Lighthouse Investment Management

Weekly Chart Window

July 15, 2013

Weekly Chart Window - July 15, 2013

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Lighthouse Investment Management

Contents
TIPS-derived Inflation Expectations .............................................................................................................. 3 Stock Market and TIPS-Derived Inflation Expectations ................................................................................ 4 Trend: Moving Averages ............................................................................................................................... 5 Trend: MACD................................................................................................................................................. 6 Stocks Above 50-Day MAVG ......................................................................................................................... 7 Stocks Above 200-Day MAVG ....................................................................................................................... 8 Net New Highs: NASDAQ .............................................................................................................................. 9 Net New Highs: NYSE .................................................................................................................................. 10 New Highs/Lows Ratio: NASDAQ ................................................................................................................ 11 New Highs/Lows Ratio: NYSE ...................................................................................................................... 12 Risk-on / Risk-Off ........................................................................................................................................ 13 Lighthouse Timing Index ............................................................................................................................. 14

Weekly Chart Window - July 15, 2013

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Lighthouse Investment Management

TIPS-derived Inflation Expectations
US Inflation Expectations (TIPS-derived)
3.00
Source: Federal Reserve Bank of St. Louis, own calculations. 10-day moving averages. (c) Lighthouse 2013

2.50

2.00

1.50 Jan-2012 5yr inflation Jul-2012 10yr inflation Jan-2013 5yr/5yr inflation Jul-2013 30yr inflation

Observations: Inflation expectations are calculated by subtracting real (TIPS) yields from nominal yields Despite the recent rise in nominal yields, inflation expectations have declined further (real yields have risen faster than nominal yields, compressing inflation expectations) Nominal yields have not risen because of an 'improved growth outlook for the economy' The Fed is not happy about reduced inflation expectations, as it does not force consumers to spend. A slowing velocity of money further counters the efforts of the Fed. Recent talk from Bernanke about possible 'tapering' of QE later in 2013 led to doubts regarding the Fed's policy of N-GDP targeting, only adopted in late 2012. CONCLUSION: In order for a successful transition, Bernanke's successor (likely Janet Yellen) needs a 'good' reception from markets. The current setback in bonds and stocks might therefore be actually wanted / engineered by the Fed in order to create some upside potential for asset prices.

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Stock Market and TIPS-Derived Inflation Expectations
S&P 500 Index and expected inflation
1,700 7/10 y = 236.4x + 896.16 R = 0.1462 1,600

S&P 500 Index

1,500
Source: Federal Reserve Bank of St. Louis, own calculations. Data since 1/3/2012. (c) Lighthouse 2013

1,400 2/12/2013 1,300 R2 [1/2012-2/2013] = 0.75 1,200 2.00 2.10 2.20 2.30 2.40 2.50 2.60 10-year expected inflation rate

Observations: Since January 2012, the S&P 500 is basically uncorrelated to the yield of 10-year Treasury bonds (r2 = 0.02), but very much correlated to the expected rate of inflation over the next 10 years (r2 = up to 0.75). Since mid-February 2013, the strong correlation between expected inflation and the S&P 500 Index has reversed into a negative one. This is quite unusual.

Conclusion: Assuming the bond market (despite price manipulation by the Fed) correctly reflects market expectations, the S&P 500 should be closer to 1,350 points given inflation expectations.

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Trend: Moving Averages
S&P 500 Index, moving averages
1,700

1,600

1,500

1,400

1,300

1,200
(c) Lighthouse 2013

1,100 May-2011 Nov-2011 SPX (10d mavg) May-2012 SPX (50d) Nov-2012 SPX (100d) May-2013 SPX (200d)

Observations: All moving averages have a positive slope (pointing upwards) The 10-day mavg has caught up with the 50-day mavg, a good sign

Conclusion: The uptrend is still intact

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Trend: MACD
MACD (moving average convergence / divergence)
12% 1,700

