January 31st, 2013

Anatomy of the “Bull Market”

imageEveryone right now is trying to figure out how vulnerable the market is to a serious correction as it approaches its previous all-time highs.  For example, CNN recently posted a piece entitled “Bull market winding down. Don’t panic” in which they overlaid onto the 2009-2012 S&P 500 the template of the market’s traditional psychological life cycle.  [FYI, I’ve used that template myself in many earlier postings.  For example, two years ago in Two Views of the Same Image, some had voiced fears that investors were “euphoric” and that meant that the market was approaching a peak followed by a significant downturn.]

In the recent CNN article, Laszlo Birinyi Associates suggested that the bull market “likely entered its final stage last summer. So far, the S&P 500 has climbed almost 8% during this period of ‘exuberance’.”  Birinyi, says this stage of the market’s life cycle is when “fireworks” happen….. when all the people who have been reluctant and hesitant to invest in the stock market start realizing this isn’t the New York City subway system.  There’s not going to be another train coming so they better get on board.”

Four stages of Bull Market

The CNN article concludes that some of the best gains are to be had in the market’s final stages as everyone begins to pile onto stocks.  This year, that run could be even more impressive as the fixed income bull market ends and investors sell those investments in favor of equities.

When I look at the S&P Index over the same period, I don’t see some rather arbitrary demarcations of changes in market psychology.  I see another interesting pattern of market behavior (click on image to enlarge):

S&P 500 - Steps

At the risk of being labelled an Elliottician, that is a practitioner of Fibonacci patterns and Elliott Wave Theory, I see that this bull market looks like a stair-step affair with each successive leg of the bull run lasting only 50-70% of the previous leg and the % change of each leg being only 50-80% of the immediately preceding one.  The intervening steps down were less regular; excluding the 2011 correction that was amplified by the European debt crisis, each correction leg lasted approximately 60 calendar days and each (again, other than 2011) was 50-70% of the prior one.

Call it a stair-step or ever more tightly wound spring …. no matter what the analogy, the trend is unsustainable.  In the next correction down leg down could be the last of the series.  Each of the four previous corrections were between 50-70% of the immediately previous upleg.  If it holds true again, a correction beginning soon could carry the market down to approximately 1410-1415, another pivot at the bottom boundary trendline.

Looking at the psychological terms in the Birinyi chart above, I can’t come to grips with calling today’s market psychology as “exuberant”.  The reason the market saw an unusually large cash inflow in January was because they’ve been nearly non-existent since 2007.  Even though we aren’t hearing much today about the inadequacy of job creation, consumer demand is still weak and businesses still hoard their cash fearing a weak economic future.  Actually, the market rose 225% since March 2009 not because of a growing economy but only because of how far it had fallen from 2007 to March 2009.

Before there can be market “exuberance” there needs to be exuberance concerning the world economy, a condition that may be near but clearly hasn’t arrived yet.  After the coming correction, psychology surrounding the economy might have improved sufficiently to allow the market to quickly maneuver around the tip of that coiled-spring and make a run at and finally, after 14 years, cross above the all-time highs.

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December 2nd, 2010

The Launch of Optimism?

Let me take you back to the sweltering days of last summer. The market peaked last April and declined 16% by the end of July. Some looked at a chart of the S&P 500 and saw a top similar to 2008, just before the Financial Crisis had fully bloomed. CNN reported on July 1 that going all the way “back to World War II, a decline of 15% off the highs has often turned a correction into a Bear Market — a drop of 20% to 30% — according to Standard & Poor’s chief investment strategist Sam Stovall.” It was pretty scary times.

On the other hand, I saw an inverted head-and-shoulder and the possibility of a new bull move emerging. In “Healing Damaged Investor Psychology” of August 2, I wrote:

“There hasn’t been a blow-out rise, a throwing of caution to the wind. Instead, it has looked like a consolidation (or base, depending on where you start counting) with the market transitioning from relief that the bottom has been put in to optimism of possible renewed growth. It feels like the end of an accumulation phase and the beginning of the mark-up phase.

Yes it’s taken a long time but the trauma of the Financial Crises Crash was severe. We can talk about interest rates, earnings vs. top line growth, balance of trade and other currency issues. But bottom line is that there’s also a lot of damaged investor psychology involved and that psychology requires time and therapy to heal.”

