Stock Chartist

What Happened to the Symmetrical Triangle

noreply@blogger.com (Joe) — Fri, 18 Nov 2011 15:11:00 +0000

Markets like such as we've been suffering through since June tests the loyalty and dedication of most believers in charting as a trading tool. Nothing that's happen in the market since the European crisis fully bloomed at summer's beginning has been actionable for trend followers with any degree of confidence or certainty.

Chart patterns actually represent the convergence in time and space (i.e., prices for stocks and levels for indexes) of a condition of balance between supply and demand that is bounded by one sort of trend line or another (ascending, horizontal or declining). If chart patterns depict equilibrium conditions then it's futile to use them to predict the direction in which that equilibrium will be broken. We can state with some degree of confidence, however, that over the long run patterns will tend to break to the upside between 60-70% of the time because that's the percentage of time that markets are in bull mode.

Take the symmetrical triangle we've watched forming over the past several weeks and finally broke down dramatically yesterday. As fellow blogger Springheel Jack on Tim Knight's typically bearish blog Slope of Hope points out, "these triangles are poor performers on downwards breakouts, with only a 48% chance of reaching the target in a break down." He goes on to quote the "bible" of chart patterns, Bulkowski's The Pattern Site, "symmetrical triangles have a tendency to double bust -- the final breakout direction is the same as the original one."

The fact that most commentators see patterns busting is that they fail to take the phenomena of fractals into consideration; in other words, these commentators look at charts in only one time horizon without taking into consideration that all patterns are actually the actualization of a stream of continual changing market emotions and psychology. It's when a general consensus begins to take hold (either a positive or negative one) that a breakout occurs and a new trend is established. Until that happens, the stalemate continues and one pattern morphs into another and another and another.

Rather than looking at two or three week's worth of trades through a magnifying glass and seeing (creating) a "pattern", it's better to take a longer-term view and see where all the potential boundaries of this congestion of equilibrium might be:

To proclaim that the symmetrical triangle had been broken and a major move down had therefore begun is ludicrous. It ignores the following realities:

trendlines aren't concrete structures. They are only a visual representation of the chartist's belief as to where one a boundary might be
rather than being lines, boundaries are actually zones, a range of prices where the struggle for control changes
there can always be tail-end moves, crosses of trendlines that are nothing more than an atypical expression of momentary extreme optimism or pessimism. Until proven that the psychology of the majority or market participants has changed, the stalemate continues (and the symmetrical triangle pattern morphs into another pattern ... perhaps a horizontal trading range channel?)
it's understandable that since it's jammed between two earlier larger patterns (the head-and-should reveral and the summer's horizontal trading channel), those equilibrium situations have to be resolved before a new extended trend can start.

True the lower boundary of the symmetrical triangle was violated but there are still several other trendlines that act as resistance against a major downside move. Most of the bad news coming from Washington and Europe has already been reflected in the market and there isn't sufficient consensus for the launching of a new bear market. If anything, the surprise could be from a new positive development from some unexpected source.

Caught in a Whirlpool

noreply@blogger.com (Joe) — Thu, 10 Nov 2011 14:08:00 +0000

At times, the market these days makes you feel as you might when you're caught in a whirlpool while kayaking down a raging river. You know the current's general direction but all you sense at that moment is that you're unable to extricate yourself from being whipped around in circles.

While "whirlpool" might describe how we investors feel, a better description of the market might be "unprecedented". Frequent readers here know that my market timing discipline rests on the alignment of the S&P 500 Index and its 4 moving averages (50-, 100-, 200- and 300-dma). The alignment that indicates clearly that the market is in a bull trend is when the Index is above each of the moving averages and those averages trail the Index with them stacked from shortest to longest. Since 1963, that alignment has existed 34.5% of the trading days. As you might expect, the alignment that typifies a bear market is the mirror image with the Index below the four moving averages which are stacked from longest to shortest (300-, 200, 100- and 50-dma). That alignment has existed 9.2% of the days since 1963.

There are 120 possible combinations of the Index and its four moving averages in addition to the above two. Each combination has in the past nearly 50 years has been associated to so degree with a bullish or bearish market trend. Actually, 25 of the combinations have never existed because they would have required nearly impossibly extreme moves in either one of the moving averages or the Index itself. As of two weeks ago, one of those impossible moves actually did occur(click on image to enlarge).

For the first time in history (at least according to my records going back to 1963), the Index crossed above the four moving averages which were nearly in perfect bear market alignment. The crossing each time was so rare that it couldn't be sustained for a day or two.

The problem is that the market jumped so far ahead of the prevailing consensus of market participants as reflected in the trend of its moving averages. There only one of three ways for the market to correct this imbalance:

Continue advancing far ahead of the moving averages and hope that the averages eventually catch up from this unprecedented situation
Stay generally at the current level until the moving averages catch up and return to a more common alignment
Decline to more quickly bring the alignment into balance and then turn up again in sync with the moving averages in a more typical reversal.

There's are two out of 3 chance that the market can't advance much further without the moving averages turning and heading higher. As my subscribers know, I remain skeptical and mostly on the sidelines.

Instant Alerts are back. To be alerted when the Indicator turns Green again,

subscribe now to Instant Alerts!

Lunar Cycle Once Again.

noreply@blogger.com (Joe) — Mon, 07 Nov 2011 15:22:00 +0000

It's been a while for those who hang on to the hope of finding a quick and easy way of unlocking the future of the market's volatile movement so here is the latest update of my Lunar Tracking Table (click on image to enlarge):

When I told a friend about this strange phenomena of the moon's phases being in close synchronicity (meaning: "an apparently meaningful coincidence in time of two or more similar or identical events that are causally unrelated") with one another he replied "it's too small a sample. You have see it happening year over year for many, many years." Well, in the end we're all dead. We have to make some judgment calls for the here and now.

I added another column to the analysis: rolling twelve month accuracy count. Since June 2010, the Waning Lunar Phases has correctly correlated with the market's direction in 9-10 out twelve times. That's understandable because the market over the period has trended higher. So, the accuracy during the 12-mos. rolling Waxing Phases has been correct half the times.

What has always intrigued me the most the cumulative changes during each of the two types of lunar phases. Since I started tracking these returns in 2009, if you had bought the SPY at the beginning of Waning Phase and sold at the end, your cumulative returns would have been 64.48%. I you had sold the SPY short at the beginning of each Waxing Phase and covered at the end, your cumulative returns would have been 27.99%. Combining the two would have nearly doubled your money in just over two years. Not bad for a theory that has yet to be statistically proven, wouldn't you say?

By the way, for all those interested, the Waxing bearish phase will end on Thursday, so be patient. If synchronicity continues, we should have clear sailing to Thanksgiving.

Instant Alerts are back. To be alerted when the Indicator turns Green again,

subscribe now to Instant Alerts!

Reversion to the Mean - Ver. 3.0

noreply@blogger.com (Joe) — Fri, 04 Nov 2011 14:30:00 +0000

Even though it feels frustration looking at a chart that stretches years, I find it worthwhile to periodically update the "Regression to the Mean" graph because it helps keep our expectations in check. Whether today we are bearish or bullish about prospects for the market's near-term future, this "Regression to the Mean" will help moderate our views and help contain them within the realm of possibilities.

First, some background is necessary and warranted. I had accumulated monthly statistics on the S&P 500 Index going back to 1939 while working on my book, Run with the Herd, during the Financial Crisis Crash in 2007-08. What I had discovered was that when viewed within the broad sweep of history, the market had risen risen at a 7.5% rate, through bull market and bear, war and peace, economic boom and bust. In order to be able to make that statement, I added a boundary 44% on either side of that 7.5% average annual growth rate. Two, longer than 10-year secular bear markets during that 70 year history carried the Index from the upper boundary across the mean to the lower boundary.

After briefly crossing the upper boundary at the end of the Tech Bubble in 2000, the Index approached the bottom boundary in 2009 and lead me to conclude that the Financial Crisis Crash was approaching a bottom (click image to enlarge):

Today, the question to answer is what might be reasonably expected for the future? One model might be the exit from the previous 1969-1982 secular bear market. There are many similarities between that period and today: domestic economic, monetary and fiscal concerns, unpopular government leading possible change of administration. The major dissimilarity is the diametrically different interest rate environment.

