September 19th, 2008

Has Monetary Action Forced a Market Bottom

I know you’re confused and don’t know what to do; I know I am. And at times like this, the safest thing to do is to do nothing. Not every action calls for a reaction.

If we’ve been conservative and hedged ourselves (or even shorted indexes through the Powershares index short, foreign currency and precious metals ETFs) then we’ll be taking a hit due to this morning’s surprise announcement and subsequent market runup. But since most of our capital is locked in money market funds (now even more secure because of the announcement of new government insurance) and short term T-bills (which, I must confess, I only started researching a couple of days ago), they we’re in an excellent position to get back in the market when it’s clearly indicated that momentum has turned from pessimism to some optimism.

How do we know when that is? We know that through looking at stock market history and looking at when, under similar market situations, it was safe to buy stocks again. Given the current alignment of the moving averages (300-, 180-, 90-, 60- top to bottom), the earliest that has happened in the past is when the Index reliably (with volume) crossed above the 90-day moving average:

During all Bear Markets and corrections since 1963, the odds are that you will wind up with less money in the end if you bought prior to hitting this threshold. It’s not to say that there might not have been instances when this wasn’t the case. It only means that, on average, those early trades haven’t generated sufficient gain to offset the instances when the market feigned an upside move only to reverse course and turn back down.

This market is treacherouse. It does look like strong government action has forced a bottom in at least the financial sector. What it will do for housing is still unclear. Even more importantly, will monetary policy alone turn the rest of the economy, a weak employment picture, faltering $US and soft consumer economy around so that the rest of the stock market can also form a bottom.

July 30th, 2008

An IBD "Follow Through Day". So What?

O.K., so yesterday was called a “follow through day (FTD)” by IBD . Does it matter?

I wanted to find out so I did a search on how many FTD’s there have been this year and wrote Joshua Hayes of Big Wave Trading (he recently wrote about FTD’s) who responded saying the last time was on March 20, when the market began correcting after it hit “bear market territory”. The move carried the S&P 500 up 11.7% between March 17 and May 19.

Why hasn’t IBD come up with a mirror image of the FTD, something like an “distribute from day (DFD)”?

My search for information on FTD produced many listings but one of the consistent threads was that “every bull market begins with an FTD but not every FTD signals a bull market.” Actually, one of the most extensive expositions was written this past January by Rob Hanna in his very technical blog Quantifiable Edges. He discovered that FTD’s were much better than tossing a coin in predicting bottoms.

I agree. This could be one of those times that the FTD falsely predicts a bottom, as it did in March (although a 10% trading bottom isn’t anything to snicker at … it’s just not a bear market bottom). I prefer sticking with charts and my Market Timing Indicator.

My opinion hasn’t changed as a result of yesterday’s FTD. I believe we’re still in a bear market. In fact, as I outlined on July 16, it appears to me that all the indexes are forming the right side of extended, long-term head-and-shoulder top formations. I hope I’m wrong because it’s a lot more fun and clearly much more profitable to be in a bull market but there’s just too much economic turmoil still unresolved to move ahead very far. So let’s take a look at what’s been happening (updated through 11:15 a.m. on 7/30):

This morning you again repeatedly heard talking heads attesting to the fact that the bottom has been put in. It may be enough for them to put their money at risk but I still want more proof. I’d agree that the market was as oversold as it was in March. As it did between March 17 and May 19, the market might again retrace from the 1200 low by 10-11% to around 1320. That also happens to be where it would be attempting a cross over the moving averages.

You can put some trading positions on but be ready to dump them quickly if this retracement to 1320 succeeds.