Hugging the Bear Issue 20120212

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     ® 

    R   ESEARCH   ECH   NVES   FEBRUARY 12, 2016Vol16 Iss02

    If it Looks like one… Walks like one… and Growls like one…(Technically – A Confirmed Bear Market) 

    4 Weeks Ending February 5, 2016 

    Federal Funds 0.40% 0.27% 0.38%30yr T-Bonds 2.97% 2.66% 2.67%

    Gold (London PM) $1156.35 $1085.40 $1150.35

    DJIA 16516.22 15766.74 16204.97 17338.84

    DJUA 626.64 578.66 624.62 576.26NASDAQ 4685.92 4363.14 4363.14 4937.90S&P 500 1940.24 1859.33 1880.05 2040.81

    S&P 500 P/E Current: 20.7 88 yr Avg: 17.0

    High Low Last

    High Low Last 200D M.A.

    For more than 12 months, as technical warning flags have increased, we have been steering a more defensive course in both our strategy and portfolio allocation. In hindsight, our only regret was not fighting the “bullish headwinds” moredecisively. But the sirens of Wall Street have been compellingly convincing, even to the seasoned investor:

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    # of Days w/ 1% gain or loss

    # of Days w/ 2% gain or loss

    Day-to-Day Volatility

    DJIA

        T   o   t   a    l    D   a   y   s

    Major bear market bottoms

    2016 extrapolated from Jan-Current data

    InvesTech Research

    While 2016 opened with headline-grabbing weakness as the worst startto any year in history, it was the spike in day-to-day volatility thatcaught our attention. As we first noted in December 2014, a notableincrease in volatility would almost certainly accompany the onsetof the next bear market – just as it did in 2007 and in the late 1990s.

    It might prove misleading or dangerous to extrapolate the first fiveweeks to a full year; however, there is little doubt that daily volatility(both large UP and DOWN days) is at extremes. This is a tug-of-war between the bulls and the bears… and, so far, the bulls are losing.As you’ll note in this issue, our Negative Leadership Composite islocked in bear market territory and warning flag divergences arenot improving. A market with narrowing participation and failingleadership is a market in trouble.

    Yet at the same time that technical evidence of a bear market seems overwhelming, most leading economic indicatorsare resilient in not forecasting any recession on the horizon. So either this is a market-induced decline (or bear market)that might not have too many more months to run, or we should soon start seeing confirming negative signals on the

    macroeconomic side that Main Street is heading for trouble too. Inside, we tell you where to watch…

    EDITOR: JAMES B. STACK2472 Birch Glen ♦ Whitefish, MT 59937 ♦ 406 / 862-7777

      COPYRIGHT 2016 INVESTECHwww.investech.com

     

    MONEYSHOW ORLANDO ISSUEMONEYSHOW ORLANDO ISSUE  S  P

      E  C  I A  L

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    JANDECNOVOCTSEPAUGJULJUNMAYAPRMARFEBJANDECNOVOCTSEPAUG

    S&P 500 Index

    2014 2015

    Vanguard says bull market will keep sparkling in 2016MarketWatch  – 12/2/15 

    U.S. Stocks Seen Rising Next year in Barron’s ‘Outlook’ SurveyBloomberg  – 12/12/15 

    A Brighter Outlook for 2016: J.P. Morgan FundsBarron’s  – 12/22/15 

    Bull market to stampede through 2016, Deutsche Bank predictsMarketWatch  – 12/4/15 

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     84 mo.

     55 mo. 44 mo. 40 mo.

     37 mo.

    29 mo. until 2000 Bear

    2007 Bear!  ?1966 Bear!1987 Crash!

    Longest Correctionless Bull Market Runs

      Longest periods without a 10% correction since 1928

     Oct 1990 - Oct 1997:

    Mar 2003 - Oct 2007: Oct 2011 - May 2015?: Oct 1962 - Feb 1966: Jul 1984 - Aug 1987:

    0 1 2 3 4 5 6 7 8 9 10yrs1932

    19351938

    1942

    19471949

    1957

    1962

    19661970

    1974

    19821987

    19902002

    2009

    Average = 3.8yrsMedian = 3.6yrs

    Bull Market Duration

    Time From Market Bottom to Bull Market Peak (S&P 500)

    InvesTech Research

    Bull Markets

    6.9yrs (through 2/12/16)

    5/21/15

    InvesTech Research

    Recovery

    Length of Economic Recoveries

    6.7yrs*

    *through 2/12/160 1 2 3 4 5 6 7 8 9 10yrs

    19041908191219141919192119241927193319381945194919541958196119701975

    19801982199120012009

    Average = 3.8yrsMedian = 3.1yrs

    InvesTech Research / 2

    The stock market leads the economy, yet bear markets donot always mean a recession is imminent. However, the bigger bear markets are accompanied by a recession – andthat’s why it’s helpful to learn early in a bear marketif recession warning flags start flying. It could proveparticularly important this time around since thiseconomic recovery has also turned into one of the longeston record [see graphic at right]. This leads one to question

    if a “recession” might be somewhere on the horizon.

