Last week was pretty easy for me to analyze since most of my UP signals went up and most of my DOWN signals went down. I should be happy about that but I am experiencing a nagging hesitancy to get excited. Some people might call it “worry” but I have no facts to worry about - just a weird feeling. Similar to my summary from last week, I still see a market with an upward bias but more of a tendency to shuffle sideways. Once again, there was an almost equal number of new UP signals versus new DOWN signals. More importantly, I was largely ambivalent about a lot of stocks that showed some signs of improvement but not enough to provide conviction for me to change the signal. The same can be said for stocks that were weakening but not breaking. As a result, I didn’t change as many signals as I had expected. Maybe that’s a reflection of the hold pattern we are in regarding the FOMC meeting this week or maybe it’s a sign that we are starting to see a deceleration of the bullish move. Not a decline yet, just a deceleration and that can be a good thing for the bulls or an opportunity for the bears to exploit. I just have no clue which one it is yet.

From a sector rotation perspective, I am reiterating my commentary from last week that suggested that a ton of money coming out of energy stocks appeared to be put back to work in the technology area. Technology has been an underperformer for quite a while and if I am right about this rotation, the new money flow could catch some shorts in awkward positions. Despite the brief attempt at a trading rally in energy and even though I tried to see the support that kept being mentioned on financial media yesterday, I still see continuing weakness in oil and the rest of the sector. This week I spent a lot of time looking at financials and transports and to be honest, I was confused. I had expected a more positive reaction in financials from the recent economic data and even though today’s PPI was too late to be factored into this week’s signal changes, it only made this situation stick out even more to me. Similarly, transports are not declining as rapidly as they had over the previous few weeks and there appears to be some improvement in the railroads, but it’s odd that this sector is not doing better given the decline in oil.

Geopolitics is interesting right now but not that exciting. I know it’s easy to dramatize the sabre rattling between Presidents Bush and Ahmadinejad (I think it’s pronounced “Im-u-nut-job”) but I am not expecting anything substantial to come of it, at least for any effects on the market. The UN has way too much at stake to be the forum for anything but harmless rhetoric and a general love-fest of Kumbaya singers. Maybe when everyone goes to their respective homes we will see some international flareups, I just don’t expect it over the next few days.

The coup in Thailand is an interesting situation but not one that I expect to cause a significant market impact on its own country much less a domino effect on the rest of Asia. Certainly, there will be some short term effects on the currency, but I don’t see parallels between now and the 1997 Asian crisis that coincidentally began with a Thai unraveling. This one appears to be a political crisis, not an economic one and the rest of Asia is stable and growing compared to the situation that existed a decade ago. That being said, take a look at the international ETFs on EVALUATE and you will see that I started getting negative on these markets a few weeks ago. Other than EWM (Malaysia ETF), I have had DOWN signals on all the Asian markets and the emerging markets in general. I am not overly excited about entry points in the European and non-emerging market ETFs, but they look better than the rest of the international ETFs.

Lastly, earnings warnings / guidance is starting to concern me. YHOO’s blowup is not a good sign and neither are some of the other cautionary outlooks. I will be spending a lot of time this week on the fundamental picture because I think it has been de-emphasized lately and not just by me.

Good luck this week. I am expecting that the haze covering this market for the past few weeks will be lifting soon and we’ll be able to see a clear move in one direction or another. At least I hope so.

Some people give contrarians a lot of credit for going against the herd, like some red badge of courage. I am inclined to do that too at times (when it’s warranted.) Maybe it’s empathy as I am often in the minority with my signals and the market timing aspect of the HedgeFolios Timing Indicator. It feels good to root for the underdog. Sometimes it’s tough to offer an opinion that goes against common wisdom (or common stupidity) and other times it seems easy.

Being a contrarian is a neat way to call attention to yourself and stick out as a hero when you turn out to be right. If things don’t eventually match your unique view, most people will give you a pass and suggest that the odds were stacked against you. That’s the part that makes being a contrarian easy and I take no comfort in it. You should get no credit for being contrarian and being wrong - only for being contrarian and being right. When I am wrong, I am wrong - not contrarian. Saying the sun will rise in the west may be contrarian, but it is also wrong.

