2.2.14: Weekend LinkFest: Is the 2-Year Presidential Cycle, Right Analog for this 2014 Stock Market ?

With the SP 500 down 3% in January ’14, and as January is thought of as the January Barometer, and a good leading indicator for full-year equity returns, we are trying to balance the mental gymnastics of knowing the stock market was overbought and needing a correction, versus the thought that January’s negative 3% return might actually mean something. The SP 500 JUST exited a 13-year bear market in May, 2013 by trading over the old March, 2000 and October, 2007 highs of 1,550 and 1,577. According to the charts, the new bull market has just gotten started.

One pundit described the 3 choices this way: January’s thrashing for the SP 500 as a suggestion that the SP 500 is entering a long-term bear market, versus a period of flat-to-negative 10% returns, versus another strong year.

I don’t know of too many widely-followed market bears that think we are headed for a repeat of 2008 today or even a 20% bear market, but those who are negative seem to think a 10% to 15% pullback cures all the bullish sentiment from the stock market and will instill a significant amount of appropriate fear to allow for the next decent advance.

My own opinion is that the “2-year President Cycle” as proferred by Jeff Kleintop and Josh Brown in this Linkfest is the right analog to this market, which means we get a flat to -10% through the first 6 – 9 months of 2014, and then a strong year-end rally.

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Some think a re-test of the SP 500’s 50-day moving average at 1,812.41 as of Friday 1/31/14’s close is the key to the next market move. The thought is that if the SP 500 is rejected at the 50 day m/a and starts to fade on volume, it is highly likely we take out the Dec ’13 lows on the SP 500 and we are headed for a deeper correction in the SP 500, which could mean 1,700 on the SP 500 or lower. We need a better flush in the main stock market indices;

Josh Brown on some using the 1929 chart as analog for the 2014 market. Have to believe that 2014 SP 500 crash like 1929, is a huge stretch. Josh does a good job of debunking the analogy.

Here is Ryan Detrick on the 2-Year Presidential Cycle analog. When you have three market heavyweights and superb pundits like Jeff Kleintop (strategist at LPL), Josh Brown (portfolio manager, analyst and market commentator)and Ryan Detrick (technician) all who come at the market with somewhat different disciplines, agreeing that the 2-year Presidential Cycle pattern has some weight, you can see why I am starting to talk to clients about it;

Ryan Detrick flagged this buying climax cluster last May ’13, too and it led to some market congestion. The attached tweet from Ryan is from Friday Feb 1, ’14, and it is December ’13 and January ’14 data. Tells me we are likely working lower over the near term.

This guy, UKarlewitz, has some good stuff on Twitter. Good tweet on SP 500 testing 1,770 3 times this week.

Good chart from @361Capital on the retail space. XRT is the chart shown here. Largest 3 components of XRT by market cap weight are Amazon (AMZN) at 10% of XRT, Wal-Mart (WMT) at 9% and Home Depot (HD) at 8% – 9%. Two of the three – Amazon and Wal-Mart – had a tough Friday, Jan 31, 14 with earnings (AMZN) or the preannouncement (WMT). I think you have to use pullbacks in sectors like retail and Consumer Discretionary to buy quality names: WMT is first, despite US comp issues; next we’d buy AMZN down near $325, is where we would add that name. Whole Foods (WFM) we like and they report in next two weeks. @361Capital’s summary comes out Monday night’s – it is one of the best research pieces all week. Long all stocks mentioned. XRT trading just below its 200 day moving average currently. (Long all except XRT).

The Treasury and bond markets had a good January ’14: The TLT was up 6%, the IEF up 3%, the AGG was 1.5%. The Muni Bond Agg (MUB) was up 2.5% and the HYG and JNK, both high yield corporate ETF’s rose 0.40% and 0.57% respectively. Some think when corporate credit spreads get whacked (widen), the equity market correction will be in its last throes. We sold one of our muni ETF’s this week (MEN) and will likely trim further some interest rate risk this week or next. Our Treasury short – TBF – hurt us in January, down 6%.

Our balanced accounts did very well in 2013, as our Treasury short (TBF) added a lot of value, and we traded in and out of high yield and the ETF’s. I told clients, in a tough market like the credit and bond markets will be in the next few years, you have to trade, and not buy and hold. The plethora of ETF’s introduced over the last 13 years has allowed a typically long-only advisor like me to become much more hedge-fund like in volatile markets. It is much easier to hedge risk with inverse ETf’s and protect/limit client’s downside risk. We haven’t bought on yet to the Direxion and the 2(x) – 3(x) leveraged ETF’s but the unlevered inverse ETF’s do work nicely for valuation sensitive protection.

According to the SPDR ETF’s, every sector was negative in January ’14, except healthcare (+0.94%) and UTE’s (+2.98%) for the month.

The Russell 2000 fell 2.77% in January ’14, versus the SP 500’s -3.52%. Hard to believe with the outperformance of the RUT, over last 5 years (here), that the small-cap run is over. Continued small-cap outperformance relative to the large-caps tells me that the bull market isn’t getting long in the tooth, as the 1998 drop did. The RUT peaked in early 1998, and its drop preceded the LongTerm Capital Crisis. RUT’s only began to outperform again in 2003. The RUT is struggling to regain its 50 day moving average on the daily chart.

Eddy Elfenbein quoting Bespoke: 836 days without a 10% correction per this graph from Eddy Elfenbein’s Crossing Wall Street blog.

Jeff Miller, from earlier this week, on ECRI’s 2011 Recession call, which I guess they haven’t yet rescinded. Here is Jeff’s Jan 30, 2014 blog post.

JC Parets, a technician that is found frequently on StockTwits, thinks that corn is bottoming. John Deere (DE), a stock that returned just 5.5% in 2013, is a way to play a higher corn price. Tractor Supply (TSCO) is down about 6.5% in the last 90 days, so the group might be setting up for a better opportunity. We think DE is a lower-risk equity play on corn and farm prices.

We have been buying some of 2013’s underperformers like IBM, ISRG, CAT and DE, and companies with solid q4 ’13 earnings reports like MSFT, that continue to trade at reasonable values. We’ve sold already this year Goldman Sachs (GS) and Sandisk (SNDK), and will trim more of 2013’s stalwart’s as time moves along. More and more, we think the 2-year Presidential Cycle makes sense, and that 2014 will be flat to down 10% – 15% in the first 6 – 9 months of 2014, and then a 4th quarter rally.

From left field, we do think Basic Materials will have a good year. Names like Alcoa (AA), US Steel (X) and Freeport (FCX) even though copper is trading funky. Basic Mat is 70% chemicals, but we think the industrial metals do well.

Thanks for reading.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

 

 

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