Staying in cash until we see this ‘all clear’ sign

Author: TG Asset Management LLC

Covestor model: Tactical All Asset and Tactical Growth

The volatility, trend, and pattern in stocks remain bearish, despite some recent optimism tied to the development of a framework to end the Eurozone crisis. With the Eurozone’s plans to issue 1.3 trillion Euros in bonds, we believe there is no place for bond prices to move but down. While Emerging Market stocks look attractive in the long-run, an all clear sign from both our Stock Volatility and Trend factors has yet to appear to enable an allocation to both Domestic and International stocks. Until then, we believe an allocation of 100% to cash equivalents is appropriate at this time.

Our current outlook
Long-Term Stock Pattern (3-5 yrs) – Bearish, Lower stock returns ahead
Intermediate-Term Stock Trend (1 year) – Bearish, Lower stock prices ahead
Short-Term Stock Volatility (30 days) – Bearish, Lower stock prices ahead

Inflation
For Developed Economies – At or Above Target (except Japan)
For Emerging Economies – Above Target

Fundamental, Technical, Trend, & Volatility Indicators
Fundamentally, the S&P 500 is trading at a 21.16 P/E (Shilller approach) as of October 31, a 32% premium over the long-term average of 16. Lower than average returns on stocks over the next 5-10 years are therefore expected.

Precious Metals
Bullish consensus on Gold pushed it to $1740 last Friday. Overall expectations are for lower prices ahead. However if Gold goes higher it should meet near term resistance at $1756. $1500 and then $1300 are our longer term targets with an eventual target at $1038, the major long-term trend-line. Investors in gold should by now realize that Gold and stocks are moving in tandem; Gold offers essentially no diversification benefit for a stock allocation. The high correlation between stocks and Gold has been in place since the Fall of ’08.

Expectations are for Silver to eventually fall to approximately $23. Near term the price pattern shows upward resistance at $36.69.

Euro Zone Leaders Develop Fix: MORE LEVERAGE
Optimism for a final conclusion to the Eurozone crisis pushed stocks briefly above their 200 day moving average major trend line. However, this fact remains: the actual funds to fix the problem are not yet in place. Furthermore, the finance instrument that got us into this mess – leverage – is the same tool that the Eurozone will be using to “fix” the crisis.

Here are the funding requirements. 1.3 trillion Euros for new bond issues. Banks need to raise 70 billion Euros of new capital by next June. Also by June, the EFSF will have to fund 37 billion Euros for recapitalizing Greek and Portuguese bonds.

This means one thing for global bonds: yields are going up, and prices down. Bottom line on the “Fix”: it is unfunded, untested, and will surely suffer from implementation woes.

U.S. Economy is Back to ’07 Level…
However, job growth has yet to occur. For more details please see this post of mine.

Strategy   
Optimism surrounding the framework to end the Eurozone crisis briefly pushed stocks above a major trend line. However we’ll need to see both a close above the trend line and a further decline in the VIX to approximately 16 before an allocation to stocks can be made. In the meantime, with global bond yields heading higher and therefore prices down, a 100% allocation to cash equivalents is advisable at this time.

When both the Trend and Volatility factor call for a stock allocation, the domestic stock sector allocations will be added to using a cost effective method to capture corporate earnings through the use of the following fundamental factors: Growth At A Reasonable Price, Return On Equity, & Earnings Yield. International Stocks allocations will be developed using expected Gross Domestic Product (GDP).