March 1st, 2015

The Crash is Coming, The Crash is Coming!

The following piece appeared here on March 25, 2013 entitled The Known Stock Market World, almost exactly three years ago. I repeat it here because Paul Farrell just came out with another one of his dire, “end-of-the-market-as-we-know-it” predictions. What prompted Farrell to make his doomsday call in 2013 was the fact that the market was about to cross into all-time new high territory and he, along with many of the other gloom-and-doomers were saying that the market was about to swoon into a major correction. In today’s blast (see today’s MarketWatch), Farrell claims

“the crash of 2016 really is coming. Dead ahead. Maybe not till we get a bit closer to the presidential election cycle of 2016. But a crash is a sure bet, it’s guaranteed certain: Complete with echoes of the 2008 crash, which impacted on the GOP election results, triggering a $10 trillion loss of market cap … like the 1999 dot-com collapse, it’s post-millennium loss of $8 trillion market cap, plus a 30-month recession … moreover a lot like the 1929 crash and the long depression that followed.”

Everyone put a link to this MarketWatch article in your “stocks” Evernote folder, in your electronic calendar, where ever you can so that you’ll be alerted to it then, can quickly retrieve it (unless MarketWatch pulls the story by then) and can lobby to take away Farrell’s soapbox.

Back in 2013, it was clear that the market would be going to new heights, which it did.  In 2015, when we’re in the sixth year of a secular bull market, there’s no question there will be a correction soon.  But no one today can predict when it will begin nor how far it will carry the market down.  Anyone who claims to know, like Farrell, is taking you for a sucker.

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imageI was asked to read Paul Farrell’s most recent blurb on the Wall Street Journal’s blog site Marketwatch.com entitled “New Critical Warning as 2013 shocker looms” in which he enumerates 6 new critical warnings, which added to the 7 he says were issued last year but to which there doesn’t seem to be a convenient link of the site.  This “critical warning” comes from Gary Shilling (the others came from Bill Gross, Nouriel Robini, Reinhart and Rogoff and Farrell himself.

Farrell clearly spells out that their vision of economic and market doom is rooted in their dislike and distrust for Fed Chairman Bernanke and his policies.  Is it professional jealousy?  Does it come from an contest between Keynesian and Austrian monetarist inside schools of economic philosophy?  In Farrell’s own words:

“Timing is critical at a turning point. We warned of the coming crash well in advance in 2008. We picked the bottom in March 2009. We are in the fifth year of an aging bull. These six Critical Warnings tell of a hard turning point dead ahead. Wake up. It takes time to restructure a portfolio. If you think you can do nothing and just wait for another year, you are like most investors: You just “can’t handle the truth.” Or you “have no idea what’s about to happen.” Or you believe “this time really is different.”

But the truth of the matter is that all these perma-bears have continually been calling for the market’s reversal and demise since last year, a 15% missed opportunity had you taken their heed and fled the market.  Was the turning point in 2012, in January 2013 or some undefined point in the future.  Why do these guys want us to sell equities?  Where do they want us to put our money?  Are they gold-bugs in disguise?

I’ve been reading much over the past couple of years from those who view a market reversal at the level of the previous all time high high as indisputable.  The reasons they offer could be technical, like Prechter’s obtuse Fibonacci reckoning, or fundamental economic, like those of Farrell, et al.  To me, it all sounds like a through-back to beginning of the Age of Discovery in the 1500’s when most believed the world was flat and you’d fall off if you sailed to the end.

1500 WorldYou could sail the Mediterranean Sea or Indian Ocean but sailing beyond the sight of land meant sure disaster.  It’s like the course the market’s followed since 2000, the Secular Bear Market seas.

Map of Known Stock Market

So long as we don’t venture outside the bounds, we know the landmarks, the levels at which the market pivoted in the past and has a probability of pivoting again in the future.  If the market reversed direction for a third time, we can guess, by looking at the above “map of the known stock market” where islands of rest might be and where it might reverse direction again.