Looking back four months, in retrospect it may actually have turned out to be a base rather than a top (so far, at least!). The mistake I may have made was that we were probably moving from hope to relief rather than transitioning to Optimism.

And what does investor psychology say today? As I wrote to subscribers of Instant Alerts this morning “You’re beginning to hear more and more of the “Talking Heads” begin to focus on the fact that “things are improving” than those saying that say “we have a long way to go”. Here’s the schematic at which we attempt to ground our chart analysis of the market with a dose of emotional reality:

If investor psychology in August could be described as moving into Relief, then today I see the market nearing the end of a period of Relief and beginning to move into Optimism and clears the way for an extended move higher.

One subscriber brought to my attention the following excerpt from Bloomberg this morning:

“The Standard & Poor’s 500 Index will climb 9.9 percent by the end of next year as revenue and economic growth boost earnings, according to UBS AG’s Jonathan Golub. The benchmark gauge for U.S. equities will reach 1,325, representing an increase of almost 10 percent from yesterday’s closing level, with earnings expanding to $93 per share, the chief U.S. market strategist wrote in a note dated yesterday…… His 2011 forecast compares with Goldman Sachs Group Inc.’s 1,450 projection and Birinyi Associates Inc.’s 1,333 estimate, both announced today.”

I didn’t realize we were so influential down on Wall Street. They all must read this blog because on Monday before Thanksgiving, in “Listen to One Opinion or the Sound of the Thundering Herd“, I established “a new near-term target of 1320 sometime before the beginning of the “sell-in-May” escape”. It’s always nice to be in such distinguished company.

August 2nd, 2010

Healing Damaged Investor Psychology

There’s so much conflicting and contradictory information that investors don’t know whether to sell or to back up the truck and load up? For example, In a recent Seeking Alpha blog article entitled “Warning Signs Suggest Market Headed for Another Collapse“, the author compared the head-and-shoulders formation in 2008 just before the Financial Crises Crash of 2008-09 to one he sees in the recent market action (something I wrote here often about). He concludes:

a head & shoulders formation is arguably the most bearish technical formation in the books. The time, breadth and size of this head & shoulders is exactly the same as what we saw in early 2008 just before entering the biggest bear market in modern history. The neckline on this formation sits at around 1040 on the S&P 500. A substantial break below 1,000, the low of this current correction, could spell disaster for the broader markets ….. The long-term prospects of the market are completely in question until we see a rally above 1,220 on convincing volume.”

A major fallacy I see in his comparison is that it totally ignores market life cycle and investor psychology. Remember the two charts I frequently inserted last year depicting the various psychological phases the market goes through during its life cycle?

I look at these schematics and ask myself “In what sort of frame of mind are most of “talking heads” today as they give their views, concerns, strategies or advice?” Are they euphoric about stocks today? Are they thrilled with the opportunities they see in the market today? Are they filled with optimism and excitement at the market’s prospects?

If they are they would be tell tale signs that the market is approaching a top, on the verge of a collapse. This is how the big money guys spin their spiel so they convince the little guys to get into the market so they can distribute to them stock they accumulated a long time ago at much lower prices.

I just don’t see that happening and I don’t feel immersed in that sort of psychological atmosphere. Rather than excitement, thrill or euphoria, I sense more of the same sort of anxiety, depression, hope and even despondency resulting from continued uncertainty and fear that is associated more with bottoms than with tops.

We all know that the market hasn’t done anything for almost a year (actually, since last August or 11 months). How flat has it been? Here are the changes from the end of each of those months to last Friday’s close. The table shows the sort of percentage change investors would have realized had they invested at the end of each month and held through Friday’s close:

That sort of performance sure doesn’t look like a top to me. There hasn’t been a blow-out rise, a throwing of caution to the wind. Instead, it’s looked like a consolidation (or base, depending on where you start counting) with the market transitioning from relief that the bottom has been put it to optimism of possible renewed growth. It feels like the end of an accumulation phase and the beginning of the mark-up phase.

