The Will Robinson Moment Continued

6. S&P 500, DJIA, DJT, and NASDAQ Momentum Oscillators: Each of these oscillators have been tested against historical data resulting in 24-week measurement periods for each that are based on the best fit of indicator reading to subsequent performance of the index. They are all at or are approaching peak levels that have historically marked the end of a short-term trend move. The oscillator range is 0 to 100. Reaching peak levels of 80 or higher have consistently indicated the end of an up-move. The S&P 500 reading is 91. The DJIA reading is 80. The NASDAQ reading is 89. The DJT reading is 87. I am not a buyer of equities at these levels and my recent actions this week (Monday December 12, 2016) reflected selling of shares in companies I hope to buy back at lower levels in the future. Following the adage of buying low and selling high governs this action.

7. Five-day summation of the DJIA point change compared to the NYSE net change in volume and issues for the week indicate a weakening state. For the prior five days, the DJIA has risen by over 600 points. The corresponding period net advancing volume over declining volume is 565 billion shares. The corresponding period net advancing issues over declining issues is 599 issues. Contrast this present state with the historic averages dating back to October 2009, and we find that there is a lack of underlying support for the index point advance. Historically, the average 5-day advance in points is 198 points, corresponding to average net advancing volume of 807 billion shares and net advancing issues of 2,372 companies. The lack of underlying participation in this index rally is very troubling in the non-confirmation of staying power.

8. Net Annual Advancing Volume as a percentage of total NYSE volume of shares traded is meaningfully above the historic average. Dating back to 2009, and utilizing a year period commencing on October 1 to focus on the seasonality of the fourth calendar quarter as reflective of the most up-to-date earning predictions for the current year and following year, this assessment looks at the relationship of the total net volume of advancing/declining shares traded to the overall volume for the year. On average, the annual net advancing volume over declining volume has measured 2.7% of total annual volume. The range for each year is as follows: 2009/10 = .4% (with a corresponding DJIA rise of 1,238 points); 2010/11 = .5% (with a corresponding DJIA rise of 135 points); 2011/12 = 4.4% (with a corresponding DJIA rise of 2,799 points); 2012/13 = 2.8% (with a corresponding DJIA rise of 1,769 points); 2013/14 = 3.3% (with a corresponding DJIA rise of 1,760 points); 2014/15 = -2.1% (with a corresponding DJIA point decline of 733 points); 2015/16 = 3.2% (with a corresponding DJIA point rise of 1,974 points). For the Y-T-D period from October 1, 2016 thru December 13, 2016 mkt open the percentage is 4.7%. (with a corresponding 1,563 point rise in the DJIA index). Clearly, the relationship that currently exists reflects a robust full year set of positive results, yet we are only a little over two months into the year. A correction will likely come soon to bring into balance the current year with the historic balances, as we presently reflect a full years relationship that is not viewed as being capable of moving much higher given the underlying fundamental market valuations that presently exist.

More to come……………………….

A Will Robinson Moment

This is a work in process and will have much more to come over the next few days. To kick this off, we begin with some technical momentum indicators, indicators that are very strongly calling for a market turn lower.

Indicator reference sheet and market direction assessment

TECHNICAL

1. DJIA 3% Data: I measure the magnitude and duration of changes in the DJIA when there is at least a 3% change in the index. Currently the DJIA is in an uptrend period. The current movement since the last 3% decline shows a positive Return of 10.13% as compared to the historic average of 9.0%. The time period over which this 10.13% increase has occurred is 5 weeks as compared to the historic 8.8 week average for up periods. This indicates we may be in the late stage of a rally, as this move came off of a 3.73% decline with a duration of 11 weeks, so the up-market was not recovering from a deeply oversold condition that might support a much higher up period beyond the historic average.

2. OTC 3% Data: Currently in an uptrend period. Return is 7.79% vs historic average of 12.50%. Time covered is 5 weeks vs 10.6 week average for up periods. Indicates we may have more to rally. The move higher follows a 5.07% decline (below historic decline average of 9.3%) that took 5 weeks (equal to historic avg). Similar to the DJIA, the market was not rebounding off of a deep oversold condition, so this move higher may run out of gas over the near term.

3. Weekly Relative Strength variances from the Mean indicate an overbought condition:

a. Over the next six weeks, absent new point gains or losses of a material nature, the RS indicators will not move in any notable way. The net weekly up and down changes that will roll off net to zero, with no individual week containing greater than 140 DJIA points.
b. DJIA: We are at extreme levels in the twelve-week RS Up measure and in the RS Sum measure. Both are more than 1 Standard Deviation from the historic mean and absent a meaningful move down, the RS will not change materially.
i. The RS Up indicator resides at 2,076. Levels above 2,000 have occurred 51 times since 2007, a 10% occurrence rate. One Standard Deviation indicating an overbought condition occurs at the 1,818 level. At this time, we are 1.56 SDs away from the mean.
ii. The RS Sum indicator resides at 1,633. Levels above 1,600 have only occurred six (6) times since 2007, a 1% occurrence rate. One Standard Deviation indicating an overbought condition occurs at the 999 level. We are presently 1.88 SDs away from the mean. For the six times in the past ten years where we have been this extended to the upside, within approximately four weeks, five of those periods experienced declines in the 400 to 500 DJIA point area.
iii. The 12 week RS Down indicator currently resides at -443. This is one SD away from the mean and further indicates a condition that is unbalanced given the lack of normal swings in weekly market activity. History has indicated that declines after reaching levels near the -440 area range between 500 and +1,000 negative points over the ensuing 12 weeks.

c. NASDAQ: This index is not as overbought as the DJIA. The RS Sum and Down indicators are mildly overbought, and do not indicate extreme levels at this date. The RS Up indicator does reflect an extreme condition that is 1.72 Standard Deviations away from the Up mean, and is by itself a cautionary indication. There is no appreciable impact over the next six weeks from the rolling off of prior periods, so the current condition will not change absent appreciable point moves in the coming weeks.

