March 1st, 2013

“Timing Is Everything”

imageCNBC never cease to amaze me the way they always trot out mostly bearish commentators on day’s when the market is declining severely, like Monday’s 1.83% plunge, but the bull’s when the market makes a stunning advance like the 1.27% rise a few days later.  Rather than counter-balancing the market’s prevailing psychology, CNBC feels that it’s in their best interest to go with the flow: panic when everyone else is throwing stocks overboard and be euphoric when buyers are flocking back into stocks.  Promote “risk off” on days when everyone has already decided to sell and “risk on” when the bulls are already stampeding.

They are a “news” organization and, as such, their time horizon is  very short and they need to present stories and “talking heads” who primarily describe or explain why something is just happening or has recently happened.  The information they offer is mostly anecdotal, opinions or canned offerings by companies rather than analytic and are, therefore, irrelevant to decision-making about the investable future.

That’s why I don’t watch the business media.  Rather, I attempt to peer out into the future and see if I can perceive where the next turning point might be. Towards that end, I’ve been focusing an area I labelled the “Crunch Zone”, the range between the 2000 all-time high and the 2007 all-time high (approximately 1545-1575) and have been monitoring for Members since the beginning of February as the market closes in on that target:

  • February 2: “The most glaring difference [between the 2007 attempt at crossing into new high territory and now] is that OBV [on-balance volume indicator] was also making new highs in 2007 but it has failed to do so, so far, this time.  That difference could be attributed to greater investor skepticism in 2012 than there was in 2007 as evidenced by the huge volumes of cash still sitting on the sidelines and in fixed income/gold safe haven investments.  That actually, could be positive indicator for the market actually finding success in breaking higher this time around.”
  • February 10: “the 50-day moving average of daily volume of the 500 S&P stocks has declined since peaking in 2006.  As the Index and OBV (on-balance-volume) continued to advance to new highs in 2007, average daily volume diverged and failed to move higher.  As a matter of fact, average daily volumes have trended lower to where they are now about 50% of the that 2006 peak….What events will cause these trends to reverse direction?…Stocks usually move opposite of interest rates: when interest rates decline, stocks advance and when interest rates rise, stocks fall.  Rates have been falling since 2009 and stocks have increase.  But because of the Fed’s intervention, when interest rates begin to rise, stocks could also rise.”
  • February 17: “Technically almost nothing new has happened other than the market has edged a little closer to the “crunch zone” ….The one significant development is on the volume side: 1) On-Balance Volume (OBV) has finally matched the peak during last year’s March high and 2) the 50-day moving average of daily volume seems to have finally bottomed out and shows a teeny-tiny upward slope…..Since the Market moves at glacier rather than human speed, we probably won’t get an answer of what follows the Crunch Zone interaction until the fall.”
  • February 24: “the market is bumping up against the “Crunch Zone”….I wouldn’t be surprised if we were stuck in this area through the summer…..Don’t believe the media “talking heads” who offer explanations for a pause or correction at these levels grounded in the employment numbers, earnings reports, interest rates, exchange rates or corporate guidance announcements.  The true explanation is that investors small and large have acrophobia, they fear heights, especially those at levels they’ve never seen before…..What encourages me is that there aren’t any bubbles today and, rather than being buoyant, the economy is still struggling to gain its footing.  Rather than exuberance, there’s still a lot of skepticism and fear about the stock market and the economy, the sort of ground in which the seeds of a true bull market can begin to root and grow.”

We don’t need CNBC to tell us that approaching the bottom edge of the Crunch Zone will be a bumpy ride.  As much as we might hang on every word of their prognostications, neither Cramer, Gartman, Kass nor any of the other familiar cast of characters can tell us whether we will ultimately cross through the Zone or bounce off it, reverse and begin sliding lower again (click on image to enlarge).

SP 500-20130222

You’re familiar with the old saw that “timing is everything”; the next few weeks or maybe months is a perfect time to heed it.  This is no time to make new commitments if you’re getting into the market for the first time or are looking to put some idle cash to work.  You’ll know when this struggle between bulls and bears, supply and demand, in the “crunch zone” is resolved and you’ll have plenty of time to add new positions to participate in the next trend to higher levels.  Don’t fret losing the first few percentage points; consider them insurance against the possibility that the market reverses instead.