Yes it’s taken a long time but the trauma of the Financial Crises Crash was severe. We can talk about interest rates, bottom line vs. top line growth, balance of trade and other currency issues. But bottom line, there’s also a lot of damaged investor psychology involved and that psychology requires a lot of time and therapy to heal.

January 5th, 2010

My Top-15 List of Low-Priced Stocks

Mark Hulbert had a piece in this past Sunday’s NYTimes entitled “What the Past Can’t Tell Investors“. I usually find Hulbert’s articles very interesting but a headline like that obviously really caught my attention. Hulbert studies the research and summarizes the findings as follows:

“the market’s performance in 2009 doesn’t increase the probability of a net gain in 2010…..while growth stocks this year may very well continue to lead the market, whether they do so won’t be determined by their 2009 performance…..One exception to this general pattern involves the relative performance of small-capitalization stocks, which over the last 80 years have shown some modest persistence from year to year…..the persistence of small caps’ relative strength bodes particularly well for the sector in 2010, because the average small-cap stock handily outperformed the average large cap last year…..this weathervane points only to relative, not absolute, performance. Small caps could lose money in 2010 and still outperform their large-cap brethren.”

It’s fashionable for bloggers, magazines, newspapers, newsletter writers and business media to lists of stocks of one sort or another. For example, a Google search of the expression “list of stocks for 2010” produces over 31 million results. The first page of 30 includes the following:

  • lists of the “best” penny stocks,
  • BloggingStocks.com has their list of the 10 best value stocks for 2010,
  • Mark Hulbert of Marketwatch.com published his list of 10 stocks that are going to bounce in 2010.
  • Zacks publishes a list of what they believe are going to be the ten best stocks of 2010
  • Jon Dorfman of Business Week put out his list of 10 “casualty” stocks, those that were badly beaten up last year and have an opportunity to rebound in 2010.
  • Yahoo! Finance has their list of 10 high-yield stocks and there is even
  • a list of stocks with “negative equity value”, whatever that means.

With all these lists floating around, why produce another one? For no reason that it’s fun playing “what if”s”. For example, last March I challenged a friend who was very conservative with his investments by creating a mock portfolio of low-priced stocks for him. I had been watching the ticker at the bottom of the CNBC screen and was amazed at the number of familiar and favorite symbols crawl across at such low, mostly single digits prices.

It was a few weeks before the crash bottom in March 2009 and I called it my “perpetual call options” strategy. The mock portfolio consisted of 15 stocks chosen at random on February 1, 2009 with an investment of $200 in each for a total of $3000 (the amount chosen was completely arbitrary; the only condition was that each stock would have an equal dollar investment).

So how did that porfolio perform? While the market, as measured by the S&P 500, increased by 28%, this portfolio of 15 stocks increased by nearly 100%. The original $3000 would have grown to $5954 in 11 months as of Monday.

I understand that 2009 was an unusual year but it’s instructive nevertheless. It was the beginning of the recovery and you could have thrown darts and hit nearly any stock that produced significant gains 11 months later. Every stock had been beaten down and would most likely recover. There was a risk that one or more of the stocks in the portfolio might have failed and their value dwindle to nothing but the price appreciations among the remainder would have more than compensated for the losses.

February and March of 2009 were the beginning of the accumulation phase of the market’s life cycle. After the May-August correction, the market moved into the Mark-up phase of its life cycle. In the early stage, all that was required was sufficient confidence to throw money at the market. The Mark-up phase, however, takes some real stock picking. [I believe we’re far away from the final bull stage called the Distribution Phase, where institutional investors pass their shares onto smaller hands in anticipation of the final bear market liquidation phase.]

But Hulbert’s comment about the advantages of small-cap converged with the seasonal flood of top-10 stock lists and encouraged me to put together another mock portfolio that might work again. The rules are:

  • $200 (or any other arbitrary amount) equally invested in
  • stocks selling less than $10 that
  • appear to be on the verge of completing a reversal chart pattern
  • appear to be showing some upward momentum (favorable moving averages trends) and
  • are fairly actively traded.

