July 17th, 2012

Market’s Path to 1575

“Bear markets make you feel dumber than you are, the same way bull markets make you feel smarter than you are…..investing is a marathon, not a sprint, and do not let the bear market turn you into a sprinter.”  all you can do is That quote is from Vitaliy N. Katsenelson’s The Little Book of Sideways Markets: How to Make Money in Markets that Go Nowhere in Barry Ritholtz’s popular Big Picture blog.  And how true it is.  It’s been incredibly difficult harvesting any capital gains for so long and it feels like the recent boring market when one ignores the drama of the political and economic background grinding out day in and day out.

But all that may soon change.  The market has carved out, for reasons that continually bewilder those of the fundamental analysis persuasion, a fairly clear consolidation pattern that it is trying desperately to break out of:

For this to truly be considered a flag, volume on the breakout needs to expand and the advance has to cross above the previous high at 1420.

But if everything works out as we hope, then the outlook is extremely promising.  According to traditional charting rules-of-thumb, the consolidation pattern should be at about the midpoint of the range from the trough to the ultimate peak.  The move from an October, 2011 low at the end of the Congressional and the beginning of the EuroZone budget stalemates to March 2012 peak was approximately 26.5%.  Advancing a similar 26.5% from the June bottom of this recent consolidation would carry the market to about 1575.

Whether it’s coincidental or not, the 1575 target happens to also be about the market’s all-time high as measured by the S&P 500.  As we hear all the negative news still flooding the media (to which must be added the impact on consumer prices from the devastating impact of the heat wave on crop yields), it seems hard to believe that the market can advance to those levels.  However, all that negative sets us up for positive surprises.

Whenever I try to balance the news I hear against the market’s action I fall back to a chart I’ve frequently featured here: The Cycle of Market Emotions.  I ask myself what emotional state does it feel that most market participants are experiencing today.  Today, you can’t argue that most players continue to express feelings of fear, desperation, panic, despondency, depression and, sometimes, “hope” than they do emotions of optimism, excitement, thrill or euphoria.  These range of emotions are actually bullish because they signal that the market is closer to a bottom than a top.
The market’s ability to continue advancing above 1365 will give me the confidence I need fully commit the remainder of my cash reserves.

June 22nd, 2012

An important, emerging new positive chart pattern in the S&P

Look at the chart inserted on the June 12 post below, “Cramer and One of My Five Lines in the Sand” and you’ll see the second trendline from the top at 1365.  When the market touched that level on Tuesday, I emailed Members the following yesterday morning:

“Yesterday, the market touched 1363 and then fell back. Let’s see what happens today after the Fed Meeting. We’re not alone in looking at this trigger level and, if there’s any positive signals out of Washington about more Fed easing then all those technicians could launch the next move higher. I, for one, will join the herd.”

Having set that hurdle saved us a lot of money because after hitting that level a couple of days ago, the market pulled back significantly.  If we had bought stocks on the expectation that the advance would continue, we would have been hurt terribly yesterday as near 90% of stocks declined as the market took its biggest hit in months.

Those who make decisions based on the news that the media decides to spotlight each day will continue to be whipsawed.  Yesterday, everyone was talking about double-barreled mauling of the market with Goldman Sachs’ bearish call and the across the board marking down of the major banks’ credit ratings by S&P.  Today, they’re talking about the market’s surprising resilience and how “the ratings agencies are always late”, “when they only reflect what everyone already knew” and “changing the rating on one company is important but adjust the whole industry changes nothing”.

But for those of us who take a longer-term view (like the chart in the June 12 post), we need as much of a downside confirmation before heading for the exits as we needed an upside confirmation.  The chart below identifies those two critical levels: 1360-65 for the bullish confirmation and 1260-1266 for the bearish confirmation.

Chart reading is a dynamic exercise as new data reveal new balances in the continually changing struggle between bulls and bears.  Interestingly, a new chart pattern has emerged as a result of the recent volatility: a flag sort of correction (descending parallel lines) coming off the March high.  Patterns like these are usually constructive as they underscore consolidation (or continuation) rather than reversal.  Furthermore, crossing above the upper boundary of this new pattern as well as the 1360-65 level only solidifies further the strength of the following upside move.

