Too Late to Panic?

This chart shows a picture of several bear markets. The bear market of 2007-09 is already the second most severe in history. And it is still well above the levels where the bear market of the 1930s eventually found support. To my eye, it appears that significant downside risk remains.

It is probably too late to panic because the market down trend is well extended past the mean. Because the model has detected poor market conditions, the portfolio has been in a net-short allocation for 7 out of 10 weeks YTD, and has profited from the market's decline.

There is a possibility that the market will bounce and perhaps rally strongly off the new lows set this week. If so we will give back some of our gains. But whether the market gives us a bounce or not, we must be prepared for the possibility that the market may decline much further before reaching the ultimate bear market low.

Rather than speculate on when the market trend will reverse, we rely on the data-driven Thrust / Trend Model to determine prevailing market conditions and then we align our capital to take advantage of the model's statistical edge. The model doesn't attempt to anticipate trend reversals. The market will tell us what it is doing and we will use our statistical edge to systematically generate returns over time.

As a result of this week's decline, the Dow reached a new bear market low. The Dow is currently down 53% since peaking in October 2007. To put the magnitude of the current correction in perspective, the chart illustrates the 15 worst corrections of the Dow since its inception in 1896. As the chart illustrates, the current Dow correction already ranks as the second worst on record. Only the correction that began in 1929 was worse.

The SGM model portfolio has returned +51% since the market peaked in October 2007.

Absolute and Relative Returns by Holding Period

This chart shows the returns for the Strategic Growth model portfolio for the past quarter (13 weeks), 6 months (26 weeks), and 52 weeks ending Friday, February 27th. Over the past year, the portfolio has generated an absolute return of +38.7%, beating the market by +85.5%.

Many fund managers are proud to merely beat the market. A high performing hedge fund should be able to consistently generate positive returns over the full Bull-Bear market cycle. By aligning investment capital with the prevailing market conditions, the Strategic Growth model portfolio has consistently generated positive returns over virtually any holding period greater than 26 weeks since inception.

This chart shows that the model is generating a relatively linear rate-of-growth when measured over successively longer holding periods.

Could the Market Go Lower From Here?

Sure it could.

This chart indicates that the Dow could decline another 50% from today's levels. This is not a prediction, only a possibility worth considering.

For some long-term perspective, this chart illustrates the Dow adjusted for inflation since 1925. There are several points of interest. For one, the inflation-adjusted Dow has gained a mere 55% since its 1929 peak and gained only 10% since its 1966 peak – not that impressive considering it took many decades to achieve those gains. It is also interesting to note that based on an inflation-adjusted Dow, the current bear market actually began in 1999 only to be interrupted briefly by a multi-trillion dollar credit bubble. That bubble has burst, of course, and the Dow now trades at a level not seen since 1995.

S&P 500 Earnings Collapse

The S&P has finally updated their 4Q earnings, which (predictably) have collapsed.

This is one of the most frightening charts I've seen in awhile.

Worst 10 Years Ever

Semi-log Chart Shows Steady Rate-of-Growth

A traditional Equity Curve chart uses a linear axis. A linear axis has the effect of distorting the rate-of-change when equity is compounding over a long time period. That's why charts showing equity curves are sometimes called "mountain charts." Fund marketers love them! They are very flattering. The compounding effect makes it look like the returns are accelerating sharply, while the rate-of-change may actually be constant or even declining.

A better way to visualize the model's rate-of-change is a semi-log chart, used to visualize data that are changing with an exponential relationship as with a compounding return.

In this semi-log chart showing the equity curve, it is easy to see that the rate-of-growth for the model's equity has been fairly consistent over time.

Worst January Ever

Stocks wrapped up their worst January on record with a final plunge on Friday.

The Dow Jones Industrial Average finished January down 8.84% on the month. Previously, the worst January for the Dow had been that of 1916, when it fell 8.64%. Friday, the Dow dropped 148.15 points to 8000.86 after briefly dipping below the 8000 mark. The Dow has fallen five straight months and in 12 of the last 15.

The S&P 500-stock index lost 2.28% Friday to end at 825.88, for cumulative losses in January of 8.57%. Until Friday, its worst January from 1929 onward occurred in 1970, when it lost 7.65%.

Both stock-market indexes are off by more than 40% from their 2007 highs.

Historically, stocks' January performance has been thought of as an informal indicator for the market's direction the rest of the year. When the S&P declines in January, the index loses an average of 2.4% in the next 11 months, according to data going back to 1950 from Ned Davis Research. When the S&P climbs in January, the index posts an average gain of 12.3% in the next period.

Absolute and Relative Returns by Holding Period

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Now 12 months into the live test, the Strategic Growth Model (SGM) portfolio continues to generate positive returns in spite of the adverse market conditions. Compared to the market, the SGM portfolio has generated 71% in excess returns over the past 52 weeks. And it continues to exhibit no correlation to the market trend.

The footprints of a Secular Bear

In a Secular Bear Market (US), US Treasuries perform better than US equities over a 10 year span. Here we see that the S&P 500 is down over 26% over the past 10 years. Note that several international indices have done much better.

Dow performance 2008

To put this year's performance in perspective, this chart illustrates the 15 worst calendar year performances of the Dow since its inception in 1896. As today's chart illustrates, the Dow's performance in 2008 ranks as the third worst on record. Only 1931 and 1907 endured greater declines. It is of interest that major banking crises occurred in 1931, 1907, 2008, and 1930 – the four worst calendar years on record in terms of stock market performance.

The Nasdaq Composite had its worst year ever in 2008, while the S&P 500 Index had its third worst year ever.

Here is the yearly performance for 2008.

Dow Jones industrials -33.84
S&P 500 -38.49
Nasdaq Composite -40.54
Russell 2000 small cap -34.80

Is the Market Undervalued?

