Is Inflation Out of Control?

Mike Turner |

Wall Street Bulls EyeIs inflation out of control and working quite nicely for those of us in the stock market??

Based on the CPI (Current Consumer Price Index), inflation is running at a very manageable 1.98%. So, what in the world am I talking about when I ask the question about "out of control" inflation??

There is another form of inflation and it is one that is not often discussed but you and I should be keenly aware of. It is "stock market inflation", or SMI, as I like to call it. The SMI is directly tied to how inflated or uninflated share prices are for equities. I am sure you have been asking yourself, "How can Bernanke continue to print trillions of dollars and have no impact on inflation?"

Quote worth Quoting Again
"The way to have safe government is not to trust it all to the one, but to divide it among the many, distributing to everyone exactly the functions in which he is competent....To let the National Government be entrusted with the defense of the nation, and its foreign and federal relations..... The State Governments with the Civil Rights, Laws, Police and administration of what concerns the State generally. The Counties with the local concerns, and each ward direct the interests within itself. It is by dividing and subdividing these Republics from the great national one down through all its subordinations until it ends in the administration of everyman's farm by himself, by placing under everyone what his own eye may superintend, that all will be done for the best."...Thomas Jefferson

It is because, directly or indirectly, the Fed's Quantitative Easing of printing trillions of dollars, is not finding its way into the economy. Much of that money is finding its way into the stock market though, and to a large-but-unquantifiable impact, causing share prices to soar. Big Ben's hope (I assume) is that if the market is booming, the velocity of money involved in a booming market will trickle down into the growth of companies, which by extension will in theory, spur hiring. QE is, again in theory, supposed to spur economic growth and mitigate the high unemployment rate. It has done neither; at least not so much.

But... it has put more money into chasing shares of stock, which has had the direct effect of inflating share prices rather dramatically if you make a few important assumptions. This is good for our net worth if we own shares of stock in the stock market.

How much the market is being artificially inflated due to the "Quantitative Easing" of the Fed is unknown. But... assuming the market is a leading indicator of economic growth and grows in direct proportion to the economy; and economic growth has been, at best, anemic since March of 2009 (the last major bottom in the market), one has to assume 'something' is driving stock prices higher and higher other than the economy. Regardless of whether it is the Fed (my assumption) or not, we need to take advantage of this anomaly and make wise trading decisions. But... and this is very important... the Fed will not always be there to keep the equity inflation running at the pace it is running now. Keep in mind the following:

  • The economy has limped along at or below 2% to 3% (or worse) since the March low of 2009, and
  • Real job growth has actually declined if you consider the total number of people employed, during that same time period, and
  • The DJIA is up more than 120% since the March, 2009 low. From a SMI (stock market inflation) perspective, that means share price inflation is running high. Even if you assume a modest economic growth of 10% over the last 4 years (which it hasn't), that means the market is still inflated by well over 110%, in terms of economic growth. I realize that the market is not completely tied to economic growth in the US or the world, for that matter. Other factors come into play when it comes to the rate of growth of share prices. But, I think it more than a bit naive to think that none of the BB (Bernanke Bounce) of QE has had nothing to do with the juicing of the stock market. A day of reckoning is coming and we all need to NOT be surprised by it.

It is important to stay in the market right now. Even when Big Ben begins to attempt an orderly unwind of his QE activities and the market begins to contract (drop) in response to a lack of a Fed-induced juicing of the market, you should stay in, but utilize inverse ETFs to make money on the downside... I suspect a decent downside is coming, but only after the secession of QE.


My Take...

The forecasts on the major indexes are a bit more bullish this week than last week. The NASDAQ remains the most bullish, showing a potential trend higher of about +3.6% into mid-June. The most negative of the indexes (the Russell 2000) shows a potential trend lower into mid-June of about -4.3%... between the two, it's a wash.

The UK and German indexes look decently bullish between now and early June, so I am leaning toward the US market also trending slight higher. I don't see any big rotation out of one country or global segment into another at this point.

Gold and Silver are on a very short-term bump that, according to Equity Forecaster, will revert to a bearish trend into June (at least). I keep looking for an opportunity to buy either of these precious metals, but the forecasts just do not support a long trade in this market segment.

Crude oil has reversed its bearish forecasts in the recent past and is now indicating a 10% gain is likely by late May or early June.


The Bull/Bear and Turner Oscillator Report...

The investor sentiment Bull-to-Bear ratio slipped a little toward the Bearish side this week with a 1.5-to-1 ratio favoring the Bears. This is the second week in a row of declining Bullishness.

The black line (Composite of Signals) may be bottoming, but this is far from being a fact. If it is bottoming, that could be a sign that the market is about to bounce higher yet again.

The time-cycle market forecasts are split 50/50 on the 90-day outlook but are flat to Bullish in the very near term. This is not a convincing forecast of strong Bullishness.

Risk continues to be slightly elevated that the market will pull back but the pull-back is forecast to be inconsequential. The prudent trader would be looking for reasons to take profits.

