Category Archives: Stock Markets

February 17th, 2012

The Gestation and Rebirth of “Buy and Hold”

As January ended, I reiterated a hypothesis that the market was following the script written at the end of the 1970′s secular bear market by writing in That Old 1978-82 Analog Again,

“On the one hand, we might actually be escaping the Bear Market sooner than I had originally anticipated but, on the other hand, the analog may still be in play and we’re looking at a possible reversal for the remainder of 2012 in order to get back closer to the analog.  I guess if I had to choose between swallowing my pride at having missed a “forecast” and accepting the upside break out or meeting the forecast but delaying the opportunity of seeing a higher market again ….. I’ll live with having missed a forecast.”

Compare the two secular bear markets, note the similarity and draw your own conclusions (click on image to enlarge):

  • 1969-1980
  • 1999-2012

Combining the two charts in sequence produces the now familiar view:

For the past 5-10 years we’ve been listening to the mantra “Buy and Hold is Dead”.  Just do a search on the term and you see books, videos, TV clips, articles and blog posts …. I’ve probably even wrote it here several times over the past 6 years of this blog’s existence.  Not to be just a contrarian but because I believe it might be true, I now offer a heresy.  If we are witnessing the death of the current secular bear market might we not also be seeing the rebirth of buy and hold?

If the market over the next several quarter into early 2013 is laying the groundwork for a new bull market might it not be the right time to load up on stocks with great growth potential that you’ll want to hold for several years through several corrections?  It begins not with the search for specific names but with a reorientation of mindset to accept the possibility that the market can and will exit the secular bear market by crossing above the previous highs and finally move into uncharted waters.

Let me know if I’m being a cock-eyed optimist or that it might actually turn out to be a plausible scenario.

Technorati Tags: ,

February 14th, 2012

Is the Market Overvalued and Overbought?

I was struck by a post on Slope of Hope entitled “An Ongoing Balloon Ride” the major premise of which was that the the market has risen too far and diverged too far from its 400-dma such that there’s no questions “if this debt-filled balloon will disintegrate, but when“.  The writer’s premise is that the several times in the past when the Index has diverged as far as it has from its 400-dma have all been followed by a drop or correction.

I have my own database and decided to do my own research and gather my own facts to see whether I could replicate those results and come to the same conclusions.  My database goes back to 1963 and the moving average I rely on is the 300- rather than the 400-dma (but what difference does a hundred days make between friends).  The Slope writer visually picked the areas when the index diverged significantly from the moving average and eyeballed the subsequent change.  What I discovered was:

The S&P 500 Index is currently 6.38% above the 300-dma.  In the 12,089 trading days between March 12, 1963 and March 11, 2011, a spread between the index and the 300-dma of 5.00-7.99% occurred on one out of every 6 days, or 16.89% of the time.  One could almost say that this spread is “typical”, not large or overbought or stratospheric.  Actually,  it’s fairly typical.

One can look at both tails of the distribution as indications of how extreme the spread defining overbought or oversold situations, times when one needs to sell or has a true opportunity to buy.  In 2008 and 2009, at the depths of the Financial Crisis Crash, the market was over 35% below the 300-dma …. we should have all bought then but few had the nerve.  In August, 1987, the market was 24% above the 300-dma; a few months later, the market suffered it’s largest single daily decline in the October Crash …. we should have sold.

The market was more than 20% above the 300-dma also in 1983 as the market rocketed in celebration of its exit from the secular bear market of the 1970′s.  Rather than crashing, the market went into a horizontal consolidation lasting 15 months (just like the past 15 months?  I’ll leave that determination for you to make.)

So is the market now overbought?  Not if you use the 300-dma as a benchmark.  Did the Slope of Hope contributor select a seldom used 400-dma benchmark to prove his point?  It’s possible.  Where would the market have to be for it be overextended or overbought by these measures?  Somewhere around 1500-1550 …. interestingly, exactly the level of the market’s all-time high as measured by the S&P 500.

Technorati Tags: ,

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.

Technorati Tags: , , ,

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.

Technorati Tags: ,

February 7th, 2012

How Reliable Is Insider Buying as An Indicator

I don’t know whether insider buying should be considered a part of the fundamental or technical arsenal but as far as I’m concerned, it surely isn’t a very reliable indicator to use when deciding whether to buy a stock or not in a market that appears to be on the verge of breaking higher in a major way.  The indicator I’m referring to is “insider buying”.  SeekingAlpha just ran a piece entitled “4 Stocks With Heavy Insider Buying” and the stocks mentioned were: IEP (Icahn Enterprises), RDEA (Ardea Biosciences), HES (Hess Corp) and WEN (Wendy’s Corp).  As Cramer would say, “Yes, you’re diversified!” …. but is it anything else?

