Market Climateand Weather Forecast

Presented by Herb Geissler, Managing Director of The St.Clair Group

Rational Investing/VectorVest Special Interest Group of Pittsburgh AAII

May, 2012

"It is not the strongest of the species that survives, nor the most intelligent,

but the ones most adaptable to change." Charles Darwin

Absolute Return More Important Than Relative

Return

Kuznets’ Infrastructure cycle averages 17.6 years for each bull or bear phase

Ten-fold, 15-20 year

Big Bull Market

15-20 yearConsolidating Bear Market

Cyclical ClimateNew Political Agendas and Administrations

globallythrough 2013

Still in churning phase of Kuznets cycle Europe sick with sovereign debt & austerity fears, US healing slowly from debt crisis and is improving

manufacturing efficiencies with fewer workers emerging markets coping with demand shrinkage from

their major markets in developed countries

Then why has US stock market been so strong?

Recent Market Surges WereFueled by Fed Stimulus

Liquidity

Stock Market Tracks Growth in GDP

For 40 years, ECRI’s

WLI Called every major SP500 Drop

The leading economic indicator (LEI), published by Economic Cycle Research Institute, is a weighted average of ten different economic and financial indicators. Above 50 is expansion, below 50 is contraction

Growth in WLI since January ’12 is now weakening

and WLI (absolute) is barely above 50 and remains below par

ISMs (PMIs) Confirm Direction of Stock Market

Market rises when ISM is above 50, except right after 9/11/2001

9/11

NAPM = 54.8

NMBA = 53.5

in April ‘12

Even the Workshop of The World

Is in Contraction

Consumer ConfidenceStruggling to Reach Prior

Lows

Consumer confidence still close to the worst during Normal periods

Small Business Confidenceis below normal and

weakening

Rhetoric Causes Trading Rhetoric Causes Trading RangesRanges

2013 Bull Rally 2013 Bull Rally Hinges on Hinges on Severity of Severity of AusterityAusterity

June Buying

Opportunity

Analysts’ Consensus Expects

Rebound from “Soft” 2012

Source: Morgan Stanley Research of Analyst Expectations

2012 Intermediate-Term 2012 Intermediate-Term Strategic ConclusionsStrategic Conclusions

Walk softly and carry a big stickWalk softly and carry a big stick

1. Active institutional bottom-fishing and Operation Twist in November 2011 produced strong relief rally to end-March, 2012, as cash hoards were put to work

2. Liquidity from Fed is over, Europe is in sovereign debt crisis, emerging markets slowing down all likely to cause US stocks to sag into seasonal low by July 4 th, ‘12

3. U.S manufacturing sector becoming healthier from “creative destruction” and better technologies. But investing methods require greater selectivity in strategies and vehicles during such uncertain times

4. Political uncertainties and posturing delays problem-solving into next administration. Stocks bobble (crab-like) through 2012 into a political relief rally in Fall 2012

5. Next administration “forced” to drastically cut spending, paring Government from 20% of GDP closer to historical 15%, increasing job-losses. Big Slice will be received better than frequent small slivers. European socialism/populism will worsen problems

6. Thus 2013 likely to be a “blood bath” year for the US economy and the stock market. Using Contras and Defensives could be critical to getting any positive returns.

Depends on Who You Are?Depends on Who You Are?

Passive Investor is defined by absence of Passive Investor is defined by absence of disciplined rules to sell-off losersdisciplined rules to sell-off losers ““Snooze and lose” has destroyed many nest eggsSnooze and lose” has destroyed many nest eggs

Active investors vary in degree of activityActive investors vary in degree of activity Timing to avoid big losses = dynamic asset allocation = MA12Timing to avoid big losses = dynamic asset allocation = MA12 Periodic rebalance ETFs = tactical asset allocation = IVYPeriodic rebalance ETFs = tactical asset allocation = IVY

