Goldman Management is a Commodity Trading Advisor registered on the IASG database. Below is an excerpt of his recent market commentary.
The two years of persistent market gains in a low volatility environment may have fueled speculative excesses “the likes of which have not been seen since the last bull market”. In the first day of trading in 2013 the NASDAQ Composite moved above its 100 day moving average and steadfastly remained above this average until April 4th the following year. The time span above this moving average was more than 15 months, a feat for the record books, going all the way back to the inception of the NASDAQ Composite in 1971. This is 4 months longer than the previous record. The second longest streak lasted 11 months, ending July 1983 nearly one year after the bull market began in August 1982. Measures of speculation were rampant in both these tops. For instance in the most recent period, discount brokerage firms’ transactions in February was the highest in over 10 years and 400% higher than in February 2009, which was near the bear market lows. The NASDAQ Composite in the month lost 2% and is 5.5% off the early March closing highs.
Last month we noted the five year anniversary of this bull market and the business cycle commonly follows bull markets. According the Business Cycle Dating Committee or the NBER, the length of the economic expansion will celebrate its fifth year anniversary next month. The average length of an economic recovery since World War II, which encompasses 11 expansions is also nearly five years. At this juncture in this business cycle it may be best to start to focus on the different stages of the Investment Cycle (which is related to the Business Cycle) in order to observe what clues can be deciphered from a market timing perspective. From a simplistic standpoint, certain characteristics tend to reappear during each stage and these stages commonly fall into six groupings: The first stage will start with the beginning phase of economic contraction, when bond prices generally outperform most other asset classes. The next stage is marked by stock prices outperforming, followed by Stage III, which is noted by an outperformance in early cycle cyclical stocks. As the economy matures, bond prices become vulnerable in Stage IV, while deep cyclical stocks lead, which is eventually followed by weakness in stock prices in Stage V. The final Stage (VI) is led by selloffs in late cycle cyclical stocks. In Stage IV groups that tend to lead are: Oil drillers (YTD 9%), oil stocks (YTD 6%), semiconductors (YTD 8%), aluminum (YTD 25%). Although not confirmed by other employment statistics, another point worth noting that would typically occur in Stage IV appeared in the recent quarterly population survey released in mid-April by the Bureau of Labor Statistics. The usual weekly earnings came in at $796 in the first quarter, +3% from a year ago (the broader wages components is +1.9%) and the biggest yearly gain since the recession. Wage growth was above CPI which rose 1.4% during this time span. Presently the classic signs of Stage IV are not fully present given the fact bond yields are lower this year, while the Utility Average has jumped by 13% YTD. Therefore, the potential exists that this late Stage IV will be an elongated process, which is likely to last well beyond the historical average of 6 to 9 months. Subsequently the duration of this Business and Investment Cycle is likely to have the potential to be extended when compared to the historical average.
Trading last month was more dynamic than in the past year. Short term defensive posturing was implemented, the first time in over the past year and a half. On the plus side at the interim market lows on April 11th when the S&P had declined 3% on a closing basis on the month, a 75 basis points saving was captured by implementing this defensive posturing. Although by month’s end the lift in stock prices was a tad stronger than expected which led to modest under performance versus the S&P.