4. Relative Strength Oscillators that measure turning points in the market indicate the following:

a. For the DJIA, given its relative stability vs the NASDAQ in terms of volatility, a comparison of the 4-week average and 12 week average volatility has proven to be a quality metric in predicting market turning points.
i. Presently, the RS down measure equals a value of 20 within the defined range of 0 to 100. A measure between 0 and 20 indicates an extreme overbought condition. A measure between 80 and 100 indicates an extreme oversold condition.
ii. The RS Up measure equals a value of 97 within the defined range of 1 to 100. This level strongly indicates an index decline is relatively close in time.

b. For the NASDAQ, the greater volatility requires a longer measurement period to generate a more reliable indicator. Here we utilize a comparison of 4 week changes against 16 week changes in the NASDAQ Relative strength index. The activity and high volatility that has taken place over the past five weeks has placed both the RS Up and RS Down measures at or close to turning points. The RS Down measure is 96 and the RS Up measure is at 75. The only trend change we see is the beginning of a turn to the downside for the RS Down measure, and a continued acceleration to the upside for the RS Up measure. This indicator implies that more time will be needed before a reliable turning point arrives.

5. Daily Factors that contribute to the timing decision of the market continuing or changing its direction, include the following:

a. Daily Volume: The comparison of magnitude of the market point changes to the changes in market share volume often highlight internal support or lack of support for the movement in share prices. Presently, the Volume measure has been exhibiting a declining level of positive volume given the point increase in the stock indexes. Over the last 26 days the DJIA has increased by 2,000 points while the volume point relationship has declined from .90 volume per point to .85 volume per point over the 26 day period of the current market rally. This indicates a weak level of support for the index move higher.

b. Daily Issues: Consistent with the discussion above, and even more pronounced is the relationship of issues advancing versus index point changes. Here the relationship over the same 26-day period has moved from 3.02 to 2.59 which indicates a declining level of participation by the broader market in the index advance. Every time over the past three years, when this indicator has reached the 2.65 level or lower the market has reversed from a high point, typically experiencing DJIA declines of 500 to 2,000 points over the next 20 to 30 days post reaching the 2.65 level.

c. Volume and Issues in a combined comparison for advancing components and separately for declining components indicate a lower level of support behind the index advance. The advancing components are rising but have not attained levels that would be consistent with the magnitude of the index increase. The declining components are falling, but similar to the advancing observation, they have not fallen to levels that would historically be present in an advance of the magnitude we have experiences over the past 26 days.
The above factors do not provide a sense of immediate urgency in regard to a reversal being imminent. That is not to say that the market will not fall in the near-term (month of December), it very well may decline precipitously, however it does indicate that the advance is not well supported, which raises the risk of a material decline within the next eight weeks, if not sooner.

Time for a Change

Tom Connolly’s Equity Market Discussion
for the upcoming week beginning Oct 31, 2016

Introduction:

There is a quite a bit to cover and to help you focus on what may be of the greatest interest to you, I am providing an index of the contents of this issue. In this newsletter we will cover the following:

1. Summary Comments
2. Valuation
3. Momentum
4. Economic data
5. Connolly Portfolio

1. Summary Comments:
Before Friday’s revelations of the FBI action investigating HRC emails, I was net short of the market. This net short position reflected Put Options, S&P Futures and individual equity short sales. On Friday morning, I sold some of my long holdings in Qualcomm, General Electric, and Cisco, and continued my buying of Gold and Silver miners while also increasing my holdings of Bitcoin. I took these actions given my view of the equity market being over-valued and the week’s release of 3rd quarter strong results and positive forward outlook for the company New Gold.

After the Friday FBI announcement, I added to my holdings of volatility and increased my net short positions.

In summary, I believe the current equity market is extremely over-valued, has been for quite some time, and is now exhibiting an internal loss of momentum to the upside with increasing downside metrics that portend a material decline. Any catalyst event that ignites a material move from the valuation levels we are presently at is now heavily weighted to the downside vs the upside.

2. Valuation
The most important valuation metrics that I rely upon indicate the following:

a. Price to Cash flow multiple for 2016: The price of stocks trade today at a 20.81X multiple of the projected 2016 per share cash flow they generate. This exceeds the historic median of 17.14X

b. Price to Cash flow multiple forecast for 2017: The price of stocks trade today at an 18.31X multiple of the projected 2017 per share cash flow they generate. This exceeds the historic median of 15.14X

c. Number of equities within my 187 company portfolio that are currently valued above their discounted cash flow value: 84 or 45% of the 187 companies that I track are trading at prices that exceed the discounted cash flow value of each company.

d. Growth in cash flow and price from November 2007: Historically, the growth in cash flow has been closely correlated with the growth in share prices. The recent declines in cash flow during 2016 without a corresponding decline in share price has broken this correlation. When comparing the growth in cash flow and price for each year commencing with 2007, utilizing the month of October data (comparing Oct. 2007 vs Oct. 2016, Oct 2008 vs Oct 2016, etc), we find the divergence of price to cash flow is expanding such that we are valued today as the market was in October 2007, right before the market gave way to a material decline. This divergence must resolve itself at some point. Consider the data:

              October 31, 2016 current mkt price and cash flow vs Prior Years
price cash flow
% change % change
vs 2007                66.80% 66.33%
vs 2008              180.46% 60.88%
vs 2009 118.09% 94.95%
vs 2010   84.16% 43.82%
vs 2011   75.77% 21.15%
vs 2012   69.06% 19.31%
vs 2013   30.92% 16.25%
vs 2014   17.60%   5.36%
vs 2015     5.85%  -0.62%

e. Number of companies within the 187 Portfolio that have declined in price this year: 34% of stocks within the portfolio have a lower price than their December 31, 2015 price. This is up from 27% on September 2, 2016 yet the price of the portfolio has risen. This indicates the advance is becoming more narrow, being led higher by fewer stocks, a typical sign of a market top.

f. Current cash flow growth estimates and trend: The current forecast of year-end 2016 cash flow growth over or under 2015 now shows a .43% decline. In April of 2016 the forecast was for a 6.80% growth in cash flow for the year, and since then every month has seen the forecast reduced until we are now at a negative growth rate.

g. Current market enterprise value divided by Earnings (EBITDA): This multiple is now at 14.06X. A high multiple indicates greater risk. Greater risk arises when the market value of the 187 companies plus their debt less their cash is growing faster than their earnings. The prior record high was on October 19, 2007 at 13.06X. We now exceed the 2007 high.

h. Market decline needed to bring the various valuation measures back to historical averages: A 15% decline is needed within the 187 portfolio to bring the various metrics back to historic averages. A reversion to the mean. Typically, in a major move the market overshoots and goes further then the needed correction. An equity market decline greater than 15%, absent governmental interference, would not be a surprise.

