Category Archives: Stock Markets

May 16th, 2012

The Difficult Choice

The times aren’t easy for market timers.  The market has declined around 6% since the April 2 peak of 1419.04 and the anxiety level is rising.  The question of every market  timers lips are: “Should we sell into this decline and, if so, how much?  Is this a collapse similar to the stealth bear market brought on by last year’s Federal budget deficit crisis, the S&P downgrade of US debt and the deepening lose of confidence in the Euro currency?  Or, as many have discussed before, are we merely going through a typical “sell in May” correction which, if we stay put, we’ll recover from relatively unscathed in the fall?

Contrarians might take the opposing side and ask “Should we take advantage of the opportunity presented by lower prices and begin to pick up some bargains while we have the chance?”  As the saying goes, that’s what makes a market.  Two diametrically opposing views leading to two opposite courses of action, both coming from the same set of facts.

Unfortunately, the chart of the S&P 500 doesn’t provide much insight as to the best course of action.  I first began surveying what I called a “congestion zone” on April 12 in “Identifying the Boundaries of Stock Chart Congestion Areas” and followed that up on April 23 with “The Lower Boundary is Becoming Clearer“.  Here we are, just over a month later, and without any clearer idea of what the boundaries of the zone are or whether we may have actually fallen through the bottom of the zone and began a downward trend.  The striking thing is the apparent similarity between March-April hump this year and the April-May hump last year.  Let’s hope the slide when the Index crossed below the 200-dma last year isn’t repeated this year.

The market index has fallen through the lower boundary of what could have been a flag pattern.  It fell below what I was hoping would be the neckline of a small head-and-shoulders pattern.  It fell below the 100-dma and is quickly approaching the 200-dma (which, coincidentally lies just above the 300-dma).  If last year is any example, then the selling could again be quick and deep.  But the recovery 4-6 months later was just as sudden and it may be so again this year.

The Market Momentum Meter was tested against nearly 50 years worth of stock market history and in the process identified the conditions (as reflected in the relative positions of the moving averages and the Index itself) under which exiting the market was the best strategy.  At other times, staying in the market, regardless short-term fluctuations, was the best long-term strategy.

So far, the Meter is still signalling a full commitment.  However, extrapolating further straight-line declines of an average -0.168% per day (the average daily rate of market declined between March 26 and yesterday’s close), the signal would turn a Cautious/Yellow when the Index hit approximately 1290 and a Bear/Red at 1240.  Coincidentally, those are the approximate levels of the 200-dma and of a long-term trend line that has been the locus of multiple pivot points since the Tech Bubble began in 2000, respectively.

Last year, however, the market’s decline was so steep and rapid that the Meter’s exit signal was too late.  Furthermore, the recover was rather quick so that it failed to signal a timely return.  Unfortunately, the difficult choice being faced is between violating our discipline and sticking to the discipline and risk further losses.

April 23rd, 2012

The Lower Boundary is Becoming Clearer

Less than two weeks ago I wrote ““Identifying the Boundaries of Stock Chart Congestion Areas” in which I talked about three potential bottom boundaries of the congestion area that was developing and might eventually turn into a recognizable chart pattern.  With time, the emerging chart pattern is becoming clearer and, I must add, a bit more worrisome.

 

The discussion of “boundaries” is actually at the core difference between fundamental and technical analysis.  In fundamental analysis, analysts look at the slowing Chinese manufacturing index, Spanish debt refunding, elections in France and the upcoming U.S. elections, this quarter’s corporate earnings reports and the guidance for the year, upcoming Fed meetings, jobs reports, etc., etc.  Those analysts would then attempt to distill and prioritize the voluminous and disparate data facts into a consistent picture.  Finally, they will translate that picture into not what it means today, where it all might be headed in the future and what the impact might be on the stock market and individual stocks.

Needless to say, there are about as many divergent opinions about each of these data points as there are analysts willing to speak about them.  Some of those opinions are meaningful and reliable while most are guess that are about as useful as yours or mine.

Technical analysts, on the other hand, focus more on the actual decisions continuously being made by millions of investors, whether rightly or wrongly, rather than the reasons for their having made them.  They look at the continually changing balance (or imbalance) between supply (sellers) and demand (buyers) as reflected in transaction prices and volumes.  The primary focus begins with whether that balance is shifting on a continuous basis in one direction or another because when that imbalance starts it tends to be self-perpetuating, reinforcing and continues for some time (i.e., momentum).

The market, after having risen nearly 30% since October, is currently almost perfectly balanced between buyers’ demand and sellers’ supply.  Based on investors’ various interpretations of those fundamental facts, nearly an equal number see the facts portending a bearish future as those who see the facts leaning in a more bullish direction.  In other words, about as many see the market glass as half-full as see it half-empty.