8%

1,600

4%

1,500

0%

1,400

-4%

1,300

-8%
(c) Lighthouse 2013

1,200

-12% May-2011 Nov-2011 May-2012 Nov-2012 MACD (100d, 20d) May-2013 MACD (200d, 20d)

1,100

SPX (10d mavg)

MACD (50d, 20d)

Observations: The S&P 500 Index is around 7% above its 200-day moving average, which is still quite 'extended'. Similar levels had been reached in April 2012. The S&P is less extended from its 50- and 100-day moving average (which is to be expected, as those averages tend to follow the index more quickly) All three derivatives of moving averages have peaked, suggesting the stock market is losing momentum.

Conclusion: Stock market needs to 'work off' its extended condition, especially from the 200-day moving average. This can be done by sideways movement. Such a 'solution' is unlikely, as the market has had no correction since November 2012 (and went up 23% since then). A significant downward move is therefore the likely solution.

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Stocks Above 50-Day MAVG
% of S&P 500 stocks above 50-day moving average
100
Correlation: 0 t+60, 0.10 real-time

1,650

80

1,550

60

1,450

1,350 40 1,250 20 1,150

(c) Lighthouse 2013

0 Aug-2010 Feb-2011 Aug-2011 SPX (10d mavg) Feb-2012 Aug-2012 Feb-2013 50a 30d

1,050

%>50d mavg

Observations: 62% (previously 46%) of the 500 stocks within the S&P Index are above their 50-day moving average

Conclusion: More than half of the S&P 500 members are in a medium-term uptrend. This is a good sign. Any reading below 50% indicates trouble for the bulls.

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Stocks Above 200-Day MAVG
% of S&P 500 stocks above 200-day moving average
100 1,750 1,650 80 1,550 60 1,450 1,350 1,250 20 1,150
(c) Lighthouse 2013

40

0 Aug-2010 Feb-2011 Aug-2011 SPX (10d mavg) Feb-2012 Aug-2012 Feb-2013 200s50

1,050

%>200d mavg

Observations: 86% (previously 84%) of the 500 stocks within the S&P Index are above their 200-day moving average

Conclusion: More half of the stocks in the S&P 500 Index are in a long-term uptrend. This is a healthy sign. A drop below 50% would indicate trouble.

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Net New Highs: NASDAQ
$NAHL: Nasdaq net new 52-week highs
30,000
Reliability: medium

1,650

25,000 20,000

1,550

1,450 15,000 1,350 10,000 1,250 5,000 0

(c) Lighthouse 2013

1,150

-5,000 Aug-2010 Feb-2011 Aug-2011 SPX (10d mavg) Feb-2012 NAHLc Aug-2012 Feb-2013

1,050

NAHLc 30d

Observations: The number of Nasdaq-listed stocks with new 52-week highs exceeds the number of stocks with new 52-week lows. This means the current record highs for the S&P 500 Index are supported by a large number of individual stocks.

Conclusion: The rally has a good 'breadth'. No warning flag.

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Net New Highs: NYSE
$NYHL: NYSE net new 52-week highs
125,000
Reliability: better than NAHL

1,650

100,000

1,550

1,450 75,000 1,350 50,000 1,250 25,000

1,150
(c) Lighthouse 2013

0 Aug-2010 Feb-2011 Aug-2011 SPX (10d mavg) Feb-2012 NYHLc Aug-2012 Feb-2013

1,050

NYHLc 30d

Observations: The number of NYSE-listed stocks with new 52-week highs is higher than the number of stocks with new 52-week lows.

Conclusion: The breadth of the recent stock market rally has improved again. The cumulative number of net new highs has broken above its 30-day moving average. This is a buy signal.

