The Peter Dag PORTFOLIO STRATEGY & MANAGEMENT
65 Lakefront Dr., Akron, OH 44319.
1 year, 24 issues, $389. www.peterdag.com.

Long-term outlook: Very cautious

       George Dagnino: “Our long-term outlook (next 12 months), based on our indicators, remains very cautious.
       Change in profits as percent of GDP has stalled since late 2010. Not coincidentally the market has had problems making any progress since then.

       Our financial risk indicator remains close to historically high levels, well above the average range, suggesting this is a “timer” market. Other financial stress measures we follow are still rising. The financial environment remains dicey. Investors cannot invest taking as a given the long-term return of about 7% per year. The historical rising trend line has been broken.
       Commodities have been rising until April 2011 because of the economic growth experienced after the end of the 2009 recession. They have been declining since then because of slower growth in business activity. They seem to have bottomed in response to somewhat better news on economic activity.
       Gold will continue to consolidate. Gold miners – GDX – are more attractive. The dollar will go nowhere.”

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THE CHARTIST
P.O. Box 758, Seal Beach, CA 90740.
1 year, 17 issues, $290. www.thechartist.com.

200-day line good barometer
of the market’s primary trend

       Dan Sullivan: “The 200-day lines held the market in check during the last four bear markets. We have pointed this out in previous letters however it is certainly worth reviewing. The last bear market began on 10-10-07 and ended on 3-9-09. Once the S&P 500 dropped below its 200-day line with conviction, it was held in check throughout. It crossed its 200-day line a couple of times but only by a narrow margin. The best it could do was move 2.04% above on 12-10-07 with the S&P closing at 1515. The next attempt came on 12-26-07 when it moved 0.55% above closing at 1497. The final attempt was made on 5-19-08 when it came within 0.08% of its 200-day line closing at 1426. From there it was all downhill. From top to bottom the S&P lost 56.7%.
       The bear market prior to that began on 3-24-00 and ended on 10-9-02 with the S&P losing 49.15%. It was not until October of 2000 that it dropped below its 200-day line with conviction for the first time. After that the best it could do was move 0.49% above the line on 1-4-02 and 1.58% on 3-11-02.
       Going back still further, the bear market that started on 11-28-80 and ended on 8-12-82 resulted in a 27.11% loss for the S&P 500. Once the S&P slid below its 200-day line like the previous bear markets, it was held in check throughout. The best it could do was move 1.90% above its 200-day line on 5-27-81, 0.94% on 8-13-91, and 0.01% on 5-11-82.
       During the devastating 1973-74 bear market, which started on 1-11-73 and ended on 10-3-74, the S&P 500 lost 48.2%. The S&P managed to move 2.36% above its 200-day line on 10-26-73 and from that point was held in check for the rest of the bear market. As we mentioned previously the 200-day line is not a magic number; it is a guide. It certainly is not the holy grail but it is a good barometer of the market’s primary trend.”
       Question: What do you mean by “dropping below its 200-day line with conviction”? Answer: “Our interpretation would be a drop of at least 5%. At the outset of a bear market the key indices will always be above their 200-day lines and in many instances remain there for a considerable period of time, but once they fall below and stay there for a lengthy time span the warning flags come up which is exactly what has occurred this time around. Until we see evidence to the contrary, we will continue to work under the assumption that a bear market is in progress. Thus, our advice is to stay on the sidelines 100% in money market funds.”

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