    Where are we on the Wall Street road map?Extended bull markets always create excesses. And those excesses can take many forms – in valuation, speculation,margin debt, and simply investor complacency. Historically, 5-10% corrections are a healthy part of every bull market.And the longer a bull market runs without a significant correction of 10% or more, the more likely the end result will bea [sizable] bear market.

    We have repeatedly warned over the past 18 monthsthat this bull market could be getting long in the tooth. While bull markets never die of old age alone, most bullmarkets expire between 2-5 years [see shaded region ingraphic at left]. If the current bull market remains intactand new highs still lie ahead, then it would turn 7 yearsold next month. By summer, it would be the 2nd longest bull market in Wall Street history. That is, of course, ifthe bull market is still intact! 

    Citigroup urges investors to ‘be brave’ as it forecastsa 20% gain in global equities by end-2016

    The Telegraph  – 10/6/15 

    Last Oct

    Citi: World economy trapped in ‘death spiral’CNBC  – 2/5/16 

    Today

    After more than 6 years of seemingly continuous rising stock prices, the “R” word was rarely mentioned in any discussionsor forecasts from economists and Wall Street analysts last year. But what a difference a volatile month of declining stockprices can make:

    Over the next few pages, we explore the dichotomy between leading technical and economic indicators, and lay out our

    strategy for navigating the current Wall Street conundrum…

    In the table at right, we show the 5 longest bullmarket runs without a 10% correction, and this bullmarket’s recent run through last May falls right in themiddle – at 44 months. It has not been comforting to be “sandwiched” by bear market endings on both sidesof that ignominious record.

            ➞

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    2.8%

    2.4%

    2.0%

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    67   71 75 77 79 83 85 89 93 95 97 03 05 11 1391 01 09

    Source: Ned Davis Research

    Margin Debt(% Nominal GDP)

    69

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    S&P 500

    73   81 87 99 07

    67   71 75 77 79 83 85 89 93 95 97 03 05 11 13 1591 01 0973   81 87 99 07

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    Apr2015

    Next Release

    ~Feb 24

    S&P 500

       B  u   l   l   M

      a  r   k  e   t

       "   l  a  u  n  c   h   i  n  g  p  a   d  s   "

    Fears of Debt CeilingFed Taper Announcement

    Oil Price Collapse

    -500

    -100

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    DISTRIBUTION (high danger)2

    1SELLING VACUUM

    (very bullish)

    69   8173   77 87 93   99 01 05 07 11 13 1571 79   8583   8967

    Log Scale

    NEGATIVE LEADERSHIP COMPOSITE

    75   91 95 97 03 09

    -100 

    1 SELLING VACUUM[-BULLISH-]: Thisconfirms the absenceo f n e g a t i v e o rdownside leadership.It is normally a verybullish signal sincea s tock ma rke twithout any downside

    leadership is destinedto move much higher.

    2 DISTRIBUTION[-BEARISH-]: Thissignals that investorsare anxious to sellstocks regardless ofwhether their positionis at a loss, or the stockmarket is tumbling tonew lows. It carriesbearish implicationsas it suggests investorswill use any rallies toget out of the market.

      3  / InvesTech Research

    The run up in margin debt has also become anincreasing concern in the past few years. Thisrepresents “hot money” borrowed to buy stocks onmargin… that will likely panic as selling in a true bear market progresses.

    Note that past peaks in margin debt have

    coincided with, or led, peaks in the stock market.That was also the case a year ago when margin debtpeaked a month before the blue chip indexes. Butas we’ve pointed out, the final peak cannot clearly be identified until margin debt falls enough to makenew highs or peaks unlikely. Based on the volatile,high volume down days we’ve experienced sincethe start of this year, we anticipate margin debtmay confirm a bear market when reported laterthis month by tumbling decisively through thesupport levels of the past 18 months.

    Technical Evidence: Confirming a bear marketIt’s been 26 years since we developed our Negative Leadership Composite (NLC) to help identify the best buyingopportunities, as well as the highest risk markets. It’s pure common sense that broad upside leadership (and absence ofdownside or negative leadership) signifies or confirms a new bull market. It usually does the same for second or third bull market legs. This is shown when a bullish “SELLING VACUUM” [*1] appears in the NLC. Conversely, broad andincreasing downside leadership –shown by “DISTRIBUTION” [shaded region *2]– will always confirm high risk early ina bear market by dropping to -100.

    Our challenge, at times like this, is distinguishing whether “DISTRIBUTION” might be caused by temporary factors,

    which was the case three times in the current bull market – the Congressional showdown over the debt limit, themarket’s Fed “taper tantrum,” and the oil price collapse over a year ago. Judging by the depth, duration, and broadening sector contribution to the “DISTRIBUTION” in leadership, we must conclude that Wall Street is currentlyin a bear market.