Again, I arbitrarily and randomly selected the stocks. I made no attempt to perform any fundamental analysis so there’s a high likelihood that one or more of these stocks might not make it to the end of 2010. This is a high risk game, an experiment, something that shouldn’t be attempted by anyone unless they understand that it’s as risky as throwing dice or playing the roulette wheel. The stocks in this hypothetical, low-priced stock portfolio were:

Can a basket of low-priced stocks beat the market average in the market’s middle, mark-up phase? Find out on January 5, 2011.

July 14th, 2009

Following the Herd to New Heights

Here are two quotes, guiding lights, that if you copy them down and post them over the monitor of your computer or trading station will never fail you:

  1. “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”. The saying comes from a dissertation paper written in the 1960’s by a graduate student at the University of Chicago, Benjamin F. King. I came across it early last year, just as the Bear Market was starting and quoted it several times last year throughout the year. Adhering to it’s message enabled me (us) to avoid getting sucked into the market is it metamorphosed into the worst Crash in 70 years.
  2. Buy high, sell higher.” This principal applies to stocks making new highs and works better in some markets than others. As I’ve written frequently here before, I think the market’s on the verge of transition from Accumulation phase to the Mark-up phase of a typlical life cycle. It’s in early stages of the Accumulation phase, when the market is clearly in an upward trend, that this stock selection technique works best.

I make no attempt to hide the fact that I’m basically a momentum trader/investor. I like to buy stocks where the herd’s already begun moving the stock up rather than hope for a big score by buying a stock that’s at the bottom of its trading range and may, or may not, turn back up. If the market does come through with completing the formation of my long-term inverted head-and-shoulders pattern, then this is the perfect time to start running with the herd by buying stocks that are moving to new highs.

I haven’t updated these market report card statistics for a few weeks (click image to enlarge):

I’ve selected 5 prior periods when the S&P 500 was at approximately the same as today’s close. While the most sensitive crossover (the 90-day) has deteriorated (today 68.74% of stocks having crossed over down from 86% on June 5), the number of stocks with Golden Crosses and Bull Crosses has continued to grow.

I’ve added 5 new pieces of information at the top half of the table: the number of stocks hitting 1, 2, 3, 4, or 5 year new highs. New highs, especially those approaching all-time new high status, are a fertile ground for finding stocks with real momentum, especially when in sync with the market’s upward momentum. Note: Stocks that recently started trading (4 years or less) become especially strong momentum stocks [a prime source for stocks on IBD’s 100 or New America lists]. However, a 3 year-old stock making new highs will only be on the 1, 2 and 3 year list – not the 4 or 5 year new high lists.

Take, for example, the following:

  • SNX (Synnex):
    In all likelihood, the stock may suffer traders’ remorse and soon consolidate, retreating back to the 24-26 area but, after that, with a strong market tailwind could shoot up to new heights.
  • RDEA (Ardea Biosciences)Another relatively new IPO that’s forging new high ground territory. It, too, may soon consolidate in a traders’ remorse consolidation but soon afterward could be propelled to much higher levels.
  • LL (Lumber Liquidators)LL has made a new 12-month high and is within a hairs breadth of a new all-time (albeit 2-year) new high. LL also has an excellent volume accumulation pattern.
  • CTB (Cooper Tire):Not only has CTB made a new 12-month high, it has also completed a near perfect inverted head-and-shoulder pattern (mirroring what I hope will happen at the overall market level as reflected in the S&P 500).

I’ll post a Google spreadsheet listing them when the new high lists begin to generate some week-to-week consistency.

May 29th, 2009

From Shoulder to Bump, Hopefully

Ever since the Crash began early last year, most investors have struggled with not having been adequate warned, not knowing what they needed to do, deciding when they should reenter the market if they were fortunate enough to have sought protection in cash. During it all, they should have been gauging their own psyches and the emotions of the market.

First there was disbelief, then fear in acting, then depression … well the following chart appearing in “Emotional Risk Management: Reflections of a Wanna-be Surfer” by Dr. Ken Celiano with Mark Paulik in the current issue of Stocks, Futures and Options Magazine tells the story better than I can:

The wave cycle (hence the title “Surfer”, I suppose) is a close relative and slightly different cut of the Market Life Cycle chart I’ve shown here before.