But if half the stocks break into their own all-time new high territory and cause the index, by definition, to also begin to venture into uncharted territory then where will the first island be?  Where might we hit and wreck on a market/economic shoal or reef?

Bottom line: are you someone who has the confidence to sail where no one has ever sailed before to discover new lands and new wealth?

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June 20th, 2012

Resuscitating The Near Dormant Dow Theory

An old name made the news this week with his dire prediction: Richard Russell.  You may never heard of Russell but he’s been around ever since the very first days that I became interested in stocks many years before most of you were born.  Russell began publishing a newsletter called the Dow Theory Letters in 1958.  He’s written Dow Theory Letters for well over 50 years, with six updates per week for much of that period.

However, his current opinion has recently surfaced in the general business press for some inexplicable reason.  The headline that’s making the buzz is “Don’t Believe This Rally & Prepare Yourself”  Do a search on this headline and you’ll see all the blogs that referenced it.  For those who haven’t seen it elsewhere, Russell’s points are:

“The best way to describe the primary trend is to compare it with the great tide of the ocean. Once the tide turns down (as now) I compare it to a broad irresistible force. It’s a force that can’t be timed or described in detail.

 

It’s an invisible force, but it exerts a pull that has an effect on almost all stocks. The weaker stocks are swept along rapidly by the primary trend, while the stronger stocks are pulled along more slowly.

 

The important consideration is that most portfolios of stocks will be under water by year’s end. You can be sure that the bear market will try to make you believe that you should be in this market. One way or another, the bear market will have you doubting that it’s really a bear market.

 

“How far will the bear market carry? No one knows. Already all of 2012’s gains have been wiped out. There’s a number down there to where the bear market is heading. I don’t know what that number is. Dow 8,000? Dow 6,000? Dow 4,000? Dow 2,500?”

 

“The number could be any one of these. What I hope is that we get to that number as quickly as possible. I just hope we get the pain of the bear market over as fast as possible. One mistake is to think we know how costly the bear market is fated to be — and how far the bear market will carry. The Primary trend is a law unto itself. It will continue until it dies of exhaustion.

 

In the meantime, the bear market goes on. I’m afraid it has a long way to go.

 

Russell’s claim of an imminent bear market of huge dimensions stems from what he sees as an apparent divergence between the two Dow Indexes.  I looked and the only divergence I could find that might point to a bear market on the order of Russell’s prediction is the fact that the 2012 peak in the Transportation Index wasn’t higher than the 2011 peak; for the Industrials the 2012 peak was higher:

The Dow Theory evolved in the 1930’s when the country had a very different economy.  Most people worked in manufacturing.  Most goods were transported on rails rather than by trucks on the country’s highway system.  The economy was essentially domestic as contrasted with today’s outsourced and imported global economy.  One of the critical elements of the Dow Theory is that the 20 stocks of the Dow Transportation Index should move in synch with the 30 stocks of the Dow Industrials.  If the Industrials move to a new high then so should the 20 Transportations.

My own Market Momentum Meter is currently flashing Bull/Green and the market is close to a perfect bullish alignment where the 50-dma is above the 100-dma which is above the 200-dma which, in turn, is above the 300-dma and all are trending higher; the Index itself is above them all.  If the market is able to cross above 1365 and stay at that level or higher for a week or two then a certified bull market is indicated.  [Coincidentally,  that should coincide with when the “sell in May” phase ended in each of the prior two years.]

So there’s only one reason I can imagine for Russell to drag out such a “newsworthy” prediction.  It can only be to garner free publicity to shack out some new subscribers who are predisposed themselves are uncertain and fearful.  From a contrarian perspective, that’s precisely the sort of environment out of which emerges a bull market.

March 28th, 2012

Just 10% to previous all-time high

Conversation on CNBC the other morning centered on why so many financial managers, hedge funds, institutional and individual investors are skeptical about the sustainability of the market’s strength.  The debate revolved around whether the skepticism results from the global situation, strength of the domestic economy, Federal budget deficit and its fix, the outcome of the upcoming Presidential election or any of a half dozen more reasons?

