During times of great uncertainty regarding the outlook for stocks, I often focus on long-term indicators to provide some guidance.

Let’s by means of example consider the U.S. benchmark S&P 500 Index. A simple 12-month rate of change, or ROC, indicator seem to pick up the major turning points quite well. Let me say straightaway that monthly indicators are of little help when it comes to market timing, but they do come in handy for defining the primary trend. The ROC line below zero depicted bear trends quite clearly, as in 1990 (not shown), 1994, 2000 to 2003, and from 2007 to March 2009. Right now, the ROC line is on a knife’s edge and is perched only 1.9% above the zero line.

I will, needless to say, be watching this space quite closely.

Source: StockCharts.com

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James Grant, publisher of Grant’s Interest Rate Observer, talks about Federal Reserve policy, investment strategy and the recent sale of one of Edvard Munch’s four versions of “The Scream” for $119.9 million.

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Source: ZeroHedge, May 3, 2012.

As part of my daily routine, I publish all my reading (including snippets from other well-known commentators) in an Internet newspaper, “Investment Postcards Daily”. I publish the paper even when traveling for extended periods like over the past month. This is a sure way of staying in touch.

Click here to read the latest edition of the paper.

The newspaper’s subscription is separate from that of the “Investment Postcards from Cape Town” blog. To ensure you receive daily alerts of the updated paper, click here and then subscribe for free by clicking on “Subscribe” (top right of newspaper, just below my photo) or by following me on twitter (click here).

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Don Coxe has updated his popular webcast on Friday, May 4, 2012 – good news for his followers. You can access the recording here or from the sidebar of the Investment Postcards site (the column on the right-hand side) by clicking on Don’s photograph.

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Source: Unknown (via dsshort.com), April 7, 2012.

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Wall Street “gurus” come and go, but in the case of Bob Farrell legend status was achieved. He spent several decades as chief stock market analyst at Merrill Lynch & Co. and had a front-row seat at the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987 crash.

Farrell retired in 1992, but his famous “10 Market Rules to Remember” have lived on and are summarized below, courtesy of The Big Picture and MarketWatch (June 2008). The words of wisdom are timeless and are especially appropriate at the start of a new year as investors grapple with the difficult juncture at which stock markets find themselves at this stage.

1. Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.

2. Excesses in one direction will lead to an excess in the opposite direction
Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.

3. There are no new eras – excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots.

As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it – human nature – is never different.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction eventually.

5. The public buys the most at the top and the least at the bottom
That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing. Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors Survey.

6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism”, says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
This is why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks.

8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend

9. When all the experts and forecasts agree – something else is going to happen
As Sam Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”

Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets
Especially if you are long only or mandated to be fully invested. Those with more flexible charters might squeak out a smile or two here and there.

Sources: The Big Picture, 17 August, 2008 and MarketWatch, June 11, 2008.

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Yale professor Robert Shiller shares his perspective on whether the U.S. is in the midst of a “late great depression” and how temporarily raising taxes could help stimulate economic recovery.

Source: CNBC, May 2, 2012.

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The bar chart below, courtesy of Scott Barber of Reuters, shows the monthly performances of the principal asset classes.

“The “risk on/risk off” barometer moved back in the direction of “risk off” during April, as U.S. 10-year Treasury securities turned in the best investment gains (in U.S. dollar terms) during the month,” said Barber. “The 2.8% jump in the value of the Treasury securities came despite the almost universal perspective on the part of professional investors that the 30-year bull market for bonds is finally sputtering to a halt and that eventually interest rates will begin to climb. Investors displayed a clear bias in favor of assets that not only generated income but also offered them security – in other words, bonds of various kinds were the only major asset classes to end the month in the black.”

Source: Scott Barber, Reuters, May 2, 2012.

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Martin Feldstein, a professor of economics at Harvard University, talks about the impact of Federal Reserve monetary policy on the stock market. He also discusses the outlook for the U.S. economy.

Source: Bloomberg, May 5, 2012.

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Source: Bob Gorrell, Townhall,com, May 2, 2012.

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The chart and paragraphs below come from friend, scrumming partner and uber-bear (equities, not bonds), Albert Edwards, global strategist from Société Générale Cross Asset Research.

“We are in a profits recession, both at the developed and emerging level. My Quant colleague, Andrew Lapthorne, pointed out to me that forward earnings growth for both MSCI developed and emerging are now falling. For we are at that point in the cycle where the easy productivity gains are over. In the US, for example, we can see unit labour  costs running well ahead of output price inflation, leading to a downturn in the margin cycle. The equity markets seem able to ignore this inconvenient truth for the moment while they think the US economy might be reviving and China’s policy makers are successfully engineering a soft landing. But any evidence to the contrary at a time when profits are already under downward pressure will likely be met by an unforgiving response.”

Edwards concludes by saying that with global stock market profits in a recession, it “explains why US bond yields might dive much lower”. He therefore remains overweight long government bonds and remarked: “Government bonds will become even more expensive on a 6-12 month view with an evaporation of confidence in the sustainability of the US recovery and/or a China hard landing (the former could occur with or without the latter).”

Source: Albert Edwards, Société Générale Cross Asset Research, May 3, 2012.

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