May 21st, 2012

Echoes of 2009, 2010 and 2011

Today’s post features excerpts from the Recap Report I sent to Members this past Sunday evening. After seeing today’s (Monday) recovery, I thought it would be worthwhile for all blog readers also to see it.

As part of each Weekly Report, members also see the current position of the Market Momentum Meter and what extrapolation of alternative market trends in terms of S&P 500 levels over alternative time horizons might produce in respective Meter signals.  This is important for evaluating true market risk and portfolio strategies for dealing it.

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This week’s Report is very difficult to write. There was so much going on last week and the market acted so horribly. Europe was still a huge question mark, the over-hyped Facebook IPO was characterized as a disappointment (to all but Zuckerberg and about 1000 other insiders). Worst of all, the market had its worst decline of the year with a drop of 4.30%; the tech heavy Nasdaq Composite Index did even worse with a 5.28% decline. Stocks in the Model Portfolio fared poorly declining 5.95% but fortunately the 40% cash position cushioned the portfolio’s net drop to more constrained 3.92%.

This is the third year in which the market has tanked entering the summer months (the “sell in May” syndrome working overtime). The one consolation is that in both of those prior instances there was a respite and early stirrings of a recovery soon after the Index penetrated below the 300-dma (in time not in level). This Friday’s intra-day low touched the 300-dma and closed just above it (click on image to enlarge):

I know this looks complex with many horizontal trendlines but one can think of it in terms of the market climbing up a step set of stairs. Each resistance level that the market has successfully crossed above winds up later being a landing it steps on in preparation for the assault on the next resistance level.

That’s what may be happening again (speaking technically only and putting aside any discussion of the continually evolving fundamental causes like Greece, unemployment rate, declining price of gold, oil and other commodities, a harder than expected landing in China and the ever nearer Presidential election).

If this will be the third time around, then the current correction is close to the end/bottom. There may be another 2-3% left on the downside to 1250-1260 or to about the level of the neckline of the previous head-and-shoulders top.

As they say, there are harmonies (or echoes) in the market but never exact replicas. If this is the extent of the decline that the market suffers after having all this bad news thrown at it then the optimist in me thinks that any positive news on any front could result in a bottoming and reversal of direction again (and we won’t know what positive news it was that caused the market to reverse course until way after the fact).

Rather than thinking about how bad things could get, a better “contrarian” approach might be to think of this correction as our last opportunity to climb aboard the train that we missed climbing on three times before (2009, 2010 and 2011 bottoms). Some called the March, 2009 low at 666 as a “generational bottom” and it truly was. We had an opportunity to make up for being to fearful to act then in 2010 and again in 2011. This may be the next and hopefully last opportunity. Let’s not obsess above the bottom of the value and look instead to the climb up the other side to the market’s previous all-time high peak of 1576 made in October, 2007.

January 11th, 2012

The Breadline for Financial Bloggers

Time have been tough for hedge fund managers, big and small.  John Paulson, for example, needs to generate a 104 percent return to recoup a 51 percent drop in one of his largest funds after wagers on a U.S. recovery went awry.  Until he hits that mark, Paulson will have to forgo his 20 percent performance fee, and will collect only his 1.5 percent management fee.  According to the San Francisco Chronicle,

“Hedge funds are on track for their second-worst year in more than two decades. They’ve dropped 7.6 percent from their peak asset value in April, according to Hedge Fund Research. At the end of the third quarter, about 30 percent of the 2,000 funds that make up the firm’s benchmark index were below their so-called high watermark, or previous peak value.”

That’s the herd but what’s happening to the individual investor?  According to the NY Times, in an article entitled “Small Investors Recalibrate After Market Gyrations”,

“small investors withdrew hundreds of billions of dollars from American stock funds, and they kept bolting as the market rebounded sharply for much of last year….The timing for those people was off, and now they are being buffeted by the steep drops on Wall Street or bailing altogether. Still others who have been holding on in recent years have had enough.”

Some investors fear that the markets have become dominated by high-frequency traders blitzing in and out of stocks, or by sophisticated hedge funds running mind-bending algorithmic trading programs that can outsmart the ordinary investor.  After years of underperformance or losses, some individual investors are questioning whether the long-term outlook that has been drilled into them by Wall Street financial advisers and professionals is really the best advice.

