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Is Evidence Piling Up For A Sustainable Bottom In Stocks?

By: Chris Ciovacco | Monday, February 3, 2014

Manufacturing Data Spooks Markets

Wekaest Data since May 2013

Last week, we noted that buying dips in 2014 was riskier than doing so in 2013. Markets often anticipate bad news. The news that came Monday made it hard on last week's dip buyers. From The Wall Street Journal:

Monday's selling was touched off by a weak report from the Institute for Supply Management that showed the nation's manufacturers cut orders and reduced production in January. The group's manufacturing purchasing managers index for January slumped to a reading of 51.3, its lowest reading since May, though still indicating an expansion of activity. The metric missed a projected 56 and marked a drop from December's 56.5.The moves in U.S. trading followed weakness in European stocks amid continuing anxiety over emerging markets.


Weekend Video Showed "Be Careful" Evidence

This week's stock market video was created over the weekend, meaning before Monday's 40 point drop in the S&P 500. As you might imagine, if the weekly charts looked concerning Friday, they still look concerning after Monday's close. Consequently, until cleared, the concepts in the video still apply from a risk-assessment perspective.

 


Growth Expectations Not Being Met

As described in detail on October 28, the Federal Reserve was hoping the economic coals would catch fire allowing them to cut back on the lighter fluid (QE). The Fed has cut back, but the economy is not stepping up in a convincing manner. From Bloomberg:

U.S. stocks fell, sending benchmark indexes to their biggest declines since June, as a gauge of manufacturing in the world's largest economy retreated more than estimated. Only eight stocks in the Standard & Poor's 500 Index advanced today and all 10 main groups fell at least 0.7 percent. "Everyone walked in this year expecting a continuation of at least growing economic activity and the latest data we've been seeing throw a bit of cold water on that theory," Bill Schultz, chief investment officer at McQueen Ball & Associates.


Investment Implications - Incremental Risk Reduction Continues

Since Twitter timestamps every tweet, it can serve as a de facto investment journal. Our market model began shifting our allocations on January 23 based on the observable changes in the market's risk-reward profile.

Ciovacco Tweet

Charts used to monitor the battle between bullish economic conviction and bearish economic conviction called for a second chess move on January 24.

Ciovacco Tweet


Signs of A Lasting Bottom?

We have not seen improvement in the ETF space or within our model that points to an imminent and sustainable turn in stocks. Could a dead cat bounce occur soon? Sure, anything can happen. Since our approach looks at the evidence in hand, rather than attempting to forecast, we will wait for meaningful improvement before shifting from our current incremental risk-reduction strategy to an incremental cash-redeployment strategy. We took another step away from stocks (SPY) and toward bonds (TLT) Monday. Our bonds performed well during Monday's sell-off in equities; TLT was up over 1.22%. Our cash performed well (relative to stocks).

TLT:$SPX

 

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

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