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.

Technorati Tags: ,

August 29th, 2012

Every Trading Range Is Not a Reversal Top

One of the “Talking Heads” regularly trotted out by CNBC to share his wisdom is Dennis Gartman.  He usually makes some sort of esoteric, useless recommendation like “I’m not buying gold in Dollars but am buying it in [Australian Dollars, Indian Rupee, Thai Baht, Japanese Yen or some other currency which is equally meaningless to his US audience but meant to make him sound like a true authority.  Instead, I just chuckle at his pomposity.

In any event, he’s been taking a different tack recently calling for a market decline.  One June 4, Gartman announced the beginning of a new Bear Market:

“The weak U.S. jobs report for May and a deterioration in the U.S. economy will lead the U.S. Federal Reserve to announce another round of quantitative easing as early as this month….could come as early as the Fed’s next meeting on June 19-20, or at the following meeting on July 31-Aug. 1. The central bank will want to ease as “far ahead” of the U.S. presidential election in November as possible, so it doesn’t come off as being “politically amenable” to the current administration….”I’d much rather be optimistic than pessimistic, but I think the European governments have forced me into being somewhat pessimistic,….But will [QE3] have a bullish effect on the stock market? Probably not. The fact that they need to do it alone is very disturbing.”

On June 4, the S&P 500 was 1278.18, or 10.35% lower than today’s close.  Not having changed his mind (nor learned his lesson), Gartman went back on the CNBC air to reiterate his nervousness:

“We saw divergences between the transports and the Dow Industrials — old-style, Dow-type theory things — a lot of people having been bullish.  Now I’m just neutral.  I’m flat, and I’m nervous.”

So what’s causing all this angst for those who are supposed to be cool and collected?  I’d say it’s their superimposing what they see in the global macro-economic environment onto the market’s narrow range.  A friend of mine used to say that “if the only tool you have is a hammer then everything looks like a nail”.  In a similar paraphrasing vein, “if you’re basically a pessimist then every trading range looks like a reversal top.”

The market must be offering a lot of fodder for pessimist these days because, if you are so inclined, you can envision a “double-top” emerging from the huge trading range the market’s been stuck in since March:

Yes, if I squint hard enough I can can perhaps begin seeing the possibility of an emerging double-top.  But the market is far from clearly completing the left shoulder.  The May trough is the single pivot “defining” the lower boundary of the horizontal channel (two, if you consider the pivot point at the November 2011 peak to be a part of this emerging pattern) and that is a long way from a fully formed congestion pattern.

I don’t deny that there may be a correction around the corner but it’s a long way to a fully formed reversal top.  I’m also cautious but not so worried as to be ready to start dismantling my portfolio of excellent stocks.  One of the reasons I’m not ready yet to see the market’s reversal top is that, at the individual stock level, I see too on my watchlist as if they’re ready to finally break above key resistance levels.  One typical example of many is SRCL, one a leading momentum stock:

So let’s not walk around with a hammer breaking everything because all you see are nails.  Let’s not allow our basic caution mistake every trading range as a reversal top.