Market Timing | Stock Chartist

March 1st, 2013

“Timing Is Everything”

CNBC 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).

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.

Technorati Tags: market psychology, market timing

January 2nd, 2013

Shaking Off the Fear

If you’re an individual investor, one of the most important articles of last week besides the focus on the “Fiscal Cliff” debacle was an article in the December 29 Washington Post entitled “Bull market roars past many U.S. investors“. The gist of the story was that “Americans have missed out on almost $200 billion of stock gains as they drained money from the market in the past four years, haunted by the financial crisis……Individuals are withdrawing money as political leaders struggle to avert budget cuts that threaten to throw the economy into a new slump.”

According to the Post, much of the damage to investors is “self-inflicted” because of fear and anxiety brought on by market volatility and memories of past “crashes”. However, U.S. growth has improved and earnings tied to the economic are expanding. Those improvements have been reflected in stock prices. Of the 500 stocks comprising the S&P 500 Index, 481 are higher now than they were in March 2009 or when they entered the gauge. Some of the statistics supporting these conclusions are:

Investors are lowering the proportion of stocks they own in retirement funds during a bull market for the first time in 20 years.
The proportion of stocks in the assets in 401(k) and IRA (excluding money market funds) fell to 72 percent from 72.5 percent in 2009.
The percentage of households owning stock mutual funds has dropped every year since 2008 to 46.4 percent in 2011, the second-lowest since 1997. [Of course, this could also result from the wide choice, availability and acceptance of competitive ETFs]
New money has gone to the relative safety of fixed-income investments as corporate bonds and Treasuries have received nearly $1 trillion since March 2009.

Housing is making a comeback and housing stocks were among the leaders last year, banks are on the mend and financial stocks were also among the best performers and 2013 auto sales are projected to approach 1.5 million. Is it time then for individual investors to begin fearing declines in the value of their fixed income investments as interest rates reverse (regardless of Bernanke’s protestations to the contrary) and start moving money back into stocks?

Meanwhile, institutional investors (the group I call the “herd”) hasn’t fared that well in the market either. According to in December 26 Wall Street Journal article entitled “2012 Was Good for Stocks, Bad for Stock Pundits“,

At the end of 2011, Mr. Cramer warned investors to avoid bank stocks. Oops. They were one of the best-performing sectors in 2012. He urged investors to avoid real estate, but housing prices are up more than 2% from a year ago…..and the stocks of home builders, as measured by the S&P Homebuilders exchange-traded fund, are up 53.6%.
Of the 65 market “gurus” tracked during the last few years by CXO Advisory Group, the median accuracy for market calls is 47%. If that sounds low, or you wonder about the quality of the pundit, consider that the list includes such well-known names as Bill Fleckenstein (37%), Jeremy Grantham (48%), Bill Gross (46%) and Louis Navellier (60%).

So how do I deal with the noise coming from the “talking heads” and the uncertain produced by the market? I maintain my equanimity in the face of volatility by relying on how market participants have behaved during similar situations in the market’s history. I rely on my Market Momentum Meter to give me some indication of what market participants believe will happen, on average, in the near-term as reflected in their collective buying and selling decisions. It’s measure by whether they are pushing prices up or down and the momentum behind those decisions.

The Market Momentum Meter turned a bright Green on January 31, 2012 when the Index was 1312.41, or 10.25% under today’s close of 1462.42. It wasn’t Green for only 10 trading days during the year (the longest period was 7 days around the November correction low:

Like a parent who never quite trusts riding in a car that his kid is driving, I didn’t fully trust my own creation. It took me a few months after that Green signal at the end of January to increase the money I had in stocks. As hard as I tried to totally drown out the noise (news) about Euro debt and currency problems and, more recently, the fiscal cliff debates, I never could bring myself to be fully invested and, like corporate America, always had a significant amount of cash on the sidelines. And then in after the November elections, as the Market reacted to the realization of a second Obama term and continued Congressional stalemate, it looked for a couple of weeks like we might see a repeat of the 2011 market implosion. Fortunately, I waited this one out and saw money begin flowing back into stocks as prices quickly recovered.

