May 10th, 2017

The Watergate Template

Everybody seems to be talking about today. In the wake of Trump’s firing Jim Comey, head of the FBI, nearly every newscast is comparing the Tuesday Night Massacre with the Saturday Night Massacre of 1973 when Nixon fired independent special prosecutor Archibald Cox, which led to the resignations of Attorney General Elliot Richardson and Deputy Attorney General William Ruckelshaus on October 20, 1973, during the Watergate scandal.

But Stock Chartist was ahead of the curve as subscribers got a “heads-up” about the stock market implications of the emerging White House turmoil in their April 2 issue of the Weekly Recap Report. You can today read what they got … 5 weeks ago.
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The Watergate Template

Two weeks ago, in “Should We Sell Everything“, I offered up a view of the three previous corrections of any magnitude in the bull market we’ve had the benefit of enjoying since 2009 and concluded that since it takes several months for tops to form “all this talk about selling everything in anticipation of a correction that clearly is coming, at some time and at some point in the future is premature.”

Last week’s Recap Report entitled “Politics and the Stock Market” looked at stock market behavior in two previous Presidential Crises and concluded that “The big grey cloud on the horizon is the impact the charged political situation will have on Trump and his anticipated programs.” Today we drill down into the 1972-73 Nixon/Watergate market (click here for a chronology) in the chart below as template of what we might be able to expect should Trump’s Russia problems escalate to such a degree that it actually begins impacting the market (click image to enlarge):

Nixon Impeachment - 2

I know it’s blinding but let me walk you through it. The chart depicts the August 1972-December 1973 S&P 500 Index. This is import because the market advanced 6% between Nixon’s Election and January 11, 1973. The massive 48% crash (third steepest in history) began when the market peaked on January 11, a couple of days after the trial of the Watergate Seven burglars presided over by Judge Sirica began on January 8, 1973; it ended in October-December 1974.

  • At the top, the Market Momentum Meter’s values (e.g., 1234, 12936, 21605) and colors (green, yellow, red)
  • Some of the milestones in the Watergate saga
  • The S&P 500 Index and moving averages

The Watergate took weeks and months to unfold. It involved criminal prosecutions, Congressional inquiries and special prosecutors. It involved a cover-up that was discovered and disclosed, indictments and resignations and immunities granted. Calls for Nixon to resign began in January 1974 (click here for chronology), a House Judiciary Committee began impeachment proceedings on February 6, 1974 with demands for the tapes to be turned over. It continued until August 8 when Nixon announced his resignation.

Market upside momentum slowed dramatically as “breaking news” about the break-in continuously flooded the media so the moving averages began pivoting, first moving horizontally and then turning down. The Meter didn’t turned consistently Bearish Red until mid-April after the Index had already declined 6% below the peak to 110. Even with all the news, the market closed the 1973 with a -17.4% drop. But the meter was solidly Red with a Perfectly Bearish value of 21605. The market dropped another -36% before touching the low of 62.8 on October 3, 1974!

Why dredge up this sad chapter in Presidential history? Because it serves as a template for how investors might react and how the stock market might behave, should questions and inquiries about Trump and his staff’s Russian ties continue and evolve into indictable criminal activity. While the Nixon saga stretched over months, the Trump replay will be in fast-motion Internet time.

Just as athletes or first responders, for example, practice, run drills and watch game replays so as to be prepared for any contingency, stock market participants need to practice and be prepared. No one can predict where we’ll be a year from now. The indexes of confidence are hitting highs for over a decade, if not all time highs internationally and domestically in business, consumers and housing. And yet, like in 1973-74, politics overwhelm economic and market euphoria.

Being forearmed is being forewarned. This is not a prediction of a market crash but rather, using today’s popular jargon, it’s an “alternate narrative” of what did happen and could happen that we need to be ready for. We shouldn’t sell everything today because, if we and Trump are lucky, all this could blow over, the economy will continue plugging along, and the stock market will cross the mid-point trendline in the Reversion to the Mean channel and become support. I suggest, however, that you print the chart above, have it handy nearby, plot emerging events against what did happen and take action as needed depending on your tolerance for risk.

