Market Climate and Weather Forecast Presented by Herb Geissler, Managing Director of The St.Clair Group Rational Investing/VectorVest Special Interest.

Market Climateand Weather Forecast

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

Rational Investing/VectorVest Special Interest Group of Pittsburgh AAII

May, 2013

"It is not the strongest of the species that survives, nor the most intelligent,

but the ones most adaptable to change." Charles Darwin

Basic Traits of Successful Investors

1. They look at objective indicators. Removing the emotions from the investing process, they focus on data instead of reacting to events;

2. They are Disciplined:  The data drives decision making with pre-established rules. External factors do not influence them;

3. They have Flexibility:  The best investors are open-minded to new ideas, or revisiting previous thoughts;

4. They are Risk adverse: Not always obvious to investors, it is a crucial part of successful investing.

Investors always will make mistakes, and many of them.The only difference between winners and losers

is that winners have small losses and losers have large losses

Observations by Ned Davis

Secular Bear Market RequiresDifferent Strategies Than During

Bull

Avoiding losses is more important than going after big gainsKuznets’ Infrastructure cycle averages 17.6 years for each bull or bear phase

PE Likely To Halve Before Bear Ends

88

Ominous Triple Top Also Implies Halving of Market

Value

1590

Government Spending Now Approaching European

Levels

Medicare andWar on Poverty

Guns and Butter

Redistribution

Of Wealth

Industry Bore Initial Brunt of Social Welfare

Programs

Workers Endure The Most Pain

Spending Problem is Severe

And Misdirected from Infrastructure Needed for Long-

Term Growth

Total Public Construction Spending vs GDP

Spending on roads, bridges, sea/air ports, sewage and water supply, public housing, etc

Congress Spends Excessivelyon Vote-Getting Consumption

Sequestration on March 1 would trim 10% from

31%,halving one year’s

growth

Federal spending exceeded revenues by $100 Billion every month for past 3

years

Federal ReserveFinancing Spending

ExcessesFederal Reserve QE is creating $85 Billion of IOUs every month

$40 Billion finances Federal excess spending $45 Billion funds housing & mortgage banks This $1 Trillion in annual QE adds 7-points to

GDP of $15 Trillion (vs 2-3% net growth) FRS liabilities tripled from $0.874 Tln in ’08 to

$2.9 Tin in early 2013The 7 Governors and 12 Bank Presidents are all political appointees from White House and Congress

Central Banks in China and Europe

Are More Bloated than U.S.

Fed’s Game Planand Likely Timing

Cease reinvesting some or all payments of principal on the securities holdings; (mid 2014)

Raise the target federal funds rate; (mid 2015) Sell remaining agency CMO securities over a period

of three to five years; and (mid 2015, 16, 17, 18, 19) Once sales begin, normalize the size of the balance

sheet over two to three years (mid 2015, 16, 17)

Actions stated in June 2011 FOMC Meeting.

Timing from August 2012 FRS Staff Discussion Paper

Real Driver of Bull Market Has Been

Fed Stimulus Liquidity

Make hay while the sun shines, but watch out when Fed dampens QE

Hirsch Foresees Six More Years of Pain

Jeff Hirsch’s Little Book of Stock Market Cycles

May 2013May 2013 Long-Term Long-Term

Strategic ConclusionsStrategic Conclusions

1. Deleveraging heavy borrowings for excessive spending increases unemployment and will cause recessionary conditions globally during next several years.

2. Now, at middle of Kuznets’ cycle, upside is limited; as long as QE persists, cautious selections and disciplined timing (in and out) can be profitable. Even bonds & gold are risky now.

3. Return of capital is more important than return on capital. Defensive strategies and disciplined timing to lock-in gains is essential in this roller coaster market.

So, what should we do over the next months and quarters?

For Intermediate Term investing:

Stock Prices Track GDP

Four Key IndicatorsShow Pace of U.S. Recovery

WLI Tracks GDP andEvidences Last Year’s

RecoveryPres. Election

Positive and rising PMI’s supported rising market

Market rises when ISM is above 50, except right after 9/11/2001

Consumer Spending is supporting retail,

wholesale, healthcare and services sectors

Rising stock market despite weakening PMIs

suggests summer correction

S&P500

May 2013May 2013 Intermediate-Term Intermediate-Term

Strategic ConclusionsStrategic ConclusionsUS employment is stabilizing and consumer spending is holding up Liquidity from Fed still flowing strongly; low interest rates boosts stocksU.S manufacturing sector is becoming healthier, but starting to falter

Europe’s sovereign debt and spending problems prolongs their recessionsEmerging Markets losing strength; even China in PMI contraction.

Bullish US stock market is vaporizing, suggesting a bad summer.

Fiscal uncertainties necessitate great selectivity in both strategies and vehicles and, most importantly, the rules and discipline to exit when market swoons

12-Month Moving Average Helps Avoid Major Losses

11% above

Bear-Zone

Weather Forecastfor More Active Investors

When the facts change, I change my position.What do you do, sir?

- John Maynard Keynes

IVY Invests Very Defensively

Bull’s End Is Confirmed When Summation Index Crosses its

MA20or its MACD drops below zero-line

... And When 1/3 of S&P Stocks Stay Below Their

MA50

Traders Still Showing No Fear, which could be dangerous

50/50/0 Rules Show Rollover Top,

But Not Yet Confirming Exit

Investors Were Fleeing Bonds, But Are Now Seeking Shelter

And Gold Has Lost its Defensive Luster

High Quality Dividend Stocks Are Favored During Weak Bull

PeriodsUnderscoring Weakness of Today’s Bullish Levels

May 2013May 2013 Short-Term Short-Term

Strategic ConclusionsStrategic Conclusions1. Hot market is now rolling over towards a Summer correction

Topping out and roll-over patterns reveal current risks Tight stops, caution, and cash accumulation is prudent for stockpiling

ammunition

2. Liquidity from QE and bond sell-off provides some cushioning Correction could be a mild 10-15%, but Washington is erratic Use simple spreadsheets or charts to signal when to get out and when to re-buy

3. Preferred havens are cash and/or strong dividend equities REITs, Production MLPs, Utilities, Food Makers are attractive havens

4. But Hirsch may be right• Stocks may drop 20% into Thanksgiving, move sideways til Easter, then

plunge another 20-25% into a 4Q/14 bottom• Use charts and spreadsheets for logical, disciplined actions

Remember: we are still in the Kuznets Bear Phase; use the discipline of indicators to

pinpoint trigger points

Any Questions?