Like many other market participants, I need additional “guarantees”. Even though the Meter says that these sorts of market conditions in the past have lead to higher prices and that it’s all clear to be fully invested with relatively low risk, I still want to see the Index continue its assault on the all-time highs by first crossing above where it stalled out last September. When that happens (which could be next week), I’ll feel more comfortable putting rest of cash to work.

Technorati Tags: market momentum, market timing

December 11th, 2012

Our Discipline: A Case Study in MED

As I’ve written here often, I believe the best approach for the typical individual investor is to manage their portfolios employing the following three steps: 1) a well-founded, unemotional approach to market timing, 2) the notion of industry group rotation and 3) diversification that spreads risk among a fairly large number of individual stocks (i.e., investing approximately equal amounts among stocks in the portfolio).

Put another way, the portfolio management effort down to answering the following questions: How much money should be put at risk in the stock market at any particular moment and, if new money is to be put to work, which stocks should be added to the portfolio?

I solved the first question for myself several years ago. I collected data back to 1963 on the daily S&P 500 Index and, by asking a series of “what-if” questions determined when it would have been better to have invested money in the market making an average return than having it sit idle on the sidelines. Or, stated in the reverse, when would having money sit on the sidelines been better for long-term returns than had it been invested earning an average market return? The analysis resulted in my Market Momentum Meter, an unemotional barometer of market sentiment, that allows me to shut my ears to all the media noise and hype about what they claim is “Breaking News” and focus instead on the truth about conditions conducive to momentum-driven markets over the past 50 years. Following the Meter’s signals over the long run, investors could have avoided market crashes while still taking advantage of the bull market runs. I can attest to the fact it helped me avoid the worst of the 2007-09 Financial Crisis Crash.

Once the Meter signals that it’s relatively “safe” to put new money to work in the market, I use a two-step approach for finding the stocks best for carrying that risk. I scan all stocks to find those that meet one of four different sets of criteria and, once having narrowed down the population of publicly-traded stocks, I look at their charts to find those that might have a good chance of crossing above levels that stymied their past advances (in other words, those that look like they could soon breakout across significant, long-term resistance trendlines). The first stocks to breakout are first in line as investment candidates. The discipline requires me to sometimes be fairly active and at other times to do nothing but unemotionally watch the Portfolio run with the market or sit idle safely protected in cash.

The debate/negotiations in Washington has brought us again to a crucial market pivot point. The Meter indicates that when market conditions look as they do today it might have been best for us to have money invested. I have begun running those scans to begin finding those stocks that look like they’re ready to trigger Buy Points in their charts by crossing above key resistance levels.

While 75% of the stocks currently in the Portfolio show gains and 69% have outperformed the S&P 500 since their purchase, few have delivered the sort of results as has MED since its purchase last March. I had never heard of Medifast when it dropped through one of the Scans and presented a compelling chart. When I purchased the stock, I wrote in the Instant Alert to Members that the stock is “a product of yesterday’s Stocks-on-the-Move scan. It has formed an inverted head-and-shoulders reversal pattern at what I hope will be the bottom of a multi-year descending wedge pattern.” Since then, the stock has advanced 95%:

As the usual disclaimer says, “Past performance is no guarantee of future performance”. But, I believe in the discipline and am using it today to find the next batch of stocks some of which, with some patience and luck, will hopefully deliver what turns out to be the outstanding performers over the next nine months or a year.

Technorati Tags: inverted head and shoulders, MED, Stocks on the Move, Technical Analysis

November 7th, 2012

The Market and the Quadrennial Election Cycle

Nate Silver has really made a name for himself by accurately predicting the outcome of the past two Presidential Elections through statistical analysis techniques. I’m clearly not a statistician but several people did asked me, both before and since Tuesday, what I thought the elections would mean for the stock market. Which would be (have been) better for the market, a Romney or an Obama victory. We don’t have to wonder any more because the market responded today with a 2.36% decline, the worst one-day drop in around six months.

