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Current Fund Distribution
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F Fund (ticker symbol: AGG)
The F Fund is modeled by the Barclays Aggregate Bond iShares AGG. [The AGG is the most commonly watched barometer of investment grade corporate and Treasury bonds]. Very little has changed since last week. We are bullish in the bond fund for these reasons: (1) The bond fund has crossed above the downtrend that started in April '15 and continues higher within an uptrending channel that started in June. (2) AGG seems to have formed a downslanting inverse head & shoulders formation. The left shoulder is seen as the dip in May '15. The head is the larger trough in June. The right shoulder is the short two-week dip in July. Two weeks ago we wrote, "If this formation comes to fruition, then AGG may have a sharp rally up towards its highs of April '15." So far, AGG has broke above its neckline (i.e., line connecting the highs of late-May and early-July) and is continuing higher. If the index declines, then support at the upcurling 50-day moving average is not far below. (3) In the lower window, the Relative Strength Index (RSI) is in bullish territory (above 50). Though it appears to be weakening. Overall, we are bullish AGG.
iShares Lehman Aggregate Bond Fund (AGG), One-Year Chart
C Fund (ticker symbol: $SPX)
The C Fund is modeled by the S&P 500 Index ($SPX). Our technical interpretation of the S&P 500 index continues to be in sync with the dynamics of the market.
Overall Comment: We are short-term neutral to bearish, intermediate-term neutral, and long-term undecided.
As shown on the chart below, the major trend for the S&P 500 continues to be bullish. We will update the reasons for justifying a bullish and bearish market using SPX.
Bullish Conditions: (1) Drawing a line that connects the intraday lows of Dec '14 and Feb '15 gives support around the 2065 level (green line). (2) Drawing another line that connects the lows of May and July '15 (yellow line) somewhat converges with the lower boundary of the intermediate-term uptrend (blue line) around the 2030 level. However, this level would require a further pullback to test this level of support.
Bearish Conditions: (1) SPX is having a lot of trouble with follow through to higher prices. (2) We mentioned in previous newsletters the possibility of SPX forming an inverse head and shoulders pattern. The recent decline of SPX is slightly lower than its adjacent component decline of June (the left shoulder dip of the H&S structure). In order to validate this structure, we need to see SPX break significantly higher and above the neckline (~2130). If this does not happen, then the formation is bearish. (3) SPX has declined (once again) below its 200-dma - this is bearish.
S&P 500 Large Cap Index ($SPX)
For members who would like to know the schedule of important financial news that may influence the stock market, feel free to view the Economic Calendar: http://www.nasdaq.com/markets/us-economic-calendar.aspx
What has been happening on the NYA's Accumulation/Distribution levels? The chart below show's the NYA Index's (NYSE) Accumulation/Distribution trending since October 2014. Note that the level of Accumulation has made no real progress for months. From a short term trending standpoint, the NYA is still seeing down trending action, so caution is in order.
The Banking Index ($BKX) is a key to the market and the economy. Central Bankers are being reported as scared now, so caution is a very good thing to exercise at this point. As shown on the chart below, the Banking Index closed at 78.30 with the C-RSI at a Caution-Positive level of +2.02.
For Today: The fast Accelerator line was in very low positive territory and trending down so it was at a Danger level. The Timing Indicator was in low positive territory and trending lower with less deceleration. It was also in a Danger condition.
Keep an eye on $BKX, as the stock market won't be able to stay up if the Banking Index trends down. We did post a red dotted line which indicates a sell condition, but it was a quasi-sell due to the CRSI still being technically positive. This is a high risk condition showing some short term improvement.
A good question to ask yourself: Do we have the necessary economic growth for borrowers to pay off their existing loans?
Is the NYA Index stuck? Yesterday, the NYA Index had a down tick inside its triangular pattern. Note that the NYA has not broken above the triangular pattern yet (nor below). There was a prior upside breach, and a downside breach, so there is no clear winning direction. Therefore, there is more work to do in order to move back to the upside. For now, the market is in a very high risk condition, so be careful.
The Dow Theory is neutral. A Dow Theory denotes the market is in an upward trend if one of its averages (industrial or transportation) advances above a previous important high, it is accompanied or followed by a similar advance in the other. The theory also says that when both averages dip below previous important lows, it's regarded as an indicator of a downward trend.