Where on this wave curve do you think the market is now? I look at all the emotional stages and believe we’re moving from Hope (third from right end) to Relief, equivalent to the transition from Accumulation to Mark-up on the Life Cycle chart. I don’t know about you but I can still remember when we moved from Euphoria to Anxiety during July-October, 2007, the periods of Fear, Desperation and Panic during the Summer and Fall of 2008 to finally Depression and Despondency between last October and this March. And since March we’ve been through Hope and Relief.

Throughout, I’ve tried to explain that the MTI (or the simpler and more conventional 200-day moving average rule) is less a prediction tool than it is a barometer measuring market momentum (i.e., emotions) plus a regulator of investor emotions. It told me that a serious decline was in the offing in February, 2007. While everyone was calling a turn last May, it pointed to a Suckers’ Rally. It allowed me to wade into the water beginning March 9 but to do so cautiously.

But we’re on the verge of stepping over important lines, of crossing from Relief to true Optimism, from Accumulation to Mark-up Phases, from under the Neckline and the 200-day Moving Average to above. Next week, we’ll probably hear the “all-clear signal” we’ll see the green light flashing. We’ll be able, finally with some certainty, to see upside momentum become self-sustaining and, consequently, to become fully invested in the market. For the first time since January, 2008, it could be relatively safe to be fully invested.

Astute readers will probably ask how I can write so positively when only last week, in “Is it déjà vu or something new” [what I meant the title to be], while describing an inverse head-and-shoulder pattern, I wrote:

we’re in the earliest stage of this bottoming process. In all likelihood, there will be a retest of the November low and it may or may not hold. What can be said, however, with some confidence is that the Index will not rocket through the remaining moving average benchmark hurdles without some retracements and retesting. As Cater Worth said this evening on CNBC, this bottom will be similar to the saucer bottoms of 2003 and 1974, not the V-shaped bottom of 1987.

Carter and I may have been wrong….to a degree. We may have missed the strength of the market and believed there would be a retesting, a right-shoulder to that pattern. But there’s a smell of optimism in the air and that shoulder may turn out to be no bigger than a bump. At least the strategy I spelled out in that post was spot on this week and made a lot of money for those who followed it.

Today’s 1.5% run up in the last hour must have been related to end-of-month trading (i.e, the desire to end with as good as possible month-end statements), so it can’t be extrapolated into next week. But, nevertheless, the focus of the discussion is about to change from whether and when we’ll cross the 180-day moving average (see January 5, “March to the 180-day Moving Average: Slowly“for an earlier reference) to whether the market will have sufficient momentum to cross of the 300-day moving average at 1050 and what might happen afterward.

Two moving averages have already turned up and, if the Index crosses the 180-day, it will begin working on turning the 180-day MA up, too. Rather than writing about a “base-building process”, you’ll be able to read about the Excitement, Thrill and Euphoria of stock picking in the Mark-up phase. I just can’t wait.

May 26th, 2009

Grading "Talking Heads"

Hope everyone had a restful and reflective Memorial Day …. and are prepared for a rough and tumble June. A reader and, if he doesn’t object, now a correspondence friend asked an interesting question:

“The more research I do, and the more I read, it seems charts can tell the entire story of a stock’s future. How often do you find yourself wrong?”

An interesting but difficult question to answer. Very few athletes continually bowl perfect games, daily hit holes-in-one, only pitch perfect games or hit an .800 batting average. But some traders and investors incorrectly assume that if they hold a loser long enough it will eventually break even, perhaps even make some money. Or in a misguided tactic they decide to buy more shares to average down their cost, lowering the break even point.

The challenge is to accept making mistakes in the market but hope that you’re right more than around 60% of the time. Strive to keep losers to a minimum but when you do have one, make sure you cut your losses quickly. [The IBD convention is to sell any stock that falls more than 8% below what they consider to be the ideal entry point.]

When it comes to the pro’s you expect them to do better than average. It reminds me of a recent Cramer segment where he felt vindicated due to a study by two finance professors at some no-name business school. They concluded that his recommendations performed better than the benchmark averages. But to his credit, Cramer confessed that trying to calculate performance was complicated so he couldn’t really go into the methodology of how the professors assembled their results.