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    Market

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    Peak 

    Log Scale

    97 9995 05 11 13 150393 098987 070191

    97 9995 05 11 130393 0989   019187 07 15

    Market

    Peak 

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    NASDAQ

    DJTA

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    Russell 2000

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    03 0402 05 06 07 08 09 10 11 12 13 14 15

    03 0402 05 06 07 08 09 10 11 12 13 14 15

    03 0402 05 06 07 08 09 10 11 12 13 14 15

    -25.6%

    -24.2%

    -17.9%

    -13.1%

    We also find little to cheer about inmarket breadth or participation. TheAdvance-Decline Line, which showeda bearish negative divergence with the

    S&P 500’s secondary peak in November,continues to weaken with –or ahead of– the blue chip indexes.

    When the majority of “troops” are in retreat,it can become increasingly difficult for the“generals” to stand their ground. Withouta measurable improvement in breadth, we believe this market will continue to strugglein the coming weeks and months.

    Two (almost three) major U.S. indexes already qualify as bear markets…

    Globally, one of the safest places to be has been in solid blue chip stocks in the U.S.The S&P 500 Index and Dow Jones IndustrialAverage are approximately 13-14% off theirpeaks last May. Meanwhile, the Nasdaq Indexis within several percentage points of hitting the-20% threshold of qualifying as a bear market.

    By comparison, the Dow Jones TransportationAverage is already in bear market territory witha loss of -24%. And the premier small-cap

    Russell 2000 Index has tumbled over 25%.

    In summary, the bear market damage tomany investors’ portfolios has alreadyproven significantly more severe than what isportrayed by the more resilient blue chip DJIAand S&P 500.  Even within the S&P 500 Index,over 60% of component stocks are down 20% from their 12-month highs, while 37% are downmore than 30%!

    Investors might be surprised to learn that mostforeign stock markets –including London’s FTSE(Financial Times Stock Exchange) Index, theGerman DAX, and Tokyo Nikkei– are all offmore than 20% from last year’s highs. China’sShanghai Composite has tumbled 46% from itspeak last June.

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    Unfortunately, the Coppock Guide is generally not as useful in identifying market peaks. One reason is that bull markettops are usually slow, rounding formations in which momentum –and the Coppock Guide– peak up to a year or moreahead of the market. Yet there are certain instances when it has proven invaluable at a market top…

    In the late 1960s a technician named Don Hahn observed another phenomenon about the Coppock Guide. When adouble top occurs without the graph falling to “0” –a phenomenon that Hahn referred to as a “Killer Wave”– it confirmsan extended bull market where psychological excesses can reach extremes. In those situations, the appearance of a secondpeak generally means a bear market has just begun or is not far off (see red dashed lines). The late 1990s was an exception.

    Killer Waves are rare, and they can be dangerous. This is only the 8th bullmarket in the past 95 years to see a double top in the Coppock. The table atright shows that in 5 of the previous cases the second peaks were associatedwith the start of the more notorious bear markets of the past century: 1929,1969, 1973, 2000, and 2007.

    The Coppock Guide is now projected to drop through “0” in February, whichin the past carries over a 75% probability that a bear market has taken hold.  Of course, that does not mean the bear market will soon end, and it would befoolish to attempt to second guess when or where the Coppock might bottom.But the more important message for defensive investors is this: Once theCoppock Guide does hit bottom and turns upward –by even 1 point– we will bepresented with one of those historical buying opportunities that comes around

    only once or twice a decade. We can’t rush it… and we certainly can’t forecast it… but we can look forward to it and quicklyrecognize it when it does occur. So be patient, stay defensive, and remember that there is light at the end of the tunnel.

    The Coppock Guide, which has been weakening for almost 2 years, is now confirming a bear market. That’s bad news forthe market in the near-term, but has positive implications down the road. This important indicator was developed morethan 50 years ago by Edwin S. Coppock and has often been described as “a barometer of the market’s emotional state.”   Assuch, it methodically tracks the ebb and flow of equity markets, moving slowly from one emotional extreme to the other.By calculation, the Coppock Guide is the 10-month weighted moving total of a 14-month rate of change plus an 11-monthrate of change of a market index. While that sounds complicated, it’s actually an oscillator that reverses direction whenlong-term momentum in the market peaks in one direction or the other.

    Historically, the value of the Coppock Guide lies in signaling or confirming low risk buying opportunities that emergeonce a bear market bottom is in place (black dotted lines on the graph below). And since market bottoms are typicallysudden V-shaped reversals, it works amazingly well – as it did shortly after the bottom in 2009.

      5  / InvesTech Research

    W

    h  en

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    i   t   s i   gn

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     t  h  e"  B E 

     S T B 

     UY "  

     o p p or  t   uni   t  i   e

     s 

    NOTE: S&P 500 estimated prior to 1928 by correlation with a similar index.

    InvesTech Research

    Log Scale

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    Coppock Guide-Double Tops-

    NOTE: Double Tops have preceded 1929, 1969, 1973, 2000,

      and 2007 - five of the biggest bear markets this century.

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    falsesignal falsesignal

    40 55 65 80 0025 35 50 60 70 75 85 90 9520 30 45 05   10 15

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    More bad (but also good) news…

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     Sept 7, 1929

    May 29, 1946

    Nov 29, 1968

    Jan 11, 1973

    Aug 25, 1987

    Mar 24, 2000

    Oct 9, 2007

    May 21, 2015?