We admire the famed Pacific salmon that swims upstream, the ultimate rebel, the ultimate contrarian. We celebrate the ones that make it to spawn a new generation of future contrarians. Just remember the majority of these contrarians die before making it there and the rest die within two weeks of being successful. I hate to be a downer but we need to NOT admire contrarians who find it easier to maintain an opposite view because they don’t want to admit being wrong. I admire contrarians who are right. More often than not, contrarians are often equated to bears and when it comes to that group (people like Doug Kass, Bill Fleckenstein, Jim Chanos, David Tice, Barry Ritholtz et al) - they are worthy of my admiration. Their thoughts are well reasoned, not just blindly contrarian and usually, they are right.

In the current Ticker Sense Blogger Sentiment poll from Birinyi Associates, the commentary suggests that a high percentage of the respondents are bearish and are contrarian because the market has been heading higher. Note that I have voted “bullish” each week since the poll started and except for a slim margin on 8/28 and a tie on 9/5, I have been in the minority (let’s call it “contrarian”) every time. Fortunately, I don’t care whether I am bullish or bearish. I just want to be as right as I can be. In the case of the poll and market timing, I have been right and the bears have been wrong. When / if I eventually turn out to be wrong, I’ll make sure not to call myself a contrarian!

The market could go up, if only…..

the Fed would stop raising rates (Past)
the Fed would hold rates constant (Present)
the Fed would cut rates (Future)

oil prices would stop going up (Past)
oil prices would drop into the $60’s (Present)
oil prices would drop into the $50’s (Future)

the economy stays strong (Past)
the economy slows down (Present)
the economy doesn’t go into a recession (Future)

I am sure you have heard a bunch more of these examples. The permabulls love to keep raising or lowering the bar (whichever the case may be) to explain what they need to feel confident that the market will head higher. Over the past few months I have heard the past and present versions of the above statements, and it’s only a matter of time before the future ones start popping up more often. I don’t buy into any of this crap, but it is amusing to watch. No single condition will guarantee a percentage gain or even the general direction. I fear that bullish investors are setting themselves up for a fall if they ever get more disappointed with achieving their past wishlist than being ignorantly hopeful for the next one.

****Performance has been updated through 9/13/06 - please read through the following disclaimer and find the updated figures at the end of the post.

Before I discuss Hedgefolios performance, I want to cover myself with some cautionary language.

So here goes:

Nothing in my performance quoting is intended as an advertisement or in any other way meant to encourage anyone to subscribe to Hedgefolios. That part is easy given that Hedgefolios is entirely free right now, but when I start accepting subscriptions - the same nonsolicitation clause will apply. Regardless, you should be very hesitant to rely on any newsletter’s performance figures unless they are audited or verified by an outside party. To be as transparent as possible and remove any question of Hedgefolios credibility, I am hoping to have audited performance figures by the end of 2006. Until then, you need to be aware that any performance figure on Hedgefolios is NOT in compliance with the CFA’s AIMR Performance Presentation Standards and does not net out any transaction costs such as commissions or management fees. They are not a total return calculation as I do not include dividend yields or any compounding factor. These performance figures cover a hypothetical portfolio of the entire Hedgefolios stock universe with an equal weighting of each security. The calculation is simply the cumulative total of all gains and losses from the signals during the period in question.

All this being said and under those parameters, Hedgefolios performance for stocks:
2005, the Hedgefolios performance was +19.99% vs. +3.00% for the S&P 500 index
2004, the Hedgefolios performance was +31.19% vs. +9.00% for the S&P 500 index

As the year goes forward, I will update this post periodically to let everyone know how Hedgefolios is doing.

UPDATE: Hedgefolios stock performance for 2006 year-to-date (through 9/13/06 close) was up 16.57%. Over the same time period, the S&P 500 index was up 5.59%.

This morning Joe Kernen, co-anchor of CNBC’s “Squawk Box” interviewed Yahoo! Finance general manager Peggy White about a huge deal that has been struck with SeekingAlpha to provide content on one of the web’s leading finance portals. For those of you that don’t know SeekingAlpha, I suggest you click on the link, bookmark it in your favorites list and then check it out as frequently as you can. And if it seems like I am sucking up here, I am not. I have no relationship with Yahoo or SeekingAlpha. In my opinion, SeekingAlpha is the premier aggregator or stock / finance blogs and has been a significant factor in the credibility that many bloggers now enjoy. Yahoo could not have picked a better partner and I am confident investors will benefit from the association.