On the other hand, I like most of the 70 positions in my Portfolio and don’t see weakness in most of their charts.  There’s little reason to unload them and run the risk of losing out on the launch of the next wave higher if the “crunch zone” turns out to be only a milestone rather than an insurmountable wall.

I don’t know about you but I’m currently around 90% invested and have no plans to either unload in anticipation of a correction or bear market or aggressively put the remaining cash to work until this uncertainty is resolved.  The Market moves at glacier rather than human speed so we probably won’t know what follows the Crunch Zone interaction until sometime around Fall. This may not be want you want to hear – we all like to see more action – but it’s unfortunately what we’re going to get.

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January 31st, 2013

Anatomy of the “Bull Market”

imageEveryone right now is trying to figure out how vulnerable the market is to a serious correction as it approaches its previous all-time highs.  For example, CNN recently posted a piece entitled “Bull market winding down. Don’t panic” in which they overlaid onto the 2009-2012 S&P 500 the template of the market’s traditional psychological life cycle.  [FYI, I’ve used that template myself in many earlier postings.  For example, two years ago in Two Views of the Same Image, some had voiced fears that investors were “euphoric” and that meant that the market was approaching a peak followed by a significant downturn.]

In the recent CNN article, Laszlo Birinyi Associates suggested that the bull market “likely entered its final stage last summer. So far, the S&P 500 has climbed almost 8% during this period of ‘exuberance’.”  Birinyi, says this stage of the market’s life cycle is when “fireworks” happen….. when all the people who have been reluctant and hesitant to invest in the stock market start realizing this isn’t the New York City subway system.  There’s not going to be another train coming so they better get on board.”

Four stages of Bull Market

The CNN article concludes that some of the best gains are to be had in the market’s final stages as everyone begins to pile onto stocks.  This year, that run could be even more impressive as the fixed income bull market ends and investors sell those investments in favor of equities.

When I look at the S&P Index over the same period, I don’t see some rather arbitrary demarcations of changes in market psychology.  I see another interesting pattern of market behavior (click on image to enlarge):

S&P 500 - Steps

At the risk of being labelled an Elliottician, that is a practitioner of Fibonacci patterns and Elliott Wave Theory, I see that this bull market looks like a stair-step affair with each successive leg of the bull run lasting only 50-70% of the previous leg and the % change of each leg being only 50-80% of the immediately preceding one.  The intervening steps down were less regular; excluding the 2011 correction that was amplified by the European debt crisis, each correction leg lasted approximately 60 calendar days and each (again, other than 2011) was 50-70% of the prior one.

Call it a stair-step or ever more tightly wound spring …. no matter what the analogy, the trend is unsustainable.  In the next correction down leg down could be the last of the series.  Each of the four previous corrections were between 50-70% of the immediately previous upleg.  If it holds true again, a correction beginning soon could carry the market down to approximately 1410-1415, another pivot at the bottom boundary trendline.

Looking at the psychological terms in the Birinyi chart above, I can’t come to grips with calling today’s market psychology as “exuberant”.  The reason the market saw an unusually large cash inflow in January was because they’ve been nearly non-existent since 2007.  Even though we aren’t hearing much today about the inadequacy of job creation, consumer demand is still weak and businesses still hoard their cash fearing a weak economic future.  Actually, the market rose 225% since March 2009 not because of a growing economy but only because of how far it had fallen from 2007 to March 2009.

Before there can be market “exuberance” there needs to be exuberance concerning the world economy, a condition that may be near but clearly hasn’t arrived yet.  After the coming correction, psychology surrounding the economy might have improved sufficiently to allow the market to quickly maneuver around the tip of that coiled-spring and make a run at and finally, after 14 years, cross above the all-time highs.

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February 9th, 2012

Will the Market Soon Cross into All-time New-High Territory?

There’s no question about it, I’m definitely in the minority.  First I wrote a piece entitled “KISS in Market Timing Too” in which I compared my approach to a complex algorithm developed by Ciovacco Capital Management called the Bull Market Sustainability Index (BMSI).

I followed that up with a piece yesterday entitled Market Momentum Turning, But Will It Accelerate? in which I see each of the four moving averages that I use in my Market Momentum Meter market timing tool having turned up and soon approaching a perfect bullish alignment (50-dma>100-dma>200-dma>300-dma).