As reported on Yahoo! Finance, “The WSJ says all this volatility is detrimental to the markets … Plus, the swings scare off individual investors, leaving only the big players on the field.”

But the high volatility and lack of trend is a double-edged sword for us financial bloggers.  Not only do we struggling like other individual investors to make a reasonable return on our own investments but we also suffer because so many individual investors have thrown up their hands and resigned themselves to sitting on the sidelines or exiting the market all-together and are, therefore, in no mood to plunk down a membership fee.

But having abandoned the market, those individual investors aren’t aware that what we may be witnessing is the withering end of a secular bear market that’s held us hostage for the past 12 years.  By remaining uninterested, uninvolved and uninformed, those investors could run the risk of missing out on the quickest and most inclusive of all stock market moves … the exit from a long horizontal trading range.

Rather than turning away, investors should be now looking for the most reliable and objective source for market timing.  I believe with our proprietary Market Momentum Meter, the Stock Chartist blog is answer.

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December 21st, 2010

Racing Against The Hedge Funds

I was interested to read that hedge funds have found the past year as trying as I did. The headline on Marketwatch.com was In risk-on, risk-off year, hedge funds come up short” and the lead paragraph stated that

“Several of the largest hedge funds lagged the return on equities and bonds this year as big market swings combined with massive monetary stimulus to disrupt trading strategies.?”

An index of managers compiled by Chicago-based Hedge Fund Research Inc. rose 7.11% this year, through the end of November and early December as compared with a 7.88% gain in the S&P 500 Index. Those hedge funds that only invest in equities returned even less at 6.89%. The article went on to point out the returns up to the beginning of December for some of the larger and better-known all equity head funds:

  • Viking Global Equities was up less than 3%
  • Paulson & Co.’s Advantage fund climbed 1.8% this year
  • Paulson & Co.’s Advantage Plus fund, which uses a small amount of leverage, gained 3.68%.
  • Brevan Howard Fund, a giant global macro hedge fund, returned 1%.
  • Moore Global, another global macro fund, was up 2.5%
  • King Street Capital, a big credit-focused fund, advanced less than 5%.
  • Och-Ziff Capital Management’s Master fund,gained 7.63%.
  • Oculus fund was up just over 6%.
  • Tudor BVI Global advanced 5.4%.
  • York Investment was up 5.8%.

One of the factors contributing to the less than stellar performance of many hedge funds this year were this year’s violent market swings. However, this news came as a relief to me because my portfolio has outperformed the market and, apparently all these highly compensated hedge funds.

The following chart shows two indexes: the S&P 500 in red and the model portfolio my subscribers see in my Instant Alerts service:

Both indexes start at 1.0 with the launch of the service last March 17. As of last Friday (I issue a weekly Recap Report each Sunday), the portfolio was up 8.8% as compared with a 7.3% increase in the S&P 500. It was tough going until just after Labor Day when I reversed direction and started buying. You read about it here on September 2, when I wrote:

“I know I’m going to be criticized yet again for being too optimistic or pallyannaish but I’m looking forward to the possibility …. now perhaps 60/40% …. that the market also will hit and cross above the major, long-term descending trendline that stretches all the way back to October 2007.”

And two weeks later:

“…. the market timing indicator gave an “all-in”, 100% invested signal back on September 2 with the index crossing above the 50-dma ….. I’ve struggled against skeptics …. one of my harshest critics, continually asks me to explain to her why the market should advance in the face of continued bad economic news …… The only way I can respond is to say “stay tuned, the media will tell you why something happened after it happens … and then will call it news”…… the problem isn’t knowing which stocks to buy as much as knowing how much to invest and when. There are more great stocks out there to buy (like there were in March-May 2009) than money to buy them. What is in short supply is guts to do it.”

Finally, at the end of September, when asked why I buy stocks making new highs, I wrote:

“When the stock market is moving from a trough or consolidation into an uptrend and I have cash to invest, one of my primary means of employing that cash is to buy stocks making all-time new highs.”

