Flatlining

The stock market’s behavior in the last 45 days or so since mid-July reminds me of an electrocardiograph that we’ve all seen in the hospital (or on TV).  Not so much the steady rhythm of a regular heartbeat, but rather that ominous visual of a flatline when the patient expires.

I’m not implying the stock market is terminal in any way.  Hardly. Rather, it’s just to convey that large company stocks have gone mostly nowhere since July 15.  Witness—on July 15, the S&P 500 stood at 2161.  On August 1 it was 2170, and was also at 2170 on September 1.

You can see this visually on the chart below, courtesy of www.stockcharts.com.

In fact, it has been 41 days since the index has risen or fallen more than 1%.  What does this quiet period portend?  That’s hardly definitive, but my observations of past markets suggest one should ask, “what is the trend?”  For the most part, that has been up since mid-February, so I would expect that eventually this narrow range of trading will eventually be resolved to the upside.

I’d also be remiss in noting that small stocks have hardly been comatose—the Russell 2000 index has gained 3.8% since July 15.  Foreign equities have been equally as strong, with the Vanguard Total International Index fund up 4.09% in the same period.

Investment Allocations

Given this placid environment, it’s not surprising that there has been little change in our various risk models, or allocations.  Stock exposure in TABR’s tactical accounts remains at about 65% of its maximum, plus another 5% in real estate (less in Conservative and more in Aggressive accounts).

Our high yield bond risk model remains positive, still on a February 29 BUY signal and confirming new highs in the stock market.

All in all, the overall technical evidence has to be considered moderately bullish.  As noted from last month’s update featuring breadth thrusts, downside corrections are likely to be limited in scope until support on the S&P 500 at the 2130 level is decisively violated.

Something to Watch—The Dow Transports

I often cite divergences in indicators, both positive and negative, to give clues about market risk.  One such process is called Dow Theory, which was formulated in a series of editorials in the Wall Street Journal back in 1900 by Charles Dow.

There’s no set of formal rules, which makes it impossible to test, but in general, the underlying trend of the market (up or down) is said to be in sync if both the Dow Jones Industrial Average and the Dow Jones Transportation Average are confirming each other.

When they’re not, it can be a warning for a change in the trend.  Below are daily charts of the Industrials, Transports and Dow Jones Utilities indexes, reproduced from the latest issue of Barron’s.

On a shorter term basis, the Industrials made a new high in mid-August, while the Transports peaked in mid-April, and the Utilities in early July.  A similar negative divergence took place last May when the Industrials peaked, while the Transports had peaked in December 2014.  This eventually led to the intermediate correction that culminated in February’s low.

The Dow Jones Utilities are not part of Dow Theory, but can be helpful too.  The longer these non-confirmations continue, the more likely the Industrials will eventually be dragged down.  At present, though, this divergence is being offset by a new high in the daily advance/decline line, as well as new highs in corporate high yield bond prices.

Borrowing From Your IRA

This inquiry has come about several times in the past 8 months from different clients, so I thought I’d write about it briefly.

Basically, you cannot borrow money from an IRA and pay it back.  Period.  Loans are permitted from many 401 (k) plans, if the plan document allows them, but this is not possible with an IRA.

One may WITHDRAW money from an IRA, and put it back within 60 days, which is called a rollover, and you’re allowed to do one of these during a 12-month period, no matter how many IRA accounts you may maintain.

If you withdraw money from an IRA, and don’t put it back within the 60 day period, you’ll be taxed on the amount of the draw, and also assessed a 10% federal penalty if you are under 59 1/2.

Remember, a distribution (withdrawal) and subsequent rollover isn’t considered a loan, although some have incorrectly referred to it as such.

Material of a Less Serious Nature

As a bagpiper, I was asked by a funeral director to play at a graveside service for a homeless man who had no family or friends.  The funeral was held at a cemetery in the remote countryside  and this man was the first to be laid to rest there.

As I was not familiar with the backwoods area, I became lost and being a typical man, did not stop for directions.  I finally arrived an hour late and I saw the backhoe and the crew who were eating lunch, but the hearse was nowhere in sight.

I apologized to the workers for my tardiness and stepped to the side of the open grave where I saw the vault lid already in place.  I assured the workers I would not hold them up for long, but this was the proper thing to do.  The workers gathered around, still eating their lunch and I played out my heart and soul.

As I played, the workers began to weep.  I played and played like I’d never played before, from “Going Home” and “The Lord Is My Shepherd,” to “Flowers Of The Forest.”  I closed the lengthy session with “Amazing Grace” and walked to my car.

As I was opening the door and taking off my coat, I overheard one of the workers saying to another, “Sweet Jee-zuz, Mary’n Joseph, I never seen nothin’ like that before, and I’ve been putting in septic tanks for twenty years.”

All of us at TABR are grateful for the trust and confidence you express in us daily.

Sincerely,

Bob Kargenian, CMT
President

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