Rational InvestingRational InvestingSpecial Interest GroupSpecial Interest Group

Economic Climate andEconomic Climate and

Market Weather ConditionsMarket Weather Conditions

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

February 2014

combines fundamental and technical analysiscombines fundamental and technical analysis

WithoutWithout Using VectorVest Using VectorVest

Current Bear Market Not As Current Bear Market Not As SevereSevere

as prior secular bears (yet)as prior secular bears (yet)

50% below today’s level

Production of Goods and Production of Goods and Services Been Declining for Services Been Declining for

Over Two YearsOver Two Years

US Economy Sliding US Economy Sliding DownhillDownhill

Because Rising Federal Because Rising Federal Debt Debt

Stifles Economic GrowthStifles Economic Growth

Employment Still Employment Still StagnantStagnant

Claims decreasing as workers leave workforce

And Social Benefits And Social Benefits Consume More of Limited Consume More of Limited

IncomesIncomes

Further Dampening Retail Further Dampening Retail SalesSales

All Key Measures Show All Key Measures Show Continual Weakening Since Continual Weakening Since

19901990

Key Economic IndicatorsKey Economic IndicatorsImproved But Are Still Improved But Are Still

WeakWeak

Global Economy Also Still Global Economy Also Still WeakWeak

Bulk of dry-ship volume is moving Asian goods to US and returning with commodities for Asian production

Yet Stock Market Advanced Yet Stock Market Advanced Fearlessly,Fearlessly,

Sucking In Money As It Did During Roaring 90s

Market Gains Primarily Market Gains Primarily FromFrom

Expanding PE MultipleExpanding PE Multiple

QE Provided That QE Provided That LiquidityLiquidityAnomaly: Stock market gains despite higher interest rates means over-abundant cash

Resulting in Only Two Resulting in Only Two Corrections During Past Five Corrections During Past Five

YearsYears

Major Indexes Pressing Major Indexes Pressing Against Long-term Against Long-term Resistance LevelsResistance Levels

Pushing Market ValuationPushing Market ValuationTo A Dangerous ExtremeTo A Dangerous Extreme

Q Ratio = Market Valuation to Replacement Cost

Key PointsKey Points

Federal spending, funded by debt, is choking Federal spending, funded by debt, is choking economic growth, as dysfunctional Federal economic growth, as dysfunctional Federal Government avoids addressing core problemsGovernment avoids addressing core problems

Fed Reserve IOUs (to fund excessive debt) Fed Reserve IOUs (to fund excessive debt) lubricates stock prices, but make inevitable lubricates stock prices, but make inevitable solutions increasingly more painfulsolutions increasingly more painful

Market Valuations are at unsustainable Market Valuations are at unsustainable extremes, but can remain so for quite a whileextremes, but can remain so for quite a while

Implications For Implications For Investors Investors

Despite the facts, Media and Wall Street Despite the facts, Media and Wall Street Analysts are extremely bullish for 2014Analysts are extremely bullish for 2014

But remember Warren Buffet’s advice to:But remember Warren Buffet’s advice to: Sell during greed; Buy during panicSell during greed; Buy during panic

For Individual Investors, this means:For Individual Investors, this means: Sell when proven market-measures roll to downsideSell when proven market-measures roll to downside Buy back-in when those measures rollover to upsideBuy back-in when those measures rollover to upside Monitor moving averages weekly or monthlyMonitor moving averages weekly or monthly Discipline to act promptlyDiscipline to act promptly

What To Do?What To Do?

Keep drinking, as long as bartender Keep drinking, as long as bartender keeps pouring cheap drinkskeeps pouring cheap drinks Benny’s Bar “flicked the lights” in JanuaryBenny’s Bar “flicked the lights” in January

Remain sober and watchful to jump out Remain sober and watchful to jump out of harm’s way, before “last call” of harm’s way, before “last call” (2/1/14???)(2/1/14???)

Use disciplined decision-making tools to Use disciplined decision-making tools to know when to shift positionsknow when to shift positions

Index ETFs Were Up Over 20%Index ETFs Were Up Over 20% But Turned Bearish on January But Turned Bearish on January

3131

Defensive Asset Class Defensive Asset Class Strategy Missed the Strategy Missed the Strong Stock SurgeStrong Stock Surge

Sector Strategy Gained Sector Strategy Gained 19%, 19%,

But Now Moves Into CashBut Now Moves Into Cash

Troubled Emerging Markets Troubled Emerging Markets Have Gone From Bad to Have Gone From Bad to

WorseWorse

Intermediate-Term Net-Intermediate-Term Net-OutOut

Economic uncertainties churning markets and Economic uncertainties churning markets and sectors into short, choppy trendssectors into short, choppy trends

Excessive liquidity raised aggregate, causing Excessive liquidity raised aggregate, causing Index Funds to perform well as stock market Index Funds to perform well as stock market “melted upward”“melted upward”

Risk and size of correction increased daily and Risk and size of correction increased daily and finally has arrivedfinally has arrived Knowing “How big and how long” is less important Knowing “How big and how long” is less important

than “when to get out and when to get back in”than “when to get out and when to get back in”

Weather Forecast forWeather Forecast forSwing and Position Swing and Position

TradersTraders

It’s hard to outperform Index FundsIt’s hard to outperform Index Funds Stock selection remains challenging; Stock selection remains challenging;

holding periods tend to be short holding periods tend to be short Short, choppy trends makes trading rules Short, choppy trends makes trading rules

and discipline more imperative than everand discipline more imperative than ever

Fed Reserve Turned Fed Reserve Turned Corrections Into DipsCorrections Into Dips

Optimism Remains High,Optimism Remains High,Intuitionals Remain “Fearless”Intuitionals Remain “Fearless”

McClellan Summation McClellan Summation Turned Bearish on Wed. Turned Bearish on Wed. January 29January 29And rebounded from trendline support

Barely 1/2 of S&Ps Are Barely 1/2 of S&Ps Are BullishBullish

And fewer big stocks get out of bear territory, creating an unsettling divergence

Now, Correction Is Now, Correction Is UnderwayUnderway

MA 50 Broken but Trendline HeldMA 50 Broken but Trendline Held

185-170 = 8%

185-159 = 17%

50/50/0 Rules Keep Position 50/50/0 Rules Keep Position Traders on the Right Side of Traders on the Right Side of

the Marketthe Market

Still below zero

Net-Out for Position Net-Out for Position TradersTraders

It’s hard to outperform Index FundsIt’s hard to outperform Index Funds Simple MA timing keeps you out of troubleSimple MA timing keeps you out of trouble

Stock selection remains challenging; Stock selection remains challenging; holding periods tend to be short holding periods tend to be short Use 50/50/0 rules to avoid excessive whipsawsUse 50/50/0 rules to avoid excessive whipsaws

Short, choppy trends makes trading rules Short, choppy trends makes trading rules and discipline more imperative than everand discipline more imperative than ever Monitor daily as position trader or monthly with Monitor daily as position trader or monthly with

diverse strategies in the spreadsheet CDdiverse strategies in the spreadsheet CD

Any Questions?Any Questions?