I wish, however, there had been a “none of the above” choice because I think the answer may actually lie in basic investor psychology.  The answer is as fundamental as the difference in perception, the mind’s eye, between a recovery move higher and a move higher into all-time new high territory.  When an individual stock or the market as a whole descends the far side of a valley in a crash or correction it leaves pivot point markers which serve as resistance levels on the near side as it ascends from the valley’s bottom [and for those doubters let me say there always is a bottom except for tulip bulbs and perhaps the Japanese stock market].  Those pivot point markers were the failed attempts to find and create the bottom.

After actually making a bottom and reversing, those earlier failed attempts often mark the approximate levels where fear takes hold that the recovery will fail again fueled by those who rationalize or explain why the recovery will fail and the market or stock will will turn lower again.  Remember all the talk back in 2009 about the S&P’s “double-top” that would lead to a final Wave 3 descent to below 600?  In August 2009, I wrote:

there are the Elliott Wavers led by Prechter who claim that a “Primary Wave 3″ down will soon get underway because “the DJIA has now retraced a Fibonacci 38.2% of the 2007-2009 plunge in stock prices, meeting a minimum threshold for the completion of the Primary Wave 2 rebound”. One Elliottician blogger also believes that

“the next wave down will likely entail the collapse of Western Civilization. Given the precipice of history at which the world stands, I’m hurrying to complete my thesis regarding the creative insanity of man. There’s a possibility of global nuclear war by mid-October according to my analysis.”

It was pure malarkey then and it is today.

But when the market or a stock ascends ever higher into all-time high high territory there are no benchmarks on the facing wall, no earlier pivot points where optimism slowed the fall which could now turn into skepticism and hesitation about the ascent.  Once the ceiling is penetrated, fears and reservations don’t stop the ascent but overconfidence, irrational exuberance and mania will.

Consider the S&P 500 in two alternative periods; the current secular bear market and the other the 1982-2000 bull market (click on images to enlarge):

But what does 10 or 15 years of stock market history have to do with investment decisions today?  What does it have to do with the explanations for investor skepticism given by those CNBC talking heads the other morning?  The relevance comes from the omission of one important fact not mentioned in the whole discussion:  the approach of one of the most significant pivot point benchmarks of the last 12 years …. the previous all time high, a mere 10% away from the market’s current level.  (To be technically correct, there is one other lessor precursor pivot point at around 1450 emanating from the other side of the Financial Crisis Crash valley that has to be crossed before the market can break into the clear, blue, cloudless skies of all-time new highs territory at around 1565.)

While the market is still 10% below its previous all-time high made in 2007, close to 40% of stocks are now trading higher than their highs of 2007 including such well-known leaders as QCOR, PCLN, GMCR, REGN, HSTM, SHOO and PRGO.

The secular bear market won’t die easily and it may yet survive forcing us to live through another major decline (that’s from where all that skepticism originates).  But then again, those talking heads haven’t yet had sufficient reason to think up the explanations and rationalizations for why the market will break through the resistance into blue skies.  But my guess is that they’ll have to start looking for them towards the end of this year.

February 16th, 2012

Parallel trendlines for positioning targets

There are those who follow Bob Prechter, one of the strong proponents of the Elliott Wave principles have their ways of identifying price level targets.  And then there’s the crowd who hide out at Slope of Hope, the place where perma-bears can always find a reason for an impending correction or “much welcomed” bear market crash through targets derived by their overly precise application of arcane Fibonacci mathematics.  But I’ve always found a rather simple approach to projecting out potential targets by applying a resistance trendline parallel to the corresponding supporting trendline and thereby creating a channel.