Our search for boundaries is an attempt to learn when that equilibrium balance starts tilting in one direction or another.  Sometimes the balance continues for a few weeks and sometimes it takes months.  In the last post, I inserted three possible bottom boundaries.  As a result of today’s severe open, one of those supporting trendlines was penetrated; if there isn’t a quick strong bounce before the close and into tomorrow, then more downside can be expected.  If the demand is insufficient to absorb the supply of those investors who see a pessimistic outlook then the market will break below both of the remaining support levels and will continue lower until a new equilibrium balance forms at lower levels.

April 12th, 2012

Identifying the Boundaries of Stock Chart Congestion Areas

I was traveling this week so, fortunately, I wasn’t able to react to the ups and downs of the market this week.  If I had, I would have been closing some really good positions on Monday and Tuesday and then kicking myself as I scrambled to put them back on Wednesday and Thursday.  The lesson to be learned that was reinforced yet again is to turn off the CNBC, tune out the noise of all those explanations (read “rationalizations”) for why the market had done what it had done and to focus intently on the longer term for true trend reversals.

For the past several weeks I’ve been writing to members in my Weekly Recap Report that

“This narrowing, trading range can’t continue indefinitely and, I believe, will in all probability be resolved with the market falling below the bottom trendline as contrasted with a highly unlikely blow-out cross above the upper boundary.  I’m guessing the cross (the “collision”) will take place as the market approaches the horizontal resistance trendline extrapolated to occur sometime towards the end of April.  Coincidentally, that also coincides with everyone launching into their seasonal ‘Sell in May and go away’ discussions.  Taking that course of action would have been the right move to take in 2010 and 2011 and could again be true this year.”

But even that wasn’t sufficient to call this week’s action as a reversal.  There are millions of investors around the world making a huge number of trading decisions every day.  It takes more than a few hours, days and even weeks of trading to have this ship, the market, list to the other side as the majority of them run from one side (the bull side) to the other (the bear side).

One of the most difficult challenges in charting is distilling from the daily action the true boundaries of emerging chart pattern that are emerging from the congestion of what will, with the clarity of perfect hindsight will be either an obvious reversal or consolidation pattern.  Boundaries require pivot points, the short-term reversals made be either the market or individual stocks.  I’ve inserted three possible bottom boundaries based on the market’s recent behavior:

The important take-aways from this exercise are:

  1. Don’t get wedded to one point of view or another too early as to the market’s future course (and that’s what we’re most interested in since it determines 50% of each stock’s performance).  Congestions, those times when sellers and buyers, bulls and bears, supply and demand are fairly much in balance struggling to take control of the future trend.
  2. Regardless of how astute or knowledgeable you may think you are, it’s nearly impossible to predict the outcome and nothing you do can change what the ultimate outcome will be.  The best course is to wait for the trend.
  3. Don’t get wedded to what you think will be the pattern likely to emerge.  Supply and demand is dynamic and constantly in flux.  It’s difficult making money during these congestion periods but profits are relatively easy to come by when either a bullish or bearish trend emerges.

It’s only after several pivot points are made over an extended period of time (weeks or months) that solidify the trendlines will you be able to determine whether the congestion will in all likelihood be a consolidation, a top reversal or a bottom reversal ….. and then the market will confound you further by either doing the opposite or continuing adding further clarity to the congestion area.

March 21st, 2012

1912 = 2012; so many things change yet stay the same

These posts aren’t usually on subjects unrelated to stocks and the market but I just couldn’t resist this one.  I’m working my way through the last of Edmund Morris’ monumental biographical trilogy of Theodore Roosevelt called Colonel Roosevelt.  If you haven’t read much about our 36th president then you can’t possibly understand much about what made the world we live in today.  In many ways the two periods are nothing alike but when it came to the political, economic and international scene there are interesting similarities.

There probably aren’t many history professors and teachers assigning the following project to their pupils: “Compare the similarities and differences between 1912 and 2012″ but, if I taught such a course, I certainly would.

This morning’s NYTimes business section included and article entitled “Inequality Undermines Democracy” which stated:

The gap between the rich and the rest has been much wider in the United States than in other developed nationsfor decades….. Our tolerance for a widening income gap may be ebbing, however. Since Occupy Wall Street and kindred movements highlighted the issue, the chasm between the rich and ordinary workers has become a crucial talking point in the Democratic Party’s arsenal. In a speech in Osawatomie, Kan., last December, President Obama underscored how “the rungs of the ladder of opportunity had grown farther and farther apart, and the middle class has shrunk.”