 

 

Turner Bull/Bear Forecast
For the Upcoming Week
Investor Sentiment Weekly Forecast
The Turner Bull/Bear Forecast™ provides a one-week directional forecast on the market, with [-5] being the most Bearish and a [+5] being the most Bullish. This is predicated on the ratio of number of new Buy Signals to the number of new Short Sell Signals for the previous week. The assumption is investors are becoming more Bullish the more lopsided the ratio becomes in favor of new Buy Signals; and the converse is true; the more lopsided the ratio becomes in favor of new Short Sell Signals, the more Bearish investor sentiment.

 

 

Turner CrossOver Oscillator
The Turner CrossOver Oscillator™ provides an indication of the over-bought or over-sold condition of the market. The red line (New Short Sell Signals) shows a technical direction and strength (or lack thereof) of investors to push stock prices lower, triggering new Short Sell Signals. The higher the Short Sell Signals line, the more Bearish the market. The black line (Composite of both Short Sell and Long Buy Signals) is the combined impact of both the new Short Sell Signals and the new Buy Signals and is an indication of the degree of oversold or overbought condition of the market. Buying opportunities exist when the Composite of Signals line is moving higher. The higher this line moves, the more Bullish the market. Market bottoms are represented by a change in direction of the Composite of Signals line from moving lower to moving higher. Market corrections become much more likely when the Composite of Signals line crosses the Short Sell Signals line from below the Short Sell Signals line to above the Short Sell Signals line. The market is represented by the green shaded area.

 


Equity Forecaster... and the Last 10 Years...

For a moment, I want you to pretend it is January, 2002; just a few months after the 9/11 attack. Most of us, at that time, were more interested in standing together in the face of what appeared to be a far more menacing world than we had previously thought; than participating in the division of our country into a non-productive and destructive campaign of incessant class warfare currently being promoted by... well... you know who... This was before the Iraq war, the worst recession since the Great Depression, the take-over of the healthcare industry by the Government and a national debt approaching $20 trillion. This was a time when markets were not (so significantly) manipulated by the Federal Reserve and more people believed in pulling the wagon than riding in the wagon. In 2002, we still believed (or at least most of us did) in equal opportunity under the law... not the current, politically correct and ideologically and socially engineered, equal outcome under the law.

We didn't know the bear market of 2008 was coming and we didn't know that the market would recover from a low in March of 2009 to reach all-time highs in early 2013... while still dealing with massive unemployment and out-of-control Governmental spending.

I launched my first portfolio in January of 2002 and the idea of time-cycle analysis wasn't even a twinkle in my eye. A LOT has changed in the last 10 years. Some of what has changed has not been to my liking; particularly on the political front... but you already know that.

Some of what has changed has been staggeringly positive; especially when it comes to the stock market trading tools that this engineer and his team have developed in that decade. Trading stocks in the stock market has become, for my CycleProphet and Sabinal Capital Investments companies, more of a science than an art... and that is a good thing. Over the last decade, we have developed what I believe are, the finest, most useful, most accurate stock market trading tools in the world. I would put our technology up against Wall Street's best and biggest traders and any quant-driven or artificial intelligence-based set of algorithms anywhere. I am absolutely confident we could not be beaten. I know that sounds extremely cocky and more than self-servingly arrogant, but based on the results that I am going to share with you below, I am 100% confident that no other legitimate... not this 5% per trade per day snake oil you hear about from time-to-time... technology can even get close to what we have to offer.

We recently completed a series of 10-year back-tests of our time-cycle forecasting technology, starting in January of 2002 and ending in December of 2012 where we tested our technology on over 15,000 blind trading studies. Below are some of the results that I think you will find fascinating. I certainly do! What I am about to review with you is typical throughout all the stocks, indexes and commodities that we tested.

There is a lot of information in the table below, which shows the year-by-year results of using the Equity Forecaster to blind trade the DJIA Index. Here are the salient points:

  1. For the duration of the study period of January 2002 through December 2012, the DJIA Index gained 42.61% for an average of 4.26% per year. Blind trading the Index using the Equity Forecaster, resulted in an uncompounded gain of 160.18% for that same period of time for an average of 16.01% per year; nearly 4 times better than the Index.
  2. Using CycleProphet's Equity Forecaster, there was never a losing year; whereas the actual index had 3 losing years out of 10.
  3. If compounding is used, meaning a hypothetical investment of a fixed amount is used to determine growth or loss of an investment, the results are even more significant.
    • The compounded return using CycleProphet's Equity Forecaster to time entry and exits, resulted in a gain of 333.30%.
    • Trading the Index using a buy-and-hold strategy, resulted in a gain of 30.76%; 12% less than the actual gain of the Index over the 10-year period.

Using compounding, the CycleProphet Equity Forecaster outperformed the buy-and-hold strategy by more than 11 times! And one more thing... Equity Forecaster kept the above trading strategy in cash nearly 51% of the time, resulting in even higher returns on a risk adjusted basis.