March 20th, 2013

Rocket or Breakout? What say you?

imageThe second most difficult challenge (after auguring the market’s future near-term direction) is to select the best stocks into which to put some money to work so as to maximize potential returns while keeping risk of loss acceptable.  Most of the time, whenever you hear or read a comparison between two stocks, “talking heads” like Jim Cramer usually  throw out such slogans as “buy best of breed” as the guide in making your choice.  However, although “best of breed” is subjective and is boiled down fundamental factors like sales and earnings growth, great management or higher profit margins.  Seldom does Technical factors such as stock volatility, institutional support or relative strength seldom enter a “best of breed” discussion.

For example, on January 26, 2012, Cramer’s theStreet.com had a piece on XLB, the basic materials ETF in which they claimed that “DuPont Company (DD) is the undisputed king of basic materials. From the 2009 rally, DuPont was the top performing Dow component.”  However, PPG (PPG) wasn’t mentioned at all.  PPG represented only 4% of the ETF as compared with DD’s nearly 10%.  But which was actually the better stock to have bought more than a year ago.  A comparison of the two shows that PPG actually appreciated 58% while DD declined nearly -3% (click on images to enlarge).

PPG - 20130319DD - 20130319 I’m now sitting on some cash trying to figure out if I should redeploy it in yesterday’s momentum stock leaders (who are still advancing nicely) or taking a gamble on stocks that have great charts and look like they may soon breakout and become tomorrow’s leaders.

In technically-based comparison like these, IBD’s rule is to only buy stocks that are within a few percentage points above what IBD labels their “buy point”, those breakouts or crosses above resistance trendlines which are top boundaries of a variety of chart patterns such as inverted hear-and-shoulders, ascending triangles or IBD’s cups-and-handles.  This comparison might match up LKQ (automotive parts), a stock that’s advance 370% since 2009 in a near straight shot and, perhaps, may continue to advance higher against, for example, Williams-Sonoma (retail home furnishings).

LKQ - 20130320WSM - 20130320

Putting aside fundamentals and basing the investment choice strictly on a technical basis, the choice rests on how one evaluates two factors:

  • Trading off the risk one perceives in buying a stock continuing to advance after having nearly doubled in each of the past four years vs. the risk that a stock will continue to languish for continued economic sluggishness.
  • How important the psychic reward might be for you to have found a new “high flyer” before others vs. piggybacking on a winner that others continually discovered over the past four years.

I’ve always tended to chose the breakout but what say you?  Would you catch the tail of a comet like LKQ or get on what you hope might be a future rocket?  And why?

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March 1st, 2013

“Timing Is Everything”

imageCNBC never cease to amaze me the way they always trot out mostly bearish commentators on day’s when the market is declining severely, like Monday’s 1.83% plunge, but the bull’s when the market makes a stunning advance like the 1.27% rise a few days later.  Rather than counter-balancing the market’s prevailing psychology, CNBC feels that it’s in their best interest to go with the flow: panic when everyone else is throwing stocks overboard and be euphoric when buyers are flocking back into stocks.  Promote “risk off” on days when everyone has already decided to sell and “risk on” when the bulls are already stampeding.

They are a “news” organization and, as such, their time horizon is  very short and they need to present stories and “talking heads” who primarily describe or explain why something is just happening or has recently happened.  The information they offer is mostly anecdotal, opinions or canned offerings by companies rather than analytic and are, therefore, irrelevant to decision-making about the investable future.

