Lighthouse Investment Management

Weekly Chart Window

June 17, 2013

Weekly Chart Window - June 17, 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 Divergence From 50-Day Moving Average ................................................................................................... 7 Divergence From 100-Day Moving Average ................................................................................................. 8 Divergence From 200-Day Moving Average ................................................................................................. 9 Stocks Above 50-Day MAVG ....................................................................................................................... 10 Stocks Above 200-Day MAVG ..................................................................................................................... 11 Put-Call Ratio of Equity Options.................................................................................................................. 12 Net New Highs: NASDAQ ............................................................................................................................ 13 Net New Highs: NYSE .................................................................................................................................. 14 New Highs/Lows Ratio: NASDAQ ................................................................................................................ 15 New Highs/Lows Ratio: NYSE ...................................................................................................................... 16 Risk-on / Risk-Off ........................................................................................................................................ 17 Lighthouse Timing Index ............................................................................................................................. 18

Weekly Chart Window - June 17, 2013

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Lighthouse Investment Management

TIPS-derived Inflation Expectations

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)

Conclusion: Investors expect inflation to remain below the Fed's target (2% +/- 0.5) for the next 5, 10 and 30 years. The Fed is not happy about reduced inflation expectations, as it does not force consumers to spend (as would happen in case of anticipated price hikes). This further depresses the velocity of money and counters the efforts of the Fed. It is likely the Fed will try even harder to raise inflation expectations by continuing, or even increasing, "quantitative easing" measures.

Weekly Chart Window - June 17, 2013

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Lighthouse Investment Management

Stock Market and TIPS-Derived Inflation Expectations

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 1,400 points given inflation expectations.

Weekly Chart Window - June 17, 2013

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Trend: Moving Averages

Observations: All moving averages, except for the 10-day, have a positive slope (pointing upwards)

Conclusion: The uptrend is intact and has strong momentum

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Trend: MACD

Observations: The S&P 500 Index is around 11% above its 200-day moving average, which is 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 seem to 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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Lighthouse Investment Management

Divergence From 50-Day Moving Average

The S&P 500 Index is currently about 0.25 standard deviations above its 50-day moving average. The index spends more time inside a +/- 1 standard deviation envelope around its average than a normal distribution would suggest (only 1,354 days outside versus 1,812 days expected). The number of days outside a 2 standard deviation envelope (265) were in line with expectations (260). However, the balance is skewed towards the downside (204 versus 61 days). The number of days outside a 3 standard deviation envelope (84) exceeded expectations (15) by far. The balance is extremely skewed towards the downside (84 versus 0 days). The Lehman-aftermath was a six standard deviation-event, which should happen only once every 2 million years.

CONCLUSION: Anything between +/- 1 standard deviation is statistical noise. +2 gets reached only after a sharp drop. -3 events much more frequent than expected under normal distribution.

Weekly Chart Window - June 17, 2013

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Lighthouse Investment Management

Divergence From 100-Day Moving Average

The S&P 500 Index is currently about 0.5 standard deviations above its 100-day moving average. The index spends more time inside a +/- 1 standard deviation envelope around its average than a normal distribution would suggest (only 1,345 days outside versus 1,812 days expected). The number of days outside a 2 standard deviation envelope (263) were in line with expectations (260). However, the balance is skewed towards the downside (222 versus 41 days). The number of days outside a 3 standard deviation envelope (89) exceeded expectations (15) by far. The balance is extremely skewed towards the downside (89 versus 0 days). The Lehman-aftermath was a six standard deviation-event, which should happen only once every 7,000 years.

CONCLUSION: Anything between +/- 1 standard deviation is statistical noise. +2 gets reached only after a sharp drop. -3 events much more frequent than expected under normal distribution.

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Lighthouse Investment Management

Divergence From 200-Day Moving Average

The S&P 500 Index is about 0.75 standard deviations above its 100-day moving average. The index spends more time inside a +/- 1 standard deviation envelope around its average than a normal distribution would suggest (only 1,508 days outside versus 1,812 days expected). The number of days outside a 2 standard deviation envelope (239) were less than expected (260). However, the balance is skewed towards the downside (236 versus 3 days). The number of days outside a 3 standard deviation envelope (114) exceeded expectations (15) by far. The balance is extremely skewed towards the downside (114 versus 0 days). The Lehman-aftermath was a six standard deviation-event, which should happen only once every 400 years (and it occurred twice within 7 months).

CONCLUSION: Anything between +/- 1 standard deviation is statistical noise. +2 gets reached only after a sharp drop. -3 events much more frequent than expected under normal distribution.

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Lighthouse Investment Management

Stocks Above 50-Day MAVG

Observations: 66% (from 68%) of the 500 stocks within the S&P Index are above their 50-day moving average

Conclusion: More than half of the stocks are in a medium-term uptrend. This is a healthy sign. A drop below 50% would indicate trouble.

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Lighthouse Investment Management

Stocks Above 200-Day MAVG

Observations: 89% (down from 91% a week ago) 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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Lighthouse Investment Management

Put-Call Ratio of Equity Options

Observations: The equity put-call ratio (volume of puts traded relative to calls on individual stocks) has recently risen to 0.64 (from 0.60). Please note the inverse scale on the left. The reading is near the mean.

Conclusion: The put-call ratio shows neither bullish nor bearish sentiment among option traders.

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Net New Highs: NASDAQ

Observations: The number of Nasdaq-listed stocks with new 52-week highs exceeds the number of stocks with new 52-week lows.

Conclusion: This means the current record highs for the S&P 500 Index are supported by a large number of individual stocks. The rally has a good 'breadth'. No warning flag.

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Net New Highs: NYSE

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

Conclusion: The breadth of the recent stock market rally has deteriorated. However, the recent set back was not yet strong enough to turn this indicator around.

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Lighthouse Investment Management

New Highs/Lows Ratio: NASDAQ

Observations: Nasdaq-listed stocks with new 52-week highs exceeds the number of stocks with new 52-week lows by a ratio of 8:1, with a falling trend. 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.

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Lighthouse Investment Management

New Highs/Lows Ratio: NYSE

Observations: NYSE-listed stocks with new 52-week highs exceeds the number of stocks with new 52-week lows by a ratio of 4:1, with a falling trend (previous week = 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: A fall in the ratio below 5 could indicate trouble. This is an early warning sign.

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Risk-on / Risk-Off

The general market (SPY) is outperforming high dividend shares (SDY), (red line, bullish) Stocks are outperforming bonds (blue line, bullish, but slowing momentum) High-yield bond ETF (HGY) has peaked versus investment-grade ETF (LQD); green line (neutral)

Equal-weight ETF (RSP) is outperforming market cap-weighted ETF (SPY); red line (bullish)

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

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Lighthouse Investment Management

Lighthouse Timing Index

Observations: The Lighthouse Timing Index fell to +4 (previous week: +8 points)

Conclusion: Our composite index suggests that no break in the upwards trend yet and investors should be positioned "long" in the stock market. However, we could be getting closer to a "sell" 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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Lighthouse Investment Management

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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