If one superimposes the market's track from the 1974 low on to an extrapolation from the 2009 low, one gets the following picture of what might be reasonably expected in the future:

The market started to face some headwinds and retreated as the country faced an election in 1980. It wasn't until two years into the Reagan Administration that the market crossed above 1000 and began the long, 20-year bull market run.

As you can see, the market has been tracking fairly closely to the exit process back in the '70's so far. If that track continues for the near-term, we shouldn't expect the market to approach the all-time high of 1365 until 2015 and not successfully cross above it until 2017. Let your hearts not lose hope because if it continues following the track then it could reach 3000 by 2020.

Instant Alerts are back. To be alerted when the Indicator turns Green again,

subscribe now to Instant Alerts!

Sloping or Horizontal Trendline: Which is More Trustworthy?

noreply@blogger.com (Joe) — Thu, 03 Nov 2011 00:28:00 +0000

I often cringe when I see charts posted on other sites where the author inserts a sloping trendline and then jumps to the conclusion that the trendline will act as some sort of wall of support or resistance as the case may be. The first thing I do when I look at the same chart on my system is to look for and usually find what might be horizontal lines that project a dramatically different interpretation. The question is "Which trendline, sloping or horizontal, prevails and trumps the other?" In making a decision as to whether to buy (or sell) and two lines lead to different conclusions which should you pay more attention to?

I don't know about you but let's suppose you bought a stock when its price was at the intersection of both a sloping and a horizontal line. Next, pretend that you were lucky and the stock starts moving higher but then, suddenly begins to correct. Which of the two lines are you going to look to as support? Here's an example (click on image to enlarge):

This is the chart of DECK (Deckers) you would have seen on September 1, 2010. I you were lucky enough to have gotten on this bandwagon early enough then you would have ridden higher relying on the ascending trendline to act as support. Then in August, 2010, the stock was caught between a rock and a hard place: the horizontal trendline emanating from the stock's all-time high and that ascending trendline.

We know what happened ... it's what almost always happens when a stock hits an all-time high. That horizontal trendline trumped the ascending trendline which the stock crossed under. Most chartists only look at short-term charts. They would have seen the break of the sloping trendline and would have issued a sell recommendation. They probably wouldn't have paid much attention to the trendline from all-time high or even known that it contributed to DECK stalling out at that level. But what happened since?

For 6-9 months during 2010, the market was consolidating its huge recovery from the Financial Crash bottom and building for the next wave that began on at the end of August with the announcement of QE2. Deck took that pause to build up its own head of steam to finally cross into all-time new high territory. As the market broke higher, so did DECK. It's never crossed back above the previous ascending trendline and actually it may be acting as a ceiling of sorts. A new trendline with a shallower slope can now be seen. [For new readers of this blog, I recommend the you read "My Sell Rules" since it's relevant to the above DECK chart.]

So if I have to chose between an ascending (or descending) trendline and a horizontal one to drive my decisions I would look to the horizontal one. I can't easily calculate where the trendline will be a month or two out. But I can easily see whether there are any horizontal trendlines that mark where buyers and sellers have traded places for control of a stock's trend. Those are the transfers of power that I rely on to help me anticipate what might be ahead for a stock (or Index).

In the DECK's case, there's potentially a neckline at the 70-73 level which could turn out to be important some time in the future should DECK cross under that new sloping trendline. Whenever that happens, there will be other new horizontal trendlines to draw that will act as milestones along the way.

Instant Alerts are back. To be alerted when the Indicator turns Green again,

subscribe now to Instant Alerts!

What is the Dow Theory?

noreply@blogger.com (Joe) — Tue, 01 Nov 2011 23:22:00 +0000

I was alerted to the fact that November 3 will be the Charles Dow's 160th birthday. The Market Technicians Association is celebrating the anniversary with a cocktail celebration.

We look at the gyrations of the market these days and think that it's never been this bad. Some individual investors say that the stock market is rigged, have taken their money out of the market and pledge they will never come back. The claims of the Occupy Wall Street demonstrations are unique but assemblages on Wall Street have happened before.

For example, the Panic of 1907, also known as the 1907 Bankers' Panic, was a U.S. financial crisis precipitating close to a 50% decline from its peak the previous year in most stocks on the New York Stock Exchange. The 1907 panic eventually spread throughout the nation causing businesses and many state and local banks to enter bankruptcy. The panic would have deepened if not for the intervention of financier J. P. Morgan, who pledged large sums of his own money and convinced other New York bankers to do the same to shore up the banking system. There was no central bank to inject liquidity back into the market as there is today.

It was around that time, that investors started looking for ways to sidestep the damage the market did to their portfolios. Within that context, Charles Dow wrote a series of articles outlining his views of market timing which ultimately collectively were given their eponymous name.

Most consider the father of technical analysis to be Charles Dow, the founder of Dow Jones & Company, the publisher of the Wall Street Journal. In a series of articles around 1900, Dow described his belief that markets represented by his creations, the Dow Jones Industrial Average and the Dow Jones Transportation Index, tended to move in similar ways over time. The articles were expanded later by other traders and ultimately became known as the “Dow Theory”. Although written over 100 years ago, the Dow Theory still has advocates and relevance due to its often being cited and referred in the business media today.

Dow Theory can be summarized in the following six tenets:

The First Tenet is that markets move in one of 3 trends:

Up Trends are defined as when successive rallies close at levels higher than those of previous rallies and lows occur at higher levels than previous lows.
Down Trends are when the market makes successive lower lows and lower highs.
Corrections are defined as a move where the market recedes in a direction opposite of a move sharply in one direction before it continues in that original direction.

The Second Tenet is that trends have 3 phases (a precursor of the theories of market life cycle and psychology described above):

The Accumulation phase which is when “expert” traders actively take positions actually opposite the majority of people in the market. Price does not change much during this phase as the “experts” are in the minority and so are not significant enough to move the market.
The Public Participation Phase which is when the public at large catches on to what the “experts” know and begins to trade in the same direction. Rapid price change can occur during this phase as everyone piles onto one side of a trade.
The Excess Phase is when rampant speculation occurs and the “smart money” starts to exit their positions.

The Third Tenet is that the markets discount all news so that once a piece of news is released it is quickly reflected in prices. On this point Dow Theory is in line with the efficient market hypothesis.

The Fourth Tenet is that the Industrials and Rails Averages must confirm each other; a sign that the market is going to change direction comes when two averages move in opposite directions.

The Fifth Tenet is that trends are also confirmed by volume. There are many reasons why price may move on low volume, but when prices move on high volume there is a greater chance that the move is representative of the overall market’s view.

The Sixth Tenet is that trends exist until definitive signals prove that they have ended. What Dow was saying here is that there will be market moves which are against the primary trend but this does not mean that the trend is over and the market will normally resume its prior trend.

Sometimes it pays to get away from complicated algorithms, indexes and formulas and just go back to the basics. I'm sure that Dow would found the current environment familiar albeit on a much larger scale. I wonder how he would have played this market?

Instant Alerts are back. To be alerted when the Indicator turns Green again,

subscribe now to Instant Alerts!

The Futility of Fundamental Analysis for Us "Home Gamers"

noreply@blogger.com (Joe) — Fri, 28 Oct 2011 18:47:00 +0000

We've heard it often recently, especially after the last nasty Republican debate, the gospel known as "Republican Eleventh Commandment" originally set out by gubernatorial candidate Ronald Reagan during a particularly feisty 1966 California primary: "thou shall not speak ill of a fellow Republican". It may also be true of bloggers, especially those of the stock, investment or financial variety: "thou shall not speak ill of another blogger".

But I just can't resist and am aware that I risk rebuttal or criticism from other bloggers in return. The article in question came in my daily update from Greenfaucet, a piece by Chuck Carnevale, a long-time investment manager and creator of something he calls the F.A.S.T. Graphs (Fundamentals Analyzer Software Tool™). Carnevale applies his F.A.S.T. Graphs to 10 of the Dow-30 stocks and derives the following sort of chart with accompanying financial fact data sheet for each:

The F.A.S.T. approach apparently takes earnings and dividend streams and, like good fundamental analysts, comes up with a fair value for the stock to determine whether the stock, at the time of the analysis was under-, over- or fairly-valued.