June 12th, 2012

Cramer and One of My Five Lines in the Sand

I informed Members in their June 3, Weekly Recap Report that “the market has been in a 30% trading range (1050-1365) as the economy works its way through the ruins brought on by the 2007-09 Financial Crisis.  While we’ve been glued to news stories about one crisis or another over the past three years, we fail to see that, underneath the surface, the economy and the market have been in a healing process.”

I included in that Report a chart onto which I inserted five critical trendlines, levels at which the Market has pivoted (reversed direction) from 5-7 times over the past two and a half years.  I also suggested that Members “click on the image to enlarge it, print it out and past it over your computer …. we’ll be looking at it throughout the summer watching for the turn.”

On CNBC’s Fast Money show tonight (to see clip, click here), Cramer revealed a bold prediction by Carolyn Boroden, a highly regarded technician on Wall Street.and one of his “favorite” technical analysts in an “Off the Charts” segment.  The analyst predicted that 1265, the point at which the market seemed to have turned up last week, would be a line in the sand.  It might actually turn out to be the low for the year followed by a run to as high as 1465.  That technical analyst based her interpretation of the chart mostly on Fibonacci time and level measurements which were beyond my understanding.  But what I found most interesting is that the levels mirrored almost exactly the trendlines I’d presented to Members two weeks ago.

Now that Cramer has pulled the covers off a market timing analysis that closely correspondents to one that I distributed to Members a couple of weeks ago, I wouldn’t be committing any breach with Members’ by now including that chart here:

Interestingly, Cramer and I aren’t the only ones having focused on the importance of the 1265 level.  Yesterday, in the Minyanville post The Single Most Important S&P 500 Level, Kevin A. Tuttle wrote that over the last dozen years, the SPX has crossed, retested, and breached this level 12 times.  According to Tuttle,

“When adding the melodrama and sensationalism, Wall Street scandals, global tensions, political finger-pointing, misappropriation of funds, struggling economics, quantitative easing, and the US’ skyrocketing debt load, it can become somewhat overwhelming to ascertain potential direction.  It’s the whole “forest for the trees” idiom. My firm believes that no single individual or institution has the mental capacity, intellect, or quantitative ability to comprehend the amalgamation of all global fundamental factors to derive a meaningful conclusion about the general direction of the market without employing the demand factor, or better said, the law of supply and demand.”

I, said as much to Members in my Report of two weeks ago.  I confessed that I
“…. don’t have enough time for that and throw my hands up when it comes to trying to evaluate and assess the potential impact of the news flow from around the world.  I find it overwhelming and I just don’t feel up to the task.  But I can look at the above chart and identify important levels where the supply and demand for stocks came into balance and created turning points in the past (even if temporarily) and may, with a high degree of probability, do so at the same levels again in the future.”
The low of last week may have been one of those critical turning points.  If it was, then it behooves investors to begin putting some more cash to work because the summer break may be short and the run to higher ground may begin sooner than most anticipated just a month or so ago.

May 24th, 2012

Moving Averages: Trend Inidicator or Resistance/Support Level

There are almost many discussions in technical analysis circles as to whether moving averages are predictive and form resistance and support levels or whether they instead exclusively depict historical information (like, the average price of a stock over the past 200 trading days) and indicate trends (like, the average price over the prior 200 days continues to improve).  I’m not going to take either side other than to say you can’t use one to the exclusion of the other.  What I can say is that the 200- and 300-dma’s have performed extremely well as support over the past week (click on image to enlarge):

It could purely be happenstance or it could be that the close proximity of the two moving averages intensifies their support support capabilities or it might just be that a few more trading days will see the Index cross both moving averages indicating a dramatic deterioration in the market’s health and future prospects but for the time being it does break some temporary comfort and relief to those of us who are of the “technical persuasion”.

Where to from here?  Your guess is as good as mine.  But what I do say is that I’m relieved that I have a discipline that insulates me from all the speculation we’re bombarded with daily in the business media by neutralizing the day-to-day volatility and helps me focus on the longer term picture.  My Market Momentum Meter distills the market’s trend over a number of time horizons and translates the analysis into a single number which, when compared to experience over nearly 50 years of market data, indicates what market tactic (all cash or fully invested) which will like generate the best likely outcome.