3. Momentum
The various oscillators for the Dow Jones Industrial Average, the S&P 500 and the NASDAQ have all turned with strength to the downside indicating a correction is in process. The current oscillator readings, based on trends in point moves of the indexes, indicate the market has completed its advancing stage and that we now reside in a falling market. The oscillator indicators are meaningfully below the level that would indicate the decline is finished. Every one of the following oscillators are pointing to a further market decline:
1. DJIA
2. S&P 500
3. NASDAQ
4. Relative Strength

The other Momentum indicators are confirming the weakness:

5. New Highs and Lows on both the NYSE and the NASDAQ are pointing to a turn lower: On both a daily and a weekly basis the number of New Highs are declining while New Lows are increasing.
6. Companies on both the NYSE and the NASDAQ that show an increase in price vs a decline in price are falling faster than the indexes: The number of Advancing issues (companies showing higher prices), less the number of Declining issues has swung lower and they are leading the indexes on a downward trajectory. The composite of advancing issues less declining issues is falling faster than the point declines in the Indexes. This is a leading indicator and reflects the opposite of what has existed since the market correction of February 2016.
7. Volume of shares traded on the NYSE are being led by higher volume in declining stocks then volume in rising stocks: Total share volume on days when the market declines is higher than the volume on days when the market rises. This indicates more shares are being sold at lower prices than shares are being purchased at higher prices.

4. Economic Data
The strengthening vs weakening economic data comparisons indicate a weak environment. Summarizing and grouping the data into buckets that reflect what is occurring in the economy, the monetary changes in the US, the interest rate environment within the US, the US equity market trends, and the movement of the US dollar against the currencies of key trading partners, reveal negative trends in all cases other than in the expansion of money. The weighted summary metrics (positive is good, negative is bad) for the following macro-economic measures are as follows:

ECO. IND -108.13
MONEY IND 170.63
INTEREST IND – 23.00
MKT IND -118.50
EXCH INDIC -117.39

5. Connolly Portfolio

The performance of the portfolio at this time is very dependent on rising gold and silver prices and on an equity market decline.

The Connolly Portfolio’s YTD performance vs the market, and its current composition as of October 28, 2016, are as follows:

Connolly Portfolio YTD gain as of October 28, 2016 equals + 3.29%
S&P 500 Index YTD gain as of October 28, 2016 equals + 4.03%
NASDAQ Index YTD gain as of October 28, 2016 equals + 3.65%

The Portfolio’s composition as of October 28, 2016 is as follows:
• Cash 55.1%
• Equities 19.4%
• Gold & Silver 23.4%
• Fixed Income 2.1%

As always, be careful out there.

Tom

Current State

Tom Connolly’s Equity Market Discussion
for the upcoming week beginning Oct 10, 2016

Summary Comments:

Beginning to feel like the boy who cried wolf. My assessment of the market remains one of heightened caution. It has been a caution that has not been proven to be profitable, and that fuels doubt as to the value of the financial models that I place so much faith in. While doubt is very much alive, I do not see future success in changing my investment approach. Why?

Because, we are at valuation levels that stop me from investing on the long side of the market. I cannot get caught up in the emotion and money flow into equities in an environment that has more “bubble’ attributes then value attributes. The present state of the market reflects the following summary of extremes:

• Cash flow multiples based on forecasted 2016 results are at 20.90X, a new all-time high in a non-crisis market.

• Cash flow multiples based on forecasted 2017 results are at 18.48X, a new all-time high in a non-crisis market.

• Discounted cash flow values of equities within the 187 Portfolio, as a basket, are now below the current price of the basket. This has never happened before.

• The S&P 500 earning yield is above the 10-year treasury yield by the lowest margin in the past 18 months.

• A full third of the companies that I track have current year cash flow estimates that are lower than the prior year, yet 71% of those companies with negative cash flow growth are actually at prices that are higher than the prior year. Why would a company be worth more today when it is under-performing?

• The momentum oscillators of the DJIA and the NASDAQ are at peak levels that have consistently preceded a downturn.

• The momentum indicators of shares traded in rising stocks versus declining stocks show expanding volume in declining shares now outstripping volume into rising shares.

• New Highs in the market peaked roughly a month or so ago, and while the indexes have been relatively stable or rising, the number of new highs are declining.

• Projected S&P 500 earnings for 2016 are lower than the 2015 earnings by -.03%.

• Forward cash flow growth rates looking out three to five years are at levels meaningfully below the historic average growth rate of 10.85%. Today the average annual growth rate in cash flows over the next three to five years is 8.72%, the lowest level in the past ten years other than the forecasts that existed in 2009 at the height of the Great Recession fear (which were at 7.59%)

• Commodity indexes are rising and reaching breakout levels that point to momentum and asset allocation shifts to emerging markets and commodities, shifts that will divert investments out of US equities.

The above factors keep me in a consistent and similar investment mode of being light on equities, heavy in Gold and Silver, selective in making new investments in commodity related alternatives, and meaningfully weighted toward cash. This portfolio set-up has yielded a below market performance over the past two months, and is testing my patience. For the year, I am now underperforming the broader market given the material declines in Gold and Silver, and while my portfolio is still positive for the year, stronger results would have been realized at this juncture by simply holding the broad market indexes such as the S&P 500. Nonetheless, I remain a believer in the analyses I have undertaken and the view that the level of risk vs reward in today’s equity markets is not favorable and does not warrant increased capital allocations to stocks at this time.

The Connolly Portfolio’s YTD performance vs the market, and its current composition as of October 7, 2016, are as follows:

Connolly Portfolio YTD gain as of October 7, 2016 equals + 1.73%
S&P 500 Index YTD gain as of October 7, 2016 equals + 5.37%
NASDAQ Index YTD gain as of October 7, 2016 equals + 5.69%

The Portfolio’s composition as of October 7, 2016 is as follows:
• Cash 55.7%
• Equities 19.9%
• Gold 22.2%
• Fixed Income 2.2%

Returning my attention back to the market and to the beauty of Fall Foliage in Vermont, I wish you all great success.

As always, be careful out there.

Tom

“An Investor’s Point of View”

Year-to-Date returns and Asset Allocation of the Connolly Portfolio
plus
An Analysis of U.S. Equity Market Fundamentals and Technical Indicators
September 17, 2016
by TJ Connolly

SECTION I

The Connolly Portfolio’s YTD performance vs the market, and its current composition as of September 16, 2016, are as follows:

Connolly Portfolio YTD gain as of September 16, 2016 equals + 5.05%
S&P 500 Index YTD gain as of September 16, 2016 equals + 4.66%
NASDAQ Index YTD gain as of September 16, 2016 equals + 4.74%

The Portfolio’s composition as of September 16, 2016 is as follows:
• Cash 55.2%
• Equities 22.3%
• Gold 20.5%
• Fixed Income 2.0%

The portfolio suffered over the past month given the relatively large percentage decline in the Gold and Silver miner equities that I hold in the Connolly Portfolio. The collective decline in the Miners’ share price since August 18, 2016 is 21%. That decline was the main reason the portfolio gains as of August went from double digits to the 5% noted above.