It was a shock then that I heard Joe’s take on stock blogs and the tone of his questions and commentary during the interview. Ms. White endured comments from Joe and Charlie Gasparino that equated stock bloggers to “minefields”, the “wild west” and some of the absurd comments that populate the Yahoo Finance Message Board. I kept waiting for a disclaimer that said CNBC didn’t think this way about all stock bloggers but unless I missed it, that never happened. There were lectures about the need for due diligence and fact-checking when writing stories and on that we agree. However, believe it or not, some of us do a lot of research, think things through, and go through multiple edits before publishing. I also agree that there are a lot of crappy stock blogs that fit the description that CNBC painted all of us with. That broadbrushed generality is a very untrue and very unfair guilt by association. I am sure it was an editorial oversight on their part. After all, CNBC has its own blog and I doubt they were indicting themselves. And I really doubt they wanted to cast aspersions on some of their regular guests like Barry Ritholtz who happen to write blogs at the same time as providing tremendously insightful commentary over their network. Comparing bloggers to “scam” artists who are apparently bent on “frontrunning” is a sweeping assumption that is way off target.

I don’t agree with all of the commentary that appears on CNBC, but I don’t question their intentions. Some bloggers love to take shots at the reporters, anchors and guests and if this was an attempt at retribution, it was from a bully pulpit. I did “check the facts” and according to their own media info “CNBC is the recognized global leader in business news, providing real-time financial market coverage and business information to more than 200 million homes worldwide, including more than 88 million households in the United States and Canada.” That’s a huge reach and it is a shame that stock bloggers were so mischaracterized to such a huge audience. It was disappointing but I have faith that viewers were able to make up their own mind.

It’s tough to create a meaningful audience with any business endeavor and blogging is no exception. As Joe Kernen pointed out, almost anyone can write a blog and there are very few barriers to entry or any required credentials. That’s all true and it is tough to make it to his level within a major financial outlet like CNBC or in similar levels at print publications like the Wall Street Journal or whatever equivalent mainstream outlet you might want to discuss. However, not everyone in major media checks their facts or avoids wrong or salacious comments. In fact, media and political blogs were responsible for uncovering Dan Rather’s lack of fact checking. At the highest level, mistakes are possible.

Making it onto CNBC is an honor and legitimizes many guests including professors, economists, analysts, politicians, etc., and yet, the appearance does not guarantee accuracy of their facts. Some CNBC contributors are wrong and others make mistakes, it’s unfortunate but it happens. SeekingAlpha does a great service to scrutinize their contributors’ content and filter out as much of the bad stuff as possible. Is SA perfect? Nope - and neither am I and in the case of CNBC’s comments about stock bloggers, neither are they.

Last week’s market action was tough and the best I can tell you is that we are starting to hit some sideways action. Not overly bullish and not overly bearish with new signals. Note that this is different than an expectation of the market changing trend or not having any gains. What I am talking about is the fact that I had 143 new UP signals and 139 new DOWN signals. For the past several weeks, the new UP to new DOWN ratio was running at about 4-to-1. So the evenhanded results of this past week, caused me to evaluate a lot of other fundamental and technical factors.

The net result of my research suggests that while there are less new leaders coming on board, I am not going to change my bullish bias. At least not yet because there still seems to be some run left in the stocks that have recently started to head higher. Additionally, the DOWN signals didn’t deteriorate much last week so I didn’t see a lot of incremental selling pressure. I have no clue how much longer the upward move will last but I am not seeing evidence of an impending decline.

From a sector perspective, energy and commodities are getting whacked and you have heard enough about that already from just about every source. My only comments are that money is coming out in a broad-based move from energy and commodities but it appears to be immediately reinvested in areas such as technology and not kept on the sidelines. The problem I have with energy and commodity stocks is their volatility. The moment that there is reason to push these stocks back in the upward direction, I expect a rapid move to reenter these sectors. Please be ready to respond because this is the first substantial pullback for quite a while.

Note that I am still reluctantly willing to change a few signals in consecutive weeks. I hate doing this zig-zagging and very rarely do so, but it was something I thought I had to deal with. Last week’s action caused me to change 9 signals for two weeks in a row and most of them were energy and commodities (go figure.) As I said, this market is getting tougher to evaluate and I am getting more aggressive until I see a picture that is getting clearer, not cloudier as it currently is.