My Market Momentum Meter is at the borderline and may soon suggest a more conservative, risk-off approach but for the time being it still indicates that the market’s longer-term trend continues to be “provisionally, moderately bullish”.

 

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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.

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.

May 3rd, 2012

Rohrbach on Market Timing

I shouldn’t but I will anyway.  I shouldn’t whine but you’re all friends or you wouldn’t be reading this so I’ll borrow your shoulder to cry on and your ear to hear my complaint.  OK, here it goes, “I don’t understand why more of you haven’t subscribed?”

I happened across a series of interviews on Forbes.com with Jim Rohrbach of Investment Models about using moving averages to spot trend changes.  The essence of Rohrbach’s message is that:

  • “[You] can’t look into the future. If you can just identify when the trend changes, that’s all you need.”
  • “[Most traders] don’t know how to identify a change in the trend in the market, and it’s not that difficult, if you spend the time to try to figure it out.”
  • [most investors] are being told constantly by brokers, etc., ‘Don’t try to time the market…it can’t be done.’
  • [Rohrbach] “spent seven years working on the mathematics of that thing. I kept stumbling, but I finally came up with a way where I can take certain ingredients, which I’m not going to tell you what they are, and if I applied them to the mathematics, I could tell on a daily basis what the trend of the market was for that day.”
  • “Convert the action of the market into a number. That number represents the trend for today. If the market is going up several days in a row, that number will go up, and vice versa.  But you’ve got to know the ingredients, and you’ve got to use mathematics. Don’t listen to those guys on the Street, or wherever, who tell you the reasons for the market going up or down, because they have nothing to do with reality.”
  • “And you’ve got to stay in [Apple] if you’re really going to capitalize on this thing. If you get out because Apple dropped ten points today, that might be a big mistake…… Stay in, stay in, stay in. Even if the market goes down 200 points.”
  • “You don’t have to be smart. You have to be intelligent. You have to have a strategy that tells you when to get in and out….if you have something that’s worked for 40 years, then once you know where the market’s going, the trend of the market, then you can start playing around with individual investments.”
  • “Just play it with the market. It’s telling you—and I know that’s kind of difficult for the average person to do, and it’s also very difficult for them to have the discipline to act on every signal. Your emotions get involved in this game, especially when your money’s involved.”

I tell you all this because I want to demonstrate what I’ve been writing here about since starting this blog over six years ago are the same things that others in the know have been doing also.  I also studied the market’s action since 1963, almost 50 years worth of history, and came up with my own mathematical indicator as to the strength of the market’s momentum and direction; I call my indicator the Market Momentum Meter.

If market conditions remain relatively unchanged over the next several weeks, the Market Momentum Meter will approach a critical level early in June.  Members to Instant Alerts see what the Meter’s reading is each time I make a trade; each day’s reading is recapped in the Weekly Report.

Rohrbach charges $395/yr for his market timing service or, as he says, “about a dollar a day”.  My service is less expensive plus you can see how I translate my Market Momentum Meter into actual trades shortly after their execution.  I also keep track of the the performance of those trades in a Model Portfolio because market timing needs to be followed with a high success factor in stock selections (even the best in baseball strike  out once in a while).

The market is at a critical point.  Is it correcting or reversing?  Should you sell in May and go away or buy in anticipation of a market resurgence?  Become a member to see what I’ve done.  Don’t put it off, act now!

May 2nd, 2012

“Trading Around a Core Market Direction View”

Jim Cramer did one of his “I’m going to teach you ‘homegamers’ how to trade the same as I did when I was in my multi-million dollar hedge fund years ago” shows.  The point at which I was surfing through the show was when he was answering a viewer’s question about when to sell a winning position?  His answer was that if the viewer didn’t want to act like a novice trader, he needed to “trade around your core positions”.  But what does that mean?

According to the show’s transcript, the concept involves:

  • start by picking a stock about which investor has an opinion. They should believe the stock could go higher over the long term. It should be a great underlying company with a stock that could get tossed around by market volatility, but nevertheless has potential to push higher in the long haul.
  • Each time the stock jumps 3 percent, the investor sells 16% to make some profits and continue selling shares as the stock advanced until the position was reduced by 50%.
  • At that point, the investor would wait for the stock to be knocked down, so they can buy more shares.  When the stock declines 6%, the investor would buy back 16% and continue buying in increments until the original position was repurchased.