Choosing to own Gold and Silver Miner equities is not for the faint of heart as the volatility in these shares is often dramatic. Given the global dynamics at play from a political and monetary perspective, I strongly believe that continuing to hold these investments will be very rewarding over the longer term. Stomaching the recent declines is not easy, but my thesis still rings true and I continue to expect to be handsomely rewarded by this investment decision.

SECTION II

U.S. Equity Market Fundamentals and Technical Indicators

1. What are the Dow Jones Industrial Average (“DJIA”), the Dow Jones Transportation Average (“DJT”), the Dow Jones Utilities Average (“DJU”), the S&P 500 Index (“S&P”), and the NASDAQ index indicating?

Chart Trends: When charting these indexes on a weekly basis over time, we find that they are all pretty much sitting at support levels. I would not be surprised from a charting perspective to see these equity indexes bounce off of the support levels and head higher. However, this technical picture also poses the risk that should the current support levels not hold, the ensuing declines could be large. I have structured the Connolly Portfolio with a very low level of equity holdings as I do expect a material decline in the overall U.S. stock market.

Relative Strength Readings: Relative Strength is the accumulation of net changes in the individual equity indexes over a period of time. Rising markets increase RS, while declining markets decrease RS. Markets tend to move up and down in a way that present buying and selling opportunities. A rising market is a reason to buy stocks, but if the enthusiasm for owning stocks become excessive with the result that prices have risen too much, we often will see these excess levels identified by very high RS readings. The opposite is true for declining markets. RS readings above 50 indicate a rising market trend, while RS readings below 50 indicate a declining market trend. At levels above 70 or below 30, one must consider whether the buying or selling has become excessive and thereby presenting of an opportunity to profit from a reversal of the excesses. Presently, we are in overbought territory on the RS indicators, with the NASDAQ being the most at risk given its high reading. The NASDAQ reading is 83, the DJIA RS reading is 67, and the S&P reading is 73.

Price Earnings Multiples which allow a relative way of comparing how expensive or inexpensive individual stock prices may be given the earnings they generate are presently at historically very high levels. This means stocks are currently trading at high prices as compared to the earnings they generate when viewed through the lens of past performance. The current PE multiples are 24.75X for the S&P 500 and 19.68X for the DJIA. Why is this viewed as expensive on a historic basis? Consider that since 2005, the median PE for the S&P was 18.88X, while the median PE for the DJIA going back to 1988 is only 18.03X.

The DJT remains in a churning but declining chart pattern. It was modestly down this past week but maybe more importantly it broke below the recent weekly closing low of 7,807 from August 12th. It has been a leading indicator of the broader market over the past two years and should be watched closely for direction of the overall market.

The DJU has been declining since July 22nd. It did move higher this past week as the fears of an interest rate increase began to fade and investors seeking yield went back into the high dividend paying utility sector.

2. What is the current score on the “Market Tells metric”?

I developed a “Market Tell” indicator that treats a portfolio of 187 companies as if they are a single stock. This “stock” is tracked over time to provide an overall sense of whether the “187 Portfolio” is expensive or cheap, and whether there are individual components of the portfolio that present profitable opportunities. The Market Tell indicator principally compares the “187 Company Portfolio’s” current cash flow and valuation metrics to its historic medians. It closed this week at negative 220. This is a very strong indicator that future positive returns from buying equities will be hard to come by.

The 187 Portfolio’s Cash flow multiple based on expected 2016 full year results is 20.24X. This price per share as a multiple of cash flow per share represents the highest reading reached over the past ten years and compares to the historic median of 17.06X. A high multiple such as we have today would be justified if we had accelerating cash flow growth prospects. However, cash flow growth projected for 2016 over December 2015 is only plus 0.68%, basically no growth. What makes matters even more negative is that the cash flow projection as of September 2016 versus the same time last year actually shows a negative or lower cash flow level being produced (minus 1.32%).

Comparing current equity prices to their Discounted Cash Flow values indicates 84 of the 187 companies were priced above their DCF value. The DCF price is the calculation of what a company’s share price should be based on the cash flow it generates, the expected growth in that cash flow over time, and the discounting of that future cash flow by an appropriate interest rate to arrive at a current price that a willing investor should pay to own the value of the future cash to be earned by the company. The current number of companies within the portfolio that have per share prices above their cash flow value is at a new record high. The 187 company portfolio’s historic average of companies that are priced above their DCF is 61 versus today’s 84. This warns of an expected fall in the market as more companies within the portfolio are presently overvalued and will need to correct lower to create a more attractive risk reward profile.

The current per share market price of the 187 Portfolio is $75.66. The DCF price of the 187 Portfolio is $87.25 assuming an annual 13.05% future cash flow growth rate post 2016. The spread or difference in the current price and the DCF price is plus $11.59. This is a good thing, but given the level of uncertainty as to how the future will play out, it is important to consider what the historic difference or spread has been over time. Historically, the forward DCF price is $21.97 above the current price. As the outlook for the future today is no less certain than it has been in the past, the lower spread today is of great concern. In this environment it should be apparent that future performance has been pulled into the current pricing in a manner that reduces the prospect of future potential gains from buying stocks at today’s prices.

3. Beyond the pricing of the market, what can we learn from the activity in the market as measured by the volume of shares traded, the number of companies going up or down in price, and the number of companies reaching new highs or new lows in price?

During the post-financial crisis period, I believe we have lived in an investment cycle where investment prices have been elevated through the support of Central Bank policies. Fundamentally, there has been a lack of equivalent economic strength to support current prices, but there has been interest rate reductions and Quantitative Easing policies that have channeled investment resources to equites and bonds. So while the market has appeared to be expensive by historic measures, its internal action has told a story of money flowing into stocks and bonds with the effect of raising prices as if risk was limited. It has been interesting to watch this dislocation that reflects weak fundamental values versus technical strength.

I am taking the time to write this view because something appears to be changing in regard to the technical strength. Specifically, the technical strength now appears to be fading.