    BearMarket Loss

    Oct 1929

    May 1946

    Feb 1969

    Jan 1973

    Sept 1987

    Apr 1998

    Jul 2007

    Mar 2014

    -86.2%

    -28.8%

    -36.1%

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    2nd Peakin Coppock

    Start ofS&P 500 Bear

    Coppock Guide

    InvesTech Research

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    81 837977 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

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    RECESSIONS fear ofdebt ceiling

    showdown

    CEO Confidence

    fear of

    fiscal cliff

    Conference Board

    Consumer Sentiment

    University of Michigan/Reuters

    RECESSIONS

    RECESSIONS

    Consumer Confidence

    Conference Board

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    49-yraverage

    49-yraverage

    Next ReleaseFeb 23

    Next ReleaseFeb 12

    NAHB Builder Confidence Survey

    Source: National Association of Home Builders/Wells Fargo

    85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

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    U.S. CEOs unleash recessionfears in earnings calls

    Reuters  – 2/2/16 

    Unfortunately, the next CEO

    survey will not be available untilearly April.

    Economic Outlook: Not (yet) confirming a recessionThe investing dilemma today is that leading economic evidence is not pointing to an imminent recession.   In fact, forthe most part, economic indicators are showing no recession on the horizon. The U.S. Leading Economic Index [see the January 29, 2016 Interim Bulletin] has barely turned down, and is considerable distance from falling under its 18-monthmoving average – a warning flag that typically occurs 4-12 months prior to the start of recession.

    Consumers also commonly provide early confirmation of an imminent recession with a drop in confidence. There aretwo gauges for measuring this – from the Conference Board (top graph) and the University of Michigan/Reuters (bottomgraph). Both are holding up surprisingly well.

    The two caveats we have in tracking these gauges are:• Sometimes consumer confidence doesn’t fall significantly until the recession is well underway (1981 and 1990).• Even though consumer confidence leads the start of recession, that does not mean it leads the stock market. Very

    often confidence will start falling after the peak on Wall Street.That makes the upcoming reports on consumer confidence and sentiment particularly important.

    It is also rare to see a recession startwithout a deterioration in outlook for

    the housing sector. A downturn in theNAHB Builder Confidence Surveyusually leads both the peak in thestock market and the start of recession.

    Our caveat here –other than thelimited historical data– is that perhaps builder confidence is being artificially buoyed by the perpetually low(attractive) mortgage lending rates.

    One area of confidence that is NOT holding up lies in the Conference Board’s survey of corporate CEO confidence.This recent drop is significant, and unrelated to political showdowns in Washington like the previous two drops inthis recovery. More importantly,that December quarterly surveydoesn’t include the effects of themarket rout since the start of theyear, or what CEO’s are revealingin their earnings calls:

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     NEXT ISSUE: March 11, 2016 MODEL FUND PORTFOLIO

     

    PERCENT FUND SYMBOL 52-WEEK INIT. RECOMMENDED RECENT ALTERNATE FUNDSHi Low Date Price PRICE

     

    19% T-BILLS/ CASH/ MONEY MARKET ------------------------------------------------------------------------------------ Money Market Fund

      5% CONS. DISC. SELECT SECTOR SPDR XLY 81.43 70.16 11/18/11 35.54 70.16

      14% CONS. STAPLES SELECT SECTOR SPDR XLP 51.24 45.07 7/1/11 27.82 49.63

    7% ENERGY SELECT SECTOR SPDR XLE 81.02 51.77 7/1/11 69.13 55.94

      2% FINANCIAL SELECT SECTOR SPDR XLF 25.29 20.85 6/8/12 13.21 20.95

      17% HEALTH CARE SELECT SECTOR SPDR XLV 76.61 64.01 7/1/11 33.28 64.40

    9% INDUSTRIAL SELECT SECTOR SPDR XLI 56.94 48.01 7/1/11 34.48 50.04

      16% TECHNOLOGY SELECT SECTOR SPDR XLK 44.34 37.34 11/18/11 23.34 39.50

      3% MATTHEWS ASIAN GROWTH & INCOME MACSX 18.48 14.90 5/8/09 9.52 15.53 iShares MSCI Pacific EX-Japan (EPP)  8% PROSHARES SHORT S&P 500 SH 23.31 20.38 12/15/15 20.91 22.54

    Cons. Discr.5%

    Cash19%

    Technology16%

    Industrials9%

    Health Care17%

    Financials2%

    Energy7%

    Cons. Staples14%

    International3%

    Bear Fund8%

      7  / InvesTech Research

    11 13 15

    RECESSIONS

    Institute for Supply Management

    ISM Purchasing Managers Index80%

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    (Business Activity Index)

    Institute for Supply Management

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    53.9%

    CHANGES SINCE THE LAST ISSUE: We have reduced our net long exposureto 65% and hold minimal exposure to the two riskiest sectors, ConsumerDiscretionary and Financials. On the January 15 Financial Hotline, we recommendedincreasing the position in ProShares Short S&P 500 ETF (SH) from 3% to 8% in theModel Fund Portfolio. That changes the overall invested position from 76% to 81%(73% long plus 8% short) but, due to the inverse relationship of SH to the market,lowers the net long exposure to 65%. The remainder of the Portfolio (19%) is heldin short-term Treasuries or a money market fund. Continue to monitor the FinancialHotline for important strategy updates.