That’s looking backwards; the question everyone wants answers to is what the future holds. I recently pointed to several areas where I’ve bought stock:

  1. Tech stocks will probably continue to be strong in the first half. See “Inverted Head-and-Shoulder Potential on NASDAQ Composite“; the NASDAQ composite is up 12.8% since that post.
  2. There’s “The Resurrection of Financials“. Have you seen what XLF has been doing over the past several days?
  3. Finally, how about “Steels: Your Second Chance“. The five steel stocks in that post are up an average of 4.84% over three trading days and none are down.

There will be new opportunities as the New Year rolls in so stay tuned and subscribe.

January 3rd, 2010

Scorecard and The Head-And-Shoulder That Might Be

On the first Sunday of the year, I usually sit down and tally the past year’s results. On that score, last year was outstanding at the same time as it was disappointing. On the one hand, the year produced the second results of the past seven (since I first began actively managing my portfolio full-time). On the other hand, I was unable to surpass the benchmark S&P 500 Index:

The major reason for the under performance was that I was overly cautious and refused to head the various all-clear signals during the year (e.g., the Index’s “Golden Cross”, the Index crossing above the 200-dma) and stubbornly (or, if I want to be generous, “cautiously”) holding on the too much cash for too long. My second mistake was not following my instincts about the overly extended gold and the miners and not taking some profits from their nice run.

While I can learn from these mistakes but I can’t complain. Over the past seven years, my portfolio has increased over 85% while the market, as measured by the S&P 500 Index is only oh so close to breaking even.

It would be so nice if this year produces another 14-15% appreciation bringing the cumulative total to a doubling over 8 years, slightly less than an average 10%/year compounded annual return (contrasted with the market’s measly 1-2% compounded annual return). I can say with some pride (since next to my wife, I am my harshest critic), I will have earned my salary as the asset manager of our portfolio.

As I wrote last year:

“The stock market is like a huge voting machine. Those who believe the market will be headed higher vote as buyers and those who believe the market is headed lower vote as sellers. And every minute of ever trading day we can tally the vote count to see which way the voting is going.

Rather than digesting and analyzing reams of statistics ourselves, we chartists look at the on-going tally to see which way the majority of investors are voting. Like the public opinion pollsters (at least those who are independent, impartial and honest), we attempt to measure trends and forecast expectations based on statistics and previous patterns.

…..I love ‘stock picking’ but that’s a waste of energy if the market is moving in the opposite direction”

We find ourselves since around Labor Day in a long tug of war between the bulls and the bears. Some of the pro’s say that the First Half will be strong with the market turning soft in the Second Half as the Fed is forced to start raising interest rates and the benefits of the stimulus begin to wear off. Other pro’s say the exact opposite; they say that a 10-20% correction will finally arrive in the First Half but the bull market will resume in the Second Half with the market closing above 1300 by year-end for the first time since mid-2008, or another 16-18% increase.

I’m in the latter camp. I see many similarities between the current situation and the Tech Bubble Crash Recovery in 2003-04. In 2004, the market continued the huge recovery move into March, its one-year anniversary before it went into a agonizing, slow, 7-month correction, 8%, wedge-shaped correction. The year ended by tacking on 10% in the last two months.

That correction began at 1163 on the S&P 500 Index; the high for 2009 was 1130 on December 28. Will the market zoom past 1163? I might hope it does but think it won’t.

It’s interesting that in May-June, everyone saw the market carving out a head-and-shoulder top (and I was focused on a long-term inverted head-and-shoulder bottom; see “Market Future is in Eyes of the Beholder“). In fact, the market surprised them and continued its mad dash higher. Today, several potential head-and-shoulder tops are emerging that we hear very little about:

The pattern is far from being formed and it’s prospect could easily be broken, quickly, soon. But it is something to be aware of and to watch.

December 2nd, 2009

2009 Rewind: Part 4

As you read this, my wife, our dog, and I are cruising down I-95. In the meanwhile, I thought you’d be interested in highlights of just a few of the 157 posting so far this year (there were 259 postings covering the difficult 2008 crash). This is the last part of this 4 part series.