According to the lead in the SeekingAlpha story,

“There can be many reasons why insiders might sell their own company’s stock: a big personal purchase like a house; cash to fund a charity; and many other reasons.  Whichever the case is, insiders usually buy shares because they think the stock is a bargain and has upside potential. When mutual funds or hedge fund managers (and even everyday investors) see a lot of insider activity, it most definitely triggers a reason to take a second look at the company.”

My “stock chartist’s” view of each of the stock’s charts is the none contain sufficient evidence in the form of trend or pattern to make a compelling argument for buying any of them today. In other words, they may be great buys in the future but there are many other stocks available with better charts that are worth taking a risk on today.

  • IEP: “the most intriguing news is the fact that the chairman of the board reported to have bought 411,755 shares at $36.79 amounting to a total of $15,149,825. I believe this warrants a second look.”  That may be true based on “insider buying” but it’s going to be a while before momentum builds sufficiently to cause the stock to break out of its 3 1/2 year horizontal symmetrical triangle.  It would take a move above 41.50 and preferable 45 for a buy signal:
  • RDEA: “The chart shows a possible trend reversal for this stock, and perhaps best of all, a director just bought 876,828 shares at $17 amounting to a total of $14,906,076, and another director bought 426,470 at $17 amounting to $7,249,990.“  That’s a nice commitment but wouldn’t you be upset if directors lacked confidence in the firm on whose board they served and instead were dumping the shares?  When you look at the chart, you see a stock that ramped up nicely after its IPO but then faltered during the financial crisis crash.  It’s to early to tell whether the current pattern evolve into a buyable double-bottom?
  • HES: “the most intriguing is the fact that the Chairman of the Board and CEO just bought 91,250 shares at $54.79 amounting to roughly $5M.”  I concur!  I see little intriguing in the stock chart to warrant a purchase today.
  • WEN: “Recently there have been a total of nine directors buying up shares in the $4.75 – $4.87 range. Each director bought a total of 875,000 shares, a total of 7,875,000 shares amounting to roughly $37M.”  Restaurant stocks have been hot lately but WEN hasn’t seemed to be able to participate.  Perhaps it’s lack of participation and it’s absolutely boring chart (although filled with potential) pattern, low price and potential high volatility makes for an interesting speculative buy.

Bottom line: I’ll ignore insider buying and stick with good charts. Of the four, I’d put my money on WEN joining the rest of the Industry Group leaders.

Technorati Tags: ,

February 3rd, 2012

Launching The Next Tech Bull Market

The big news today is that the Tech sector, as represented by the Nasdaq Composite Index, crossed into territory it hasn’t seen for more than 11 years (chart below is as of noon; actual close was 2905.66).  What this means is that the average Tech stock has surpassed the previous high set before the market’s collapse in the Financial Crisis Crash of 2007-09; new highs are breaking out in many tech stocks.

With the market measured in terms of my preferred benchmark, the S&P 500 Index) having risen by more than 22% since the October low, it’s probably a great time to ask the following two questions:

  1. What does “market timing” mean (or more correctly, what do I mean when I use the term “market timing?”) and
  2. With the market having gone up so far, it isn’t the time to jump in but rather the time to take profits and exit?

I’m not sure there are any “correct” answers to these questions …. and don’t let anyone who gives you an answer tell you that it is the correct one ….. there are only opinions.  So what I’m about to offer is my opinion and the discipline I intend to follow as hopefully the market enters into its next bullish phase.

To me, “market timing” means catching the beginning of a big wave and staying on until the end.  The most fun (read “fastest, easiest gains”) is in the earliest part of the ride; the hardest, roughest part is towards the end.  Earnings are multiples higher than they were in 2000 so, with the average tech stock now reaching heights it hasn’t seen in over a decade, I’d say this is the beginning of that ride.

That’s not to say that this ride won’t hit some bumps along the way.  There probably will be a retracement back to that resistance trendline at the 2007 high sometime over the next year in the form of a “buyers’ remorse correction” as many will second guess the advance in the light of some bad news (we can’t predict what that bad news might be but the “Talking Heads” in the business news media will create a story and claim that it’s the cause).  But that, too, will pass and the market of tech stocks will continue advancing.