    FOR NEW SUBSCRIBERS: Purchases after our initial recommendation must be madeat your discretion. We currently advise bringing your portfolio in line with our recommendedallocation by phasing into the market over approximately two to three months.

    In Summary…Technical evidence is confirming that we are in a bear market that will likely take blue chip indexes to at least a 20%loss. However, the most leading economic evidence is not signaling a recession on the horizon – which Fed Chair JanetYellen confirmed this week in leaving the possibility of further interest rate hikes on the table.

    Our Model Fund Portfolio shown below is already the most defensively positioned since the start of this bullmarket – in both cash allocation and sector weighting. If technical evidence continues to deteriorate, or leadingeconomic indicators finally confirm the possibility (probability) of recession, then we will take increasingly defensivesteps in our Model Portfolio.

    The Institute for Supply Management (ISM) surveys are also not confirming a recession –  yet.  The ISM PurchasingManager’s Index for manufacturing has dipped below 50. But that is not uncommon in mid-cycle slowdowns of pasteconomic recoveries.

    However, in what might be“a warning shot across thebow”   of the economy, theISM Service Sector surveyexperienced a serious dropin last week’s release. It isstill in expansion territoryabove 50 and new orders

    (not shown) did not see asignificant decline.

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    The INVESTECH RESEARCH newsletter is published 13 times per year and includes access to the weekly InvesTech Financial Hotline, as well as Online Interim Bulletin available between issues. Thispublication is not a solicitation to buy or offer to sell any of the securities listed or reviewed herein. The contents of this letter have been compiled from original and published sources believed to bereliable, but are not guaranteed as to accuracy or completeness. James B. Stack is also President of Stack Financial Management (SFM), a registered investment advisor, and a separate company fromInvesTech Research. Clients of SFM and individuals associated with InvesTech Research may have positions in, and may from time to time make purchases or sales of, securities mentioned herein.

    Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performanceof any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by InvesTech Research), made reference to directly orindirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to variousfactors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion orinformation contained in this newsletter serves as the receipt of personalized investment advice from InvesTech Research. Please refer to our website at www.investech.com for full disclosure information.

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    PERSONAL PERSPECTIVE

    InvesTech Research

    0 1/4 1/2 3/4 All

    1933

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    S&P 500 Bull Market Gains“Repossessed” by Subsequent Bear Market

    Bear Market Repo’s

    EXPERT ADVICE ON INVESTING

    Jan. 4, 1988USA TODAY

    From his office overlooking Whitefish Lake in theRocky Mountains of Montana, Jim Stack foresawthe stock market crash of Oct. 19. On Sept. 30,his InvesTech newsletters told stock investors tomove to 94% cash.

    One of the most valuable lessons I have learned in over 40 years of Wall Street experience is that investingopportunities always come around again. There is no “last train” out of the station. And even if one misses theinitial launch of the next Apple, Netflix, or Facebook, there will always be attractive reentry points at the next bear market bottom.

    Wall Street pundits spend an extraordinary amount of time and resources trying to convince John Q. Investorthat the only strategy is to stay fully invested 100% of the time. They use games like showing how poorly yourportfolio would have done by missing “the xx  most profitable days of the past XX  years.”   Anything other than astrict buy-and-hold is called market timing. And no one, they say, can forecast where the stock market is headed.

    While that last claim –for the most part– is true, it is possibleto measure market risk and recognize historical warning flagsof past bear markets. Wall Street and economic cycles neverexactly repeat themselves, but they do experience similaritiesin both rhyme and reason. Bear markets do not drop out ofthin air. Neither do market crashes – which we can attest to asone of the few who recognized the warning flags prior to the1987 Crash. ➞

    Choosing Your Own Investment Odds 

    Although that might sound scary, it’s also important to know that: 1) We are defensively positioned, and ourportfolio is currently holding up much better than the broad market. And 2) We’re fully prepared to move more

    defensive if evidence reveals this bear market will turn into a bigger one. And lastly, on an encouraging note,we want to re-emphasize the message conveyed by the 95-year Coppock Guide graph (inside) that this bear willultimately lead to the best buying opportunity in this decade.

    An important consideration today is to recognize that you have total control over your own investment odds.  Following a blind 100% invested allocation in the 7th year of a bull market is a high-risk strategy. That is why we

    have been gradually, yet methodically, moving towarda more defensive position when the first technicalwarning flags started appearing early last year.