The difficulty in performance arises because “talking heads” can issue buy recommendations without ever really putting targets or time frames on them. Without a goal, it’s difficult following up to see if the goal was ever met. I came across a place, though, that attempted doing just that: CXO Advisory Group’s Guru Grades. They critique around 60 of the most well-known prognosticators including: Ken Fisher, Dan Sullivan, Joe Mauldin, Marc Farber and, yes, Jim Cramer. In addition to those in the summary, another 50 each an individual page detailing the evaluation process and conclusion. In total, about 48% of the recommendations were wrong and about 50% of the pro’s got half or less of the recommendations correct.

My answer to the question (and partly as a defense) is that 1) if you are relatively skilled at chart reading, 2) look at charts across a number of time horizons, 3) always make your investment decision within the context of the industry sectors “popularity” and 4) are aware of the overall market’s health and trend then a losing position arises usually not from misreading a chart but from poorly timed execution due to:

  • being blindsided by a later unforeseen and unanticipated corporate event
  • buying a stock too early thereby running the risk that you have to hold until the move begins or, even worse, having it morph into a bearish pattern and move.
  • due to indecision or fear, waiting too long, to buy a stock thereby running the risk that it is at the end of a major move.
  • owning a stock and not understanding or seeing that its losing Industry Group support
  • Not timing the market correctly

My reader went on to ask,

“I’m sure any chart can break down, but as of now I can’t think of a stock that you’ve touted that hasn’t performed well over the past couple of months. It’s tempting to simply focus on charts and, when the time is right, buy several more of the companies on your list. Then I can look for promising patterns indefinitely. Is that too simplistic?”

I threw that in not only because it was complementary but also to make a point. I can’t actually take credit for the performance of “my picks” because the initial stage of the market’s life cycle, the Accumulation Phase, is very special and unique.

I’ve used the metaphor here before because it’s a perfect description. Most stocks have been beaten down and are lined up like race horses in the starting gate, all waiting at the same place for the race to begin. When the starting bell rings (i.e., when fear sudsides, some better economic news starts to appear and the huge cache of money sitting on the sidelines starts poring into the market), some stocks may be faster or get an earlier jump out of the gate, some may have a delayed start but most begin moving up around the same time.

It’s actually easy at this stage (I bet you don’t hear this from too many other bloggers or “talking heads”). This doesn’t happen in later stages because stocks run at different paces and different courses. Individual circumstances soon begin to overwhelm market factors and some stocks begin to stumble. At some point, when the market needs to rest, to regain its energy, to consolidte, other stocks fail to regain momentum and fall far behind in the race. By the time the market enters the final Distribution Phase before becoming the next Bear Market, all the stocks that started the race show an extremely wide range performances.

The only thing we need to worry about now is that the right-shoulder of this market reversal pattern doesn’t fail. We’re anxious to see that this shoulder has a bottom, the market turns back up and the 180-day, the neckline and, ultimately, the 300-day moving average is crossed over. Then the race can really begin. Giddyup!

May 6th, 2009

Breakout or Resistance: The 200-day MA in the Beholder’s Eyes

I’m so frightened. The S&P Index closed today at 919.53, nearly closing the gap between itself and its 180-day moving average which today ended at 922.90 (for you purists, the traditional 200-day MA is at 954.77). A mere 3 point increase, or 0.37%, and the light will change from yellow to green according to my Market Timing Indicator. If that happens, it’ll be the first time since almost exactly one year ago, on May 16, 2008, at the end of that Bear Trap Suckers’ Rally. It stayed green for only one day. The next previous time was December 26, 2007 when it first issued warning of dire events to come by issuing an “all-cash” red signal.

Recent events are unfolding just as I had imagined they might. For example, on December 14, 2008 in “What Does 2009 Look Like From This Vantage Point“, I wrote:”

“I’m sticking with the game plan; it’s worked so far. We’re going to let the market tell us when it’s no longer in pain and is recovering. Back-testing through nearly 45 years of stock market history, I’ve determined that there’s little risk of “recidivism” when the S&P 500 Index (now at 879) crosses above its 180-day moving average (now at 1197).