Volume: There has been a meaningful skewing of volume such that greater volume is occurring on days when the market moves lower. For example, the net volume on the NYSE (total volume in advancing stocks minus total volume in declining stocks) averaged over the prior 11 days, 22 days, 45 days and 90 days, have all turned lower as negative volume is surpassing positive volume. When I couple this skewing of volume with price action, I find we have been in a declining pattern for the past year, and are presently in another leg down as greater volume is occurring on days when the market declines in an ever increasing pattern.

Issues: The ten-day average of the ratio of the number of companies rising in price versus the number of companies declining in price has now moved to the negative. This is a short-term indication that a new trend may be taking place. Further, the weekly measure of advancing companies and declining companies occurring over a look-back period of the past 49-days has also seen a reversal of trend. The 49-day average of declining issues is expanding while the 49-day average of advancing issues is contracting. This reversal began 3 weeks ago and is accelerating with more and more issues declining.

Stocks reaching New Highs and New Lows over the past 52 weeks: There is a modest expansion of New Lows taking place on a daily basis, and a more meaningful decline in the number of companies making New Highs. This is typically a sign of a market in transition, but it needs more time to play out to validate whether we are transitioning to a weaker market.

4. Other:

Bitcoin has been much less volatile of late. It is valued at approximately $606 per BC. I remain an investor in BC, buying a new coin every so often in order to slowly build a position that I believe may increase in value. There is a cap on the number of BitCoin that can ever be in circulation. Therefore, should it gain greater traction as means of exchange, and therefore become in greater demand, its value in paper currencies such as the US Dollar will rise. I found it interesting the other day when I purchased some physical Gold that the dealer accepted BitCoin as payment. It is worth monitoring. You can do so at a number of websites such as CoinBase or CoinDesk.

The U.S. Dollar Index has been consolidating in the 95 to 96 area. Over the past twelve months it has traded between 93 and 100. The dollar has appeared to be range-bound in this area. A continued strengthening could pose issues for the Emerging markets. The actions of Central Banks continue to impact the relative values of cross-currency relationships, and it is important to watch the US Dollar given its implications to trade and the pricing of various commodities.

Gold closed the week at the $1,313 per ounce. The global phenomena of negative interest rates on sovereign debt in many parts of the world is giving support to the price of Gold. The recent modest pull-back in the price of Gold in US Dollar terms is not of great concern to me at this time. However, the much more material decline in the equity prices of the Gold miners may offer a true buying opportunity. This potential buying opportunity will only prove real if the price of Gold reassumes its move higher in price. If Gold should decline further, the Miners will follow, so there is risk here that is not insignificant. Keeping a watchful eye on the actions of the Central Banks is important to this investment class of assets. Presently, the dominant view is that the CBs of the world will continue to ease and lower interest rates, as well as provide the markets with additional buying power. The US Fed is scheduled to make an interest rate announcement this week, and it may be prudent to wait to see the announcement of their interest rate decision and their forward guidance before committing new investment capital to work in this area.

The Ten-year bond yield is somewhat static and closed at 1.69%. The economic signals I see from the latest government releases show an economy that continues to operate in a very modest way, presenting signs of continued slowing. I would not be surprised to see a decline in the rate structure given the lack of economic demand and the large supplies of inventory and excess production capacity in the world.

Commodities: This week we saw the CRB commodities index soften. The softness in economic demand factors, the supplies on the market and the stability in the value of the U.S. Dollar are neutral to negative for the pricing of Oil and the Industrial commodities. Deflation remains a concern.

The High Yield vs Investment Grade spread expanded. We closed this week at a spread of 3.52% which is an increase of 52 Basis points over the past week. While still at a modest sized spread, the upturn should be watched as a further expansion will lead to a risk-off environment and a potential large decline in equity prices. The High Yield market is at 6.29% and Investment Grade is at 2.77%. If the oil market fails to hold the price of a barrel near the $45+ level, the health of high yield market may once again show pressure. A fall in oil will be problematic for the High Yield market and a general negative for the overall market.

That about covers it for this letter.

As always, wishing you great success!

Tom

“Plain Talk”

Tom Connolly’s Equity Market Forecast
for the upcoming week beginning Sept 19, 2016
With Market Questions and Answers

Summary Comments:

It has been close to a month since I last prepared a full newsletter. There are a few things to cover, but the essence of my views remain as previously shared: We are at a level in the equity markets that poses greater risk then reward.

Before I move further into the newsletter, I need to recognize that some friends have commented to me that my writing and subject matter is a bit complex and not always easy to interpret. That defeats the purpose of composing this letter, which is to educate and help others make informed investment decisions. So, I will take a bit of a different tone and approach and would appreciate any feedback from those that wish to help guide me and make this a better tool for all.

First up, where am I allocating my capital, why, and how confident am I about the market’s future direction.

Where am I allocating my capital?

I have made new investments in Gold, Silver and the companies that mine for Gold and Silver. These investments now represent the largest dollar concentration of my current investments. The actions taken are as follows:

o I have purchased physical Gold in the form of one ounce coins and bars. They are safely stored in a vault. I want some small amount of my precious metal investments to be in physical form and so have done so.

o I have increased my equity investments in precious metal miners by buying the stock of: Alamos Gold, Gold Corp, Harmony Mining, Hecla Mining, New Gold, and Pan American Silver. I have also purchased the right to buy more stock of Gold Corp and New Gold at pre-set prices in the future. I did this by buying what are called “Call Options” on the stock of these two companies.

I have made investments that will increase in value when the equity markets decline in value. I have principally done this by:

o Selling futures contracts on the S&P 500 equity index at a preset price. If the S&P 500 index declines, I will then have the ability to buy the index at a lower price. My goal, because I believe the equity market is at a level that is too expensive, is to have the selling price I contracted at to be higher than the future purchase price, and this occurs if the S&P index declines below the level of the price I agreed to sell the index. The Future sale price for delivery in the month of December 2016 that I contracted for is 2,130. Presently the S&P 500 Index is at 2,134.

o Buying the right to sell the S&P 500 equity index at a fixed future price. I have done this by buying what are called “Put Options” on the S&P 500 index that lock in a sale price of 2,150. This right expires in late October, so if the index declines between now and then I will profit, but if it does not decline, I will lose the investment premium I paid for the right to sell the index.

o Buying shares in an ETF that goes up in value when the stock market declines and falls in value when the stock market goes up.

o Selling short shares of stock in Netflix and Microsoft. Selling short is a way through your brokerage account that you can profit from individual stock declines in price. Effectively, it is a way to sell a stock that you do not own at today’s price with the expectation that you will be able to buy it back in the future at a price below the price at which you sold the stock. I believe that Netflix is over-valued given the cost of programming it is committed to buy. I like Microsoft and in fact it is a core holding for me. However, its recent run to the above $55 per share price level gave me the opportunity to hedge my position without disposing of the MSFT shares I own in my core portfolio. Should the MSFT price decline, I will lose money in my core portfolio, but will offset that loss by the gain from the short position in my brokerage account.