…..a growing share of Americans have lost faith in their ability to get ahead. We have accepted income inequality in the past partly because of the belief that capitalism can’t work without it. If entrepreneurs invest and workers improve their skills to improve their lot in life, a government that heavily taxed the rich to give to the poor could destroy that incentive and stymie economic growth that benefits everybody…..Evidence is mounting, however, that inequality itself is obstructing Americans’ shot at a better life.

That was written today but it could just as easily have been written 100 years ago, in 1912, when the country was going through a similar argument about social and economic equality.  At the time, it was Theodore Roosevelt who, like the Tea Party of today, was disenchanted with the way the Republican Party led by his successor, Howard Taft, was pulling the country back from his Progressive programs.  During his eight years in office he had promised more progressive (read “liberal”) reforms to come.  A battle for the nomination of the Republican Party to run against the Democrat Woodrow Wilson ensued between Taft and the “progressive” Roosevelt.

Predating Obama’s trip this year, Roosevelt traveled to Osawatomie, KS in the summer of 1910 to set the stage for that nomination battle by delivering a historic speech.  He argued that one of the central issues of the government was protection of human welfare and property rights.  That 1910 Osawatomie speech later became the basis for his 1912 break from the Republican Party and formation of his Bull Moose Progressive Party.  In it he said that human welfare was more important than property rights and that only a powerful federal government could regulate the economy and guarantee social justice.  A President can only succeed in making his economic agenda successful, he believed, if he makes the protection of human welfare his highest priority.“

[Interestingly, Osawatomie might also lay claim to being the "birthplace" of the Civil War since it was where John Brown led his first anti-slavery massacre in 1856 followed by his raid at Harper's Ferry in 1859 and the start of the Civil War in 1860.  Immediately before the Civil War, Kansas was the battleground of the effort to prevent the expansion of slavery and, in that battle, a main terminus of the underground railway for fugative slaves from the South.]

Key elements of Roosevelt’s New Democracy speech were (from Wikipedia).  It’s amazing how many of those issues are the ones still we debate today in one form or another:

  • A National Health Service to include all existing government medical agencies.
  • Social insurance to provide for the elderly, the unemployed, and the disabled.
  • Limited injunctions in strikes.
  • A minimum wage law for women.
  • An eight hour workday.
  • A federal securities commission.
  • Farm relief.
  • Workers’ compensation for work-related injuries.
  • An inheritance tax.
  • A Constitutional amendment to allow a Federal income tax.
  • Women’s suffrage.
  • Direct election of Senators.
  • Primary elections for state and federal nominations.
  • Strict limits and disclosure requirements on political campaign contributions.
  • Registration of lobbyists.
  • Recording and publication of Congressional committee proceedings.

We often incorrectly believe that the issues facing us are new and, at times, appear insurmountable.  But all we need do is, like in stock charting, to look at history and see that what is happening today follow from and follow patterns like events in the past.  If we understand that history and those patterns we are likely to make better decisions today.

Technorati Tags: , ,

March 2nd, 2012

Stock Picking Now Feels Like Shooting Fish in a Barrel – Chapter 2

We hear a lot today about the individual investor being frightened away from the stock market.  We hear that the young, those who face the challenge of having to replace social security for their retirement have no interest in owning stocks.  Many today believe that owning stocks is risky, difficult and is nothing more than gambling.

However, the performance of the market and of individual stocks since the beginning of the year should have been an excellent testament to exactly the opposite.  Over the past several of months, I often feel as I did on July 23, 2009 when I wrote “Stock Picking Now Feels Like Shooting Fish in a Barrel“.  You should click on the link and read the piece but, for you who are too lazy, here are some choice quotations from it:

“This is a great time to be a stock picker! You don’t hear many say this these days but it’s exactly the way I feel. The market and economy felt like they were going you know where in a hand basket on March 9. But now that seems so long ago and with the vantage of the slow, 10-month market turnaround ….. picking stocks feels almost as easy as shooting fish in a barrel …… It’s not often that you can start with a clean slate (i.e., essentially a 100% cash position) …. we have little garbage to clean out and now have the pleasant task of finding new seeds to plant ….. Many stocks have charts that closely reflect the market’s bottom reversal pattern….”