Rather than guessing or predicting as to what the future might hold, I decide instead to look at the historical records, the precedents, to see what actually did happen in the years following each of the quadrennial elections since WWII. It’s the approach I used in developing the market timing techniques underlying the Market Momentum Meter, a tool that has guided the amount of money I should pull out of the market to avoid the risks of a significant market downturn. Without divulging proprietary information available exclusively to Instant Alerts Members, the Meter is on the verge of changing again from extremely bullish to significantly bearish.

Perhaps the following statistical analysis of the Market’s performance in the 12 months following the quadrennial elections will provide similar guidance:

Before yesterday, there were 16 quadrennial elections beginning in 1948
- The market is not totally agnostic when it comes to political affiliation
  - Nine were won by the Republican candidate, seven by the Democrat
  - Of the 9 Republican wins, the market finished higher the following September 3 times and lower six times
  - Of the 7 Democrat wins, the market finished higher the following September 5 times and lower twice
- The average changes in the market, as measured by the Dow Industrial Average, has been
  - an average 1.5% gain in the two months to year-end
  - a give back to break-even by the end of the following March
  - an average net gain of 2.0% by the end of the June following the Election
  - a marginal improvement to an average 2.3% by September, or 10 months after the election
There has been a wide range of changes during those time intervals:
- in the 2 months to year-end, the maximum gain was 8.0% and the maximum decline -6.6%
- in the period to March, the maximum gain was 13.2% and the maximum decline was -8.4%
- to the following June, the maximum gain was 27.0% (during the Tech Bubble in 1997) and the maximum decline was -11.8% in 1948
- to the following September, or 11 months, following the election the maximum gain was 31.5% in 2007 and the maximum loss was -19.4% in the Tech Bubble Crash of 2001.

Putting it all together, here’s a picture of the market’s action following each of the quadrennial elections. (click on image to enlarge)

Today’s -2.36% decline is at the outer limits of the total amount of decline that’s usually taking place between the Election and year end. This one-day drop is more than 14 of the past 16 cycles; the only two that were greater took place in 1948 (-6.6%) and in 2008 when it declined -6.8% at the beginning of the Financial Crisis Crash.

Hopefully, today’s horrible reaction represents about half of the total we’ll see to the end of the year. Unfortunately, if the market isn’t able to recover this loss then there’s a strong possibility that there will be a follow through of the downside at the beginning of next year.

Technorati Tags: Election Cycle

October 31st, 2012

Lunar Cycles and the Market: An Annual Report

Hurricane Sandy was traumatic and something we haven’t really grasped the full implications of. The people in its path suffered personal tragedies. And in the midst of the news broadcasting on Tuesday was the almost overlooked fact that October 29 was a full moon. Breaking through my focus on the scenes of devastation in lower Manhattan, Long Island, Connecticut and the Jersey shore was the thought that I had written several times over the past three years about the implications of the Lunar Cycle on stock prices.

For those unfamiliar with the theory, proponents believe that the market tends to be bearish when the move is waxing to its full phase and more bullish when it is in its waning phase to a new phase. I’ve been tracking how accurate the theory might be in order to see whether there was any merit in using it to guide trading. Coincidentally, The last I reported on the statistics happened to have been Nov. 7, 2011, almost exactly a year ago. In that piece (if you click on the link you can see a table with the results for the twelve months ending 10/26/2011), I wrote:

“What has always intrigued me the most the cumulative changes during each of the two types of lunar phases. Since I started tracking these returns in 2009, if you had bought the SPY at the beginning of Waning Phase and sold at the end, your cumulative returns would have been 64.48%. I you had sold the SPY short at the beginning of each Waxing Phase and covered at the end, your cumulative returns would have been 27.99%. Combining the two would have nearly doubled your money in just over two years. Not bad for a theory that has yet to be statistically proven, wouldn’t you say?”

A year later, have the results changed much?

Nothing much except that strictly following the theory with a bimodal (on/off) investment in the S&P Index ETF would have produced a return of 12.88% for the prior twelve months and avoided a -1.26% loss for the waxing phases. The theory has delivered the expected results accurately in 58% of the 24 phases (12 waxing and 12 waning). The cumulative return for the waxing phases since July 2009 would haveincreased to 71.63% and the cumulative losses for the waning phases would have grown to -21.11%.