Who’s complaining about gas prices right now? Not too many people and none that I’ve heard from lately. For good reason - a barrel of oil has dropped from $76 at the beginning of August to $66 today, a whopping 13% decline. While I had been looking for oil to drop into the $60’s/barrel since mid-July, I am not seeing support levels kick in yet. In fact, we are beneath some key technical levels (200 day moving average, 3-year trend support lines, etc) on oil and unless there is a bullish catalyst, the current trend has some room to fall further. I don’t see much support until about $58-60 per barrel and even that is weak. All that can change with a supply shock but that’s tough to forecast. Enough of the technical analysis gibberish…. oil has declined and looks like it can go further.

Back to my rant…weeks ago there was a huge movement to blame the speculators which I of course think is bullshit. And where is all the misplaced anger about “excess oil company profits?” Not even the politicians are spewing their vote-getting hatemongering. I guess they are all gassed out because speculators are still speculating every day (even to the downside), oil companies are still behemoth profitseekers, and consumers still long for the days of $1 per gallon gasoline. If oil companies were to blame for high gas prices, are they due an apology or a thank you for lower prices?? Don’t think so. If speculators were the cause for $25 in each barrel, do they get credit for any of the giveback? Don’t think so.

None of this will change anything, but it’s nice to not hear all this crap for a little while. At least until the next time oil shoots up and then I am sure it will all come rushing back.

In my previous post, I discussed the common criticisms of market timing and my criticisms of the criticisms. So, now it’s put up or shut up time. When I met with Pimm Fox of Bloomberg in July, he asked me about the performance of my HedgeFolios Timing Indicator (”HFTI”) and I finally got around to quantifying how it has done relative to the S&P 500.

Here are the details on the individual signals:

Bearish signal from 2/14/2005 until 5/31/2005 - S&P 500 declined from 1205.30 to 1198.78, a 0.54% correct signal.
Bullish signal from 5/31/2005 until 9/26/2005 - S&P 500 increased from 1198.78 to 1215.29, a 1.38% correct signal.
Bearish signal from 9/26/2005 until 11/7/2005 - S&P 500 increased from 1215.29 to 1220.14, a 0.40% incorrect signal.
Bullish signal from 11/7/2005 until 4/10/2006 - S&P 500 increased from 1220.14 to 1295.51, a 6.18% correct signal.
Bearish signal from 4/10/2006 until 7/10/2006 - S&P 500 declined from 1295.51 to 1265.46, a 2.32% correct signal.
Bullish signal from 7/10/2006 until 9/8/2006 - S&P 500 increased from 1265.46 to 1298.92, a 2.64% correct signal.

If you had maintained a buy-and-hold strategy on the S&P 500 since the first HFTI signal on 2/14/2005, the S&P 500 increased 7.77% by the 9/8/2006 close. If you add the performance of each UP and DOWN signal on the HFTI during the same period, the result is an increase of 12.66%. Since the HFTI performance is contingent upon profiting from both UP and DOWN signals, it is higher than a pure market timing strategy.

If an investor had employed a pure market timing strategy and gone from 100% cash to fully invested in the index on each bullish signal and then done the reverse on each bearish signal, the performance would have been 10.20%.

Of the six signals given by the HFTI since inception, five of them have been correct, inclusive of the current bullish signal. So far, it has been very consistent and the one incorrect signal only resulted in a 0.40% loss.

The signals are typically wrong for a period that varies between 1 and 5 weeks. In other words, you typically have an advanced hint of a change in the market direction. This is actually a result that I wanted to achieve when I built the HFTI. One of my concerns about many market indicators is that they are very lagging and so far, the HFTI is a leading indicator. When Bloomberg first reported on the HFTI in April, it was a few weeks after the bearish signal was given and for the next few weeks, I was wrong. To those that remembered HedgeFolios while I was wrong, I am sure they disregarded the signal. In fact, it took about 32 calendar days before the signal became correct. The key thing to remember is that the HFTI typically gives a signal weeks in advance of the corresponding market move. It may be emotionally tough to exit positions and the market in general when it keeps going up, but it’s much tougher financially to exit positions when they have already declined and everyone is trying to get out. The same is true for the reverse situation when you are hesitant to get into a market that looks like it is going to get cheaper. HedgeFolios tries to give you a headstart on those races.

Market timing performance requires many years of data and HFTI has a long way to go before it will be credible in that regard. As time goes by, I will update the performance of this indicator and we’ll see how reliable the HFTI is.

The “almost” part is all about luck. If you don’t have great timing you can still get by with some luck. I really get tired of hearing that you cannot time the markets or that if you are lucky enough to do a good job timing the markets, that you cannot do it forever. Academics in love with the Efficient Market Hypothesis, devotees of Burton Malkiel’s Random Walk Theory, indexers, and fundamental-only investors love to repeat that like a mantra.