August 7, 2009: Difference Between Correction/Consolidation and Reversal

The 9-month long, inverted head-and-shoulders (Nov, 2008-July, 2009) was a classic, clear-cut, near perfect example of a bottom reversal pattern that you can’t find many clearer than. Once having been completed, the odds of it now failing were slim to none. By early August, the market had was flirting with 1000 on the S&P 500 Index, a level that happened to be the bottom end of the nearly year-long, consolidation in 2004 in the Tech Bubble recovery bull market. Some were beginning to look for the consolidation in the current recovery (and are still continuing to search as the Index is another 10% higher and bumping against 1100. At the time I wrote:

“I’ve mentioned here before the rule-of-thumb for measuring targets out of head-and-shoulder patterns: at a minimum, the neckline represents the approximate mid-point of the total move. If the distance from tip of the inverted head to the neckline represented a 43% move (952 neckline/666 tip), then the minimum target could be around 1350-1375. It won’t be a straight line since there will probably be major, lengthy consolidations along the way…. The recovery from the Tech Bubble Crash saw a major correction that lasted most of 2004 between 1050-1150; my interim target for the first one (after this traders’ remorse correction) is the 1150-1200 area.”

That’s almost where we find ourselves today, level I believe is a likely and excellent place for a consolidation.

November 9, 2009: One View of Market’s Future

Almost a month ago, when the Index was at almost the same level as Friday’s close, I began putting a plan into place for what I see as a short but rather steep correction in Q1, 2010. It was before the Dubai mini-crises, the Greece mini-crises and what be the beginning of a temporary end to the erosion of the $US.
The only thing that seems to be working right now is gold, silver, GOOG, AMZN, PCLN and NFLX. Even other large cap tech stocks like INTC, CSCO, MSFT are having difficulty marching ahead. The market has gotten very narrow.

“As the market approaches the target (1125-1150), it’s time to start speculating about what might come after. To repeat, this is mere speculation and guesswork as no one can predict the future but we have to some view so as to develop an action plan….

The correction or consolidation could be short lived as the true top of this bull market could be nearer 1350. With the neckline at 950 being half-way between the bottom at 660 and the top, on a percentage basis, a potential 17% correction demands an action plan. “

There’s a saying that’s especially true in stock charting: “If you don’t know where you came from, you won’t know where you’re going.” (o.k., I confess, I made it up.) This short recap of the highlights of this ride to 1100 tells us from where we’ve come. Only the stock market, over the next couple of months, will reveal whether we actually could tell today to where we were going.

December 1st, 2009

2009 Rewind: Part 3

As you read this, my wife, our dog, and I are cruising down I-95. In the meanwhile, I thought you’d be interested in highlights of just a few of the 157 posting so far this year (there were 259 postings covering the difficult 2008 crash). This is Part 3 of a 4 part series.

June 30, 2009: Half-Full or Half-Empty Views: A Head and Shoulder Market Top?

One of the most popular and referenced (linked) articles was what, back then, was a bold call contradicting the prevailing belief that the market had formed a head-and-shoulder top and would soon break through the neckline. Finally, the long-awaited correction would arrive giving everyone who missed getting in since March another opportunity to then jump in the bull market (that never quite came, by the way). My view, granted from a longer-term perspective, was that a more correct interpretation of market sentiment was that an inverted head-and-shoulder would lead to a break out and an unabated continuation of the March bull market. As I wrote then:

“I’m a longer-term trend trader. Rather than seeing something negative in the above chart, I see something quite the opposite. If it comes about, I see the move down as the right shoulder of another head-and-shoulder pattern, one that’s inverse (upside down)….. Of course, I’m partial to my interpretation because I have more opportunities to be correct. There’s no clear-cut requirement for a right shoulder. The preference, of course, is to have it match in time and scale the left shoulder. But (and this is what it now looks to me like) it can turn out to be shorter and shallower due to the strength of the market driven by the sidelines money waiting to be invested.”

As it turns out, I was correct and, as we are all know, the market broke above the neckline at 950 and proceeded to roll ahead to 1113, a level that it’s hit 6 out of the last 9 trading days but so far has been unable to forge above.

July 20, 2009:The Campaign for Your Economic Mind

Throughout the summer, from June to mid-July, the contest between bulls and bears continued. The bears thought economic woes were far from over and whatever relief seen in the market up to that point was only a temporary reprieve before another round of declines of Crash proportions. The bulls, on the other hand, saw the economy improving (at least, it wasn’t still getting worse), the market had hit bottom in March and was anticipating an economic recovery.