Within the realm of possibility is seeing the Nasdaq Composite nearly double over the next 3-4 years and test its all-time high of 5132.32 made in March 2000.  It will take determination and iron nerves but it could also be extremely rewarding if you pick and stick with the right tech stocks and, if you make a mistake, quickly cut your losses.

Technorati Tags: ,

February 1st, 2012

KISS in Market Timing Too

KISS is an acronym for the design principle articulated by Kelly Johnson, Keep it simple, Stupid!  Variations include “keep it short and simple”, “keep it simple sir”, “keep it simple or be stupid”, “keep it simple and straightforward” or “keep it simple and sincere.”  The KISS principle states that most systems work best if they are kept simple rather than made complex, therefore simplicity should be a key goal in design and unnecessary complexity should be avoided.

Other forms of this maxim are “everything should be made as simple as possible, but no simpler” (Albert Einstein), and “”Simplicity is the ultimate sophistication” (Leonardo da Vinci).  The principle is true whether applied to the design of an airplane, conceiving the theory of relativity or developing a market timing tool.

The following statement was made in a post today entitled “Golden Crosses Can Lead To Golden Losses“:

“While both CCM [that's Ciovacco Capital Management] market models have jumped back into bull market territory, the Bull Market Sustainability Index (BMSI) is approaching levels that are typically associated with market corrections.”

Stick a statement like that in front of me and I had to find out more about the BMSI to see how it compares with my MMM (Market Momentum Meter) which members know that it is serves as the barometer of my market timing approach and is previewed here.

About the only similarity between my MMM and the BMSI is that both are depicted on a scale that runs from Red to Green.  While my is a simple 5 traffic light approach, the BMSI looks like this:

But the similarity ends there.  Where the MMM uses 4 moving averages and the underlying S&P 500 Index, the BMSI is constructed with 30 different indexes as follows:

Complexity doesn’t mean precision and precision doesn’t mean accuracy.  It sort of reminds me of Cramer inferring in his “are you diversified?” segment that investors are safe and can generate high returns over the long run by merely diversifying their portfolio.  Aggregating a large and diverse number of indicators doesn’t necessarily give a better market timing signal than do a combination of four moving averages.

I’ve back-tested the MMM back to 1963 and am convinced that it performs well.  It got me out of the market in 2007, signaled reentry back into the market in 2009 and kept me safe through the fears brought on by last summer and winter’s worst European sovereign debt and US debt downgrades and budget debates.  It’s just issued a new signal indicating ….. sorry, that’s for members only.

Technorati Tags: ,

January 30th, 2012

That Old 1978-82 Analog Again

A post on Ritholtz’s Big Picture blog reflected a conclusion I recently reluctantly needed to begin facing.  Regular readers know that for over two years I have been tracking the path of the S&P 500 Index in what I call “Reversion to the Mean” (last mentioned here on November 4).  Briefly, the hypothesis was that the S&P has been growing since 1938 at an average annual rate of 7.5% and that it’s volatility around that growth rate was contained in a band of 40% above and below the mean growth rate.  The chart depicting that trend, updated with today’s S&P close of 1313.01.

The market’s horizontal path since the end of the Tech Bubble in 2000 appeared to me to have an uncanny resemblance to the secular bear market of the 1970′s. Consequently, I used the end of that prior secular bear market as an analog for the malaise that we’ve been suffering through for the past 11, going on 12 years and wondered where the market might wind up if it exited this time exactly like it did in 1978-82? The result was the following chart:
In November’s blog I wrote:

“…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.”

So here we are, two months later and the market is only around 4% away from 1365.  With corporate earnings reports better than anticipated, we’re now beginning to read stories about expectations for expanding multiples and higher markets.  In a Bloomberg article today:

“Multiples for the benchmark gauge rose as high as 13.82 this year. Should earnings match analyst forecasts and climb to $104.78 a share, the index would have to reach 1,718.39 to trade at the average ratio of 16.4, according to data compiled by Bloomberg. That’s more than 30 percent above its last close. “

 

The following chart in Big Picture was the coup de grâce:

This is exactly the analog I’d been following for close to two years.  On the one hand, we might actually be escaping the Bear Market sooner than I had originally anticipated but, on the other hand, the analog may still be in play and we’re looking at a possible reversal for the remainder of 2012 in order to get back closer to the analog.