    We also recognize the potential downside risk of this bear market if economic evidence starts to confirma probable recession. In that case, it would mostlikely not be just the 20-25% decline that one mightanticipate. Over the course of the past 85 years, bear markets have typically repossessed one-half or

    more of the previous bull market’s gain. The tableat left –which we have shown several times overthe past year– is another important reminder to notunderestimate the risk of this bull market if bearishevidence continues to mount. Based on the S&P 500gain during this bull market from the March 9, 2009low to the May 21, 2015 peak, if the next bear marketrepossessed half of that gain, it would equate to a-34.1% bear market.

  • 8/19/2019 Hugging the Bear Issue 20120212

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  • 8/19/2019 Hugging the Bear Issue 20120212

    10/12InvesTech Research ◆ 2472 Birch Glen ◆Whitefish, MT 59937 ◆ 1-406-862-7777  ◆ www.investech.com

    2007 2008 2009 2010

    2007 2008 2009 2010

    S&P 500

    ProShares Short S&P 500 (SH)

    1600

    1400

    1200

    1000

    800

    600

    $110

    100

    90

    80

    70

    60

    50

    40

    -56.8%

    +92.3%

    +57.4%

    -43.5%

    Bear Market Bull Market

    $1,650$327

    $254$126

    $2,100$268$320

    Bear Market Funds

     ETFETF

    ETFMutual FundMutual FundMutual FundMutual Fund

     

    Fund NameNet Assets

    ($MM)Type

    Inverse S&P 500Inverse DJIA

    Inverse NasdaqInverse S&P 500Total ReturnTotal ReturnTotal Return

    Jun 2006Jun 2006

    Jun 2006Jan 1994Jul 2006Jun 2000Dec 1995

    FundInceptionFund Objective

    ProShares Short S&P 500 (SH)ProShares Short Dow 30 (DOG)

    ProShares Short QQQ (PSQ)Rydex Inverse S&P 500 (RYURX)PIMCO StocksPLUS Short (PSSAX)Grizzly Short Fund (GRZZX)Federated Prudent Bear (BEARX)

    Source: Charles Schwab & Co.

    InvesTech Research

    Fund may have front load

    Can you provide a list of bear fund alternatives?We’ve assembled a list of some of the larger funds that have longer track records, including both ETFs and mutual funds.Before purchasing any on the list, you should perform your own due diligence to determine the suitability for yourportfolio. Reasons for providing theseadditional choices include:• Some retirement accounts are limited to

    mutual fund investments only.• When using a passively managed

    fund, it’s best to choose one based onan index that most closely matches yourportfolio holdings.

    • If you are willing to accept the added riskthat comes with an actively managed fund,you may want to consider one of the totalreturn alternatives.

    If a passive bear fund offsets the market on a daily basis, whathappens over a longer period of time?Due to the compounding of daily returns, performance over periods longer thanone day will likely differ from the inverse of the target index. To demonstrate, let’slook at an exaggerated example of how compounding affects returns.

    Assume that both ProShares Short S&P 500 (SH) and the S&P 500 start with a valueof $100. On Day 1, the S&P 500 loses 10% causing SH to gain 10%. The S&P 500,therefore, ends Day 1 with a price of $90, while SH has grown to $110. If on Day 2the S&P 500 loses 10% again, its price drops to $81 and SH increases to $121. Whileachieving perfect correlation on a daily basis, after two days the S&P 500 is down19% and SH is up 21%.

    If the stock market continues to decline after purchasing a bear fund, gains can bemuch more than you might expect due to progressively larger dollar changes basedon the increasing value of the investment. On the other hand, if the stock marketrises persistently after a bear fund is purchased, the daily percentage changes resultin progressively smaller dollar changes as the value of the investment decreases.

    Hence, investors lose less than they might expect when the fund’s return over thecourse of the rally is calculated.

    This point is illustrated in the graphs above, which show the S&P 500 and SH after the stock market peak in October 2007.Clearly, bear funds can serve as valuable “insurance” in a declining market, even if the position is held past the market bottom. One important note: bear fund performance in trendless, volatile markets is less predictable than in marketspersistently trending up or down. In fact, due to compounding effects, an inverse index fund may even decline as themarket remains flat. 

    Why don’t you use a leveraged bear fund?A leveraged bear fund is designed to go up two or three times as much as its benchmark goes down on a daily basis.“More” might sound better to the average investor; however, trying to time bear markets or corrections rarely works, andone can easily get burned with leveraged funds if the market doesn't move as anticipated and the compounding effect is

    magnified. With this in mind, we’d avoid the leveraged bear market funds due to the increased volatility and risk.

    SummaryBear market funds should be used to neutralize portfolio risk and help you sleep at night – not as a tool for speculativeshort-term trading. With a safety-first investment strategy, an inverse index fund can serve as an effective, low costinsurance offering an efficient way to offset rising market risk and reduce portfolio volatility. When considering a bearfund, the following guidelines should be helpful:

    • Use bear funds as an insurance to offset a portion of your portfolio investments.• Stay with the passively managed bear funds that inversely correlate with the broader indexes.• Choose the larger more liquid funds with longer track records.• Gradually implement a bear fund position as a bear market becomes more likely.• Do not use leveraged funds.

