Trader’s Narrative

With the year coming to a close within the next few days, I’m looking back at the whirlwind trading year that was by highlighting the most relevant and helpful analysis I shared with you each month.

If you missed the previous ones, here they are: January, February, March, April, May, June, July and August. And that brings us to September 2009:

• Gold Seasonality Turns Positive
  With the arrival of September, gold bugs rejoiced as it marked the arrival of positive seasonality for gold and gold stocks. This year it worked out great as gold started September at $950 and reached $1225 in early December. Gold stocks gained +45% in the same time period.
• Mutual Fund Cash Levels Adjusted For Inflation
  The amount of cash that is held in mutual funds is a little known sentiment indicator. We adjust this to account for the effects of inflation in rewarding and punishing those holding cash to improve its predictive qualities.
• Lowry Research Update: Rally Continues Strong
  After changing from bears to bulls, Lowry’s continued to underline the strength in the stock market rally. They stressed that there was an orderly nature to the buying which prevented the rally from hitting ‘panic buying’ spikes that would only lead to major corrections.
• Does Demographics Drive The Stock Market?
  The MY ratio measures the relative number of middle-aged people to young people in a country. A rising MY ratio corresponds to expanding P/E ratios and therefore, rising stock prices.
  The theory explaining the correlation is that the middle-aged have more assets and income which they invest (for their future retirement). The charts and data suggests that the US is facing a tough road ahead but Japan, surprisingly, has demographic tail-winds.
• Equity Mutual Funds Show Outflows - After 60% Rally!
  Remarkably, retail investors were totally rejecting the stock market, even as it powered ahead this year. By September, although we had gained 60% from the lows, the average US investor was cashing out of their equity mutual fund and rushing headlong into bond funds.
• The Mother Of All Momentum Thrust Years
  Mid-September brought us a third extreme momentum thrust - the other two were in March and July. While it was almost ludicrous to suggest buying at what seemed a lofty level, the historical breadth data suggested (correctly) that more gains were to come.
• What Happens This Far Above The 200 Moving Average?
  When you step back from the minutia of price volatility, the market begins to appear more like large, slow moving waves which peak and trough around its very long term trend. The S&P 500 usually has difficulty continuing higher when it reaches 20% above its long term trend line (which it did in mid-September).
• When September Flexes Its Muscle
  September is the weakest month of the year for stocks. But what happens if it defies the historical pattern? Based on previous performance, a strong September is a sign of continued positive returns in October and beyond.
• Why Today’s Bond Investors Will Be Disappointed
  Although retail investors in the US were enamored with fixed income, valuation suggest that they will be disappointed. That’s because initial yields tell us a great deal about future returns for bonds. This is all the more tragic as investors are jumping out of the proverbial frying pan (stocks) and into the fire (bonds).
• Do Bull Market Rules Apply?
  The only time that the market tends to shrug off the 200 day moving average barrier is when it is undergoing a secular shift. We last saw this in 1982 at the launch of the super-bull market that lasted almost 20 years. The only way to know was to watch for the S&P 500 hitting 20% above its long term trend incessantly.

Jan - February - March - April - May - June - July - Aug - October - November - December