• I have decided to hold my core equity portfolio steady at its current level. These investments are not held in a trading brokerage account. The investments are through a trustee that enables direct investments in each individual company at levels I choose, some with minimums as low as $10. These company investments enable me to enroll in each company’s Dividend Reinvestment Plan so that quarterly dividend payments are used to buy more stock of the specific dividend payor.

• Finally, my 401-K/IRA account is effectively 100% in cash. I will reallocate this cash to investment choices other than cash when the market has returned to what I consider to be more rational and reasonable values.

Why have I allocated my investment portfolio in the manner described above?

It is because I assess the current equity market to be extremely over-valued. Additionally, I view the low and negative interest rate environment that is supported by the Central Banks of the world to be negative for paper currencies and positive for hard assets such as Gold and Silver. I do not see these Central Bank policies changing anytime in the near future and therefore expect the prices of hard assets to rise in relation to the buying power of paper currencies such as the Yen, the Dollar, the Euro and the Chinese Yuan.

How confident am I in my belief that the stock market will decline from its current levels? I am highly confident that over-valued environments eventually correct to lower valuations. The question of when is the truly most difficult one to answer, but the current movement in the market’s momentum away from an upward direction indicates to me that the decline I expect is not far off. The ground is shifting under the market’s feet and this new instability is the pre-cursor to a market decline that I have been waiting for. This is why my investment positions that increase in value from a stock market decline have expiration dates of October thru December. I expect a material decline during this period.

Hopefully, the above adds some clarity that may have been absent in the prior letters.

As always, be careful out there.

Finally, the detail analysis section that includes my YTD portfolio performance vs the market and the relative measures of market value with trend data will be posted over the weekend after the market closes.

All the best,

Tom

What is Momentum telling us?

The observations I have shared over the past number of months in regard to the market, which have pointed to an over-valued condition in a supportive technical environment, are unchanged this week. So, rather then write (while I am on vacation) on the subjects I typically cover each week, I thought it appropriate to share my views on momentum and where the market is presently. The headline observation is that momentum is close to or has peaked. Using history as a guide, momentum indicators say it is time to limit exposure from long positions.

Why?

Consider the following:

1) New York Stock Exchange Volume: One of the calculations I perform each week is to compute the five day average of volume on the NYSE. I then compare the current five day period to the prior five day period and take the difference. On a running basis this difference is summed to develop a picture of net volume change over time. This is contrasted with the net point change over time in the stock indexes. The momentum change here is significant as since February 12, 2016 the DJIA has risen by roughly 2,500 points, but the cumulative volume change has lost momentum going from a net positive volume change of 850 million shares to only 115 million positive shares today. The percentage of day-to-day advancing volume and issues over declining volume and issues are supportive of an advancing market, but the decline in overall volume participating in the market points to a market that is losing steam, losing momentum. The decline in net cumulative volume noted above may be criticized in an off-handed manner as not addressing seasonality, but the truth is that last year at this time we were net positive over 900 million shares, so the summer is not the driving force here. It is simply a decline in overall demand that is occurring under the surface.

2) Relative Strength momentum as pictured through variance from the mean (Standard Deviation) is in the tail portion of the curve for both RS moves higher and for RS moves lower. The measures here compute the cumulative DJIA point moves higher for each week in a twelve week period, and separately computes the cumulative DJIA point moves lower for each week in the same twelve week period. This data has been tracked going back to the year 2010. The up move benchmark is 231 points whereas the current SD up measure is at 316 points, indicating we are in the upward end of the tail that will bring about a reversal or a decline to enable a reversion to the mean. For the RS down measure the benchmark is 345 points whereas the current SD down measure is at 166 points, indicating this too is in the tail, but in the low tail end that will bring about a reversal or a surge in downward points to enable a reversion to the mean here.

3) Lastly, the data above is put in context by using an oscillator of Relative Strength. This view is to determine inflection points and to give some sense of timing of when a reversal move may take place. It does not measure the size of the move, only the potential timing and the direction of the move. Over time the RS down oscillator has indicated a turning point lower for the market when the Oscillator reaches a negative 150 point reading. We are presently at negative 145 points. The range of the oscillator over the past ten years for downward Relative Strength is positive 5 and negative 150. At a negative 150, the market has consistently over time reversed its move higher and headed lower within the next one to four weeks. For the upward RS Oscillator, the peak point is positive 50 points, which when reached typically signals a market top is near. The RS Up oscillator hit positive 50 points two weeks ago.

I share the above with you to simply change the focus. It is clear to me that we are fundamentally over-valued to the point of extremes that are setting risk records in my models. That tells me that when we do get a correction lower, it is likely to be very large and steep for we are at stock market levels that have not been historically sustainable, particularly in an economic growth environment that is modest at best. Coupling this extended market condition with the momentum indicators above simply makes me more and more cautious.

As always, be careful out there and have a great week.

Tom

Deja Vu

Tom Connolly’s Equity Market Forecast
for the upcoming week beginning Aug 15, 2016
With Market Questions and Answers

Summary Comments:

I keep a personal diary that captures my feelings about the market. While I write in it often, it is not an everyday event. The other day, as I look back, the words I wrote seem to be the right words for the Summary comments in this weeks’ blog post. So, without further comment, this is what I wrote on August 10, 2016:

“My thoughts and feelings are very mixed. The losses I have incurred from my short positions are large. Fortunately, the gains from my precious metal positions have exceeded the losses on the shorts, providing an overall 11% YTD gain. I am tormenting myself over keeping the short positions. By every measure I track and look to over time to determine points of extreme excess or opportunity, today we are as exposed as ever at a point of irrational heights. Yet the market dynamics of high/lows, of advancing volume and advancing issues all confirm the move higher. A conundrum.

Do I keep the shorts in place after suffering such extreme losses?

Do I liquidate the precious metals after enjoying such extreme gains?

Why have valuation fundamentals become so disregarded by the market?

I am struggling to choose a path.

