Lighthouse Investment Management

Weekly Chart Window

August 19, 2013

, 2013 Weekly Chart Window - August 19,

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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 Chart Spotlight: Silver ................................................................................................................................. 15

Weekly Chart Window - August 19, 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 Inflation expectations continue to rise The Fed prefers elevated inflation expectations in order to motivate consumers to spend and to deflate the real value of debt. A slowing velocity of money counters the Fed's efforts. 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: Global central banks are the only buyers of Treasury bonds with 5yr+ maturity left in the market. Despite the Fed absorbing more than 100% of net issuance of 10yr+ maturities, yields continue to rise (from 1.65 to 2.85%). If the Fed concludes it has lost control over yields, there are only two options: increase QE (instead of 'tapering') or announce a yield cap (Fed commits to purchase every T-bond until yield drop below a certain level).

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Stock Market and TIPS-Derived Inflation Expectations

Observations: This time we show a longer-term correlation chart. Given inflation expectations, the S&P 500's predicted value is 1,242 (25% below today's level). Deviations from the mean and deviations from predicted values happen, and they can last for several months. Eventually, reality catches up to the stock market. If the stock market was 'right', inflation expectations would have to increase to 3.65%. This would imply a real yield on 10-year T-bonds of negative 0.80%. The Fed would have to buy more, not less, T-bonds to prevent nominal yields from rising higher.

CONCLUSION: Either the stock market is 'too high' or inflation expectations are 'too low'. With the Fed apparently giving up inflation targeting, the former seems more likely.

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Trend: Moving Averages

Observations: All moving averages have a positive slope (pointing upwards) The 10-day mavg is above all other averages - a good sign

Conclusion: The uptrend is still intact

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Trend: MACD

Observations: The S&P 500 Index is around 9% above its 200-day moving average, which is quite 'extended' The S&P is less extended from its 100-day moving average (which is to be expected, as shorter averages tend to follow the index more quickly) All three derivatives of moving averages could be topping out, suggesting the stock market is losing momentum.

Conclusion: The US stock market needs to 'work off' its extended condition, especially from the 200-day moving average. A correction looks likely.

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Stocks Above 50-Day MAVG

Observations: 73% (previously 79%) of the 500 stocks within the S&P Index are above their 50-day moving average 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 The indicator has breached its 30-day moving average (dotted line), a first warning sign.

CONCLUSION: The solidity of the latest bull market is fading. Caution is warranted.

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Lighthouse Investment Management

Stocks Above 200-Day MAVG

Observations: 87% (previously 89%) of the 500 stocks within the S&P Index are above their 200-day moving average 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. The index has breached its 50-day moving average - a first warning sign.

CONCLUSION: Too early to say if this is just a correction (like in June) or something bigger (summer 2011).

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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. Current record highs are supported by a large number of individual stocks.

Conclusion: The rally has a good 'breadth'. Still no warning flag from this indicator, although it could be topping out in the next few weeks.

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Net New Highs: NYSE

Observations: The number of NYSE-listed stocks with new 52-week highs is equal the number of stocks with new 52-week lows. The breadth of the recent stock market rally has deteriorated and could have peaked.

Conclusion: A breach of its 30-day moving average (dotted line) has not yet occurred, but looks likely to happen. If the stock market was to enter a correction we would need to see new lows exceeding new highs (resulting in a negative slope for the red line).

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New Highs/Lows Ratio: NASDAQ

Observations: Nasdaq-listed stocks with new 52-week highs exceed the number of stocks with new 52-week lows by a ratio of 10:1, with a falling trend (previously = 14:1). The ratio is above its 50-day moving average - a good sign. However, the index has breached its 50-day moving average, which can be interpreted as a negative sign. A fall in the ratio below 1 would indicate trouble. This is currently not the case.

CONCLUSION: The strength of the bull market is fading.

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Lighthouse Investment Management

New Highs/Lows Ratio: NYSE

Observations: NYSE-listed stocks with new 52-week highs exceed the number of stocks with new 52-week lows by a ratio of 4:1, with a falling trend (previously = 6:1). The rally since the beginning of 2013 has been accompanied by falling peaks in the ratio, which can be interpreted as a negative sign. The ratio's 50-day moving average (dotted line) is pointing downwards - a negative sign. The ratio has breached its 50-day moving average - a bad sign. The ratio has fallen below 5.0 - a negative sign.

Conclusion: This indicator has now given a "sell" signal.

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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) The high-yield bond ETF (HGY) is underperforming investment-grade ETF (LQD); green line (bearish)

Equal-weight ETF (RSP) is performing in line with market cap-weighted ETF (SPY); green area (neutral)

CONCLUSION: 2 out of 4 indicators suggest the stock market is in an uptrend

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Lighthouse Timing Index

Observations: The Lighthouse Timing Index fell sharply to zero (previously: +10 points)

Conclusion: Our composite index suggests that the upwards trend has ended, but has not yet enough evidence to recommend shorting the market.

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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Chart Spotlight: Silver

Silver managed to catch up to gold with a weekly gain of 13% (gold: +5%)

Silver has began to outperform gold (red line) Silver mining stocks are outperforming silver (purple line).

CONCLUSION: These are encouraging signs for silver investors.

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

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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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