August 16th, 2012

Scaling the Wall of Worry

Are we at a bullish or bearish pivot point?  If you’re looking for market advice from CNBC you’re looking at the wrong place.  The best way to get viewers is to create and stimulate controversy and that’s what CNBC does every single day.  You get a lot of different opinions but you can’t get just one straight opinion that you can act on.

A perfect example was how they juxtaposed, on two successive days earlier this week, Jeremy Segal of Wharton Business School articulating a bullish outlook followed the next day by Doug Kass of Seabreeze Partners pushing a bearish perspective today.  Interestingly, couched inside both opinions were opposing opinions on the impact of Romney’s selection of Ryan as his V.P. candidate:

  • First, they put on Jeremy Siegel who endorsed the Ryan selection because of Ryan’s budget-cutting efforts and suggested that, as a consequence, the market will advance to around 1500.
  • Kass came the next day suggesting than Ryan’s selection will lead to Obama’s reelection and driving the the market down to 1300 (interestingly, he started his pitch by using an invalid and inaccurate technical view  of the market) because of Ryan’s conservative history and his known hostility towards Bernanke.  Kass believes that the highs for the market have already been made.

So what is the average investor to do?  Which opinion should we embrace?  Or is watching merely a total waste of time.

If you’re obsessed with trying to guess the upcoming election’s impact on the market then you have to come up with answers to a series of difficult and highly subjective questions:

  • Is a Romney win looked on favorably or not? an Obama reelection?
  • Is the market already discounting the election of one or another candidate?
  • If there was a market bias towards one candidate vs. the other then would an upset create an adverse market reaction after the election?
  • How does control of Congress factor into the equation?
    • What if Congress is split?
    • What if Congress is controlled by the same party?
    • What if control of both houses goes to the opposing party?

And those are just the questions that easily roll off the top of my head.  Clearly spending much time trying to answer these questions is futile.  Making investment decisions today based on what you have figured out to be the correct answer to each of these questions is foolish.

There can only be four options that drive your investment decisions today based on your prediction of an event in a little more than 11 weeks.  Sell, buy, do nothing or ignore the  election and base your decision on what’s happening today.

My answer is always to “follow the herd” rather than make my own fundamental analysis.  I’m not proud; I want to do what the majority of the money sloshing around the market is doing today rather than trying to second guess whether they are right or wrong in going in the direction that they are.  I want to know how strong the market’s momentum is and the direction in which it’s driving.  As far as I’m concerned, there’s no doubt as to that answer.

For the first time since October 2009, the market next week as measured by an index of the 500 stocks comprising the S&P 500 Index will create a situation where the market’s current level will be above its average level over the prior 50 days  which will be higher than its level over the average of the prior 100 days which will be over the average of the prior 200 days.  Finally, they will all be higher than the market’s average level for the past 300 trading days.  The same will soon also be true for the index of stocks comprising the Dow Jones 30 Industrials and, for the Dow Theory followers, the DJ Transports.

On July 17, four weeks ago when the S&P 500 closed at 1357, I described the market’s consolidation flag and went out on a limb to say a cross above 1420-25 would lead to the market climbing to 1575.  Today, the market closed at 1415, or 4.27% above that July 17 close.  Hopefully, all the uncertainties and “Alerts” and “Breaking News” and “Earnings Season” jabbered about on CNBC didn’t scare you away from being in the market.  It didn’t scare the big money herd who have been accumulating stocks and, in the process, forcing prices higher.  They may reverse course but, I doubt it more ever day.

Come back often to check on the market’s progress.  Better yet, become a Member and see where I’m putting my money to take advantage of this advance … while it lasts …and the Industry Groups from which I select the stocks I buy.

June 20th, 2012

Resuscitating The Near Dormant Dow Theory

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

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