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New Highs/Lows Ratio: NASDAQ
$NAHLR: Nasdaq new highs/new lows ratio (log)
tops 15-20 bottoms 0.15-0.20 in bear mkt, below 1.00 in bull Reliability: good, but too early. Very similar to $NAHLR. Very good reliability using the slope of the NAHLr 50d

1,650

1,550

10.0

1,450

1,350

1.0

1,250

1,150
(c) Lighthouse 2013

0.1 Aug-2010 Feb-2011 Aug-2011 SPX (10d mavg) Feb-2012 NAHLr 20d Aug-2012 Feb-2013

1,050

NAHLr 50d

Observations: Nasdaq-listed stocks with new 52-week highs exceeds the number of stocks with new 52-week lows by a ratio of 9:1, with a falling trend (previously = 4.5:1). The rally since the beginning of 2013 has been accompanied by falling peaks in the ratio, which can be interpreted as a sign of weakening.

Conclusion: A fall in the ratio below 1 would indicate trouble. This is currently not the case. The ratio is above its 50-day moving average - a good sign.

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New Highs/Lows Ratio: NYSE
$NYHLR: NYSE new highs/new lows ratio (log)
50.0 1,650

1,550

1,450

5.0

1,350

1,250

1,150
(c) Lighthouse 2013

0.5 Aug-2010 Feb-2011 Aug-2011 SPX (10d mavg) Feb-2012 NYHLr 20d Aug-2012 Feb-2013

1,050

NYHLr 50d

Observations: NYSE-listed stocks with new 52-week highs exceeds the number of stocks with new 52-week lows by a ratio of 5.3:1, with a rising trend (previously = 1.7:1). The rally since the beginning of 2013 has been accompanied by falling peaks in the ratio, which can be interpreted as a sign of weakening. As a lot of fixed-income ETF's are listed on the NYSE they distort the picture (bond ETF's often rise as stocks fall).

Conclusion: The ratio's 20-day moving average rose above 5. This is a buy signal.

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Risk-on / Risk-Off
\

The general market (SPY) is underperforming high dividend shares (SDY), (red line, bearish) Stocks are outperforming bonds (blue line, bullish) The high-yield bond ETF (HGY) is outperforming investment-grade ETF (LQD); green line (bullish)

Equal-weight ETF (RSP) is outperforming market cap-weighted ETF (SPY); green area (bullish)

CONCLUSION: 3 out of 4 indicators suggest stock market is in an uptrend

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Lighthouse Timing Index

Lighthouse Timing Index "Trend"

12

LONG 1,650

1,550

1,450

1,350

-4

1,250

-8
(c) Lighthouse 2013

1,150

-12 Aug-2010 Feb-2011 Aug-2011 LIM-T Feb-2012 Aug-2012 Feb-2013

1,050 SHORT SPX (10d mavg)

Observations: The Lighthouse Timing Index rose to +4 (previously: 0 points)

Conclusion: Our composite index suggests that the upwards trend has resumed, and delivered a "buy" signal.

Note: This index is a trend-confirming indicator, and will not be able to anticipate market tops or bottoms in advance. Due to smoothing of data, a certain time lag of about two weeks is to be expected.

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Any questions or feedback highly welcome. Alex.Gloy@LighthouseInvestmentManagement.com

Disclaimer: It should be self-evident this is for informational and educational purposes only and shall not be taken as investment advice. Nothing posted here shall constitute a solicitation, recommendation or endorsement to buy or sell any security or other financial instrument. You shouldn't be surprised that accounts managed by Lighthouse Investment Management or the author may have financial interests in any instruments mentioned in these posts. We may buy or sell at any time, might not disclose those actions and we might not necessarily disclose updated information should we discover a fault with our analysis. The author has no obligation to update any information posted here. We reserve the right to make investment decisions inconsistent with the views expressed here. We can't make any representations or warranties as to the accuracy, completeness or timeliness of the information posted. All liability for errors, omissions, misinterpretation or misuse of any information posted is excluded. +++++++++++++++++++++++++++++++++++++++ All clients have their own individual accounts held at an independent, well-known brokerage company (US) or bank (Europe). This institution executes trades, sends confirms and statements. Lighthouse Investment Management does not take custody of any client assets.

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