Favorable seasonality looking forward

Today is a good day to revisit the stock market seasonality chart. I've recentered it on January 1 to give a better view of the coming months. There is a modest local low on November 20, marked on the chart by the "You are here" sign. From there we see strong positive seasonality through the end of the year; then slower but still positive movement January through March, followed by strength in April and May.

The market didn't follow the seasonality script during the summer. There is no guarantee that it will do so this holiday season. This is just another datum in our collection, to be pondered and considered with all the others.

The next bubble, now in progress

Quote of the day (actually it's from September) from Pacific Research Institute economist Robert Murphy:

Why do we assume that TIPS traders are genius forecasters, but gold traders are morons?

Leading up to the money quote, Murphy says:

It is extremely misleading when the deflationists say, “What are you nutjobs talking about? Year/year we still have price drops!” Look at this chart of the raw (non-adjusted) CPI for the last five years. Now do you see why I think we are in an inflationary environment, even though the 12-month change in CPI is negative? For what it's worth, prices bottomed in Dec 08. From then until August 2009, the unadjusted CPI level has increased 2.7%, which translates to an annualized increase of just over 4%.

Via Veronique de Rugy:

In an email message, Murphy adds: “I believe we are currently witnessing a bubble in Treasury debt. I consider the current yields on 10-year U.S. government bonds to be absurdly low, just like the price of housing was absurdly high in early 2006. After this bubble bursts, investors will slap themselves on the forehead and say, ‘What were we thinking? Why did we rush into Treasurys even as the government told us it was planning to double the federal debt burden in a decade?’ ”

Asset allocation for November

The Faber timing model, by my calculations, has had no changes since August. U.S. Treasuries, as measured by the Ryan 10-year Treasury Index, came within 0.1% of a buy signal last Friday, but didn't quite make it. So we are still not in bonds. I know it's a bad idea to deviate from your system, but even if a buy signal had occurred this month, I would have stayed out. Looking 10 years ahead, there is no way a dollar will still be worth a dollar. Everyone buying long-term bonds today thinks they will be able to sell ahead of the crowd when the time comes. If the decline is gradual, they will be right. If not, not.

Mr. Faber in his paper uses bond data from Global Financial Data, but if that source is available free on the web, I haven't found it. The Ryan indexes are available both in the Wall Street Journal and on the Ryan web site (you will need to create a free login).

The last change in allocation was in August, after commodities (GSCI) and REITs (NAREIT [pdf]) crossed above their 10-month moving averages.

Here are November's allocations:

• U.S. stocks: 20%
• International stocks (EAFE): 20%
• Commodities: 20%
• REITs: 20%
• Cash: 20%