Market ends down for the week

The market ended down 2.1% for the week, hit by weak profits, falling commodity prices, fears about China, and the Boston Marathon bomber.

Highlights from Barron’s Big Money poll

1. About 1/3 of money managers expect the DJIA to get to 16,000 by the middle of next year.

2. 74% of managers consider themselves bullish or very bullish through December of 2013, this is a high percentage.

3. 86% are bullish on stocks for the next 12 months.

4. 94% like  what they see for the next five year.

5. Managers are skeptical about gold, bullish on commodities longer term. Bonds and cash have few fans. Europe is out of favor.

Gold Miners

Barron’s ran a piece by Andrew Bary this week writing that gold miners are so hated that now might be a good time to get in, echoing our comments of April 15.

BDCs

Barron’s also wrote about business-developments companies (BDCs) this week. Both Ares Capital and Golub Capital, two companies we like, were listed in a table titled “Best Bets on BDCs”.

The market got crushed today, dropping 2.30%. The VIX spiked by 43%, the most ever in one day. Commodities, especially metals, continued in free fall for the second straight day and hurt the market early on. The market was down about 1.35% when terrorists struck the Boston Marathon with a couple of bombs. The market would drop about 1% more after that.

Our comment on April 5 that gold might have had a false breakdown turned out to be wrong. Gold was strong for two more days but then finished on the low on April 10th. That would have been the signal that gold was headed further down. Gold collapsed two days later.  But we also wrote on April 5, as well as April 4, that there has been a change in behavior in the market and remarked about the increase in volatility. For the first time, a couple of commentators even wrote today about the end of the bull market that started in 2009. Wow. We will have to see where the market takes us from here but a correction is long overdue.

If you have the guts, now is probably a good time to begin accumulating a position in the metals and miners and then dollar cost average down. The best trades are always the hardest trades. We like PAAS and AUY (but there might still be significant downside from here).

CHART BREAKDOWN

Look at the shaded ellipse from April 10 to April 12. It looks like a possible top. The market finished strong on April 10, opening at the low and then finishing at the high. On April 11, the market opened at the close from April 10th, pushed higher but closed at the midpoint of the day. The close was more than two standard deviations above the 20 day moving average. then on April 12, the market pushed lower, but it closed above the midpoint. Had the market closed lower that day it would have been more bearish. Closing above the midpoint might even be considered bullish, but the massive dropped today negated that. I would guess that the April 11 high was some kind of top, but it might just be a short term top.

Ron Johnson, the former Apple superstar is now the former JCP CEO as he was released yesterday. Johnson tried to turn the mundane and declining JCP into “America’s favorite retailer” with hip mini-stores throughout the JCP space. Unfortunately, consumers didn’t buy it. Johnson chased away the former customers and never attracted a new set of customers. If you weren’t in the investment industry, you would have no idea about the new JCP.

To just about every American consumer, based on years of conditioning from walking around malls since the 1980s, JC Penny was still JC Penny, and consumers were not going to just suddenly start shopping there. I actually checked out a JCP in February, and it looked the same to me.

Johnson also made a huge error by rolling out the change across the entire chain at once, instead of testing the concept in a smaller sample of stores. You just don’t change an entire concept overnight without testing it.

Chuck Mills, the former football coach, once said, “I give the same halftime speech over and over. It works best when my players are better than the other coach’s players.” And therein lied the big problem. Many thought that the magic Johnson had at Apple would translate to JCP. But JC Penny was no Apple.

Today I read the paper titled “Liquidity as an Investment Style” by Roger Ibbotson, Zhiwu Chen, Daniel Y.-J. Kim, and Wendy Hu. The paper argues that liquidity should be considered as an investment style, similar to value/growth, or size (large cap/small cap).

The paper finds that buying stocks with less liquidity is more favorable than buying stocks with greater liquidity. Furthermore, numerous studies have shown that value stocks outperform growth stocks, but when adding in a liquidity factor, less liquid value stocks will outperform more liquid value stocks.

The paper can be found here.

The market had a big sell off early in reaction to the unemployment report, but staged a strong rally from that point and ended close to the high of the day, just edging above the low from the previous day. As we wrote in the 4/4/13 report, there has been a change in behavior in the market. The high less low spread on the DJIA was greater than 150 points two times this week, indicating that volatility has been picking up. Volatility often rises before a downturn. On the other hand, lots of people are looking for a downturn, which might minimize the pullback or even hold it off.

HOUSING

On the 3/25 we wrote about the diminished prospects for landlords that are still purchasing single family housing now. The Journal ran an article on this today, Jed Kolko, chief economist for the website Trulia stated “Yesterday’s investors make it harder for tomorrow’s investors to get the yields they want. All the investor activity has boosted prices and added to the rental supply, which has flattened rents.” The article did also talk about markets where the math still seems to work.

GOLD

Gold had a strong day and, after falling through support the last couple of days, rallied back above, indicating a possible false breakdown.

The market was up 0.41% today after a fall of 1% yesterday. The decline yesterday was the largest in a while and might be a signal of more to come. Since the March 14 high, the market has traded in a tight range and the close has been lower than the open 6 out of the last 14 days, which is a change in behavior from the period between January 1 and March 14. No idea which will the market will break, but it is worth paying attention to.

ValueWalk has run an article on a John Hussman chart that uses the Shiller PE to calculate 10 year returns and compares the projected returns against the actual. The correlation is 0.80. The formula Hussman uses to predict the 10-year return is:

Shorthand 10-year total return estimate = 1.06 * (15/ShillerPE)^(1/10) – 1 + dividend yield(decimal)

The math currently works out to 3.9% projected annual return.

On the other hand, Lee Cooperman spoke today at Portfolios with a Purpose and said that he doesn’t see a better alternative to stocks at the current time.

GOLD AND SILVER

You can see how out of favor gold and silver are by looking at the premium (or lack of premium) in the Sprott Physical Gold and Silver trusts (PSLV and PHYS). Both are trading at close to NAV, something that does not happen often.