His conclusions:

"....we are discussing the valuation of the markets based on the intrinsic values of the underlying companies that make up the markets. In short, based on fundamentals, we believe that many quality companies are on sale today.....
As long as valuation is reasonably aligned with fundamental value in the beginning, comparisons are primarily driven by the rate of change of earnings growth achieved, and how consistently they were achieved.....
in an instant, the investor can determine what kind of company they are looking at and whether or not it is capable of meeting their specific investment objectives and risk tolerances. We believe a specific insight on individual companies is more beneficial and productive than a more general view.....
The fact that markets can and will often misprice stocks is undeniable. Furthermore, we have always felt that it is an exercise in futility to attempt to quantify why a market is behaving the way it is when it is behaving irrationally. In other words, irrational behavior is unquantifiable, and therefore, precisely what it is – irrational. Rather than try to explain it, we believe it’s more important to recognize it and behave accordingly.

And this is where my criticism comes in. The chart of MRK above speaks for itself as to why fundamental analysis doesn't work .... in fact, it's worthless (the same can be said for each of the 1o stocks for which he offers similar graphs). One might not have bought MRK at 40 in 1996 when the F.A.S.T. Graphs indicated it was over-valued and missed out on a move to 92 in 2000 (when it was way over-priced) or bought MRK at 55 at the end of 2002 and still be waiting for the dividends to compensate you for the stocks erosion to 35 today.

Rather than proving his point, his charts and data only prove to me, at least, how little fundamentals have to do with valuation for the individual investor as contrasted with the proper execution of market timing, industry selection and the timely entry and exit of individual positions.

Instant Alerts are back. To be alerted when the Indicator turns Green again,

subscribe now to Instant Alerts!

AMZN: A New Game Plan

noreply@blogger.com (Joe) — Thu, 27 Oct 2011 00:12:00 +0000

Sometimes, all we need the courage of our convictions in order to succeed (i.e., make money in the market). In July 2008, I put together something entitled "Amazon (AMZN): A Game" Plan". The inspiration for the piece was the fact that AMZN "beat the Street's consensus estimates" during the midst of the Financial Crisis meltdown. I took exception to the importance given to "consensus estimates" in a stock's price trend; it may have impact for a day or a week but prices beyond that are influenced by much more than those hits and misses of consensus. I wrote at the time:

"Who'll remember in a month, a quarter, a year or five years these "consensus estimates" or how they compared to actual results. On the contrary, everyone will remember only how these results compared to last quarter and same quarter last year (Have you ever seen a service that reports both actuals and "consensus estimates" for the past, say, 5 years! I haven't). Instead, large misses from "consensus estimates" only shine the spotlight on how incompetent the professionals are and how difficult, if not impossible, it is just to get "fundamental analysis" right."

What struck me the most was that AMZN stock had a history of gapping frequently around an earnings announcement. "The number of price gaps over the past nearly three years is impressive. Either AMZN is always pulling surprise out of their hat or Wall Street pros can never get it right", I conjectured. I also included the following two-year chart with all those gaps noted:

Based on that repetitive behavior, I concluded:

AMZN is bucking up against the trendline extending out from its all-time high in 2000. Breaking through that resistance is a huge hurdle. It's been building up to making a run into new all-time high territory since the credit crises set in last July (forming a poorly formed descending wedge).
Buying here at 78, given all the economic headwinds presents some risks. But a move to 110, the current all-time high represents a 37.5% move. But there's no telling whether it will make it there or when, whether the breakthrough attempt will be successful or not and when and, if successful, how much of a secondary, post-breakout consolidation will it take before a huge upward move can get started (these often happen and can take any consolidation form).
So here's my game plan. The 37.5% looks enticing but I think I'd pass it up and wait for the big move above 110.

On October 23, 20009, almost exactly two years ago, AMZN announced their 3rd quarter 2009 results and the stock gapped up 26.8% for the day to close at 118.49. The stock broke above my threshold should have been the signal to buy ... but I didn't and lost the opportunity for a 113% move to the high of 258!

AMZN today reported a 73% drop in third-quarter earnings and the potential for a fourth-quarter operating loss and the stock gapped and closed down 12.66%. Will this be a repeat performance? I think not. Rather than looking at that flawed measure of actuals vs. "consensus estimates, look at AMZN's actual results:

AMZN is an extremely seasonal business with 4th quarter's Christmas holiday shopping representing 35-40% of annual sales. The best way to see how the company is performing is on a rolling 4-quarter basis. The above chart indicates annual sales and EPS for 2005-2010 and rolling 4-quarter for each quarter in 2011. I shouldn't have been a surprise to those high-priced Wall Street analysts that AMZN's performance was waning. It's been evident since the March 2011 quarter. And we don't need management to tell us that it is nearly impossible for 2011 to beat 2010 and their statement that fourth quarter will be negative only raises serious questions about 2012.

Bottom line, all great runs ultimately come to an end and AMZN could now look like a great short candidate.

Instant Alerts are back. To be alerted when the Indicator turns Green again,

subscribe now to Instant Alerts!

A Bull Market Signal?

noreply@blogger.com (Joe) — Tue, 25 Oct 2011 17:32:00 +0000

Mark Hulbert, in today's Wall Street Journal's Marketwatch blog asked the provocative question: "Did Monday’s strong market action satisfy one of the official definitions of a bull market?" His answer was "Believe it or not, the answer is yes — at least for some market indexes and some definitions. Which is remarkable, given that just three weeks ago another market index satisfied another of the official definitions of a bear market."

The signal to which he referred was the Index crossing above the 200-dma. He writes further that "crossing the 200-day moving average is not the only definition that analysts use to determine a shift in the market’s major trend. Still, this trend-following indicator has a respectable record at anticipating shifts in the market’s major trend."

In my market timing studies I've found that:

market timing is a too imprecise practice to be binary (all-cash or all-in, bear or bull, yes or no) and
a combination of indicators is more effective for market timing than any single indicator alone.

For example, in developing my Market Security Meter based on nearly 50 years of market data, I found that (as quoted from my upcoming book, Run with the Herd):

"....a neutral, unmanaged buy-and-hold strategy delivered $17,022, or a compounded average annual return of 6.20% over the test period between March 12, 1963 and December 31, 2009. Applying the 200-dma market timing rule to that same hypothetical portfolio over the 46-year period improved the results marginally and delivered an ending portfolio of $21,938, or 6.62% compounded average return before considering taxes, interest and transaction costs.
Selling when the Index crosses below the 200-dma is a simple rule that marginally improves total long-term results but it has disadvantages. For one thing, it works best in secular, or long-term, bull markets as contrasted with markets that have shorter-term (2-3 year) fluctuations like the period between 2000 and 2010. Over the 45 years in the database, the indicator suggested all-cash positions 33.4% of the all trading days....
The strategy produces a marginal improvement but not one that would have made you rich. You would have avoided some losses and wound up with a $4,748 higher ending balance. "

The problem with the indicator is that it over-prescribes an “all-cash” positions, periods when investors who follow the rule are out of the market when they should actually have been fully invested.

The problem can be remedied by combining the 200-dma rule with another common indicator and moving into an all-cash position only when both selling rules simultaneously proscribe an all-cash, risk-off posture. Only when the signal of one of the rules confirms the other should you actually assume the worst.

I combine the different configurations of these two indicators (plus some minor tweaking for instances that fall between them) into what I call a Market Security Meter:

The Index crossing above the 200-dma did actually change the color of the signal from Red but it surely didn't cause the light to turn Green.

Instant Alerts are back. To be alerted when the Indicator turns Green again,

subscribe now to Instant Alerts!

I Stick by Market Timing

noreply@blogger.com (Joe) — Fri, 21 Oct 2011 14:08:00 +0000

I don't usually quote another blog verbatim but I thought this one was timely and relevant. After issuing an "all-cash" warning on August 11 after the market closed at 1172.63. Afterward, the market got stuck in a 3-month trading range fluctuating between a low of 1099.23 and Tuesday's 1225.38. With positive vibrations from Europe and quarterly earnings reports here, some claim that the market has today successfully escaped the trading range. New doubt is now cast on the ability of investors to successfully time the market and the value of doing so.