I know it looks like quite a stretch but the market’s rapid descent beginning in August (38.71% between 8/11 to 11/21) is beginning to have a more pronounced impact on the moving averages and accelerating their convergence with the index itself someplace around 975-1000 sometime in March-May (in the absence of another leg down for the market). However, if the retest of the lows fails and the market declines further, below 752.44, then waiting for that confirmation signal will have paid off.”

It’s been an interesting journey since December and we’re finally arriving at the convergence, the crossroads. Moving Averages (MA’s) present clearer pictures of the general trend of time series of values than the series themself by smoothing out shorter term fluctuations.

Last night, I attended a NY Investors Group meeting where it was pointed out that while the NASDAQ Composite had crossed above its 200-day MA, each of the S&P 500, DJ-30 and the Russell 2000 had not yet crossed but were quickly approaching their 200-day MA’s. The information was given with a warning, however, that due to the negative economic and financial backdrop, the 200-MA’s would serve in this case as an insurmountable resistance; the market would reverse direction and continue back down.

[As an aside, those in the metro-NY should check out the group. Daryl Montgomery, its leader, always has interesting guests and usually offers his views on recent news important to the market and his assessment of current state of the market. Last night, he interviewed William Cohan, author of “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street”.]

The implication was striking in its unequivocal categorization of the 200-day MA as resistance, an impediment and obstacle to the market’s continued progress to health. It was in stark contrast to my measured anticipation over the previous 6 months of a slow convergence between the Index and its 200-day MA. I eagerly anticipated what I believed would be an eventual cross over.

When it does happen, my discipline will say its o.k. to jump in with both feet. My strategy, however, will be to remain mildly cautious and go in the water only waist deep (up to about 60% invested). There could be one last hurdle to cross, a neckline at around 950 of what could turn out to be an inverse head-and-shoulder pattern. But first, we may need to suffer through the formation of the right-shoulder, similar to the formation on the left:

If the pro’s can’t predict the future, I surely can’t. But I see this process possibly taking the summer (remember “sell in May and go away”) with the break above the neckline coming around Labor Day. In the interim, be prepared for the market to correct by 13% to the 800-850 area.

Once these milestone are achieved, the confirmation will be received that the market had turned, bulls will be in control of momentum and an true and rewarding uptrend will have been started. The market will have turned from its Accumulation to its Mark-up Phase and we will have survived a once-in-a-lifetime (we hope) Bear Market of collosal proportions.

April 3rd, 2009

Designing a Bull Market Discipline

The Snowbird has landed.” My wife, dog and I made it back to the ole’ homestead last night after a couple of days on the road. What made the time driving almost bearable was Sirius satellite radio and being able to listen to the market’s continuing to improve on an audio feed from CNBC. [I have to confess, but CNBC as bad as a radio show doesn’t sound half as bad as it does as a TV broadcast … I guess we’re conditioned to having radio as a background and regularly tuning it out while doing something else like driving 70 on I-95.]

Listening to audio CNBC for 24 hours (don’t get me wrong. We spread a fair share of time to NPR, CBC, CNN, FoxNews and a big dollops to a variety of music) gives you time to think. The question that kept swirling in my mind was “What’s the best discipline to follow when it actually does becomes time to go ‘all-in’?” That time is getting close. I don’t want to sound like a broken record (remember those?) and the market’s going to have to take a breather soon. Last week, I wrote:

“It’s just about here, at what would have been an extension of the upper boundary of that symmetrical triangle, that moves tend to stall out (850-920). Buyers and sellers might maintain an equilibrium constraining prices within a narrow range. Short sellers (few long-term holders remain and are looking to unload at this point) may overwhelm the new money coming in from the sidelines and make a last attempt to push prices and the index lower.

But my guess is that, seeing the underlying strength of many individual issues (take a look at the breakouts posted by many of the stocks included in the spreadsheet in referenced on March 19), it will be a short and steep. When it runs its course, I’m guessing around mid-June, that more positive signs will be seen and a clear “all-in” signal will be issued.”