As shown on the chart below, the Dow Industrials (upper black solid line) held at support (lower green line) last week even after breaking through this level on an intraday basis. However, it is again on the verge of a breakdown. The Transports are trading cautiously above support found by connecting the lows of Jul '15 and Aug '15. A break below support (lower orange/yellow line) would confirm a Dow Theory sell signal. In order to become bullish, both the Dow Industrials and Transports must gain strength from these low levels.
Below is the seasonality chart of the S&P 500 Index for the month of August. The first two weeks of August is normally bearish. Seasonality does not pick up until the third week of the month, which is where we are now. If seasonality weighs more than other bearish elements we are seeing, then the market may become bullish for the rest of the month.
Below is a annual seasonality chart of the S&P 500 Index. This chart shows that the month of August is overall a neutral to bullish month. Then, comes the very bearish months of September and October.
As shown in the chart below and as discussed in previous newsletters, the S&P was forming an ABCDE Expanding Triangle. Many technicians identified this structure as a major "triple top" with Point D placed at about 1600. However, the S&P clearly broke above this level in early-2013.
Two major possibilities: 1.) If SPX continues to make new highs (with or without volatility), then we are in a secular bull market. 2.) If SPX starts to decline considerably and back towards or below the upper boundary of the ABCDE expanding triangle, then the market may still be in a secular bear market.
Since the S&P did not pull back from point D, and is continuing higher, then its reasonable to believe we have been in a secular bull market since March 2009 (point C) or since April 2013 (point D). However, the S&P has now crossed over the long-term uptrending boundary connecting significant lows since 2009. Is this the beginning of a major decline? No one knows. Though, this break does show market strength has weakened over the past several months. How long it will last is unknown.
S&P 500 Large Cap Index ($SPX), Eighteen-Year Chart
As the chart now stands, Waves A, B, C and D have gained or lost more than 45% for each cycle (see table below). That is four substantial moves in the last 10 years.
Secular Bear Market -- Year 2000 to the present:
- Bear cycle -- Aug '00 to Sept '02, the S&P declined 46%
- Bull cycle -- Sept '02 to Oct '07, the S&P increased 90%
- Bear cycle -- Oct '07 to Mar '09, the S&P declined 53%
- Bull cycle -- Mar 06, 2009 (intraday low of 666.79) to May 20, 2015 (intraday high of 2134.72), the S&P has increased about +220.1%
Historical View of the Dow Jones Industrial Average 1900- present (log scale, monthly):
There are three issues worth noting:
1. The long 10-20 year secular bear zones all have many cyclical bull and bear markets, which make little in the way of net progress. After 15 years, each secular bear is essentially unchanged.
2. Due to the roller coaster ride, investors who invest based on the buy-and-hold strategy naturally become psychologically exhausted, though there are many opportunities to trade during the many up and down trends.
3. Within each secular bear zone, a major bottom seems to occur about halfway through the zone (dotted oval area). Regarding the current secular bear market, this implies that the March 2009 lows will not be revisited.
Dow Jones Industrial Average, 1900- Present Chart
A Bullish Forecast?:
As shown in the chart below, the Dow Jones Industrial Average has formed an expanding channel over the past +14 years. In late 2014, the Dow broke below the uptrending support 'orange' line (2009-14), followed by a break above the long-term uptrending 'green' resistance line (2000-present). After the break above the green line, the index continues to trade "below" the uptrending orange line. As shown in 1999 and 2008, the market began a correction after the index was positioned below the orange line. Even though the Dow has broke above the long-term resistance line, the break looks weak. We would not be too surprised to see the index sharply pull back from current levels.
A breakdown in price (below the green and orange lines) will indicate the bull cycle has ended and we are entering the next bear cycle. Though, a continued breakout to higher prices (holding above 18000 and climbing to 19000, etc..) indicates the stock market has been trading in a secular bull market since March 2009.
For the past several weeks, the Dow Industrial Average has been pulling back. We see three major possibilities going forward: (1) The index is undergoing a pullback within a long-term uptrend. (2) The industrials are in the initial phase of a more serious correction. (3) It is starting to trade lateral with many ups and downs like it did in years 1999 to 2001, before crashing later in 2001-2002. We still need more time to decide if we are still in a secular bear market or in a new secular bull market.