The blogger and Director, Portfolio Manager at Sitka Pacific Capital Management, LLC of Seattle Washington, JJ Abodeely, makes the following quote 1952 about alcohol by one Noah S. “Soggy” Sweat, Jr. as his own. Sweat was a judge, law professor, and state representative in the U.S. state of Mississippi, and became notable for his 1952 speech on the floor of the Mississippi state legislature concerning whiskey, which is considered a classic example of political doublespeak. Reportedly the speech took Sweat 2½ months to write:

"My friends, I had not intended to discuss this controversial subject at this particular time. However, I want you to know that I do not shun controversy. On the contrary, I will take a stand on any issue at any time, regardless of how fraught with controversy it might be. You have asked me how I feel about whiskey. All right, here is how I feel about whiskey: If when you say whiskey you mean the devil’s brew, the poison scourge, the bloody monster, that defiles innocence, dethrones reason, destroys the home, creates misery and poverty, yea, literally takes the bread from the mouths of little children; if you mean the evil drink that topples the Christian man and woman from the pinnacle of righteous, gracious living into the bottomless pit of degradation, and despair, and shame and helplessness, and hopelessness, then certainly I am against it.

But, if when you say whiskey you mean the oil of conversation, the philosophic wine, the ale that is consumed when good fellows get together, that puts a song in their hearts and laughter on their lips, and the warm glow of contentment in their eyes; if you mean Christmas cheer; if you mean the stimulating drink that puts the spring in the old gentleman’s step on a frosty, crispy morning; if you mean the drink which enables a man to magnify his joy, and his happiness, and to forget, if only for a little while, life’s great tragedies, and heartaches, and sorrows; if you mean that drink, the sale of which pours into our treasuries untold millions of dollars, which are used to provide tender care for our little crippled children, our blind, our deaf, our dumb, our pitiful aged and infirm; to build highways and hospitals and schools, then certainly I am for it.

This is my stand. I will not retreat from it. I will not compromise."

JJ's updated version:

My friends, I had not intended to discuss this controversial subject at this particular time. However, I want you to know that I do not shun controversy. On the contrary, I will take a stand on any issue at any time, regardless of how fraught with controversy it might be. You have asked me how I feel about market timing. All right, here is how I feel about market timing: If when you say market timing you mean the loser’s game, the fool’s errand, the speculator’s effort that separates savers from their capital, turns investors into gamblers, lines the greedy pockets of brokers, strategists, and newsletter writers, challenges the irrefutable logic of efficient markets, yea, literally plunders the wealth from widows and retirees; if you mean the evil action that disrupts the well counseled man and woman from the pinnacle of appropriate strategic asset allocation, balanced objectives, long-term orientation into the bottomless pit of fear, and greed, and meaningless noise, high expenses, and tax inefficiency, and short-termism, then certainly I am against it.

But, if when you say market timing, you mean assessing fundamental value compared to price, favoring undervalued assets while avoiding overvalued ones, always demanding a margin of safety and being in cash when none exists; if you mean being opportunistic and forward looking, buying low and selling high; if you mean the activity which saves investors from catastrophic and permanent losses of capital, achieving positive absolute returns, the endeavor that avoids following the herd up the mountain of excess and over the cliff of despair, favoring instead consistent compounding of modest returns, and the ability to sleep well at night; if you mean that undertaking which has provided capital as the gasoline for the engines of economic growth and prosperity, protected purchasing power and met future liabilities, funded robust retirements, sustainable wealth transfer, and philanthropic endowments, then certainly I am for it.

This is my stand. I will not retreat from it. I will not compromise."

I couldn't agree with you more, JJ (and "Soggy"). Even with the market's spectacular run since the October 3 low of 1099, I still believe that the risks since August have been sufficiently palpable to have warranted moving everything into cash. The consensus may be that the risks have diminished sufficiently to put some cash back to work.

Instant Alerts are back. To be alerted when the Indicator turns Green again,

subscribe now to Instant Alerts!

A Scary Anologue Seldom Mentioned

noreply@blogger.com (Joe) — Thu, 20 Oct 2011 12:11:00 +0000

According to Dictionary.com, an "analogue" is a noun meaning: something having analogy to something else.

Chartists are prone to mine historical data in search of precedents, patterns that closely resemble the current market believing that by projecting forward from those historical reference points they will come up with the performance that might be mimicked in the current future.

I think I've found an analogue that is amazingly close to the present, frighteningly so. Take a look at the following chart (click on image to enlarge):

I intentionally deleted any date references so that you'll focus on the following:

The market completed an imperfect head-and-shoulder reversal top; the right shoulder was small so the pattern could have easily been considered a double-top
Moving Averages in perfect Bearish Alignment
After crossing below the neckline, the market traded in a narrow, 3-4 month range
However!

the 50-dma reversed and
the Index exited the range and crossed above all but 300-dma

Volume peaked twice as the market declined to form the lower boundary of the channel after which volume appeared to evaporate

Now compare that to a chart of the market today:

The similarities are eerie and uncanny. I've notated the similarities on the above chart of today's market.

Have you guessed what period the first chart covered? Unfortunately it was February 2007 to May 2008, a period that was the precursor of the recent Financial Crisis Crash. Just on the other side of the first chart above, the market crashed over 50% between May 2008 and March 2009!

In no way am I predicting that we're on the doorstep of another crash. What I am suggesting is that you should take all the uplifting talk by Cramer and the other "talking heads" on the air and in print with a large dose of skepticism. The market may hinge on agreement in a European bailout financing plan and a continuation of favorable earnings reports here. Those point may be preconditions to assume that the market already hit a low for the year and the bull market can resume.

I think I'll just wait, however, because if we had bought when we heard the same sort of talk as we entered our own bank and financial system emergency then we would have lost more than half and still had not recovered all our money. Rather than trust the professionals, I'm going to let the market tell me when it's o.k. to put my money back to work.

The October 19, 1987 Market Crash

noreply@blogger.com (Joe) — Wed, 19 Oct 2011 16:27:00 +0000

Twenty-four years ago today, I walked in the front door from work and my wife took one look at me and asked what the matter was. I made my favorite cocktail, a rusty nail, to steel my nerves to tell her that we'd just lost a good portion of our savings ... in a single day.

To commemorate that day, I'm excerpting a chapter in my book, Run with the Herd, in which I describe each of the recent stock market crashes. The chapter sets the stage for describing the importance of and my approach to market timing.

-------------------------------------------------------------------------------------------------------

The stock market crash of 1987 is perhaps more remarkable than the more recent Tech Bubble or Financial Crisis Crashes and singular even today because of the fact that it was and still is the largest one-day change in market history. The Dow Industrial Average lost 22.6% on October 19th 1987, or $500 billion dollars.

An extremely powerful bull market started five years earlier, in the summer of 1982, and continued into early 1987. That bull market had been fueled mostly by hostile takeovers, leveraged buyouts and “merger mania”, a philosophy of the time that companies could grow exponentially simply by purchasing other companies. Consequently, there was a scramble to raise capital to finance those buyouts. In “leveraged buyouts”, a company would sell junk bonds to the public thereby raising massive amounts of capital needed to finance their acquisition. IPOs were another commonplace revenue source.

The stock of “microcomputer” manufacturers, considered by many to be the top growth industry at the time, was another promising investment area. People viewed the personal computer as revolutionary, something that would not only change our way of life but also create outstanding profit opportunities. Investors were caught up in a contagious euphoria, animal spirits that made them believe, once again, that the market could continue to always move in only one direction – up.

The government began to take action. Seeing a growing inflationary concern, the Fed began raising short-term interest rates to temper the economy and, at the same time, cool the hot IPO-driven stock market. Coincidentally, since the SEC was unable to prevent shady IPOs and conglomerates from proliferating, it begun conducting numerous investigations of illegal insider trading in early 1987.

While the SEC could offer the proper information about the risk in these IPO’s to investors but it couldn't cause them to change their behavior. Even though the SEC required companies to state explicitly that they had no revenue or profits and didn’t even have a fighting chance at getting any, investors still believed the potential was limitless. Ultimately, the barrage of SEC investigations began to rattle investors who decided by October to exit what they now believed to be a rigged game and move instead into the more stable environment offered by fixed income securities and, even in some cases, junk bonds.

