Market Climate and Weather Forecast

1. Market Climateand Weather Forecast "It is not the strongest of the species that survives, nor the most intelligent, but the ones most adaptable to change." Charles Darwin Presented by Herb Geissler, Managing Director of The St.Clair Group Rational Investing/VectorVest Special Interest Group of Pittsburgh AAII May, 2013

2. Basic Traits of Successful Investors 1. They look at objective indicators. Removing the emotions from the investing process, they focus on data instead of reacting to events; 2. They are Disciplined:  The data drives decision making with pre-established rules. External factors do not influence them; 3. They have Flexibility:  The best investors are open-minded to new ideas, or revisiting previous thoughts; 4. They areRisk adverse: Not always obvious to investors, it is a crucial part of successful investing. Investors always will make mistakes, and many of them. The only difference between winners and losers is that winners have small losses and losers have large losses Observations by Ned Davis

3. Secular Bear Market RequiresDifferent Strategies Than During Bull Kuznets’ Infrastructure cycle averages 17.6 years for each bull or bear phase Avoiding losses is more important than going after big gains

4. PE Likely To Halve Before Bear Ends 8 8

5. Ominous Triple Top Also Implies Halving of Market Value 1590

7. Government Spending Now Approaching European Levels Guns and Butter Redistribution Of Wealth Medicare and War on Poverty

8. Industry Bore Initial Brunt of Social Welfare Programs

9. Workers Endure The Most Pain

10. Spending Problem is Severe

11. And Misdirected from Infrastructure Needed for Long-Term Growth Total Public Construction Spending vs GDP Spending on roads, bridges, sea/air ports, sewage and water supply, public housing, etc

12. Congress Spends Excessivelyon Vote-Getting Consumption Sequestration on March 1 would trim 10% from 31%, halving one year’s growth Federal spending exceeded revenues by $100 Billion every month for past 3 years

13. Federal ReserveFinancing Spending Excesses Federal Reserve QE is creating $85 Billion of IOUs every month • $40 Billion finances Federal excess spending • $45 Billion funds housing & mortgage banks • This $1 Trillion in annual QE adds 7-points to GDP of $15 Trillion (vs 2-3% net growth) • FRS liabilities tripled from $0.874 Tln in ’08 to $2.9 Tin in early 2013 The 7 Governors and 12 Bank Presidents are all political appointees from White House and Congress

14. Central Banks in China and Europe Are More Bloated than U.S.

15. Fed’s Game Planand Likely Timing • Cease reinvesting some or all payments of principal on the securities holdings; (mid 2014) • Raise the target federal funds rate; (mid 2015) • Sell remaining agency CMO securities over a period of three to five years; and (mid 2015, 16, 17, 18, 19) • Once sales begin, normalize the size of the balance sheet over two to three years(mid 2015, 16, 17) Actions stated in June 2011 FOMC Meeting. Timing from August 2012 FRS Staff Discussion Paper

16. Real Driver of Bull Market Has Been Fed Stimulus Liquidity Make hay while the sun shines, but watch out when Fed dampens QE

17. Hirsch Foresees Six More Years of Pain Jeff Hirsch’s Little Book of Stock Market Cycles

18. May 2013Long-Term Strategic Conclusions Deleveraging heavy borrowings for excessive spending increases unemployment and will cause recessionary conditions globally during next several years. Now, at middle of Kuznets’ cycle, upside is limited; as long as QE persists, cautious selections and disciplined timing (in and out) can be profitable. Even bonds & gold are risky now. Return of capital is more important than return on capital. Defensive strategies and disciplined timing to lock-in gains is essential in this roller coaster market. So, what should we do over the next months and quarters?

19. For Intermediate Term investing:Stock Prices Track GDP

20. Four Key IndicatorsShow Pace of U.S. Recovery

21. WLI Tracks GDP andEvidences Last Year’s Recovery Pres. Election

22. Positive and rising PMI’s supported rising market Market rises when ISM is above 50, except right after 9/11/2001 Consumer Spending is supporting retail, wholesale, healthcare and services sectors Rising stock market despite weakening PMIs suggests summer correction S&P500

23. May 2013Intermediate-Term Strategic Conclusions • US employment is stabilizing and consumer spending is holding up • Liquidity from Fed still flowing strongly; low interest rates boosts stocks • U.S manufacturing sector is becoming healthier, but starting to falter • Europe’s sovereign debt and spending problems prolongs their recessions • Emerging Markets losing strength; even China in PMI contraction. Bullish US stock market is vaporizing, suggesting a bad summer. Fiscal uncertainties necessitate great selectivity in both strategies and vehicles and, most importantly, the rules and discipline to exit when market swoons

24. 12-Month Moving Average Helps Avoid Major Losses 11% above Bear-Zone

25. Weather Forecastfor More Active Investors When the facts change, I change my position. What do you do, sir? - John Maynard Keynes

26. IVY Invests Very Defensively

27. Bull’s End Is Confirmed When Summation Index Crosses its MA20or its MACD drops below zero-line

28. ... And When 1/3 of S&P Stocks Stay Below Their MA50

29. Traders Still Showing No Fear, which could be dangerous

30. 50/50/0 Rules Show Rollover Top,But Not Yet Confirming Exit

31. Investors Were Fleeing Bonds, But Are Now Seeking Shelter

32. And Gold Has Lost its Defensive Luster

33. High Quality Dividend Stocks Are Favored During Weak Bull Periods Underscoring Weakness of Today’s Bullish Levels

34. May 2013Short-Term Strategic Conclusions • Hot market is now rolling over towards a Summer correction • Topping out and roll-over patterns reveal current risks • Tight stops, caution, and cash accumulation is prudent for stockpiling ammunition • Liquidity from QE and bond sell-off provides some cushioning • Correction could be a mild 10-15%, but Washington is erratic • Use simple spreadsheets or charts to signal when to get out and when to re-buy • Preferred havens are cash and/or strong dividend equities • REITs, Production MLPs, Utilities, Food Makers are attractive havens • But Hirsch may be right • Stocks may drop 20% into Thanksgiving, move sideways til Easter, then plunge another 20-25% into a 4Q/14 bottom • Use charts and spreadsheets for logical, disciplined actions Remember: we are still in the Kuznets Bear Phase; use the discipline of indicators to pinpoint trigger points

35. Any Questions?