I wasn’t going to attempt to predict the economy’s future but, what I did see was that the market was riding replicating a round-trip that was similar to the Tech Bubble Crash of 2000-03.

“The floors we stopped then could, in all likelihood, also be stops we make on the much slower ride back up this time….In 2003, the market had a “traders’ remorse” pullback to test the support of the double-bottom neckline at 1010; there could be a similar test after crossing above the neckline of the inverted head+shoulders bottom this fall/winter or early next year…..the beginning of that pullback lines up nicely with the upcoming effort to cross above the 300-day moving average…..After having successfully tested the current neckline and breaking above the 300-day moving average, whenever that happens (probably in 2010), there should be a clear run to the 1060-1160 range for a consolidation, the stops made on the way down in 2001-02 and the way up in 2004. We were on an express elevator as the Lehman and other financial calamities caused the market to skip the stop on the way down last year. There will be a consolidation pause, whenever it comes, and there’s a good chance it will be at around that level.”

November 30th, 2009

2009 Rewind: Part 2

As you read this, my wife, our dog, and I are cruising down I-95. In the meanwhile, I thought you’d be interested in highlights of just a few of the 157 posting so far this year (there were 259 postings covering the difficult 2008 crash). This is Part 2 of a 4 part series.

March 19, 2009: The Debate is Settled: The Market Has Hit Bottom

“The raging debate is whether the market has hit bottom. My unconditional answer is ‘yes’….I’m not clairvoyant but the market is. Market prices have taken all these risks into consideration today or, more correctly, the millions of investors, large and small, have factored these and many more issues I haven’t even thought of into consideration and determined that stock prices will more likely move up than down in the near term. When prices move up too much, investors will stop buying and some might even start selling thereby ending the advance.”

My conviction that the market had reached a bottom was based less on a top-down than on a bottom-up approach. Since the previous November’s “Lehman” low, I started scanning individual charts to see whether some had halted their declineswere gaining support due to their low prices and . Many successfully resisted the market’s second decline in March and failed to make new lows. It appeared that some stocks were attempting to form reversal chart patterns.

I posted a spreadsheet in this post of 60 stocks I felt had formed and were breaking out of basing chart patterns (the list was expanded to over 200 in subsequently posts). Most did follow through with their break out and proceeded to lead the recovery bull market move. Some didn’t, however, later retreating back to the March 19 levels.

April 17, 2009: The Next Industrial Revolution

“We often use metaphors when describing challenging situations, so what we’re facing as the world economy resumes its forward momentum might be considered a “World-wide Industrial Revolution”. The first was in Great Britain as factory production began displacing independent trades people. The second was in the US and Europe when technological and economic progress gained momentum with the development of steam-powered ships, railways, and later in the 19th century with the internal combustion engine and electrical power generation. The Internet Age might be considered a sort of Industrial Revolution. The next could be the industrialization and “consumerization” of the rest of the world.”

Since the article, the S&P 500 Index has increased 28.10%, a respectable Bull Market but our standards. But the U.S. market continued to lag the rest of the world, except for Japan (10.76%):

I concluded the article by writing “This coming Industrial Revolution will be about the rest of the world gaining closing the gap….We’re going to hear a lot more again about resource shortages, escalating commodity prices and booming international stock markets. If you don’t feel comfortable buying foreign ADR’s, you can participate through the foreign market ETFs.”

I followed this up with several more articles about foreign markets, including one entitled “U.S. Stocks: The World’s Laggards” in which I wrote “In the meanwhile, while your waiting for the US market to signal a green light, take advantage of the new, wonderful tools created by those mad financial inventors. Put some money into foreign ETFs (also look at foreign currency ETFs -FXA, FXF, FXC, FXB and UDN – they’ve formed reversal patterns too as the $US has started to decline in value against other currencies.)”.

Even though I believe foreign markets, especially the emerging markets of Asia will outperform the US and that is some place I want to have a chunk of my portfolio in, I also believe these markets have run up too far, too fast they may be in the throes of a brief correction.