At the same time, many institutional trading firms began increasing their dependence on program trading and to use futures contracts as insurance to protect against the potential of stock dips. But when the selling finally began, all stockholders seemed to want to dump their shares simultaneously and the market systems and procedures couldn’t handle the flood of orders. As the mass exodus began, the computer programs kicked in. The programs had created open stop loss orders and, as the influx of sellers began, the computers sent these stop loss sell orders to the NYSE computer system pushing prices down. The instantaneous transmission of so many sell orders overwhelmed the system and caused the whole market system to lag and leave investors at every level, whether institutional or individual, effectively blind. At the peak of the selling, there weren’t ANY buyers and some shares couldn’t be sold at all! (click on image to enlarge)

Herd-like panic set in and people started dumping stock in the dark without knowing or caring what their losses might ultimately be or whether their orders would execute fast enough to keep up with plummeting prices. The Dow plummeted 508.32 points (22.6%) and $500 billion vaporized. Markets in every country around the world collapsed in a similar fashion.

When they heard that a massive stock market crash was unfolding, individual investors scrambled, albeit unsuccessfully, to communicate with their brokers since each broker had hundreds or thousands of clients. Some investors lost thousands and millions instantly. Some unstable individuals who lost fortunes went to their broker’s office and started shooting and several brokers were killed despite the fact that they had no control over the market’s action. The majority of investors who were selling didn’t even know why they were selling except that they “saw everyone else selling”.

Remarkably, the markets recovered quickly from the worst one day stock market crash. Some modest refinements including “circuit breakers”, or the short circuiting of trading programs when markets slid by set amounts, were instituted. Unlike the stock market crash of 1929 from which recovery took years, this time the market regained its footing and quickly resumed its bull run. The post-crash recovery was reinforced by companies buying back their own stocks at then greatly discounted prices. Additionally, the Japanese Nikkei Index embarked on a massive bull market run contributing its own tremendous momentum to help carry the US stock market to new heights.

The comments of notables of the day are instructive for putting the confusion and crash into some context. The statements are important also because they offer some insight into what different people in similar positions might have said after each of the later market crashes. While each situation is different, people never learn and their responses are always the same. Many of the comments resonate as we are hopefully exiting from the effects of Financial Crisis Crash, the 2010 Flash Crash and the 2011 Deficit and Budget Congressional Debates:

"Technically, the crash of 1987 bears an uncanny resemblance to the crash of 1929. The shape and extent of the decline and even the day-to-day movements of stock prices track very closely." - George Soros in “The Alchemy of Finance”
The market crash of 1987 caught most economists, scholars, and investment professionals by surprise. Nowhere in the classical, equilibrium-based view of the market so long considered inviolate was there anything that would predict or even describe the events of 1987." - Robert Hagstrom in “Investing, the Last Liberal Art”
The President [Ronald Reagan] has watched today with concern the continued drop in the stock market….consultations confirm our view that the underlying economy remains sound. We are in the longest peacetime expansion in history. Employment is at the highest level ever. Manufacturing output is up. The trade deficit, when adjusted for changes in currencies, is steadily improving. And, as the chairman of the Federal Reserve has recently stated, there is no evidence of a resurgence of inflation in the United States." - White House Statement released on October 19, 1987
I have never experienced anything like this, so it is difficult to have clear vision. I don't understand it in terms of the fundamentals of the economy" - Robert Allen, president of AT&T, October 20, 1987
"The borrowing has to stop. The market slide was a shot right between the eyes that had better wake us all up to simple fact that we can't keep romping forever on borrowed money." - Lee Iacocca, Chrysler Corp Chairman, October 20, 1987"
The market is sending an unequivocal message to the President and the Congress to stop the political games and agree on a Federal deficit-reduction plan." - Representative Dan Rostenkowski, Democrat, October 20, 1987
"It's the nearest thing to a meltdown that I ever want to see. We were fortunate this occurred when the American economy is very stong." - John J. Phelan, Chairman of the NYSE, October 20, 1987
"They should bar buying and selling by programming. They can't stop the selling once it gets going, it's just computers selling to computers. It became a gamble, not an investment anymore. All those guys with 65 credit cards and Porsches who think they are all geniuses at 25 - now see what's happened." - Alexander Kopelman, 80 year old Florida man, October 20, 1987
"I told my clients that it was a sucker's market (two days after the crash). A week ago, I would have taken a gamble on anything that looked promising when I was dealing for my own account or for some of my family members. I had been spoiled by the bull market, I never knew anything else. But I became a cynic and a skeptic in a hurry." - A broker, October 23, 1987
"I will tell you that, prior to the opening of the market, Mr. Phelan (Chairman of the NYSE) and I had a conversation where he advised me that there was an inordinate number – “unbelievable” I think was his word - of sell orders coming into their market. That was like an hour before their opening on Monday. So we saw it coming, but who knows who pushed the button to make it happen. I think that button was pushed a million times by a million people." - Leo Melamed, chairman of the Chicago Mercantile Exchange, October 28, 1987
"Brokers hurling themselves from high windows. Men selling apples on street corners. Silent, shuffling breadlines and shouting crowds outside banks. Even for many of us who did not endure the Great Crash, images of the Depression still flicker across the years. Is that why so many people panicked?" - Susan Toth, author, October 25, 1987
"Investors had expectations before the 1987 crash that something like a 1929 crash was a possibility, and comparisons with 1929 were an integral part of the phenomenon. It would be wrong to think that the crash could be understood without reference to the expectations engendered by this historical comparison. In a sense many people were playing out an event again that they knew well." - Economist Robert Shiller
"So improbable is such an event that it would not be anticipated to occur even if the stock market were to last for 20 billion years, the upper end of the currently estimated duration of the universe. Indeed, such an event should not occur even if the stock market were to enjoy a rebirth for 20 billion years in each of 20 billion big bangs." - Mark Rubinstein, economist in “Comments on the 1987 Stock Market Crash: Eleven Years Later”
"Those who thought Black Monday on 1987 was the most frightening day of their lives are forgetting those first few hours of Terrible Tuesday, when the market as we know it simply ceased to exist.... In fact, the dirty little secret of that Tuesday morning is that the screens simply weren't functioning. It was like the Wild West out there. Anything you tried to buy simply went up ahead of you until you caught it and then it would come down so fast that you could lose hundreds of thousands of dollars in mere seconds. I retreated to the sidelines rather than endure that kind of punishment." - James J. Cramer, founder of theStreet.com and CNBC personality

Instant Alerts are back. To be alerted when the Indicator turns Green again,

subscribe now to Instant Alerts!

Cramer, the Windsock

noreply@blogger.com (Joe) — Tue, 18 Oct 2011 23:18:00 +0000

I went out a limb Sunday night and found on Monday that I was in good company. As Cramer said in tonight's show: "On Monday, highly regarded Wall Street technician Burt Dohmen sent the “Mad Money” host a chart that painted a very bleak picture for the market."

It's interesting that Cramer said that regardless of the good earnings reports yesterday, our stock market was being driven buy Prime Minister Merkel in Germany. On Monday he said,

"It's not that the earnings can't be trusted, it's that the futures are too powerful and their levels are set in Europe, not here.....the market sold off hard as investors grew nervous following news there 'during the upcoming summit', according to Germany's German Finance Minister. Wolfgang Schaeuble said European governments will not resolve the crisis at the EU meeting scheduled for Oct. 23."

If the market had gone up instead yesterday he probably would have said it was because good domestic results trump anything happening in Europe. He tells a good story that follows the market but he doesn't say anything that would allow you to cobble together a strategy that's valid beyond his next show.