That’s why I don’t watch the business media.  Rather, I attempt to peer out into the future and see if I can perceive where the next turning point might be. Towards that end, I’ve been focusing an area I labelled the “Crunch Zone”, the range between the 2000 all-time high and the 2007 all-time high (approximately 1545-1575) and have been monitoring for Members since the beginning of February as the market closes in on that target:

  • February 2: “The most glaring difference [between the 2007 attempt at crossing into new high territory and now] is that OBV [on-balance volume indicator] was also making new highs in 2007 but it has failed to do so, so far, this time.  That difference could be attributed to greater investor skepticism in 2012 than there was in 2007 as evidenced by the huge volumes of cash still sitting on the sidelines and in fixed income/gold safe haven investments.  That actually, could be positive indicator for the market actually finding success in breaking higher this time around.”
  • February 10: “the 50-day moving average of daily volume of the 500 S&P stocks has declined since peaking in 2006.  As the Index and OBV (on-balance-volume) continued to advance to new highs in 2007, average daily volume diverged and failed to move higher.  As a matter of fact, average daily volumes have trended lower to where they are now about 50% of the that 2006 peak….What events will cause these trends to reverse direction?…Stocks usually move opposite of interest rates: when interest rates decline, stocks advance and when interest rates rise, stocks fall.  Rates have been falling since 2009 and stocks have increase.  But because of the Fed’s intervention, when interest rates begin to rise, stocks could also rise.”
  • February 17: “Technically almost nothing new has happened other than the market has edged a little closer to the “crunch zone” ….The one significant development is on the volume side: 1) On-Balance Volume (OBV) has finally matched the peak during last year’s March high and 2) the 50-day moving average of daily volume seems to have finally bottomed out and shows a teeny-tiny upward slope…..Since the Market moves at glacier rather than human speed, we probably won’t get an answer of what follows the Crunch Zone interaction until the fall.”
  • February 24: “the market is bumping up against the “Crunch Zone”….I wouldn’t be surprised if we were stuck in this area through the summer…..Don’t believe the media “talking heads” who offer explanations for a pause or correction at these levels grounded in the employment numbers, earnings reports, interest rates, exchange rates or corporate guidance announcements.  The true explanation is that investors small and large have acrophobia, they fear heights, especially those at levels they’ve never seen before…..What encourages me is that there aren’t any bubbles today and, rather than being buoyant, the economy is still struggling to gain its footing.  Rather than exuberance, there’s still a lot of skepticism and fear about the stock market and the economy, the sort of ground in which the seeds of a true bull market can begin to root and grow.”

We don’t need CNBC to tell us that approaching the bottom edge of the Crunch Zone will be a bumpy ride.  As much as we might hang on every word of their prognostications, neither Cramer, Gartman, Kass nor any of the other familiar cast of characters can tell us whether we will ultimately cross through the Zone or bounce off it, reverse and begin sliding lower again (click on image to enlarge).

SP 500-20130222

You’re familiar with the old saw that “timing is everything”; the next few weeks or maybe months is a perfect time to heed it.  This is no time to make new commitments if you’re getting into the market for the first time or are looking to put some idle cash to work.  You’ll know when this struggle between bulls and bears, supply and demand, in the “crunch zone” is resolved and you’ll have plenty of time to add new positions to participate in the next trend to higher levels.  Don’t fret losing the first few percentage points; consider them insurance against the possibility that the market reverses instead.

On the other hand, I like most of the 70 positions in my Portfolio and don’t see weakness in most of their charts.  There’s little reason to unload them and run the risk of losing out on the launch of the next wave higher if the “crunch zone” turns out to be only a milestone rather than an insurmountable wall.

I don’t know about you but I’m currently around 90% invested and have no plans to either unload in anticipation of a correction or bear market or aggressively put the remaining cash to work until this uncertainty is resolved.  The Market moves at glacier rather than human speed so we probably won’t know what follows the Crunch Zone interaction until sometime around Fall. This may not be want you want to hear – we all like to see more action – but it’s unfortunately what we’re going to get.

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February 22nd, 2013

Postmortem on Stock Sales

imageThe jarring correction over the past couple of days understandably sent shivers down my back.  Should I start selling some of my winners in order to lock in those gains or just steel my nerves and hold on until this passes?  I like most of my positions (currently over 70 stocks in the Model Portfolio) and the market is close to testing the strength of its momentum as it approaches what I have labeled the “Crunch Zone”, the area between the 2001 and 2007 all-time highs.  Shouldn’t I do nothing and just wait?  There is nothing in the technicals other than the fact of the approach to the all-time high to indicate that this is only another correction that the market has successfully weathered during the current bull market run since the 2009 bottom.

