With over 20 years of tactical management experience, Niemann Capital Management’s primary focus is to avoid significant loss of principal in all market environments.
Don Niemann, Niemann Capital Management’s Chief Investment Officer, discusses the investment team’s daily analysis of market and sector data used to identify the areas of the market favored for investment on a risk-adjusted basis.
With a gain of almost 1% last week, the stock market continues to impress investors with its persistent strength. Up six of the last seven weeks, the S&P 500 finished last week at a 10 month high and just shy of a four year peak. The Dow is at its highest levels since May of 2008 and briefly pierced 13,000 before falling below it on Tuesday. The NASDAQ is currently trading at levels not seen since December of 2000! With the major indices trading at or near multi-year highs, the ride has been enjoyable so far in 2012. We are happy to participate in a more favorable investing environment but as always, we monitor market conditions closely as several sectors look overbought, underlying momentum appears to be slowing a bit and investor sentiment seems to be growing frothy.
As many of you are probably aware, this year’s advance has occurred with very little volatility. Compared to the last half of 2011 where 1% swings were considered normal, the market has been relatively calm and more “normal” acting with nary a 1% drop in over 7 weeks. In addition, correlations among stock prices have dropped dramatically suggesting a market in which stocks are moving more on company fundamentals than on global macroeconomic headlines. A wide variety of sectors and industry groups are performing well and as a result, occupy the top of our rankings. Broad market leadership is usually indicative of a healthy market.
As of February 1st, all of our managed strategies have been aligned with our newly enhanced models. As part of our process, we continue to pay close attention to how stocks are trending and where money is flowing in to the market as expressed by the percentage of stocks in an uptrend. As the percentage of stocks in an uptrend increases, we add exposure to various asset classes in response to the improvement. As of now, the technical picture remains solid with more room to the upside in the intermediate term. Also of note, while they performed poorly in 2011, international and emerging markets have since repaired themselves and now look to be on somewhat even footing in terms of relative strength and outlook which bodes well for Equity Plus, Dynamic International and Risk Managed Global Emerging Market Sectors (GEMS) should their recent strength continue.
Read Niemann’s entire update and see current strategy allocations – Market and Allocation Update for February 24, 2012
Market and Allocation Updates Archive available here: Niemann Capital Management – Market and Allocation Update Archive
Portfolio Manager Market Notes
Investor sentiment swung dramatically from despair back to hope, helping drive the best weekly gain for the major averages since the market recovery began. Gains among smaller-cap shares were even stronger, with the Russell 2000 Index rising by over 10%. Volumes were not particularly impressive though. Determining proper positioning is challenging when the market falls 7% one week and rips up 8% the following. If the highs from October get taken out, we’ll raise equity exposure. But each time the market has hit the top end of the range, it’s been repelled lower.
Reports of strong sales over the “Black Friday” weekend started the week off on a strong note. News of concerted action to stem the European banking crisis drove even stronger gains on Wednesday, sending the broad S&P 500 Index up by over 4.3%. Many of the world’s leading central banks announced plans to provide low-cost loans of U.S. dollars to European banks in order to head off tightening liquidity in the region. Investors were also encouraged by a reversal in Chinese monetary policy. The Chinese central bank lowered the reserve requirements for the nation’s banks, indicating that growth was supplanting inflation as the central concern of Chinese policymakers. Signs of further improvement in the U.S. labor market also helped drive gains in the week. On Wednesday, the payroll processing firm ADP announced a solid rise in its tally of monthly private sector job gains. The official count from the Labor Department on Friday was not quite as large, but the government also announced a steep drop in the unemployment rate, from 9.0% to 8.6%. Much of the other economic data released during the week also suggested the U.S. was weathering the troubles in Europe better than many economists had expected. Indicators pointed to continued expansion in the manufacturing sector, pending home sales in October jumped to their highest level of the year, and an index of consumer sentiment hit its highest level since early in the summer. Source: T. Rowe Price
Technical Outlook
The technical picture continues to confound. Down 7% one week and up 8% the next. At this point it is pretty much impossible to say which way the next intermediate term move is headed but the best clue seems to be based on what the dollar does. If the dollar looks to be breaking higher the market should be moving back to the bearish camp and vice versa.
As investor frustration continues, we continue to manage our strategies with an emphasis on downside protection.
Portfolio Manager Market Notes
Market is now down 7% in November (as of Friday) making October’s 11% rise seem like it could be a head fake. As we’ve written about over and over again, the market continues to be held hostage by the news out of Europe. Today the market seems to be cheered by robust Black Friday retail sales along with further speculation that a grand solution out of Europe, whether it comes from the IMF, Germany, or the ECB is on the way. We’re also due for a bit of a “dead cat bounce” after reaching oversold conditions.
With that being said, the market fell through its 50 DMA (and the 50 is now falling) and most metrics suggest resumption to the downside. The market has now broken down into last summer’s range.
Technical Outlook
The technical outlook continues to worsen as Friday couldn’t hold the early morning gains and the 2011 Thanksgiving week was one of the worst in history. Both momentum and money flows are showing some serious signs of weakness as of late. This could be a very important week. Int’l markets continue to be further along in the process of this latest correction. Both the US dollar and Treasury bonds continue to be the most noticeable areas of strength.
Regardless of what the market decides to do from here, our investment process was designed to respond systematically to either a bull or bear scenario. Moreover, we’ve proven in our 20+ years of asset management that we can successfully navigate clients through both.
Unforeseen events in the news have always had the possibility to cause strong price movements in the markets. But over the decades we’ve been managing money, we’ve never witnessed news blowups like the ones seen recently. Over the last few weeks the market has experienced volatile price swings in both positive and negative directions as investors continue to try and position themselves ahead of imminent policy changes occurring around the world. The S&P 500 is down slightly year to date (as of this writing, with dividends reinvested) after suffering a near-bear market decline late April – early October and a rally of almost 20% the last 3 weeks of October. Currently the market seems to be coiling like a tightly wound spring ready to explode in either direction. No one knows for sure which trend will develop next as uncertainty continues to hang over the markets.
Full Market and Allocation Update available here: Niemann capital Management Market and Allocation Update Nov 18, 2011
Market and Allocation Updates Archive available here: Niemann Capital Management – Market and Allocation Update Archive
The Niemann Capital Management blog is an information and communication site where investors, advisors and journalists can discuss with us how current world events, government policies, market fundamentals and investor buying and selling decisions are affecting investment risk in a variety of countries, asset classes, sectors and industries.
However, we want to be clear that we do not base our investment decisions on world events or government policies. We are a highly disciplined quantitative firm that uses relative strength (aka trend following) and market volatility analysis to select our clients’ investments, and we use both technical and market internal analysis to measure risk.
It should also be noted that Niemann Capital Management is not a typical buy and hold, passive, or “long only” money manager that believes diversification alone is a sufficient form of risk management. We are an active management company that uses a tactical allocation and sector rotation approach to find the best potential growth opportunities in low risk markets and we go to cash, buy inverse ETFs, and/or recession resilient investments (depending on the product) for downside protection when market risk is too high.
Our strategies are unusually flexible compared to the vast majority of the marketplace’s investment products. In fact, we think the agility of our management style enables us to more objectively discuss risk, which is a major distinction compared to firms that are perpetually bullish or bearish in accordance with how they manage money.