    If bear funds are not an option for your portfolio, the alternative is to reduce your long positions to reach the target “net”allocation and hold the balance in cash.

  • 8/19/2019 Hugging the Bear Issue 20120212

    11/12

    InvesTech Research is the most detailed, thorough, and objective information resource you can use forsafely managing your portfolio. We pride ourselves on recognizing the best profit opportunities during bull

    markets, and no one is beer at protecting those profits during bear markets. And now you’re invited to takeadvantage of the same low subscription rates we offered in the 1980s.

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    O f  f  e r E x  p i r e s S o o n ! 

    25 26 27 28 29  30 31 32 33 34 35 36 37 38 39  40 41 42 43 44 45 46 47 48 49  50 51 52 53 54 55 56 57 58 59  60  61 62 63 64 65 66 67 68 69  70 71 72 73 74 75 76 77 78 79  80  81 82 83 84 85 86 87 88 89  90  91 92 93 94 95 96 97 98 99 01 03 04 05 06 070200   08 09 10 11 12 13 14 15

    25 26 27 28 29  30 31 32 33 34 35 36 37 38 39  40 41 42 43 44 45 46 47 48 49  50 51 52 53 54 55 56 57 58 59  60  61 62 63 64 65 66 67 68 69  70 71 72 73 74 75 76 77 78 79  80 81 82 83 84 85 86 87 88 89  90  91 92 93 94 95 96 97 98 99 01 03 04 05 06 070200   08 09 10 11 12 13 14 15

    25000

    20000

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    150

    100

    80

    70

    60

    40

    50

    30

    20

    10

    25000

    20000

    15000

    10000

    8000

    7000

    6000

    5000

    4000

    3000

    2000

    1500

    1000

    800

    600

    500

    400

    300

    200

    150

    100

    80

    70

    60

    40

    50

    30

    20

    10

    16

    15

    14

    13

    12

    11

    10

    9

    8

    7

    6

    4

    3

    2

    1

    0

    16

    15

    14

    13

    12

    11

    10

    9

    8

    7

    6

    55

    4

    3

    2

    1

    0

    +14

    +12

    +10

    +8

    +6

    +4

    +2

    0

    -2

    -4

    -6

    -8

    -10

    -12

    -14

    +14

    +12

    +10

    +8

    +6

    +4

    +2

    0

    -2

    -4

    -6

    -8

    -10

    -12

    -14

        }              

    Source:The World Almanac  The Century World History Factfinder

    Penn SquareBankdeclared insolvent byFDIC

    Record Fed easing11 Discount Rate cuts in 12mos

    Terrorist attackson WTC &Pentagon

    Nasdaq hits5048Internet "bubble" pops!

    World War II

    Vietnam War

    Korean War

    SuezCanalseizedbyEgypt in

    MiddleEast War

    Bayof Pigs

    Cuban missilecrisis

    6-DayMiddleEast War

    British/Argentineconflict in Falklands

    PaulVolcker appointedFederalReserveChairman

    U.S. invadesGrenada

    U.S. bombsLibya

    U.S. launchesOperation Desert Storm

    Collapseof Germanbanking system

    Lindbergh makesfirst solo

    transatlanticflight

    Smoot-HawleyActTariffsrise44%

    Roosevelt declares"BankHoliday"

    Securities&ExchangeAct

    InvestmentAdvisorsAct

    of 1940

    Rome-BerlinAxisformed

    GermanyinvadesAustria

    Fallof France

    PearlHarborU.S. declareswar

    D-Day- AlliesinvadeNormandy

    Germanysurrenders

    Hiroshima/NagasakiJapan surrenders

    WarsawPact

    USSR launchesfirstsatell ite- Sputnik1

    Alaska/Hawaiibecomestates

    Nuclear disasterat Chernobyl

    AT&T divestiture

    Gramm-Rudman"balanced budget" bil l

    ChineseTiananmenSquareincident

    Berlin Wallfalls

    USSR dissolves

    RepublicanscontrolSenate&House

    first timein 40yrs

    S&L bailoutestimated to exceed

    $350 bill ion

    Housevotesto impeachPres. Clinton

    Russiadefaultson foreign debt

    Clinton $500 bill iontaxincreaseapproved

    Japan experiencesseveral1930s-style

    "run-on-banks"

    CongresspassesNAFTA

    Mexican Pesocollapses

    -40% in 2 wks

    SpaceshuttleChallenger explodes

    Pres. Kennedyassassinated

    Armstrong walkson moon

    WatergatescandalPres. Nixon resigns

    ThreeMileIslandnuclear accident

    Pres. Reagan shot

    Reagan 25% taxcut approved

    Berlin Wallbuilt

    Battleof Midway

    United Nationsestablished

    NATO established

    BlackTuesday(market falls-11.7%)