Now I see something written by Ray Barros in Green Faucet entitled “S&P Nearing A Top?” in which he lists the following six indicators that have convinced him that the market is just one step like the failure of Greece debt negotiations away from collapsing into a bear market. Those six technical indicators are:

  • Price – Structure: The 12-Month Swing and 13-week swing show we are in a sell zone. Figure 3 shows that since the Dec 2, 2011 that the up move has been on declining volume and range. In this context this is bearish.
  • Time: Kress Cycles suggest we are in a window when a top is likely.
  • Momentum: Figure 4 shows that this up move has been on declining momentum.
  • Sentiment: The sentiment indicators I use suggest the S&P is skewed to the upside.
  • Normalised Volume: We saw a sell setup with ‘below normal range’ and ‘normal volume’.
  • PoMo: For me, this indicator generated a sell signal today.

He even includes charts depicting each of the above as supporting evidence like the one below:

However, I looked at those charts and what struck me was that: 1) they were so complicated and there was so much to digest that I couldn’t possibly make heads or tails of them and 2) I wondered what those signals might indicate if we hadn’t been in a secular bear market for the past 11 years.

The answer to his question of whether the market is approaching a top is definitely yes!  I have little doubt that the market will approach the previous all-time high of 1576 sometime this year or next.  The correct question to ask is will the market soon scale to new heights and cross into all-time new-high territory?”  Since my Market Momentum Meter is turning bullish at these loft levels, I hope the answer is yes and I think the answer will be yes.

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February 8th, 2012

Market Momentum Turning, But Will It Accelerate?

Many decry the lack of volume, conviction on the part of most individual investors, the lack of excitement about a market that just doesn’t seem to want to turn lower but instead inexorably continues to move higher.  Beneath the surface and behind the scenes, however, something is happening.  Many aren’t aware of it because of their focus always on today’s “Breaking News”, earnings reports or press releases.  What most don’t see is the change that’s taking place in the form of a slow turnaround in the trend of market momentum as measured by the moving averages.

In a piece entitled “Sweet Dreams” way back on October 14, 2010, I wrote:

…… have you taken a look recently at how the four moving averages (50- ,100- ,200- and 300-day) are converging as they were all trying to squeeze through the neck of a bottle? (click on image to enlarge)

First, it’s important to note that sometime next week, the dreaded “Death Cross” of the 50-dma crossing under the 200-dma that we were so fearful of at the beginning of July will be reversed and, by definition, will become the “Golden Cross”.

Also note that the four moving averages are transforming themselves into a bullish alignment so long as the Index itself remains above them all for the next month or so. That’s pretty monumental because it is a solid confirmation that a bull market is in place.

A few days before I’d written this piece, Europe’s Finance Ministers approved a rescue package worth €750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF); six months later (May 2011), our stock market was 16% higher.

But the situation in Europe appeared to continue deteriorating. It became evident then that due to its severe economic crisis, Greece’s tax revenues were lower than expected making it even harder for it to meet its fiscal goals. Following the findings of a bilateral EU-IMF audit in June, further austerity measures were called for while Standard and Poor’s downgraded Greece’s sovereign debt rating to CCC, the lowest in the world.  Simultaneously, our stock market seemed to hit a wall; it cratered in August 2011.

The market now seems to be again trying to squeeze through the neck of that same bottle.  Last week, the Black Cross again turned back to Gold and  all four moving averages finally turned up this week.  Within a month or six weeks, the four moving averages will right themselves and we’ll see them in a perfect bullish alignment again.  Note the similarity between the 2010 above and what it looks like today:

I wrote to my members at the end of January that

“Going back 50 years, there haven’t been many periods when this convergence [of moving averages] has existed outside of market turns and that’s why I believe the market will soon begin trending higher. Obviously my anticipation isn’t based on an astute distillation and analysis of domestic or international economic and financial data. This prognosis is based on my read of the history of market psychology and behavior.”

The convergence continues to unfold.  Psychology is changing to match the more positive economic news.  We have begun adding to our positions with focus on select Industry Groups.  If there won’t be another surprise to hit us from left field (not intended as a reference to the elections this November) then we should continue putting cash to work as momentum begins really accelerating.

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