Best case scenario for my portfolio would be:
1) A serious market correction
2) A continued rise in precious metals

Worst case scenario for my portfolio would be:
1) A continued rise in equity indexes
2) A large decline in precious metals

What do I believe are the odds of each scenario happening?
1) Best Case:
a. Market correction in the current environment 25%
b. Gold and Silver going higher 65%

2) Worst case:
a. Market continues to rise 35%
b. Gold and Silver drop meaningfully 20%

3) Fill to get to 100%:
a. Market is flat 40%
b. Gold and Silver consolidate 15%

Given this perspective, I am going to hold my positions.”

As always, be careful out there.

Prior week’s investing activity: Last week was very much steady as she goes. I trimmed a small amount of the Gold mining position to take some profits off the table, added a little to the S&P September put option holding, and otherwise was very inactive.

My portfolio’s YTD performance vs the market, and its current composition as of Aug 12, 2016, are as follows:

Connolly Portfolio YTD gain as of Aug 12, 2016 equals +10.20%
S&P 500 Index YTD gain as of Aug 12, 2016 equals + 6.85%
NASDAQ Index YTD gain as of Aug 12, 2016 equals + 4.50%

The Portfolio’s composition as of Aug 12, 2016 is as follows:
• Cash 51.7%
• Equities 28.3%
• Gold 18.0%
• Fixed Income 2.0%

Forecast for the coming week: This coming week is the anniversary of last summer’s dramatic decline. The market metrics of July 2015 and July 2016 are twins, and not that last year should guide this year, but the level of overvaluation today is even greater than last year. Best to be careful. For the upcoming week I do not see any driving news or events that will change course. Presently, we have been in a rising market that lacks drama, so my view is to be careful and to not be complacent as this walking on a tight-rope is not for the weak of heart. Being ready to act is paramount as the current market move higher is approaching a length in time that often reflects fatigue and a need to rebalance through a correction.

Market Questions and Answers

What are DJIA, DJT, DJU, S&P and NASDAQ metrics indicating?

New index highs dominated the headlines last week (S&P 500, NASDAQ and DJIA), a triple that last happened in the year 1999. The DJU and the DJT did not attend the party and should be kept in our peripheral vision as a cause of potential concern. The trend in overall equities remains higher, but not in a rational way.

Relative Strength: We are in overbought territory on the RS indicators. The DJIA reading is 72, the NASDAQ reading is 75, and the S&P reading is 74. The NASDAQ has moved higher for seven straight weeks. The continued advance has stretched valuations like a rubber band, and any continued move higher will only serve to add tension and power to a potential snap-back event in an overbought and over-valued market.

Price Earnings multiples are 25.27X for the S&P 500 and 20.24X for the DJIA, indicating an expensive market to invest in at these levels.

The DJT remains in a declining chart pattern. It was modestly down this past week while the broader equity indexes rose. It has been a leading indicator of the broader market these past two years and should be watched closely for confirmation of a move higher or indications of a reversal in economic fortune.

The DJU has been churning over the past four weeks around a new high as investors seek yield reflecting the cautionary investing strategy of a market that poses greater risk then reward for investing in growth oriented businesses.

What is the current score on the “Market Tells metric”?

HAZARDOUS WARNING:

The Market Tell indicator, which is a comparison of the market’s current cash flow and valuation metrics to its historic medians, closed the week at negative 214. As an FYI, when we have a high positive reading this is a strong buy signal and when we have a high negative reading it is a strong sell signal. The -214 is the highest negative reading I have ever seen. Some of the components are at levels that are scary in regard to over-valuation.

The Portfolio’s Cash flow multiple based on expected 2016 full year results is 20.06X. This reading of price to cash flow is the highest reading over the past ten years. If we were experiencing continued rises in growth of future cash flow estimates and rates of growth in cash flow generation then one could justify the high current multiples. However, we just reached the lowest level of cash flow growth projections for the year, now at only a 0.61% growth YoY (August 2016 vs August 2015), and for the full year 2016 vs 2015 the growth is projected at only 1.58%. At some point in time this rising price environment in a declining cash flow growth environment will break.

Comparing current equity prices as the week closed on the 187 portfolio companies to their Discounted Cash Flow values indicates 84 companies were priced above their DCF value. This is a new record high of the percentage of the portfolio that is trading above their discounted cash flow values. The 187 company portfolio’s historic average of prices above DCF is 61. This warns of an expected fall in the market as more companies are overvalued and will need to correct lower to create a more attractive risk reward profile.

The dollar spread between the Current Price and the Discounted Cash Flow price utilizing 2017 cash flow projections on the 187 Portfolio Companies is now at $12.29. This is based on a projected cash flow increase in 2017 over 2016 of 13.09%. The difference or spread today between the current price and the DCF price is the lowest in my tracking history and is meaningfully below the historic median of $22.13. A higher spread indicates greater value to invest in whereas a lower spread indicates subpar returns will be realized from investing at current prices. In this environment it should be apparent that future performance has been pulled into the current pricing in a manner that reduces potential gains absent a significant improvement in future earnings and cash flows.

What is the position of the weekly net up down Vol/Issues?

The week’s volume and issues have faded in terms of validating the index point moves higher. Of particular note is that the weekly average volume totals are falling to levels unsupportive of the level needed to confirm the strength of the index point moves higher. Declining volume in a rising market is troublesome. This is after taking into account the seasonal phenomena of the summer in the city doldrums and the migration to the beach.

What are the daily point vs issues and point vs volume measures indicating up or down?

The daily trend is supportive but in a lessening manner. The daily metrics of (1) index point moves being supported by the daily advancing or declining volume, and (2) the index point moves being supported by the daily rising and falling number of issues, confirmed the support for the market.

Where are the New Highs and Lows moving toward?

The momentum in new highs vs new lows appears to be tiring. We are seeing a static number of new lows, and a declining level in new highs (note daily new highs are happily in excess of new lows, so there is confirmation of the underlying participation of the broader market in the rally higher, but the gap is shrinking over the past two weeks and warrants paying attention to in regard to whether the participation is beginning to narrow).

How well are Market Tells correlating with Market trading internals?

The technical market indicators and the Market Tells of valuation are not in alignment. This is an indication that future volatility will arise to bring about a resolution of this imbalance. As we continue to extend gains the level of risk for a dramatic decline to adjust the price of the market to the cash returns from the market becomes increasingly dangerous. Close attention needs to be paid to exogenous events that could ignite a market reversal.

What is the composite reading of the Calendar, Environment, Duration, Action, Trend, Emotion and Valuation Index (“CEDATEV”)?