All of us are continually caught on the horns of this dilemma but even more so when the market is correcting: 1) hold on and run the risk of more significant losses or 2) sell and run the risk of unwinding some excellent positions.  We usually evaluate our success as investors is to see whether our total returns (dividends and appreciation) are respectable.  If we’re honest, we compare those returns against a benchmark [I use the S&P 500 Index] to see whether our efforts have produced returns in excess of what we would have earned in an Index Fund or ETF.  What we don’t do often enough, however, is move beyond our current positions and analyze the previous trading that got us to where we are today.

  • When did we sell stocks?
  • How have the stocks that we did sell (often in panic in response to a market correction) perform after we had sold them?
  • How did the portfolios of investors who bought our stocks from us perform after they took those stocks off our hands?

Since January 1, 2012, there were 87 sales transactions from the Model Portfolio.  Some of those sales were swaps to move into other stocks and others were sales to reduce risk by moving into cash.  I wanted to find out whether those sales were actually necessary?  How did the sold stocks perform had I held on to them to the present?  Did I sell winners or losers?  Were the sales made as the market was rising or falling?  What I can I learn from about my trading habits from those sales?  For each transaction, I captured the gain/(loss) prior the sale, the gain/(loss) from the sale to current and the stock’s performance vs. the S&P 500 since the sale.  Some of the results were surprising and revealing (click on image to enlarge):

Sales Performance 1

Most interesting is that 65.5% of the sold stocks actually appreciated after the were sold.  Luckily, most of the stocks sold continued to underperform since only 47% kept pace and 53% lagged the S&P 500 Index since their sale.  Interestingly, the stocks with the largest gains after their sale were losers when I sold them.  As a matter of fact, nearly 60% of the sold stocks that had losses prior to their sale have appreciated since.  One of the largest post-sale gains was MTZ (click here for chart).

When were those stocks sold and should they have been?  What was the market doing at the time of the sale?  Except for one extremely short periods, the Market Momentum Meter has been Bullish Green since the end of January 2012 suggesting to Instant Alert Members that they have a fully invested posture (click on image to enlarge):

Sales Performance 2

What stands out is that many of the sales occurred during months during and after the end of market corrections.  For example, there were 19 sales in June and July after the Spring correction but only 9 in May and June when the correction was occurring; there were 11 sales during the Sept-Nov correction but 33 in the months after it had ended.

This may sound like overly personal but I think there are several lessons that anyone can take away from this exercise:

  • It’s important to periodically review stock sales in addition to tracking stocks you currently own.
  • Stick to a market timing discipline to avoid being unnecessarily scared out of the market when it is correcting.
  • Continue to monitor stocks you’ve sold and buy them back rather than taking a risk on something untried if, after the correction ends, the stock continues its advance.
  • Move into cash only when your market timing discipline indicates that the correction is likely to turn into a bear market reversal.

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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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October 25th, 2012

Maria Misses the Big Picture

Maria Bartiromo lambasted Greg Smith’s controversial book and his criticism of the culture at Goldman Sachs.  But, if you read the transcript carefully, you see that it was actually an op-ed piece about her placing the blame of the low participation on the part of individual investors in the market these days squarely on Wall Street practices.

She may also have been trying to place blame for the drop in the viewership of CNBC also on the absence of individual investor participation and, by inference, at Wall Street’s shenanigans.  In a recent NY Daily News article quotes CNBC execs as saying that

“the cable business channel are “freaking out” because viewership levels are down essentially across-the-board, particularly with its marquee shows, “Squawk Box” and “Closing Bell”. Their biggest attractions have become their biggest losers.”……..

