Questions and Answers
Q1: Vaughn, I noticed you aren’t trading as much these days. What’s up?
Buying and selling stocks is a cyclical matter. More trading is necessary when market cycles are ending or beginning. We are neither at the end nor the beginning of our current economic expansion, brought on the national lockdown. We are most probably in the middle portion of our economic cycle. Mid-cycle performance requires patience. Of course, some portfolio preening will occur. Changes in tax policy and supply-chain fundamentals are examples of factors that require portfolio adjustments.
Q2: You’ve talked about keeping a bit more cash on hand as part of a prudent asset allocation strategy. When do you expect to employ this cash?
Soon. We may witness another good entry point in the next ten weeks. Just now I am focusing on the cyclic trend index. This is a very accurate technical short-term market indicator. Like all metrics, it isn’t perfect. However, it can be correct some 70% of the time over 100-day periods of time. Note the short-term bearish signal and the longer-term cyclical connotations.
CYCLICAL TREND INDEX (CTI): Bullish
Presently the CTI is Positive at +10, down 4 notches from the previous month. The counts for Cycles B, C, D and E are bullish while counts for Cycle A are bearish.
Cycle – Avg # Of Weeks In Cycle – # of Weeks Since Previous Bottom – Bullish or Bearish Connotation
A 6 + or -1 Week 6 Weeks Bearish
B 18 + or -2 Weeks 10 Weeks Bullish
C 36 + or -4 Weeks 10 Weeks Bullish
D 72 + or -7 Weeks 10 Weeks Bullish
E 216 + or -20 Weeks 79 Weeks Bullish
The following are projected CTI readings through the week ending 11/26/21.
Week Ending – CTI – Connotation
10/01/21 (Actual) 10 Bullish
10/08/21 (Projected) 10 Bullish
10/15/21 (Projected) 4 Bullish
10/22/21 (Projected) 3 Bullish
10/29/21 (Projected) 3 Bullish
The CTI is the total of the plus and minus values assigned to each cycle based on the number of weeks that have passed since their previous cyclical bottom. Note that the short-term A cycle last bottomed six weeks ago. Since this cycle lasts six weeks plus or minus one week the transition of longer cyclical activity should occur. Cycles B,C, D, and E are each bullish, though a black-swan event could reset these cycles. Until then, the momentum of the bullish cycle trend continued to fade. It currently stands at +10. However, the momentum is projected to fade still further to +3 by month end. The optimist would assume this is the pause that refreshes, after which quarterly earnings will reaccelerate into 2022. The short-term trader, however, may project that fading market sentiment may be due to year-end tax loss selling, capital gains harvesting before tax increases, and concern that Covid-19 and supply chain constraints have reduced fourth quarter 2021 numbers.
Nevertheless, we are in an economic expansion. Therefore, if this economic expansion persists, bond yields should be headed higher, possibly much higher. Therefore, if the balance of this recovery remains ahead of us, exhibited by higher interest rates, it makes sense to assess which asset classes perform best during this phase in the economic cycle. From the chart below you can see small-cap stocks and cyclical stocks outperform as interest rates advance. The chart shows the relationship between the yield on the 10-year Treasury and a mix of small-cap and cyclical stocks going back ten years.
Chart 1 below shows the relationship between higher rates and small-cap stocks.
Vaughn Woods, CFP, MBA
Vaughn Woods Financial Group, Inc.
2226 Avenida De La Playa
La Jolla, CA 92037
The Leuthold Group
Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views of Bolton Global Capital or Bolton Global Asset Management. The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0268.