For reference, a buy-and-hold strategy for the period July 7, 2009 to last Friday’s close, the last trading day before the full moon would have produced a gain of 57.22%.

A friend scoffed at the theory claiming that the 60 phase results I presented to him was too small a sample. I’ve added 24 more phases and will continue to add more until I convince him …. and me ….. as to its validity.

Technorati Tags: Lunar Cycles

October 23rd, 2012

Important Stock Market Supports

I must confess that I’m disappointed by both Romney’s lack of fire in his belly during last night’s debate and in the market’s negative reaction to that performance. I’m one of the crowd who was looking for a bounce rather than a swoon as we moved on to the election and for several weeks after a Romney victory. My market optimism was based on the belief that a Republican victory in both the White House and Congress would a big risk factor overhanging the market (whether fairly or not) as far as economic growth and would also reduce the risk associated with the country’s falling over the fiscal cliff at year end.

This morning’s reaction forces me to go reevaluate the game plan. Perhaps the market will slip over the edge before the economy does. But then again, there are many potential support levels to stop the fall …. albeit after some major damage to stock prices and portfolios (click on image to enlarge):

Those supports are indicated on the chart:

The lower boundary of an ascending channel that begin in late-2011. Perhaps, not coincidentally, that trendline actually stretches back to the 2009 Financial Crisis Crash low (see chart below) and should, therefore, be considered an extremely important and strong one.
Three slow moving averages that all happen to currently be ascending
A horizontal trendline at approximately the prior 2012 low for the year

Unfortunately, however, my proprietary Market Momentum Meter will turn red suggesting that a move into cash is advisable based on similar situations in the past. If the decline continues at the current rate, it will be similar to the rapid decline in 2011. The recovery from that correction was fairly quick and dramatic so many investors, including me, were whipsawed and are still trying to recover.

Some look at the long-term chart a see the market back at the top of its 12-year secular bear market tradition range and, consequently, see the beginning of another major market crash (i.e., decline of 30-50%):

One usually bearish pundit recently wrote the following typical view of an impending market top,

“Cyclical bulls follow cyclical bears, so from those panic ashes a new cyclical bull was indeed born. And coming from excessive lows, it would more than double the stock markets again. Over the 3.5-year span running to just last month, the SPX blasted 116.7% higher! And that brings us to where we are today, what is almost certainly the third major bull-market topping witnessed in this secular bear.”

Rather than the proximity to the top of the secular bear market range, my focus will be on that ascending trendline from the 2011 and 2009 lows, currently at around 1400. A cross below that line would be a clear indication of more declines to come.

July 24th, 2012

How to remain unemotional in a volatile market

I look back at my last post and think, based on the market’s action over the past several days, what must I have been thinking? How could I possibly gone so far out on a limb as to call for a market rise to 1575? And how dispiriting is it when the market proceeds to decline by 1.6% over the next five trading days? Well, I’ll tell you that it feels horrible.

In the same way that last Thursday we began to see some blue skies and some progress towards shoring up portfolios, today’s market is just as equally dejecting by pulling the rug out from under. Fortunately, we have a ballast [anything that gives mental, moral, or political stability or steadiness] as market traders through the Market Momentum Meter. This objective, unblinking, unemotional barometer of what has happened to the market in similar situations over the past sixty years steers our course and guides us through these turbulent emotional markets.

Last week, the market failed to touch the upper boundary of a channel giving the first hint of a potential problem. For the rest of this week, the support provided by the zone demarcated by the two converging trendlines will have to hold or else we’ll have to rewrite the game plan.

For the time being, the Market Momentum Meter continues to ship a bright Bullish Green because the Index is above all its moving averages, only the 50-dma is out of sequence; however, only two of the moving averages are heading higher (200- and 300-dma’s) while two are heading lower (50- and 100-dma’s). But the situation changes with each day’s trading activity.