But that was just 48 hours ago. Tonight he said: "But right before Tuesday’s close, Dohmen changed his mind and now takes the opposite view. Why? Because the facts changed … the charts changed and his reading of them changed too, which is how it’s got to work.” What did he see and, since we're looking at the same data, am I changing my point of view also? Here's the picture (click on image to enlarge):

Yes, the Index did cross above the upper boundary of the trading range but it fell below the lower boundary just a couple of weeks ago [interesting that the talking heads neglect to mention that in their crowing about today's late-day move]. But about the only ramification of that breakthrough was to sucker me in to buy more 3xShort Index ETFs. There was no follow through; in fact, the market surged a quick 6-7% to today's close. Not only is the market trying to convincingly escape this trading range but it will next have to cross above the two descending longer-term moving averages (100- and 200-day).

It is correct to say that when facts on the ground change, you have to change your strategy. The biggest challenge is identifying as unequivocally as possible what the facts truly are. I'm awfully close to admitting that. A close above those two moving averages would push me to moving from a net short position to 10-15% net long.

Consolidation or Reveral, That is the Question?

noreply@blogger.com (Joe) — Sat, 15 Oct 2011 17:28:00 +0000

I've returned and am anxious to share my thoughts about the market. An incredible amount has happened since my last post on June 21, a brief three months ago that seems like a totally different era. The market then was also stuck in a trading range and we were wondering whether it would bounce off the range's bottom boundary or crash through. I wrote then:

Will it or won’t it break below the 200-dma and the neckline? I hope and now don’t believe it will. I think we’re going to see the market attempt to form a right shoulder of the emerging head-and-shoulder reversal pattern. If it does, that will be our opportunity to lighten up further at more favorable prices. And finally,
Symmetry would bring the market back up to around 1340, 5-6% above current levels, over the next few weeks. At that point we’ll find out whether we’re out of the woods for the next leg up or reversing again and put the final nail into the head-and-shoulder formation.

In fact, there was another bounce with a high close of 1353.22 on July 7 followed by other close at 1345.02 on July 22. The bottom then fell out. In a mere 11 trading days, the market collapsed to close at 1119.46 or a 16.77% decline. Waffling around for the next two months with high volatility, the market skyrocketed over the past 9 trading days from a low of 1099.23 on October 3 to Friday's close of 1224.58, or a 11.4% gain:

We were having dinner at a restaurant this evening and I couldn't help but overhear the man at the next table was saying that he now feels like he really knows how to play the market. He was mostly in cash and was hoping for a further decline after which he'll jump in with both feet and buy at the start of what he believed would be a new bull market.

The question to be answered is whether the recent trading range, as wide and volatile as it's been, represents a reversal bottom or a consolidation? The market is now conveniently positioned at what would have been the target level of the previous head-and-shoulder reversal formed in February-July.

Does that technical explanation provide sufficient justification for considering the trading range a bottom? Is there sufficient positive macro-economic news for the bulls to generate sufficient upside momentum follow through to propel a move through the range's top boundary and much higher? Or will the bears succumb to the negative background noise to enable the bears to take over and resume their push to lower levels. Here's what I see unfolding:

I'm firmly in the camp of those who see the current trading range as a consolidation at the midpoint of a bear market that began this past May-July. If I'm correct, then we should see another 17-20% decline from current levels down to the 900-950 area. Two additional reasons that the 900-950 level will serve as this Bear Market's bottom are:

the neckline of the 2009 bear market inverted head-and-shoulder bottom that ended the Financial Crisis Crash should serve as strong support and
that level continues the path followed when the market exited from the last secular bear market in 1980-82 (for more on that analog see December 3, 2009, July 13, 2010 and May 2, 2011)

There definitely are many fundamental reasons for staying bearish but the last nine days have been unusually convincing to those of the bullish persuasion. This last run-up has been especially hard on those who've remained bearish and elected not to jump on the bandwagon of those calling the recent run-up another "generational low" and a "chance of a lifetime" buying opportunity. My market timing indicator flashed a yellow warning light on August 2 but quickly switched to red on August 11 proscribing a move to "all-cash".

I've been out of the market (and in a net short position via some ultra-short index ETFs) since then. However, taking a bearish stance vis-à-vis the market has been a terribly bumpy ride and, in all honesty, an unprofitable one since we got stuck in another trading range. My discipline was developed from an analysis of market behavior over the past 50 years; it alerted me to exit the market in January 2008 and spared me from the worst of the ensuing Financial Crisis Crash. I intend to follow it until it signals the reduction of risk and that it's relative safe to return to the market.

Instant Alerts are back. To be alerted when the Indicator turns Green again,

subscribe now to Instant Alerts!

Run with the Herd

noreply@blogger.com (Joe) — Sat, 27 Aug 2011 03:09:00 +0000

Coming in October!

Taking a Long Needed Break

noreply@blogger.com (Joe) — Tue, 05 Jul 2011 02:04:00 +0000

Stock Chartist celebrated its 6th year as a blog on July 1 and needs a rest. The next few months will be totally consumed by a move to a new residence and a long-needed break. Since we're planning on taking a 2-3 month road trip, some may call this break a "working-sabbatical".

We hope to return in mid-October refreshed, with new ideas and a clear perspective. Hope you to see you again then.

Is That A Right Shoulder We're Beginning To See?

noreply@blogger.com (Joe) — Wed, 22 Jun 2011 01:21:00 +0000

In my last post three weeks ago I talked about the technical supports that could act as breaks on the the market's descent. In particular, I pointed out that

"...there is a potential neckline at around 1265, the low in March. Should the market touch that trendline then 2/3 of a potential head-and-shoulder reversal top would be put in place.
A cross by the Index under the 200-dma would indicate that the trend has clearly turned bearish for the first time since 2009. I don't think that will happen. I still have faith in the resumption and successful completion of the "mid-term election cycle" market that began in November and, if the market follows the historical precedent, should end at around 1500 by year-end. But, I must confess, I'm going to get more and more cautious if (as) the market approaches that 200-dma."

Fortunately for us who are of the "bullish" persuasion, the market stopped falling last Thursday with an intra-day low of 1258.07 and a close of 1267.64. Since then it's been almost straight up with a close today 1295.52. I included the following chart in the Weekly Recap sent to subscribers this past Sunday:

The above chart shows:

huge volume spike which seems to come regularly during options expiration triple and quadruple witching days. Interestingly, the past three triple witching days (December 17, March 18 and this past Friday) saw the market advance for the next 20-30 trading days.
Will it or won’t it break below the 200-dma and the neckline? I hope and now don’t believe it will. I think we’re going to see the market attempt to form a right shoulder of the emerging head-and-shoulder reversal pattern. If it does, that will be our opportunity to lighten up further at more favorable prices. And finally,
Symmetry would bring the market back up to around 1340, 5-6% above current levels, over the next few weeks. At that point we’ll find out whether we’re out of the woods for the next leg up or reversing again and put the final nail into the head-and-shoulder formation.

One additional piece of the puzzle for all those who follow the Lunar Theory as it relates to the stock market, last Wednesday was a full moon and the beginning of the bullish phase of the lunar cycle and conveniently coincided with the end of the market's slide. But don't get complacent, a new moon arrives on Friday, July 1 and could mean the end of the current bounce and the beginning of another bearish period.

Technical Supports to Look For

noreply@blogger.com (Joe) — Thu, 02 Jun 2011 01:01:00 +0000

The last couple of days has been a really scary ride. On Monday, the market climbs 1.06% and looks as if it's finally cleared the upper boundary of a lateral channel in which it's been trapped since February and today, the market comes crashing down 2.28%, back down below both the 50-dma and 100-dma's.

Yesterday, all the "talking heads" could speak about were the stocks that had finally moved higher, all the industries that have positive momentum, how the tragedy playing out in the EU with the Greek bailout has little to do with our markets, etc., etc., etc. Then, today, about all you heard was that the disappointing ADP survey (which has a notorious history for being wrong) could be the catalyst for launching the long-awaited 5-10% correction. Investor sentiment has been getting a little too bullish and that "wall of worry" needed a few more bricks placed on it.