The technique I described there was the “Stocks on the Move” scan; these days I run daily and it always delivers a long list of excellent candidates.  As I wrote in 2009, the scan parameters

“Sounds complex but the results filtered out with 135 amazing stocks.  I don’t mind saying I have a hard time deciding which of these 135 I’m going to add to my portfolio but I would feel comfortable and sleep well with nearly any of them (with the caveat that the market remains constructive by crossing above the neckline by Labor Day, as I expect it will). “

I present charts of the following stocks as examples in that July 22, 2009 post.  Note that by that year-end, the four stocks were up an average of 35% (the market had risen 16.88% of the period) and up over 100% by the following year-end (market up 31.82%):

As members to Instant Alerts know, I’ve bought I’ve bought 60 stocks for my portfolio since October 24, 2011 and today 75% of them show gains (four of over 20%) while I’m confident the remaining 25% will soon also show profits.

I don’t intend to boast; I mention this only to prove the point about how easy it is to find great stock to buy in at times like these.  If you buy stocks at the beginning of a bull run and are patient enough to ride them to the end of that wave then it should be relatively easy to generate some huge gains.  On the other hand,  it almost doesn’t matter what stock you buy or how good it’s chart appears to be, you’re facing significant risks and the probability of only small rewards when the trade is near the end of a market life cycle,.

In 2009, the Market Momentum Meter had turned Bull/Green on June 24, 2009, three weeks prior to the above post and the tool I use to time the market (the relative positions of four moving averages plus the Index itself as described in Market Momentum Meter) turned Bull/Green came on November 18, 2009.  We might again be at a similar inflection point, the beginning of a new market life cycle, because  Momentum Meter turned Bull/Green on January 31, 2012 and the moving averages are only 45-60 days away from a perfect bullish alignment.

Finding stocks to buy again feels like a bounty or riches, like shooting fish in a barrel.   The “Stocks on the Move” scan is again spitting out up to 200 stocks worthy of purchase (most of my 60 trades came from that scan).  As was true in 2009, many of those stocks presented classical bullish chart patterns or potential break out situations (click on image to enlarge) including:

  • ISRG on 11/3/11
  • SCSS on 1/27/12
  • EQIX on 2/2/12

At time like these, the challenge isn’t in separating the winners from losers, it’s in putting money to work quickly enough to take advantage of the market momentum move.

Technorati Tags: , , ,

February 23rd, 2012

How Reliable is the “Stocks on the Move” Scan?

If you’ve explored this site you’ve learned that one of the benefits of a membership is access to Watchlists, lists of stocks culled from the 7000 or so publicly-traded stocks by way of scans whereby all stocks are filtered against combinations of different financial and technical parameters and by my visually scanning hundreds of stock charts for potential breakout potential.

One of my favorite scans is called “Stocks on the Move”, a filter that focuses on parameters defining outstanding fundamental operating plus strong technical performance.  I developed this scan a number of years ago while attempting to replicate similar lists published in Investors’ Business Daily.  My scan was modeled after IBD’s and frequently delivers many of the same names.

A subscriber wrote the other day asking whether I’d “performed any regression analysis to ascertain the relative predictability of these parameters?”  I had to confess I hadn’t performed any rigorous analysis and realized that I should …. for the benefit of both my subscribers and myself.

I had twice posted the results of “Stocks on the Move” scans (July 22, 2009 and March 2, 2010 ) and I made the most recent list available exclusive to subscribers on January 6, 2012.  But the question remains: on a back-tested basis how reliable were these scans?  If you had selected stocks from any of these three lists, what’s the probability that they would shown a gain? outperformed the S&P 500? would the performance be any different 100 days, 200 days, 300 days or 500 days in the future?

Some might argue that this is a limited sample but I believe it’s indicative of the potency of “Stocks on the Move” as a reliable source of investment ideas with a low risk and high probability of outperforming the benchmark.  Of the 7000+ stocks the scan picked up the following stocks more than once and all together 358 different stocks:

But the question asked whether it was possible to “back-test” the scan to determine how well the stocks captured in the Stocks on the Move scan performed over various time horizons:

The back testing was performed at intervals of approximately 100 trading days after when the scans were run against 2 measures: absolute performance and performance vs. the benchmark S&P 500 Index over the same periods.  Interestingly:

  • Stocks filtered out in the scans run on both days, more than 50% of the stocks filtered out by the scan appreciated above the price on the day of the scan for 300 or more trading days into the future (of the S&P 500 Index, half perform better than the Index itself by definition).
  • More than 60% of those stocks also outperformed the S&P 500 far after the Scan was run however that better than average performance occurred primarily shortly after the scan run date; by approximately after the end of the first year, those stocks  no longer showed superior relative performance.

Become a member now and you’ll have access to the archive of all the Watchlists, the Weekly Reports, the Model Portfolios and all the Instant Alerts since November to help you navigate this market as it moves higher.

 

 

Technorati Tags: ,

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: ,