Take for example XHB, the homebuilders ETF.First, you should note how reversal and consolidation patterns easily morph from one form to another without a general market tailwind.  Until last summer’s meltdown due to the domestic budget and European sovereign debt crises, it looked as if XHB would break out the upside of a symmetrical triangle.  Since last summer’s 30% decline, it now appears that pattern has morphed into an ascending triangle and, with cooperation of a more constructive general market backdrop and expectations for finally an improved housing market, that upside breakout might now be at hand.

If break out does materialize, the next question is what might be a reasonable target for the move higher?  Consider a parallel line as on benchmark:

Parallel lines are simplistic and anything but elegant but they usually work.  They definite position a target for one’s expectations.  They won’t let your dreams run wildly out of control and add a time dimension to a price expectations.

Reality never really works so perfectly but, if the market and XHB dramatically diverges from this trajectory then we can make mid-course adjustments when and to the degree necessary.

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January 10th, 2012

Modern-Day Patent Medicine Salesmen

Bob Prechter and his Elliott Wave newsletters never fail to intrigue me.  Over the years, I’ve tried to understand the basic concepts behind Elliott Waves and Fibonacci wave counting but to no avail.  I just don’t get it.  Even more, I don’t get why there are so many people who fall for what to me sounds like one of the best marketing gimmicks and, dare I say, scams.  To me it’s not any better than snake oil salesmen out west in the 1880’s or circus barkers in the 1930’s.

I signed up for his free emails just to see whether he was selling anything new and find that there’s a veritable unlimited supply of gullible and desperate investors.  For example, a recent letter entitled “The Market is Forming Its ‘Biggest Head and Shoulders Top Ever’: Prechter” includes the following chart:

According to the Prechter email:

“This shows the Dow Industrial Average going back to 1980. It has formed the biggest head and shoulders top that I think has ever existed in any stock market…we’re now heading downward from this formation.”  Since 2000, the stock market has been in a topping process. Eleven years may seem like a long time for a market to “top,” but consider how long the 1980s / ’90s bull market was. It takes time for that market optimism to dissipate.

I’ll say it takes a long time!  Almost two years ago, in a post entitled “S&P Index at 3000 by 2020“, I wrote:

“I don’t know how many of you saw all the exposure Bob Prechter of Elliott Wave fame been recently getting (he even made the Sunday NY Times Business Section front page). Prechter, true to form as a perma-bear, reinstated his call for the next leg of this Crash to resume predicting it will be on a par with the 1929-32 Big One with the Dow-30, currently at 10198, “likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end.” But he’s been calling for a decline on that order of magnitude for what seems like years.”

Well, the Dow Jones closed today at 12462, or 22.2% higher than on July 13, 2010, when Prechter made the front page of the NY Times Business section.  Coincidentally, that NY Times piece appeared almost at the precise launch of the market’s last huge 27.9% run between August 31, 2010 and May 2, 2011.

Rather than joining Prechter’s bear camp then, I went the other direction with the view that we were (and still are) in a period very similar to the end of the last secular bear market in 1977-1982 … a view that’s more widely held and written about today than it was in 2010 when I seemed to be alone with that opinion.  My view then was and today still is:

“I’ve modeled a recovery from a similar low in the current Crash (March 2009) to where the S&P 500 Index might be in 2020 if it were to follow an identical path to the one it followed from 1975 when the Index last touched the lower boundary.  If the market were able to climb out of this secular bear market in a manner similar to the path out of the 1970’s one, then the S&P 500 Index could hit – are you sitting down – 3000 in 2020.”

and included the following chart:

Is Prechter correct in saying that the market is at the end of the topping process that began 10 years ago or is it the beginning of the march to 3000 by 2020?  If anything, Prechter [like Cramer] is often a very reliable contra-indicator.  The time he’s most bearish (if degrees to his perpetual bearishness is possible at all) is the time that the market on the very of a huge bullish move.

I you were smart, you wouldn’t have bought patent medicines or believed the acts in a carnival freakshow.  Let’s hope you don’t fall for this perma-bear sideshow and that Prechter’s new call for a market top turns about to be another contra-indication.

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