” jobs (20% more than today) Not just service jobs in retailing, distribution and

financing. Jobs producing technology products that provide more

goods and services from less resources to enhance standard of living

Secular Strategic Game Plan

for Investing in this decade

Replace mindless Buy&Hold of index or stocks with disciplined tactical allocation (select best asset-class ETFs) and use Dynamic Asset Allocation (market timing) to switch from yesterday’s heroes to strongest horses

IVY tactical and dynamic allocation needs a few minutes every month for above average returns and below average drawdown (spreadsheet discs available)

Cyclical ClimateNew Political Agendas and Administrations

globallythrough 2013

Still in consolidating bear phase of Kuznets cycle, with Europe sick with sovereign debt, US healing slowly from debt crisis and improving mfg efficiencies, and emerging markets coping with demand shrinkage from their major markets in developed countries

Tonight will just focus on US = largest and most familiar for good and cautious investing opportunities

SP500 Tanked, WheneverFed Leading Indicator was

under 1%

Latest readingNovember

20111.53

But two-month old data is “stale news”

For 40 years, ECRI ‘s weekly

WLI Called every major SP500 Drop

The leading economic indicator (LEI), published by Economic Cycle Research Institute, is a weighted average of ten different economic and financial indicators.

Latest readings:1/27 +0.3%1/13 +2.3%1/.06 +1.0%

Positive and rising

August 2011

Mfg 50.6

Non-Mfg 53.3

ISM Production Indexes Plunged Rapidly

January 2012

Mfg 54.4

Non-Mfg 53.3

Now, ISM Mfg is Slowly Improving

Latest Readings1/12 54.112/11 53.911/11 52.710/11 50.5

Bottomed and rising

SPX Turns Match ISM Non-Mfg Turning Points

Latest Readings12/11 52.611/11 52.010/11 52.9

Bobbling down sideways

Mostly retailers and wholesaling

Consumer Confidence Plummeted, then Weak

Rebound

Tepidly Restoring SomeSmall Business Confidence

But Profit Margins Likely to be Squeezed

Presidential CyclePresidential CycleFavors 2011 and 2012Favors 2011 and 2012

DJIA Gains during Presidential Cycle

sincesince 18861886 sincesince 19501950

% up % up YearsYears

Annual Annual GainGain

% up % up YearsYears

Annual Annual GainGain

Pre-ElectionPre-Election 79%79% 11.1%11.1% 100%100% 18.7%18.7%

ElectionElection 6969 8.48.4 9191 10.110.1

Post-ElectionPost-Election 5252 5.05.0 4545 2.02.0

MidTermMidTerm 5555 4.04.0 5555 4.64.6

This Cycle likely to be much below normal

2011Only unprofitable year in over 60

years

Rhetoric Causes Trading Rhetoric Causes Trading RangesRanges

2013 Bull Rally 2013 Bull Rally Hinges on Hinges on Severity of Severity of AusterityAusterity

2012 Intermediate 2012 Intermediate Strategic ConclusionsStrategic Conclusions

Walk softly and carry a big stickWalk softly and carry a big stick

1. Liquidity from QE2 is gone, Europe is in sovereign debt crisis, emerging markets slowing down all will cause US stocks to sag into seasonal low around Halloween

2. U.S manufacturing sector becoming healthier from “creative destruction” and better technologies. But investing strategies require selectivity in strategies and vehicles during such uncertain times

3. Active institutional bottom-fishing in November 2011 produces strong relief rally into February, 2012, as cash hoards put to work

4. Political uncertainties and posturing delays problem-solving into next administration. Stocks bobble (crab-like) through 2012 into a political relief rally in Fall 2012

5. Next administration “forced” to drastically cut spending, paring Government from 20% of GDP closer to historical 15%, increasing job-losses. Big Slice will be received better than frequent small slivers

6. Thus 2013 likely to be a “blood bath” year for the economy and the stock market. Using Contras and Defensives could be critical to getting positive returns.

Depends on Who You Are?Depends on Who You Are?