    1987 Crash"BlackMonday"

    Market falls-23%

    GorecontestsPresidentialElection

    outcome

    FederalReservearrangesbailout ofLTCM hedgefund

    Asian financialcrisisRecord 1-dayDJIA pt. loss

    Enron bankruptcylargest in history

    Nasdaqloss= -78%

    Iraq War

    Ben BernankeappointedFederalReserveChairman

    $787 bill ion EconomicStimulusBill

    JPMorgan Chaseacquirescollapsed

    Bear Stearns

    Lehman Brotherscollapses

    U.S. takesover AIG in

    $85 bill ion bailout

    FederalGovt takesoverFannieMae&Freddie Mac

    Alan Greenspanappointed

    FederalReserveChairman

    Iraq invadesKuwait

    SocialSecurityAct

     Worst year forstockssince1931DJIA drops-34%

    GM filesforbankruptcy

    2010Flash Crash

    Superstorm SandystrikesNortheast

    StockMarketsclosed Oct. 29-30

    BP oilspill inGulf of Mexico

    $700 bill ion TARP Bailout

    Japan 9.0 EarthquakeTsunami/nuclear disaster

    S&P downgradesU.S. credit

    Log Scale

    AffordableCareAct

    16-DayGovt Shutdownover Debt Ceiling

    Janet Yellen appointedFederalReserveChair

    Alibaba$25 bill ionrecord-breaking IPO

    DISTRIBUTION(high danger)

    SELLING VACUUM(very bullish)

    Log Scale

    2000

    2500

    1500

    1000

    800

    600500

    400

    300

    200

    150

    100

    60

    80

    50

    S &P 500

    0

    0-50

    -100

    604020

    626364656667686970717273747576777879 808182838485868788899091929394959697989900 010203040506070809101112131415

    Negative Leadership Composite

    Stock Market  • 

    Inflation  • 

    Interest Rates  • 

     InvesTech ResearchAmerican Economy 

    WallChart 1925-2016 

    Afghanistan War

    Dow Jones Utility Average

    Dow Jones Industrial Average

    U.S. abandonsgold standard

    Gold fixedat $35/oz Wage/pricefreeze

    IMFand World Bankestablished

    Gold priceraisedfrom $35/oz

    Arab oilembargo

    Becomeslegalto owngold in U.S.

    Gold hits$850/oz

    OPEC "quarrels"Oildropsfrom

    $30/bblto $13/bbl

    Oilhits$77/bbl

    Oilhits$145/bbl

    Oilhits$44/bbl

    Gold hits$1000/oz

    Gold hits$1895/ozConsumerPriceIndex

    (%annualrate ofchange)

    Stack Financial Management2472 Birch Glen, Suite A Whitefish, Montana 59937

    (800)790-5001 www.StackFinancialManagement.com

    SFM

    AAACorporateBond-%

    90-DayTreasuryBill-%

    DiscountRate- %

    Recessions

    Fed revisesDiscount Rate

    calculation

    Peak in Real Estate Prices(Housing “bubble” pops)

    Fed Funds RateTarget Range0% to 0.25%

    Key Interest Rates

    Inflation

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  • 8/19/2019 Hugging the Bear Issue 20120212

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    For 35 years, The MoneyShow has served as the individual investor’s one-stop resource for unbiased investment

    education. And James Stack, president of Stack Financial Management and InvesTech Research   has been a

    featured speaker at MoneyShow events for 32 of those years! Meet Jim at one of his educational and informative

    workshops to learn how to grow and protect your portfolio in these challenging market conditions:

    OPENING PANEL: How Top Advisors Are Protecting Client Portfolios NowThursday, March 3  8:45-9:25am

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    Risk Management – Why Your Financial Survival in 2016 May Depend on ItFriday, March 4  8:00-8:45am

    For the current bull market to extend through 2016, it must become the second longest bull marketin U.S. history. What are the historical odds of that occurring, and what could derail it into aferocious bear market? More importantly, how should you change and adapt your investmentstrategy in this election year? James Stack and his Portfolio Team will explore tactics that are mostsuccessful in capturing late-stage bull market profits, and lay out a road map for negotiating thenext major market decline.

    To make better investing decisions in the coming months, we also encourage you to attend this special educational

    workshop offered by members of the Stack Financial Management Portfolio Team:

    For complete conference details and to register for FREE admission, call MoneyShow toll-free 1-800-970-4355 or visit

    their website at www.orlandomoneyshow.com ( please be sure to mention priority code 040243).

    James B. Stack, PresidentStack Financial Management

    and InvesTech Research

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    interested in learning more about SFM’s money management services. Portfolio Managers Annell Danczyk, Brian

    Lazorishak, and Eric Vermulm will be available for private consultations; however, availability is limited . Please call

    1-800-790-5001 as soon as possible to reserve a meeting time.

    The Best Stocks of a Generation:Evidence from the Past, Ideas for Today!

    Thursday, March 3  3:20-4:05pmSFM Portfolio Management Team

    What are the best performing stocks of the past 10, 20, and 30years? Why have they consistently outperformed the market?More importantly, what clues do they give us for findingactionable investment ideas today? Join the Stack FinancialManagement team of Annell Danczyk, Brian Lazorishak, andEric Vermulm as they detail what DNA the great companies ofthe past shared, and which current stocks have these same

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