CORRECTION OR BEGINNING OF BEAR MARKET - Titan Capital Management, LLC - September 4 Global Market Letter

Titan Capital Management, LLC

Global Market Letter

September 4, 2015 Abe Askil, CFP®

CORRECTION OR BEGINNING OF BEAR MARKET

Global equity markets took quite a beating in August. The S&P 500 fell 6.3% which is the worst August since 2001, while the Dow’s 6.6% drop was its biggest since it fell 15% in August 1998. This does not bode well for stocks heading into the month of September which is the only month in which the S&P 500 has fallen more frequently than it has risen. What’s worse is that the 11 times that the S&P 500 fell by more than 5% in August, it declined 80% of the time in subsequent Septembers with an average decline of 4%. A lot is happening in September, it is the final month for third quarter earnings in which earnings are expected to decline 4% from the same quarter last year. The Fed’s FOMC meeting is on September 17th at which point they will decide whether or not to raise interest rates. I believe that the primary reason markets are declining is due to a loss of faith in the ability of central banks to continue to artificially prop up markets. We saw this first hand in China as the PBOC attempted to stop the plunge in Chinese stocks but was unsuccessful. If this line of thinking grows, the markets could decline substantially regardless of whether there is a recession or not. The following countries are already down 20% or more from the highs and officially in a bear market: China, Brazil, Russia, Turkey, Saudi Arabia, Hong Kong, Argentina, Taiwan, and Germany. Time will tell if the U.S. and other countries join this list.

The chart below shows the S&P 500 along with the VIX (fear index) and the 100-day volatility indicators. For the first time since 2011 the 50-day moving average has crossed below the 200-day moving average which is referred to as a "Death Cross". This means that the long-term market trend has turned down and there is a higher probability that the market will decline. The VIX is near the 28 level and rising which is indicative of a high level of fear amongst investors. The VIX got as high as 44 during the bear market in 2000 – 2002 and hit 80 in 2008. The 100-day volatility on the S&P 500 is also high and rising because fear (VIX) and volatility go hand in hand. When the VIX and volatility both rise it usually leads to declining stock prices. The S&P 500 is in the process of testing its August 25th lows, which also happen to be the October 2014 lows near the 1850 to 1867 area. If the S&P 500 (and other major indices) can hold this level then it is more likely that the current decline is a market correction for now. However, if the support level does not hold then that opens the door to the possibility of the current correction turning into a full blown bear market. Remember that all bear markets start out as corrections, but it is very difficult to know in advance whether a correction turns into a bear market.

ALPHA AND OMEGA

The legendary money manager Marty Zweig said "The big money is made by being on the right side of the major market moves." We use two Trend Composite models which we call Alpha and Omega to get on the right side of the major market moves. Alpha and Omega are designed to participate in up markets while protecting capital during down markets. These models help us determine when to be in stocks and when to be out of stocks. The models were built using a fusion approach which combines Tape (price, volume, breadth), Monetary (interest rates, yield curve, etc.) and Sentiment (investor optimism vs. pessimism) indicators. It is because of this approach that our Alpha model turned negative on August 6th, several weeks before the trend turned down and the markets collapsed. Over the past 20 years Alpha has given 17 buy signals and 17 sell signals. As you can see in the table below when Alpha turned positive (buy signal) the market rose 60% of the time at an average annual rate of 19.27%. When it was negative (sell signal) the market fell 53% of the time at an average annual rate of -9.33%. During the past 20 years the S&P 500 gained a total of 273% when Alpha was on buy signals and lost -51% when Alpha was on sell signals. When Omega was on a buy signal, the market rose 71% of the time at an average annual rate of 20.19%.When Omega turned negative (sell signal) the market fell 86% of the time at an average annual rate of -19.17%. The S&P 500 rose 326% over the past 20 years when Omega was on buy signals and it fell -67% when Omega was on sell signals. The bottom line is that we want to be in stocks when these models are positive because there is a high probability that the market will rise and out of stocks when the models are negative because there is a high probability that the market will decline. Our models are not right 100% of the time, no one is, but they are right more often than they are wrong. It’s not whether you are right or wrong that is important, but how much money you make when you are right and how much you lose when you are wrong. Alpha and Omega force us to cut our losses short and let our profits run, which is important for anyone who wants to maximize returns and minimize losses.

S&P 500 PERFORMANCE 12/31/1995 – 09/02/2015 DURING ALPHA AND OMEGA SIGNALS

ALPHA MODEL % Accurate % Sum of Gains % Annual Gains

Buy Signals 60% 273.11% 19.27%

Sell Signals 53% -51.38% -9.33%

OMEGA MODEL

Buy Signals 71% 326.43% 20.19%

Sell Signals 86% -67.37% -19.17%

Backtest does not include management fees or trading costs. Past performance is not indicative of future returns.

THE BOTTOM LINE

Our Alpha Trend model is still negative, while our Omega model is barely positive. Thus, we have very little allocated to stocks at this time. There has been a lot of damage done to the tape over the past few weeks which could take at least several weeks to repair. We will be closely monitoring the global equity markets to see if they are able to hold their August 25th lows. If Alpha turns positive at some point in the future, we will add to stocks. If Omega turns negative, we will be completely out of stocks. Those of you who are on our Signal Alert Report distribution list will receive an email whenever there are changes with the models. If you would like to be added to this list please let us know. I hope you all have a great Labor Day!

The content of this letter is provided for informational purposes only and is not advice or a recommendation for the purchase or sale of any security. Furthermore, we do not warrant or represent that the information contained in this newsletter is correct, complete, accurate or timely. This information reflects the views of Titan Capital Management, LLC on the date made and may change without notice. We will not be responsible for any investment decisions, damages or other losses resulting from or related to the use of the information we provide.

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