I guess if I had to choose between swallowing my pride at having missed a “forecast” and accepting the upside break out or meeting the forecast but delaying the opportunity of seeing a higher market again ….. I’ll live with having missed a forecast.

Technorati Tags: , ,

January 25th, 2012

“The Great Convergence”

In last week’s Recap Report recently sent to subscribers, I wrote and included the following chart:

“….. at the risk of being labelled melodramatic …. I see “The Great Convergence” coming to a head and finally getting resolved with the 18-month struggle between bulls and bears with (I hope it’s not just wishful thinking but an actuality) the bulls finally gaining the upper hand and finally being able to break into new higher ground.”

After today’s close and after closing higher for 20 of the last 23 trading days, the market is now up 10.01% since December 19.  Even more important is to note that today’s close was at 1326.06, almost exactly the level many chartists have touted as the breakout point that confirms an exit from this summer’s bear market and the continuation of last year’s bull market run off the lows.

It should also be noted that it’s almost exactly where the descending trendline connecting the 2007 and 2011 peaks is today.  However, rather than thinking in terms of points (e.g., 1325 or 1326) we need to think of a zone.  Every single trader doesn’t simultaneously decide to buy or sell which in turn causes a reversal at a single point.  Furthermore, the Index is composed of 500 different stocks in every economic sector and each of these stocks will have their own underlying market dynamics.  Market psychology does change when the market hits various levels but a change of psychology happens over time.

What the above chart indicates is a change in market psychology that’s been on-going since the bottom of the Financial Crisis Crash (see “Revisiting Housing and Banking With a New Ending” of a few days ago).  The ascending trendline since the bottom (higher lows) and the descending trendline from the pre-crash peak (lower highs) results in this “Great Convergence”.  The best momentum indicator (in my book) of moving averages across multiple time horizons are turning constructive adding to the conviction that a clear-cut signal to put, as they say in Wall Street, “risk back on”.

I believe there needs to be a 4-6% consolidation of this 10%, 23-day run and we’re going to look at it as a buying opportunity.  But if the market continues to zoom ahead another 2-3% without that correction, then it’s “damn the torpedoes, full speed ahead.”

Technorati Tags: , ,

January 13th, 2012

Cement, Concrete and Aggregate Group: EXP

As subscribers know, my searches for suitable stocks to buy follow a strict process: evaluate the market through the guidance provided by the proprietary Market Momentum Meter, drill down to find the Industry Groups and, finally, zero in on those stocks with the best chart patterns.

I can’t tell you the Meter’s specific reading because that’s available exclusively to members but I can share with you that there appears to a glimmer of hope, a prospect of a slightly more positive tone after nearly a year of frustrating horizontal action.  So it’s appropriate to begin looking for some of the most promising Industry Groups.

I use IBD’s Industry Groups rankings three ways:

  1. The top ranked Industry Groups are those with the stocks currently showing the best relative strength performance.
  2. The Industry Groups that have advanced the most over the past four months (granted, an arbitrary time horizon) to offer a preview of which might soon become the top performers in the near future.
  3. The Industry Groups that have advanced the most above the 20-week moving average of their ranks.

The Industry Group ranked highest by IBD last Friday were 9 stocks comprising the Cement, Concrete and Aggregate Industry Group.  Another fact that makes this group so enticing is that, as the graph below depicts, Friday’s highest rank put it 112 places higher than its 20 week moving average …. the greatest span of any of the 197 Groups.  Plus, its rise in rank over the past 4 months was greater than any other Group.  In short, this Industry Group performed better than any other when measured by these three conditions:

One typical stock in the Group is EXP (Eagle Materials), a manufacturer and distributor of gypsum wallboard and cement in northern Nevada, California, the greater Chicago area, the Rocky Mountain region and Texas:

If I were a fundamental investor, I could probably come up with any number of stories, rationales and explanations for why stocks in the group should be bought.  Could it be because infrastructure spending will finally be evidenced?  Is it because the construction drought might finally be ending?  But I’m actually a Stock Chartist who looks at the pattern of price movements and sees that for the past four years, this stock as well as several others in the Group, has been stuck for the past four years. Whether one sees a double bottom or a horizontal trading range, it’s clear that the stock is now bumping up against a resistance trendline (or you may call it a “neckline”).

After such an outstanding climb, the odds are in favor of some profit taking now.  But this is a stock and industry group that probably should be watched and bought on the dips (unless the market surprise us by losing the little momentum it’s trying to build by turning and collapsing …. then all bets are off).

Technorati Tags: , ,