Dow Jones Industrial Average, 20 Year Chart
Comparison of the Dow Jones Industrial Average (1920-1966) and Nasdaq (1994-Present):
In technical analysis, charts can be interpreted many ways. So to be fair, we will present two charts that will support the case for a secular bull market. As shown below, we have plotted the Dow Jones Industrial Average for the years 1919-1966. Below the Dow is a best fit chart of the current Nasdaq from 1996-present. This chart was made by positioning the 1929 high of the Dow with the 2000 high for the Nasdaq, and then stretching the Nasdaq chat so that significant lows of the Nasdaq fit the Dow.
As shown on the chart, the Nasdaq made an all-time intraday high of 4816.35 on March 24, 2000. On July 20, 2015, NDX made an intraday high of 4694.13. From that recent high, the difference is now only 2.6%. In year 1954, when the Dow reached its previous highs of 1929, traders thought previous highs would have presented resistance. It did not. The Dow cleanly broke through its previous highs and continued higher. "If" the current Nasdaq trades the same as the old Dow, then it too will break above its highs of year 2000. Meaning, the market has been in a secular bull market since March 2009, and not in a secular bear market.
In addition, the Nasdaq has reached its highs of year 2000 much sooner than when the old Dow reached its previous highs. For this fact, we can assumed that the advancements in technology are growing at a faster pace than the progress made by the stocks of the older Dow Jones Industrials.
Dow Jones Industrial Average (1920-1966) and Nasdaq (1994-Present) Chart
S Fund (ticker symbol: $EMW)
The S Fund is modeled by the Dow Jones Wilshire 4500 Completion Index ($EMW). We are bearish EMW for these reasons: (1) The overall trend is bullish; however, the stock is trading in a downtrending channel. (2) The stock can not break above the upper boundary of the downtrending channel that began in June, and can decline another 2% before reaching support. The convergence of three levels of support are the two yellow lines and one blue line as shown in the chart. These lines are: a) previous highs of July and Sept '14. b) The 200-dma. c) The uptrending lower support boundary (blue line). (3) In the lower window, both the RSI and MACD are now in bullish territory. We are short-term bearish in the S Fund.
Dow Jones Wilshire 4500 Completion Index ($EMW), One-Year Nine-Month Chart
I Fund (ticker symbol: EFA)
The I Fund is modeled by the EAFE Index iShares (EFA). Lets reiterate the trading activity of EFA, As shown on the chart, EFA reached its previous all-time highs of July '14 in May '15. Once previous highs were reached, this level presented strong resistance. EFA then retraced about 50% (to the price just above 61) of its move from its lows in Jan '15 to highs in May '15. EFA has been trading in a downtrending channel since May '15. The ETF broke out above the upper boundary (blue line, circled in green), and we went long there. Now, we find this to be a false breakout. On Wed (Aug 19), EFA fell through its 200-dma -- this is bearish, and the reason why we can not be in the I Fund.
EAFE Index iShares (EFA), Two-Year Chart
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Recent Fund Allocations
|Transfer Date||Interfund Distribution|
|08/05/15||40% C, 40% S, 20% I|
|07/08/15||50% C, 50% S|
|05/20/15||50% C, 50% S|
|05/04/15||30% C, 50% S, 20% I|
|03/12/15||60% C, 40% S|
|03/04/15||50% G, 50% F|
|02/03/15||50% C, 50% S|
|01/09/15||50% G, 50% F|
|11/28/14||50% G, 50% F|
|11/14/14||50% C, 50% S|
|10/02/14||70% C, 30% S|
|08/04/14||50% C, 50% S|
|06/04/14||50% C, 50% S|
|05/21/14||50% G, 50% F|
|03/18/14||20% F, 80% S|
|02/20/14||20% G, 80% F|
|02/06/14||35% C, 65% S|
|01/10/14||35% C, 35% S, 30% I|
|12/31/13||40% G, 20% C, 20% S, 20% I|
|12/03/13||30% C, 50% S, 20% I|
|10/10/13||50% C, 50% I|
|09/03/13||75% C, 25% S|
|07/01/13||30% C, 30% S, 40% I|
|04/03/13||25% G, 75% F|
|03/26/13||30% C, 60% S, 10% I|
|03/01/13||20% C, 30% S, 50% I|
|02/22/13||25% G, 75% F|
|02/08/13||20% C, 35% S, 45% I|
|01/14/13||30% C, 40% S, 30% I|
For a complete list of all fund allocation changes, please go to Our Returns page.
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