Weekly Risk Report 09/02/2009
The Trading “Pit and the Pendulum”
In Monday’s Wall $treet Journal (8/31/09), an article by Jason Zweig, starts off with “Don’t be Happy; Worry!” He mentions the very low P/E back in March of this year – the lowest since 1986 – and how it’s risen to around 18.4. Yes, this is true. The pendulum has covered a great distance is a very short period of time. He goes on to point out insider selling was very low from September ’08 through March of ’09. He then tells us that in August insider selling rose to be 31 times as much as insider buying. At SignalPoint we’re pleased to know we’ve been selling shares into the same strength that “insiders” have been exercising with their own holdings.
We have mentioned in previous Weekly Risk Updates the panic aspects of last year’s market (see Blog post for 11/17/2008 under “Get The Feed”), the deeply oversold conditions of the market from October through March (post for 03/02/2009), the requirement for consolidation because of “too much, too fast” in the way of recovery from the lows (see 05/25/2009 and 06/08/2009) and the return of worry about inflation (post 06/01/2009). With all of this we’ve attempted to decouple the “Worry” and the “Happy” from investing. We’ve attempted to moderate the emotional content and focus on the tasks at hand.
Other money managers might have thought our high cash reserves in 2007 were "unnecessary". They might have thought that having almost no cash reserves well into the panic of late ’08 and early ’09 were “wrong.” They might now be thinking with the 46% run up in the DJIA since March that not being fully invested would be equivalent to "missing the boat". Our reliance on the SignalPoint Process steered us to heavy cash back in ’07, tacked us towards utilizing that cash to average down during the panic, and has now refilled the holds with some of that cash from profitable sales during the market’s recent rise. It's clear that SignalPoint may just chart a different course.
As for today, the i-Wave Market Risk Indicator remains at the lower end of the “Average Risk” range. This doesn’t mean “No Risk” but that risk is measurable and manageable. Our Speculation component remains the only component that is currently bearish. This compoents reflects its sensitivity to the rapid rise in stock prices over the last 13 weeks - there are still 35 companies listed in Value Line’s “Best Performers – Last 13 Weeks” screen that have risen more than 100% in that short time. (Six of these have risen more than 200%). From this data you can get the feeling that there’s a bit of speculative activity present in the market. Near term, second wave of consolidation may be needed to correct some of the excesses being seen. Recession seems to be moderating, but earnings have yet to catch up with the curve. We at SignalPoint remain poised with adequate cash reserves and a Process as to how to apply them if necessary.