The reading is minus 2 (-2). This score reveals a market that has many competing influences. The world events and economic trends coupled with an expensively priced group of stocks and bonds pose significant risk, but the emotion does not show a reversal to the downside.

Contributors are:

Negative in the following areas:
Duration
Trend
Valuation

Positive in the following areas:
Emotion

Neutral in the following areas:
Calendar
Environment
Action

Other:

Bitcoin weathered a storm brought about by the hacking of a Hong Kong based exchange and the theft of millions of dollars of Bitcoin. The price per BTC fell to the mid-low $500s before moving to its current level of $573. The per unit value based in the low $400 area over the past four months. Over the past year, the price has increased by over 200% from the $230 area. I hold a position in Bitcoin as we move closer to digital currencies.

The Dollar Index has been consolidating in the 95 to 96 area. Over the past twelve months it has traded between 93 and 100. The dollar has appeared to be range-bound in this area. A continued strengthening could pose issues for the Emerging markets.

Gold closed the week at the $1,341 per ounce. The global phenomena of negative interest rates on sovereign debt in many parts of the world are giving support to the price of Gold. Over the past month, the Gold and Silver Miner equities have risen materially. Results for the quarter ended June 30 were very good, and the action in the $1,300 per ounce area does not show signs of any meaningful pullback. I believe there is much more room to the upside for these equity holdings. Given the continued global uncertainty and currency volatility issues that exist, I do see material price increases for gold and silver in the foreseeable future and for Gold to advance much higher above the $1,300 level. I will therefore maintain my PM positions (with modest sized exits and entrances to capture periodic swings above or below a normalized trend) to offset potential equity price declines from the broader market.

The Ten-year bond yield weakened a bit this week and closed at 1.51%. The economic signals I see from the latest government releases show an economy that continues to operate in a very modest way, often presenting signs of continued slowing. The behavior of the Bond market is confirming that economic slowness. Of concern is a flattening of the yield curve (recession) with only slightly more than a 1% spread between 3-month money and 10-year money.

Commodities: This week we saw the CRB commodities index stabilize. The softness in economic demand factors, the supplies on the market and the stability in the value of the U.S. Dollar are neutral to negative for the pricing of Oil and the Industrial commodities. Deflation remains a concern.

The High Yield vs Investment Grade spread contracted to give further support to the no-fear environment and the aggressive pursuit of risk for yield. We closed this week at a spread of 3.484% and the indication was to take risk-on. High Yield is at 6.124% and Investment Grade is at 2.64%. If the oil market fails to hold the price of a barrel near the $45 to $50 mark or higher (right now we are rallying to the $45 per barrel mark), the health of the high yield market may once again show pressure. A fall in oil will be problematic for the High Yield market and a general negative for the overall market. However, right now the HY arena is backing a continued commitment of money to the market.

That about covers it.

As always, have a great week!

Tom

Equity Portfolio Activity for the Week ended August 12, 2016

Equity Portfolio as of August 12, 2016

Commentary: The large gains in the Gold and Silver mining equities have marginally exceeded the losses of the short hedges. I have debated reducing the short hedges but given the fact that by every measure I track and analyze, today’s market is priced at a level that offers limited gains from continued price increases. The market is at a level of extremes that pose great downside risk. Of course, emotionally motivated buying can continue to feed the rise in prices, but for this investor it is best to watch from the sidelines and to maintain hedges that will offset the impact of equity price declines. During the week, I modestly increased the short hedges.

Good Luck and have a great week!

New Additions

1. None

Increase in Holdings

1. First Solar
2. S&P September Put Options

Complete Dispositions

1. Alamo Gold

Partial Decrease in Holdings

1. Ultra Short VIX

Overall Equity Portfolio holdings

1. Alamos Gold – Closed position
2. ASA
3. Arm Holdings
4. BB&T Corp
5. Brocade
6. Brookfield Total Return
7. Chevron
8. Con Ed
9. CISCO
10. Disney
11. Eastman Chemical
12. Endo Int’l
13. First Solar – Increased position
14. Ford
15. General Electric
16. Golar LNG
17. Halliburton
18. Harmony Gold Mining
19. Hecla Mining
20. Hershey
21. Ingredion
22. JP Morgan
23. Microsoft
24. New Gold
25. Nordic American Tanker
26. Norfolk Southern
27. Phillips 66
28. Pro Shares Ultra Short S&P 500
29. Pro Shares Ultra VIX Short – Decreased position
30. Qualcomm
31. S&P E-mini short futures
32. S&P 500 September Put Options – Increased position
33. Synaptics
34. Tetra Technologies
35. Travelers
36. Twitter
37. Viacom
38. Wells Fargo
39. Yum! Brands

“Fragility”

Tom Connolly’s Equity Market Forecast
for the upcoming week beginning August 1, 2016
With Market Questions and Answers

Summary Comments:

By almost every measure I track, the current equity market is valued at levels that historically have failed to provide near term returns that are positive. The valuation parallels with the summer of 2015 and the summer of 2007 are eerily similar. Whether it is Price/Earnings ratios, Cash flow multiples, Equities trading at prices above their Discounted Cash Flow values, the number of companies that have gone up in price yet have year-over-year cash generated per share that is lower than the prior year, or the dramatic narrowing of the spread between historic mean differentials of current prices when compared to forward valuation measures, I find little data that point to value investing as a condition of the stock choices available today.

We are in a market where I prefer to hold a core equity portfolio that is hedged by short derivatives, and a portfolio where Gold and Silver play an important role to protect against market and global uncertainty.

As always, be careful out there.

Prior week’s investing activity: I added to hedges and maintained the fewest number of equity holdings for the year.

My portfolio’s YTD performance vs the market, and its current composition as of July 29, 2016, are as follows:

Connolly Portfolio YTD gain as of July 29, 2016 equals + 9.17%
S&P 500 Index YTD gain as of July 29, 2016 equals + 6.34%
NASDAQ Index YTD gain as of July 29, 2016 equals + 3.09%

The Portfolio’s composition as of July 29, 2016 is as follows:

• Cash 51.9%
• Equities 30.4%
• Gold 15.7%
• Fixed Income 2.0%

Forecast for the coming week: Fragility is the word I feel most comfortable with in thinking about the forecast for the upcoming week. I believe this market can turn on a dime and head lower in a meaningful way. What will be the catalyst? I have no idea, but the decline from the current heights could be scary.

Given the summer schedule, I will post the details of the market questions and answers later in the week.

Wishing you all the best,

Tom