 

The network has already moved to revive “Closing Bell.” On Friday, CNBC announced it had poaching “Cavuto” exec producer Gary Schreier to take the helm of Bartiromo’s show.  According to the Nielsens, “Closing Bell” is also seeing its third straight quarter of decline.

 

From April 2011 to April 2012, the show is down 16 percent in total viewers and 11 percent in the 25-54 demographic.

“Maria gets good interviews, but she’s also not creating enough buzz,” says the insider.

It should be noted, that the Murdoch empire owns the NY Post, a Daily News competitor and also has the Fox Business News Network and delivers “Your World with Cavuto” on the Fox News Network.  But back to Maria’s rant.  In her op-ed piece, she claimed that

“there are issues in the [Wall Street] community.  Why else has the retail investor left the party?  trust has plummeted between the financial crisis, flash crashes, trading glitches and debacles like the facebook ipo, it has taken a toll on the retail investor.  bottom line, clients should be the priority, integrity should be the goal even at the expense of profitability, so books like these will not help.  it’s time for wall street to work overtime if and when that trusts returns, we all know that will help a lot more than just wall street.”

Where has Maria been for the past 10-12 years?  Has she had an opportunity to do more than merely repeat the day’s screaming headlines to actually see how truly abysmal the market’s performance has actually been during the secular bear market of the past twelve years?  True, there has been extreme, volatile long-term moves of 100% to the upside and 50% to the downside.  But in the end, the market is just about where it was in 2000.  The absence of individual investors probably has more to do with the Afghan/Iraq wars, the housing/financial crisis and failed Congressional/Executive leadership than it does Wall Street’s failures or excesses. (image from post several days ago, Important Stock Market Supports)

With the market failing to deliver any positive news, why should the small investor participate?  Why should they watch CNBC?  And, I might add rather selfishly, why should they read this or any other blog?  My hope is the the market does successfully break across the all-time highs not only because my investments will again be able to easily show some significant gains but also because my readership will jump and I’ll be able to sell more of my book.

Don’t loose hope; keep your chin up.  Contrary to the bearish views of many observers and Maria’s rather narrow view of Wall Street behavior being the culprit, the book’s final chapter is entitled “Where to from Here?” and it offers a fairly optimistic view of the market’s direction to 2020.

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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.

May 29th, 2012

Perhaps Investor Sentiment Is Still Sufficiently Bearish

You know why you feel frustrated?  It’s because the market for the past year has remained almost exactly level.  Today’s close at 1332.42 is almost literally at the same level as the 1331.10 close on May 27, 2011.  And, interestingly enough, reading the post I wrote that day entitled “May 2011 = August 2010” feels like stepping into one of those carnival perpetual mirrors, where all you see looking at one is another mirror encapsulating another mirror into perpetuity:

“the current game plan (i.e., view of the market’s near term projection) goes back to January 20 in a piece called “Pivot Points and Sell-Fulfilling Prophesies”….[in which] I wrote: ‘the market is edging ever closer to a zone (1300-1350) that has seen six pivots since 1999. As a matter of fact, the last pivot was in 2008 … here we are, four months after that post and, as expected, the market stalled out just about where I thought it might (today’s close was 1325.69). We’re back to the original question: Where to from here?”

Here we are two years after that original 2010 post and the market is again struggling to convincingly cross above the 1350-1360 zone:

I had hoped the market’s course between February and May 2011 would be similar to the May-August 2010 path but. “…. wouldn’t rule out the possibility that this one would be followed by a rise to at least 1550”, or 15-20% above that day’s close.  The conclusion was based on a recent AAII Individual Investor Sentiment Survey indicating that the last time AAII members were as negative as they were (25.6) was in August 2010.

The results of last week’s AAII Individual Investor Sentiment were that 38.7% investors were still bearish.  Not as strong a contra-indicator as the 25.6% last year at this time but also not that the majority were ragingly bullish.  Consequently, I remain optimistic and hope that the market will cross 1360 and, eventually, 1390 this year and deliver the long-awaited significant tell that marks the launch of the assault on the 1567 all-time high made nearly five years ago.

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.