Monthly weed and refresh of stocks = position tradingMonthly weed and refresh of stocks = position trading Daily or weekly trading = swing tradingDaily or weekly trading = swing trading

Modestly active investors need better tools to trigger Modestly active investors need better tools to trigger sound entry and exits that stay out of harm’s waysound entry and exits that stay out of harm’s way

Strategy PreferencesStrategy PreferencesFor Intermediate Term For Intermediate Term

InvestorsInvestors

Three Simple Strategiesfor Moderately Active Investors

to stay on the RIGHT side of the market

1. Exit stocks whenever Index drops below its 12 month moving average

2. Diversify risk by holding 5 non-correlated ETFs only when each above its 10 month MA

3. Find single best-class to boost return, with moderate drawdown, by holding the “top performing” ETF of the 5, refresh monthly

For Dynamic Asset Allocation during Cyclical Periods,For Dynamic Asset Allocation during Cyclical Periods, 12 Month Moving Average 12 Month Moving Average

Pinpoints Reversals and Minimizes Pinpoints Reversals and Minimizes Draw-downsDraw-downs

During 10 difficult years, would have averaged 6.6% annual gain with 11.5% max draw-down

vs 1.2% gain and 52.6% mdd with Buy & Hold

During past 60 years, using MA12 would have produced 40% more profit

IVY Spreadsheets, posted monthly,

Tells You Which ETFs to Hold

IVY BASIC, as shown, keeps you out of trouble and beats buy-and-hold returnsIVY TOP, best single ETF, produced 17.3% compound annual return over past five years

CDs with spreadsheets and tutorials available for $30

IVY was Cautiously Bullishat end of April 2012

IVY BASIC closed positions in VEU (Major Nations, exc USA) and DBC (commodities)

Holding VTI (US Large Caps), VNQ (Real Estate) and IEF (Bonds) for 60% invested

IVY TOP is holding VNQ

For Position traders,

Weather Forecastfor More Active Investors

When the facts change, I change my position.What do you do, sir?

- John Maynard Keynes

2011 Frustrating with Trading Ranges

and Short, Spiky Trend-Surges

2009 2010

2011

Now, SPY has pierced MA20 and MA50

and may find support again at past highs

For Position traders,

Would you be long

now?

RSI less than 50

Price is below MA50

MACD sloping down

and is under zero

DMIs are net-

negative

Risk Aversion is Absent in a liquidity melt-up, as Europe addresses sovereign

debt issues

Risk aversion = FEAR

Over Confidence =GREED

For Position Traders,

Bull runs take off when VIX drops below 25

McClellan Summation Index(MA20)

Confirmed Bull Rally before Xmasand the stall in March, finding support at prior highs

For PositionTraders,

Longs Make Money When More Than Half of SPX is above

MA50

For Position Traders,

50/50/0 Rules Signaled Xmas Bull Now Suggests More Downside If Support

Is Broken

For Position Traders,

With Current Uncertainties,Leadership Shifting to

Defensives

ConsumerDiscretionary

Healthcare

ConsumerStaples

Utilities

Weather Forecast:Sunny, but clouds on

horizon Bull rally confirmed in mid December with VIX

under 25, McC Sum crossing its MA20, and 50/50/zero chart

Rally faltering, with only 40% of SPX over MA50s 50/50/0, strong since Jan 1, now testing support at

bottom of trading range

End of Operation Twist in June and political rhetoric likely to trigger a nasty summer correction

Correction would provide a major buying opportunity for post-Election rally

For Swing Traders,

Recap of Today’s Points

Economy and stock market will be distressed for next several years

Three Simple Strategies can protect and enhance wealth, patiently

Position and swing trading can boost returns, whenever market moves advantageously as confirmed by a few key indicators

Any Questions ?

CDs with the 3 spreadsheets and 3 tutorials

are available for $30 here or by mail.Send check and return address to:

Herb Geissler1792 Taper Drive

Upper St. Clair, PA 15241