But let's step back from the day-to-day fluctuations to see whether, in the longer-term picture, momentum has actually already been damaged and, if so, how much (click on image to enlarge):

While I can't predict what the market will do tomorrow, I'm still operating under the assumption that the trend is still in tact, albeit bruised. I set up a number of "hurdles" or milestones to guide my strategy as the market came out of the 2009 Crash Bottom. Today, there are several supports that would have to be broken for the game plan to change from offense to defense:

The market would have to cross under the bottom boundary of a long channel ascending from the 2009 bottom. That trendline connects and extends from the March 2009 bottom to the August 2010 bottom. Right now, the market is just 10 points above that trendline.
If the market continues lower, the 50-dma will follow the Index itself and cross under the 100-dma; we last saw that alignment last July through September 2010.
If the market moves further down, there is a potential neckline at around 1265, the low in March. Should the market touch that trendline then 2/3 of a potential head-and-shoulder reversal top would be put in place.
If the market does continue to decline all the way to 1265 then it will be close to crossing under the 200-dma, an extremely bearish event.

A cross by the Index under the 200-dma would indicate that the trend has clearly turned bearish for the first time since 2009. I don't think that will happen. I still have faith in the resumption and successful completion of the "mid-term election cycle" market that began in November and, if the market follows the historical precedent, should end at around 1500 by year-end. But, I must confess, I'm going to get more and more cautious if (as) the market approaches that 200-dma.

Act Now To Receive Instant Alerts!

May 2011 = August 2010

noreply@blogger.com (Joe) — Fri, 27 May 2011 00:06:00 +0000

Time moves awfully slowly when you're waiting for something to happen and it's no different during consolidations or corrections. You wonder when momentum will pick up again? You begin second quessing your operating assumptions and wonder whether the market isn't actually at a reversal turning point rather than merely a much needed consolidation?

Whenever I begin asking those sorts of questions I go back to earlier posts to see whether the market has vered far from the game plan. If they have then I'd have to trash those earlier assumptions and come up with a plan; if they haven't then there's not much to do but wait.

For the time being, the current game plan (i.e., view of the market's near term projection) goes back to January 20 in a piece called "Pivot Points and Sell-Fulfilling Prophesies" in which I included the following chart (click on images to enlarge):

I wrote: "the market is edging ever closer to a zone (1300-1350) that has seen six pivots since 1999. As a matter of fact, the last pivot was in 2008 .... No one can predict what the market will do now but there's a good chance that, in its pursuit of symmetry, it will replicate the 2008 pattern..." This chart followed:

And here we are, four months after that post and, as expected, the market stalled out just about where I thought it might (today's close was 1325.69). We're back to the original question: Where to from here?

For that I turn to what might be considered a contra-indicator, Individual Investor Sentiment. The AAII published their most recent poll of how individual investors felt and concluded that their members haven't been this negative since August 2010:

Do you remember what happened in September 2010, the month after the last bottom for sentiment? It marked the beginning of a stupendous bull run that carried the market 30% higher in 8 months. The market's current February-May course looks fairly similar to the May-August 2010 path. I wouldn't rule out the possibility that this one could also be followed by a rise to at least the all-time high of 1550, or 15-20% above today's close just as the symmetry charts indicated.

Act Now To Receive Instant Alerts!

Mark Haines 1946-2011

noreply@blogger.com (Joe) — Wed, 25 May 2011 18:23:00 +0000

I'm going to miss Mark Haines. During the Tech Bubble, I associated CNBC with Mark Haines. Every now and then, when I traveled on business or had an opportunity to go into the office late or skip work altogether, I'd try to catch the market's open and .... there he was, Mark Haines, whetting my appetite for more. I planed for and looked forward with anticipation to the day when I would be able to quite my day job and begin trading full time.

That day came at the beginning of 2002 and I've started nearly every weekday having breakfast with Mark, waiting for the opening bell to ring at 9:30. Whenever Mark was out and a substitute was necessary, I had to make a conscious decision as to whether or not I'd watch the market open that day (whenever they stuck in Simon Hobbs I made it a point of quickly turning the t.v. off).

Even with the sound muted as is often the case at my desk, Mark's absence is another marker of a passing era. Market openings for quite a while just won't have quite the same excitement as they've had in the past.

Market Time Well and Market Success Follows

noreply@blogger.com (Joe) — Wed, 25 May 2011 01:47:00 +0000

There’s an experiment in A Random Walk Down Wall Street in which a large number of coin tosses are recorded and graphed. Soon the graphs began looking like your run-of-the-mill stock charts (i.e., head-and-shoulders, double heads, wedges, etc.). If each coin toss was random and a series of coin tosses resembled stock charts then the movement of stocks must also be random. That’s the logical conclusion the author, Bernard Malkiel, intend his students and the reader to have. The lesson intended to drive home the idea that the best investment strategy is investing in index funds on a buy-and-hold basis rather than individual stocks.

iStockChart.com offers an online stock market simulation game that leads to another conclusion. The game’s premise is to demonstrate that “historical data is an integral part of playing the stock market …. with the game, you can test your mettle at analyzing the historical data and making strategic decisions as to when to buy and sell.” The goal here was diametrically opposed to Malkiel’s game so I decided to try my hand.

Contestants, presented with a hypothetical $100,000 and a nondescript chart are asked to either buy or sell the stock based on what they see. For up to the next 90-120 days that they hold the stock (or have sold the stock short), they are asked to make the same decision (hold your position or not). When the decision is finally to sell (or cover the short), contestants are presented with another chart but from another random starting date. Again, the decision is whether to roll over the proceeds into this next stock or skip the next. As many charts can be skipped as might be necessary until a stock appears worthy of commitment.

With so little information, how do contestants decide whether invest in the stock depicted in the chart or not? Do you look for a clear trend? the beginning of a chart pattern? Furthermore, when do you decide to sell? Is it all purely random chance? I tried a variety of approaches at first:

All you had to do, I thought, was to figure out which stock it was since, knowing that, you’d know how the stock actually performed over the subsequent 90 days. But that was easier said than done because of the huge volume of data that would have to be reviewed.
I thought I would pass on any chart that didn’t have a clear trend or chart pattern but it turned out that very few met these criteria and many of the ones that did turned out to fail soon after the chart started rolling forward.

It finally dawned on me! I was focusing too much on the individual stock stock chart itself and had neglected a key lesson learned long ago: 50% of a stocks movement is dictated by the market. The only relevant information in each of the charts was the chart’s beginning and ending dates. If I referred to a long-term chart of the S&P 500 beginning with those dates, I’d know whether the subsequent 3-6 months were bullish or not. If they clearly were, I would buy the stock; if the market was bearish, I'd sell the stock short; if neither, I’d pass on it and move on to the next.

By making market timing my sole investment strategy, my stake grew from $100,000 to $387,146, first place and five times greater than my runner-up after 35-45 purchases plus another 35-45 I had passed on (see the leaderboard on the iStockChart.com site)! I quickly sold the relatively few stocks that failed to prevent additional losses.

If we had invested in an Index vehicle on a buy-and-hold basis for the past 11 years we’d still be behind the curve. This game convinced me, even more than I ever imagined before, that about the only thing you need to make money in the market, even more than picking good stock charts, is knowing with a high degree of probability the market’s trend over the near future. In other words, time the market well and stock market success follows. My subscribers know that my portfolio management strategy begins with market timing.

Wow! Having known that 25-30 years ago would have saved me a great deal of money and many sleepless nights. “Better late than never”, as they say.

Act Now To Receive Instant Alerts!

What's Happening to Semiconductor Stocks (SMH)?

noreply@blogger.com (Joe) — Fri, 20 May 2011 14:26:00 +0000

I could say things are pretty much evolving as expected. The market successfully held the line at the 50-dma, so far, and is now striving to make new highs for the year. I've rotated a large chunk of my portfolio into health care related stocks like drugs, biotech, medical supplies and services.

The only thing that seems to be underperforming and even, perhaps, failing right now are some of my techs, especially the semiconductor stocks. Hey, what's going on there? I took a look at the SMH Semiconductor Industry etf and found what I think might be a possible answer.

Exactly a year ago, based on the SMH chart at the time, you would have said that there's a good possibility that, as a proxy for the whole group of semiconductor industry stocks, SMH could appreciate 25-30% from the then current level of 27.45 to the 34-36 area. At the time, that projected target level, if SMH actually got there, was the descending upper boundary of a long established channel, assuming good support from a favorable market (click on images to enlarge):

Roll the tape forward, please, and here's what we see today:

Interesting but ... so what? What it means to me is that seeing the TXN, TQNT, TSM and other semiconductor stocks in my portfolio stall out might actually be more a function of where the whole industry is than something going on with the individual stocks. As a group, stocks in the industry are now at that upper boundary resistance.