According to Cramer, “A lot of people think that trading is incredibly exciting and it can be, but if you’re good at trading around a core position, you should be pretty bored because all you’re doing is watching the stock move and trimming or adding to your position accordingly.”  It sounds simple enough but, I’m sorry, the market isn’t that accommodating and unless your portfolio has less than a handful of stocks to follow it sounds like just to much trading.

Rather than watching the daily trading patterns of individual stocks, I like to “trade around a core position” where the core position is my total portfolio and the trading is making essential a single investment decision: “How much should be invested and how much cash should remain at the present time.”  What I’ve found is that investing is essentially a risk and cash management strategy.  There are times when you should be fully invested (or more so when using margin) and other times when you need to be 100% in cash.

I arrived at that conclusion by watching the action of individual stocks and my total portfolio as compared with the S&P 500 Index.  What I’ve found is that the odds are that stocks tend to follow the market’s general direction; they may vary in degree but the direction of the movement is usually in the same direction.  Regular readers are familiar with a saying that I’ve quoted here often: “50% of a stock’s price movement can be attributed to the overall movement in the market, 30% to the movement in its sector and only 20% on its own.”  Here are several examples from today’s trading.  The blue line is the S&P and the black is the stock on a on minute chart:

  • TKR
  • EOG
  • CE
  • ALGN
  • LLTC

I could go on and on but you get the picture.  When the market goes up, most  stocks will go up; when the market goes down, individual stocks will likely go down.

Bottom line, it’s probably more important having a good sense of what the market will be downing this minute, this morning, this week, this month or the next six months than it is trying to predict what individual stocks will be doing.  Rather than timing sales of individual stocks by the price action of that stock,  it’s probably more worthwhile tying that transaction to what the market will be doing.  Rather than selling a stock because it’s gone up 10%, 20% or even 50%, you should time the sale to the health of the market or industry group.  Conversely, time purchases according to whether the market will be firm or if it’s on the verge of correcting or reversing.

“Trading around a core position” can lead to either major opportunity costs in lost profit or real losses from buying into a deteriorating stocks or market.  Figuring out market direction is probably time better spent then finding stocks with the most ideal stock charts.  When the market is rising it’s more important to throw money at a diversified portfolio (or even into index ETFs) than trying to find “the best” stocks to buy; when the market is falling, getting out of the way is more important than trying to decide which stocks will survive the downdraft and which won’t.

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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.

February 27th, 2012

2 x 10 Investment Lessons

Years ago, I regularly visited a site that offered nothing more than a wonderful,  limitless supply of Wall Street sayings, truths and rules-of-thumb.  When I found the market to be frustrating or demoralizing or I caught myself being giddy with optimism or self-satisfaction I would turn to the site and read some wise quotations from market pioneers or real, true stock market gurus.

I usually try to bring you fresh ideas and concepts but I need to bring this to your attention the following item which happens to be all over the Internet because 1) I think it’s so true and 2) you may have been missed it because today each of us is being continually inundated with information and data useful and otherwise.

Jeremy Grantham, British investor and co-founder and Chief Investment Strategist of one of the largest asset management firm in the world, Grantham Mayo Van Otterloo (GMO), based in Boston.  Grantham is regarded as a highly knowledgeable investor in various stock, bond, and commodity markets, and is particularly noted for his prediction of various bubbles.  He just contributed a list of his 10 lessons investors have to learn in order to survive and succeed as investors to MarketWatch.

Bob Farrell, formerly Merrill Lynch’s chief market strategist, pioneered technical analysis of stock movements and broke new ground using investor sentiment figures to better understand how markets and individual stocks might move.  Many years ago, he had come up with his own lost of 10 lessons for investors.

I’ve combined those two lists into new tablets of 20 commandments.  I suggest you click on the image, print it and post it prominently above wherever you make most of your investment decisions or do your trading.  Whenever you are confused and don’t really know what to do about a stock or about the market, read the list again … it will help clear your head and regain your balance.