I’m going to stick by that even in the face of today’s strong market. But after the profit-taking ends, the market begins its march towards the 180-day Moving Average, crosses above and clearly signaling that the Bear Market has ended, the accumulation phase has nearly ended and the a new mark-up life cycle phase has begun – when it is all-clear what strategy or discipline should we follow? The obvious answer is to get fully invested by selecting and buying the “best” stocks. But all that driving time allowed me asking whether the obvious answer is the only answer. Here’s the process I went through:

  1. What’s the reward? I think it’s to make money but I also get a lot of psychic rewards from buying stocks with great charts that perform exactly as I had hoped and predicted. When I’m truly honest with myself, these psychic rewards are often more important than monetary rewards. I know this because these “winner” stocks with great charts may turn out not be be the best performers in terms of percentage moves.
  2. What’s the goal? Long-term, I want to average 5-10% better than the S&P 500. It’s easy in a Bear Market when you’re pretty much in cash; hence the expression “Learning to love Bear Markets”. As a matter of fact, if you were in cash last year, you could have beaten the S&P 500 by approximately 50% since the market declined 38.49% while cash lost nothing.
  3. What’s the easiest way to beat the market when it’s going up? Beating the market when it’s going up isn’t as easy. You can’t get into or hold on to losers and your winners must outperform the index. When the market does correct, you should take your profits. Tracking and managing a portfolio of 5, 10, 20 or more stocks isn’t easy. The easy way out is to buy the Ultra(Long) S&P, SSO. You automatically get a move that’s 50% greater than the S&P 500 and, when you believe a correction is coming, you can easily reduce your position and increase cash.

You’re not going to hear any talking heads mention this strategy on CNBC for a couple of reasons:

  • How would CNBC and their guests fill 18 broadcast hours if all the conversation was about timing the market and none about individual stocks?
  • If everyone owned the index, who would own the 500 individual stocks and how would their prices actually be set (Would they be all written down to $0 because there were no buyers by M2M rules?).

But as an individual investor, I make up an infinitesimal share of the overall market. I’m mostly interested only in moving up. I won’t have to worry about being “un-American” by only an Index ETF rather than the underlying individual shares when I get to be as big as a hedge fund.

[Actually, I’m only going to carve out about 25% of my portfolio in which to follow this strategy and have it race against the remaining 75% consisting of psychic-reward stocks from outstanding chart reading. Which do you bet will win? Rest assured, though, I’ll continue to write about those outstanding stocks. In fact, most of the stocks in the last spreadsheet I shared with you are performing beautifully.]

November 1st, 2008

More Early Stage Momentum Stocks

A couple of weeks ago, in Early Stage Momentum Stocks, I wrote about the power of the “Golden Cross” where the both the stock price and its 90-day moving average crosses above its 180-day moving average. At the time, there were 157 stocks that had formed this “Golden Cross”; there were 157 at the time. I promised I’d report periodically on this statistic.

The market had an excellent week and the number of stocks with Golden Crosses has increased:

The Sector showing the greatest number continues to be the Financials (banks, services, insurance followed by Health, Diversified (education) and Utilities. In the previous post, I also mentioned a number of individual stocks that were acting very nicely (all but 4 of which are also in this week’s IBD 100 list). The following are added to the prior list increasing the number to 23 stocks that are currently leading the market:

  • DV (DeVry) – IBD 100
  • LRN (K12 Inc.)
  • STRA (Strayer Education) – IBD 100
  • HCBK (Hudson City Bancorp) – IBD 100
  • TRST (Trustco Bank)
  • SRCL (Stericycle) -IBD 100
  • CBST (Cubist Pharma)
  • CHTT (Chattem) – IBD 100
  • SPTN (Spartan Stores)
  • PETS (PetMed Express) – IBD 100
  • GTIV (Gentive Health) -IBD 100

I think we may be nearing the end of the first step of the base building process (we are up 15% from the intra-day low of 839.80 on October 10; we could move up another 5% to 1020) followd by a reasonable and anticipated retest of that low. So you need to be agile if taking a short-term trading position in any of these stocks.

As I wrote in “Extrapolating to the ‘All-Clear‘”, much work yet needs to finished and time forming a bottom until we can assume that the residual risks of the financial crises have abated. We’re now dealing with the economic fall-out of the world-wide credit implosion and nothing yet indicates that the backdraft won’t be as severe as the impact of the crises itself.

(Again, the complete list is available in spreadsheet form at your request)