As bulls and bears struggling it out for control to determine if the semiconductor group can final cross into territory not seen since after the Tech Bubble burst in 2001, the decision every individual investor with a stake in that struggle, like myself, has to make is whether to sell any or all of their semiconductor-related stocks today or should they try to weather out what could be a the long and possibly disappointing struggle of the big boys. Furthermore, how long might this contest take? Weeks? Months? Quarters? And what opportunities, if any, might be lost by having money tied up in semi's?

The Bulls failed in 2003 and 2007; there's no guarantee they won't fail in 2011. I think I'm going to step back a little and watch this from the sidelines.

Act Now To Receive Instant Alerts!

Homebuilders and Financials: The Economy's and Market's Missing Wheel

noreply@blogger.com (Joe) — Thu, 19 May 2011 14:34:00 +0000

Two Industry Groups stand in the way of further market advances: financials and homebuilders.

Home building industry spokespeople go on CNBC regularly each time of the housing statistics are announced, like monthly sales, financing and refinancing, starts, or permits issued. And the spokespeople each time differentiate between the sales of new homes and resales, especially those that are in foreclosure or underwater; they also attempt to differentiate between national statistics which include negative information from extremely skewed markets like Las Vegas, Phoenix and Florida and the rest of the national housing market.

Discussed less frequently are conditions and prospects for banking, insurance, asset managers and the rest of the financial industry group. Since the bottom in 2009, I have believed the sector was a key to launching a true bull market:

On 3/20/09 in Financial Stocks are Laggards I wrote: "It's often said that financial stocks are the Industry Group that leads the market out of the average Bear Market. In this case, however, the financials not only lead us into the Bear Market but they were the principal cause.

On 5/18/09 in XLF (Financial Sector ETF): What Now? I wrote: "XLF seems to be making what looks like the beginning of an inverse head-and-shoulder, a stock pattern that looks similar to the S&P 500 Index pattern....There's only a one-in-four chance that XLF will be able to cross the resistance at the 13.00 neckline allowing it to move up to 17.00. It's almost certain that 12-18 months from now XLF will be double what it is today [closed at 12.29 on that day], we just can't say when.

On 6/7/2009 in XLF (Financial Sector ETF) = Market Health I wrote: "...the key to solidifying the market's turn, to a true change in momentum from bear to bull is financial stocks starting to move up.....The financial sector is tied up with economic health, exchange value of the $US, interest rates and the health of the financial system itself. I'll rest easier when I see the XLF successfully and with conviction cross above it's neckline. "

On 9/16/10 in Housing and Finance: Two Superimposed Crises and Bear Markets I wrote: "[The] graph clearly depicts what I see as two coincidental and superimposed Crises the country has faced. We often see them merged into one continuous stream of bad news but, in reality, there was a Financial Crisis (impacting business) that was preceded by Housing Bubble and Bust (impacting consumers)." and inserted the following graph, now updated to last night's close (click on image to enlarge):

A year later, while the rest of the economy has regained its footing enabling the market to push higher (up nearly 20% since then), those two industry groups are still stuck below significant resistance and unable to breakthrough and push significantly higher:

Homebuilders
Financials

If you believe that these two sectors will be able to successfully cross their resistance hurdles and begin advancing to levels last seen in 2008 then you should be "all-in" believing the market will continue heading towards the all-time high. If not, stay on the sidelines because rather than riding a car to the top it would be like riding a three-wheeler powered by the rest of the economy including: healthcare, retail, tech & internet, commodities, industrials and consumer non-durables.

Act Now To Receive Instant Alerts!

Lunar Cycle Tweaked on Stocktwits

noreply@blogger.com (Joe) — Tue, 17 May 2011 20:24:00 +0000

My May 5 blog post entitled "Time-Segmented Market Analysis with Lunar Phases" was tweaked on StockTwits so I'm going to have to answer here even though I fear giving the Lunar Cycle Theory more credence than it truly deserves. @fstrtrdr had this to say the next day:

"Lunar phases? Add in the Werewolf and vampire indicators and watch Loonie Tunes for trade ideas?"

Now fstrtrdr's bio says "My trading records for personal reference only. Don't follow me since I am almost always trading options against a spread or hedge that would not make a single leg of the trade a good idea." It's clear why he/she would have no interest in something that on average runs 20 days. But perhaps the rest of you may.

The intention of that May 5 piece was to put a time perspective on the market's current volatility, a framework so to speak for market expectations. One common way of doing that is to look at the market's movement in time-segmented intervals and the Lunar Cycle is, although arbitrary, one way. Basing volatility expectations for the next 20 days based on the volatility over the past year, granted, is just one approach. So on May 5, I wrote:

Although the extreme outside range of change has been from +8.29 to -6.17% for these two week lunar phase periods, the averages have been much narrower: 2.87% for when the market finished up and 2.61% when the market finished down. For the current two week period that will end on May 17, an average move down would carry the market to 1321.21, almost precisely to the level of the 50-day moving average (currently at 1318.18 as of last night's close). Based on this analysis, my guess (and blatant hope) is that the market will again approach the 50-day moving average as a support and, like it did on April 18, it will again pass the test.

Here we are, April 18, and the intra-day low was 1318.51 with a close of 1328.98. So shoot me, I missed the mark by 0.23% as far as the low is concerned (that's %, not percentage points!) but the Market lightly kissed the 50-dma and then bounced.

What might we expect for the next phase? I'm not going to risk my record so you make your own guess. Here is the data:

To help you, here's what the close on June 1 with a range of changes during the next phase:

Good luck guessing! [Psst! I'm going for 1368.85]

Act Now To Receive Instant Alerts!

Industry Rotation Among S&P 500 Industry Groups

noreply@blogger.com (Joe) — Tue, 17 May 2011 00:48:00 +0000

I don't know what's happening to the market or how long it will go on but there is a weird transition happening. Others had talked about for a number of days so I had to see for myself and, lo and behold, it turns out to be true.

Scroll through the charts of the S&P 500 stocks for yourselves, as I did, and you'll find it hitting you right in the face. The thing that's happening is that there seem to be only three group of stocks recently moving ahead while the rest of the market seems to have hit a stone wall and have fallen back. You can look at a long-term stock chart and, before looking at the stocks symbol can correctly guess the industry group about an 70% of the time. There's such a divergence between the groups and such a similarity between the stocks within a group.

The groups moving ahead (big time) are:

healthcare related like biotech and drugs, equipment, services and health plans, drug wholesalers and retails
consumer staples like cosmetics, personal care, soft drinks, tobacco, grocery wholesalers and retailers, etc.
utilities including electrical, natural gas, etc.

Several other groups have actually formed top reversal patterns and are headed south, like oil & gas. The rest of the stocks are at or marginally above long-term resistance levels at either the 2006 or 2000 highs. Most notable among these are the financials including banks, insurance and asset management companies.

Lost in the shuffle are tech, defense, industrial equipment, construction and most retail stocks. Most of the large-cap techs are retreating (MSFT, TXN, BRCM, INTC, QCOM) while the small-tech software, equipment and Internet stocks seem to be deciding in which direction they'll fall.

What does this survey mean for you; how can you use subjective evaluation like this? I'll tell you what it means for me. It means that I'm going to reconsider the investment strategy I've been following since last November when the "mid-term election cycle" started. Interestingly, the S&P has already done that when viewed on an equal-weighted basis rather as contrasted with the traditional capital-weighted basis.

I've been looking for a move to around the previous all-time high on the S&P by year-end with a interim consolidation at around 1325, around the market's level. Many "talking heads" started calling for the double dip recession which could be forcing a move by the herd towards the safer, low growth, dividend paying stocks.....at least through the summer.

I already have over 20% in health care related stocks and have dumped my energy and precious metals stocks. Should I follow the herd and now also abandon the tech stocks now representing another 20% of the portfolio? How long will this stock rotation phase last and where will it go to next [my guess is back to the long-dormant but waiting-for-a-pop financials]? Tough calls but one that has to be made in order to stay even with the herd.

Act Now To Receive Instant Alerts!