Passive Investor is defined by absence of Passive Investor is defined by absence of disciplined rules to sell-off losersdisciplined rules to sell-off losers ““Snooze and lose” has destroyed many nest eggsSnooze and lose” has destroyed many nest eggs

Active investors vary in degree of activityActive investors vary in degree of activity Timing to avoid big losses = dynamic asset allocation = MA12Timing to avoid big losses = dynamic asset allocation = MA12 Periodic rebalance ETFs = tactical asset allocation = IVYPeriodic rebalance ETFs = tactical asset allocation = IVY

Monthly weed and refresh of stocks = position tradingMonthly weed and refresh of stocks = position trading Daily or weekly trading = swing tradingDaily or weekly trading = swing trading

Modestly active investors need better tools to trigger Modestly active investors need better tools to trigger sound entry and exits that stay out of harm’s waysound entry and exits that stay out of harm’s way

Strategy PreferencesStrategy Preferences

For Intermediate Term For Intermediate Term InvestorsInvestors

Limiting Losses Keeps More of Your

GainsSince 1885, the DJIA spent

32% of time in bear markets, going down 44% of time getting back to break-even 24% of time in net bull territory

Data from Ned Davis Research

Disciplined timing takes you out of harm’s way,when the bear market begins or in progress.

Keep more of your gains Recover losses more quickly Make more money, more of the time IVY spreadsheet discs are still available at $30

Three Simple Strategiesto stay on the RIGHT side of the market

1. Exit stocks whenever Index drops below its 12 month moving average

2. Diversify risk by holding 5 non-correlated ETFs only when each above its 10 month MA

3. Find single best-class to boost return, with moderate drawdown, by holding the “top performing” ETF of the 5, refresh monthly

What Now???

1. For Position Traders, holding for months

2. For Swing Traders, holding for weeks

SPY Has Moved into Bullish Territory

and May break Overhead Resistance

For Position traders,

Cautiously Bullish in IVYat end of January 2012

IVY BASIC is holding VTI (US Large Caps), VNQ (Real Estate) and IEF (Bonds) for 60% invested

IVY TOP is holding VNQ

For Position traders,

Weather Forecastfor More Active Investors

When the facts change, I change my position.What do you do, sir?

- John Maynard Keynes

2011 Frustrated with Trading Ranges

and Short, Spiky Trend-Surges

2009 2010

2011

VectorVest Primary Wave Up on 10/6, Confirmed Up

on 10/24

For Swing Traders,

McClellan Summation Index(MA20)

Turned Bullish on October 13th

and Retested Price with higher low at Xmas

For Swing Traders,

Risk Aversion is Now Gone in a liquidity melt-up, as Europe addresses sovereign

debt issues

Risk aversion = FEAR

Over Confidence =GREED

For Swing Traders,

Longs Make Money When SPXA50has +MACD and is Above MA200

or 50%MA20 suggests current rally has legs to run for at least a few more weeks

For Swing Traders,

50/50/0 Rules Signaled January Bull Strong DMI Suggests More

Upside

For Swing Traders,

MTI over 1.60 isA Warning Extreme

MTI 1.60 Provento be Unsustainable Tops

Weather Forecast:Sunny, but clouds on

horizon Bull rally confirmed with December higher low

and McC Sum crossing its MA20 in early January Rally now is broad, with 88% of SPX over MA50s 50/50/0 strong since Jan 1; wide DMI suggests

more weeks of upside from Institutionals’ liquidity rush

But MTI> 1.60 suggests now at an extreme; tightening stops to buy on dips seems prudent

Political rhetoric likely to cause frustrating swings

For Swing Traders,

Recap of Tonight’s Points

Economy and stock market will be distressed for next several years

Three Simple Strategies can protect and enhance wealth, patiently

Position and swing trading can boost returns, whenever market positions advantageously as confirmed by a few indicators

Any Questions ?

CDs with the 3 spreadsheets and 3 tutorials

are available for $30 here or by mail.Send check and return address to:

Herb Geissler1792 Taper Drive

Upper St. Clair, PA 15241