I just wish that this technology was available to me (and my clients) back in January of 2002. I wouldn't mind having a 333% return over a 10-year period. Turning $100,000 into $433,000 is an achievement that just about everyone would be happy with!


My Plans for Sabinal...

This coming week, I hope to have all the paperwork completed, the appropriate regulatory filings in place and the Sabinal website updated so that we can open the "Sabinal One Portfolio" to client participation. Many of my subscribers and former Sabinal clients have been asking when I was going to get back into money management. If you don't know, I am a registered investment advisor within my money management company, Sabinal Capital Investments, LLC.

About a year ago, I made the decision that I needed to devote a full-time effort to the R&D needed to build the Equity Forecaster. But rather than 100% of my time, the effort took 150% of my time and left no time for money management activities (my first love). As such, I was forced to put my money management activities on hold. Now, with the R&D completed and the unbelievably successful launch of the Equity Forecaster, I can move back into full-time money management. I will still be involved in CycleProphet every day, but the bulk of my time will be devoted to growing my clients' net worth through investing in the stock market.

The Sabinal One Portfolio will utilize an investment strategy similar to the one I discussed above in the 10-year back-test. I will be using Equity Forecaster, along with Equity Analyzer, in my management of the Portfolio. The Portfolio will be trading a very select group of 20 stock and Index/ETF equities within a tightly controlled set of trading rules. I use, what is called, a "managed account" structure. In this structure, a client's money is held in their name and in their personal account with TD Ameritrade. We do not hold client funds. The Client has 100% access to the funds in their account at all times. Each time I make a trade, the confirm for the trade is sent directly from TD Ameritrade to the client, via email. Clients do NOT pay for transaction or trading fees. 100% of the fees associated with managing and trading each client's account are included in our "wrap" fee. This wrap fee is 3% (annual rate) for accounts of less than $500,000. As you will see in the following examples, our fee is often far less than the client would normally have to pay for trading fees alone:

Example 1: A $50,000 account - (minimum account size)
The Sabinal One portfolio holds about 20 positions. This means that approximately $2,500 (1/20th of $50,000) would be allocated for each holding. TD Ameritrade, normally charges about $9.99 per trade for each trade transaction. To get into a position and out of that position (a "round-trip"), there would be a transaction fee of 2x9.99, or $19.98. Based on our frequency of trading, we might make 12 or more round-trip trades per year per position. That means, just in normal transaction fees, there would be 20x12x$19.98, or about $4800 per year in trade transaction fees all 20 positions, which is a direct cost of -9.6%, if you were making these trades yourself. This means you would have to make 9.6% just to break even; if you were making these trades yourself.

But, as a Sabinal client, you do not pay any trade transaction fees. All fees are included in our management fee. In this example, the client has in effect, replaced this 9.4% cost with a 3% cost, utilizing the Sabinal management wrap fee.

Example 2: For a $100,000 account -
Using the same trading activity noted in Example 1, a $100,000 account would replace a 4.8% cost with Sabinal's 3% management fee; a net savings of 1.8%.

Example 3: For a $200,000 account -
Using the same trading activity noted in Example 1, a $200,000 account would avoid a normal trade transaction fee cost of about 2.4% per year. The net cost of my management of a $200,000 account, would be about 0.6%.

If you are interested in getting more information on my managed account services, the Sabinal One Portfolio and exactly how I plan to trade it, respond to this email newsletter with a request for more information. We will send out a packet of information to you and follow up with a phone call. If you would like me to manage an account for you, I would be honored to discuss it with you at your convenience!

ETF DISCLOSURE ***IMPORTANT***:
An inverse ETF tracks a particular sector or index with the aim of profiting from a decline in that sector or index. Leveraged ETFs respond to gains by becoming more aggressive while they respond to losses by becoming more defensive. This can be an advantage or a disadvantage. These complex securities products are designed to meet their stated objectives on a daily basis. Their performance over longer periods of time can differ significantly from the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time and this effect can be magnified in volatile markets.


Closing Remarks...

As you may know, we are partnered with the premiere education and training company, Beacon Learning Group. I know the owners, Dan and Phil, personally, and am so impressed with their dedication to their students and the quality of education their professional trainers provide to their students. If you want to get the most out of my tools or if you want to master a new trading strategy (or improve on the one you are using now), you need to attend either of the following two webinars that I will be hosting this coming Tuesday, March 26, to learn how this program works and the unprecedented guarantee that they provide.

The first Webinar is at 3:30 pm (central). You can register (free) for this session by following this link:

3:30 pm Training Overview
The second Webinar is also on Tuesday, at 7:00 pm (central). You can register for this one by following this link:

7:00 pm Training Overview


One last item... A few years ago, I had a "Free Trade of the Week" subscription service. I have decided to bring it back. The purpose of this service is to give folks who have never subscribed, an opportunity to try us out. Let your friends know about the service. They can sign up on the Subscribe page.

Have a great week in the market!

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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