But that is no reason to fall into line and adopt this notion. I never will - not even if my performance declines to 50% losers. After all, the pursuit of stock gains in excess of indexing is at the core of what capitalism is all about. It’s about the pursuit, not necessarily the results, because if we give up trying, great things are impossible to achieve. In the market as in life, we are faced with risky choices and how you deal with that risk is a primary determinant of your performance. But market timing as a part of active portfolio management is not about taking risks. It’s about using as much information as you can to minimize those risks and in competition with all the other market participants with less, more or the same amount of info, to make the best possible guess. Yep - it’s all a guess - just do everything you can to make sure that your guesses are better than everybody else’s guesses.

As one of the great copouts of the investing world, the passive buy-and-hold gang usually repeat, “It’s time in the market, not timing the market.” Academic studies are thrown up as evidence and the results typically show that for long periods of time, if you missed the five, ten or 20 (pick one) best days, your performance would correspond to 10%(5 days) , 25%(10 days) or 50%(20 days) less than if you had just bought and held. While the actual results vary depending on the time period, the general theme has been duplicated from study to study and I don’t have a problem believing the math. I just don’t like the methodology that assumes that you would have missed every one of those best days. And when you suggest any of the alternative studies that show you how good the performance would be if you missed an equivalent number of the worst days during the same period, the passive investing crowd laughs at the idea that you could achieve such results. Doesn’t seem equitable to me.

I am not ignorant of other research which supports the idea that market timing is not a successful pursuit. Specifically, I am a big fan of Mark Hulbert’s Hulbert Financial Digest and respect his work as the leading authority on stock newsletters. Over the years, Mark has studied their performance and came to the conclusion that on average, market timers underperformed the S&P 500. While Mark is largely unimpressed with market timing efforts, he would probably admit that a small number of managers can do it to a certain degree. This is a critical point that often gets ignored - just because the majority fail in their attempts, does not mean that no one succeeds or that it is impossible. Similarly, study after study has shown that index funds outperform 75% of actively managed funds over virtually any time period. And then they point out Bill Miller of Legg Mason and his ability to do exactly that over the past 15 consecutive years. I guess every rule has an exception but they are quick to suggest that it’s only a matter of time before he fails. It’s sad to see so many people desiring failure to justify the buy-and-hold mentality.

Needless to say, I am not dissuaded from market timing because of those studies. In fact, they motivate me. So do comments from people like John Bogle and others who suggest that market timing is not possible or make fun of it as some kind of voodoo or alchemy. HedgeFolios is all about market timing - so if you don’t believe that it’s worth pursuing - you should never look at the HedgeFolios Timing Indicator or the rest of this site for that matter. On the other hand, if you enjoy the pursuit of excess profits…keep coming back.

Based upon the market action this week and the incessant commentary, you would think that the bears were on vacation during the majority of August and were the only ones to come back. Maybe they were just hibernating like bears often do. Or maybe the bulls just woke up this week and said, “Let’s start selling.” Who knows? Regardless, it appears to many out there that the bullish trend is as over as the summer vacations are. That may be true but I don’t see any evidence, atleast not yet. For all the criticisms about weak volume in the preceding two weeks, the past few days have not been high volume either. It’s not surprising that the people who said the market was going up on light volume are being ignorant and silent about the market going down on light volume. For my part, it’s possible that bulls also came back from vacation and took some profits although I cannot prove that either. I have not been discouraged by the market action given that the majority of declines have come in the first half hour and the rest of the trading days have been uneventful. At some point, we will see whether there is buying on these dips.

At HedgeFolios, new UP signals outpaced new DOWN signals this week at a rate of 6-to-1. I am still maintaining the bullish tone that the HedgeFolios Timing Indicator is showing and I just don’t see the trend heading in the downward direction yet. One note of caution, the HedgeFolios Timing Indicator is approaching levels that have previously preceded the end of current trends. But that may be weeks away so I am going to focus on some current positives like: the FOMC still looks like it is going to hold, tensions in the MidEast are lessened, hurricanes have been few and not overly destructive, gas is declining rapidly, etc. etc. That can all change in a matter of days but I’ll wait for it to actually happen rather than trying to forecast it.

For any of you that are reading this and still on vacation - I hope you have a great time.