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The S&P 500 index is now trading 49.4% off its 2007 peak. Some analysts are saying the Market is undervalued and this is a great time to put capital at risk in the stock market. Maybe.

The Hussman "Prior Peak Earnings Model" (PPEM) is a good way to measure the market's valuation relative to prior bear market bottoms. As shown on the chart, secular bear markets often reach bottom when the S&P 500 index is trading at a multiple less than 10x prior peak earnings.

At the end of this week, the SPX closed at 800.03. At this level, the Market is trading at roughly 9.4x prior peak earnings, a level that is considered "undervalued." When the market has reached this valuation level in the past, stocks have ALWAYS outperformed T-bills over the next 10 year period.

But that is not saying that the Market can't first go lower from here before it goes higher. If the SPX dropped another 160 points (20%) from here to 640, the P/E would be 7.5x prior peak earnings, similar to the valuation trough of the bear market of 1983, 1980, 1974, 1949, and well above the valuation troughs of the bear markets of 1942, and 1932.

Every Mutual Fund has Has Lost Money in 2008...

Except One

Out of the 11,585 U.S. and international stock mutual funds tracked by Morningstar Inc., 11,584 have lost money in 2008, according to fund data through Nov. 20.

In other words, just one fund hasn’t lost money this year—and that is the APX Mid Cap Growth Fund, which was flat through Thursday’s close. That’s right, folks, its return—or lack thereof—is a mere zero thus far in 2008.

5 weeks to go for some of these Mutual Funds to show a positive return.

The SGM portfolio, as documented here in the live test, is up 40% YTD.

Worst Year Ever (part 2)

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Do you have 26 years?

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Buy-and-hold is what Wall Street promotes to the Sheeple. Buy-and-hold has been a good way to get fleeced this year. The fallacy of B&H should now be clear.

The above chart shows the crash of 1929 and the bear market that followed. If you had bought the Dow at the top of the market in 1929 and held onto your investment, you would have recovered your original capital 25 years later, not accounting for inflation.

A better way is to allocate your capital in accordance with prevailing market conditions. For example, the SGM portfolio's timing system generated a SELL signal on 9/12/08, neatly avoiding the OCT/NOV plunge. As documented here in the live test, the SGM portfolio has been net-50%-short the market and is UP 31% over the period since 9/12/08.

The Professionals?

Feeling mauled by the seemingly undying bear market? The S&P 500 is down -44.4% for the year.

Take a look at the year-to-date performance for some biggest of the big-name investors and consider yourself in good company:

* Warren Buffett (Berkshire Hathaway): -43%

* Ken Hebner (CMG Focus Fund) -56%

* Harry Lange (Fidelity Magellan): -59%

* Bill Miller (Legg Mason Value Trust) -50%

* Ken Griffin (Citadel): -44%

* Carl Icahn (Icahn Enterprises): -81%

* T. Boone Pickens: Down $2 billion since July

* Kirk Kerkorian: Down $693 million on his Ford shares alone

These results suggest that “a bear market gets everyone” — even Wall Street legends.

The SGM portfolio has gained 40.1% YTD.

A Photo Album of Bear Markets

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The current bear market has moved into first place for the deepest decline since the inception of the S&P 500 in 1957. Although the ultimate severity of today's bear market is unknown, the rate of decline has been faster and deeper than the other post 1950 declines. At this point in time (about 300 days into the bear market) all the other bear markets were only about halfway to their ultimate bottom.

Live Test - Performance Summary

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The Strategic Growth Model (SGM) portfolio is performing well during these adverse market conditions. It has generated 60% in excess returns over the past 52 weeks compared to the market and it is showing no correlation to the market trend.

Shock-tober!!!

The Strategic Growth Model (SGM) portfolio was UP 16.5% during the month of October. Let's look at how some of the market indices fared...

EQUITIES:

• October 2008 was the most volatile in the 80-year history of the S.& P. 500. (see NYT chart, above)

• The Dow dropped 14% drop over the past four weeks — the biggest October decline since 1987, when the crash sent markets down 23% for the month. The S&P 500 was down 17%, and Nasdaq fell 18%. This ranked as the 15th worst monthly decline for the Dow Industrials since 1900.

• Compare 3 recent SPX Bear Markets: -46% from October 2007; Compare that with 1973-74 down 48% over 23 months. The 2000-03 bear was 49 percent over nearly 3 years.

• The S&P 500 had the most volatile month since November 1929 (1% moves higher or lower).

• Consider days with 4% moves up or down: None from 2003 through 2007; Three throughout the 1950s and two in the 1960s. October 2008 - 9 days with four percent plus or minus. That edges out September 1932’s record of 8. (NYT)

Worst (Best) Week Ever

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I watched last week - and I suspect I was not alone - with shock and awe as the stock market all but disappeared into the greatest sinkhole of investment history.

The S&P 500 index was off 18% for the week, 43% for the 12 months. The Dow Jones lost 18% over five trading sessions, swelling its 12 month loss to 39.4%. Not in the 112 year history of the Dow Jones has there been a greater point or percentage loss in a single week.

On the other hand, the Strategic Growth Model (SGM) portfolio held up well under the severe stress of last week. The portfolio gained 8.8% because of its defensive stance. Due to poor market conditions, the SGM portfolio has been on a SELL signal since September 5th.

The above chart shows the performance of the SGM portfolio compared to the market benchmark since the beginning of October, 2007. The S&P 500 index has declined -44.3% while the model portfolio has returned +44.0%

The SGM portfolio has thus generated over +85% in excess returns over the past 12 months, with a maximum equity drawdown of -11.2%. This is an exceptional reward / risk in extremely difficult times.