Similar situation like this in the past became stabilized and trading confidence returned when the Index remained above the 50-dma so that it pulled the two laggard averages higher into a more proper alignment. It’s not to say that the moving averages dictate the future. What the statistics indicate is that investor confidence reflected in market prices is a progressively reinforcing loop. The Index’s ability to advance will bring in more buyers waiting on the sidelines; price pressure will turn the remaining equity holders into sellers.

I have a long list of more than 100 stocks any of which I would have bought a week ago because of the strength of their chart actions. The recent market action has put a definite questionable dent into their otherwise favorable prospects.

The past week has proven again that “50% of a stock’s price movement can be attributed to the overall market, 30% to its industry sector and only 20% to its own fundamentals.” It doesn’t matter how strong the charts of stocks already in the portfolio or those in a watchlist look, they’re all trumped by the market’s action. This is never more true than today since so many of the forces driving the market come from overseas.

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.

June 4th, 2012

Revisiting 1970′s Secular Bear Market Exit …. Again

There are two kinds of investors: those who try to predict the market’s future direction from what they understand to be the truth of today’s events and those who try to understand past events and project them as models for what the future might hold. In other words, those who view the market in fundamental economic terms and those who see the market in terms of supply and demand for stocks. As you might have surmised, I belong in the latter camp. I gravitate to the technical approach and look to the past for analogs that might guide me in looking at possible market direction today.

For quite some time, I’ve seen similarities between the end of the 1970′s secular bear market and this generation’s secular bear market that began with the Tech Bubble Crash. I’ve been calling it my “Reversion to the Mean” chart. For example, in “The Magic Number is Actually 7.5% per Year” from October 11, 2008, in the depths of the Financial Crisis Crash, I wrote:

“The good news is that …. the Index came within 6% of the bottom boundary (intra-day 839 low vs. 789) boundary); we should be near very the bottom. The bad news is that projecting forward to the end of 2009, the lower boundary increases to only 858, or still below Friday’s close.

There will be bounces but, in all likelihood, it will be a long time (several years) before the Index touches 1400 again. Unfortunately, the “buy-and-holders” are going to feel extremely frustrated. Market timing will be extremely important. You’ll have to trade gingerly taking advantage of recovery moves. You’ll have to be patient and not expect a robust Bull Market to return anytime soon. Shed poor performing stocks and, as market weakness appears, become defensive to conserve your capital.”

And then on Obama’s Inauguration on January 17, 2009, I wrote:

“Granted this is a bad recession; some even call it the beginnings of a depression. It’s not only here but it’s worldwide. Has the market fully baked in the economic distress? Has the market adequately reflected the $trillions that has been created to stave off further effects? Will the market deviate from the mean more than the 9.98% of 1982 (making today’s low at least approximately 725)?

Without getting political, I thing that investor psychology (as well as that of the general populous) see’s the Inauguration as a new beginning and psychology is the other half of the market (economics being the first). Ronald Reagan took office in January 20, 1981 and the country sighed a deep sigh of relieve as Jimmy Carter left office leaving behind the high oil prices and high interest rates; the hostages were released in Iran that same afternoon. Barack Obama is being inaugurated and perhaps we’ll be as lucky.”

Then, on May 2, 2011 in “Reversion to the Mean-Redux” I wrote:

“Following this track literally [superimposing the exit from the 1970's secular bear market exactly on to recovery from the 2009 Financial Crisis Crash] means that the market could be heading into some murky water. We may soon stall out, retreat again and not see the current level again until sometime in 2013. If the recovery time frame over which the economy and the market took to come out of the 1970′s secular bear market were followed precisely again, then a new market high won’t be seen until around the beginning of 2015.

I have no idea and care little today to know what underlying fundamentals will be used to explain in the future the market’s then behavior. “Reversion to the mean” merely establishes the boundaries within which the consequences of all these underlying dynamics might ultimately be realized.”

Finally, this past January 30 in “That Old 1978-82 Analog Again” I wrote:

“On the one hand, we might actually be escaping the Bear Market sooner than I had originally anticipated but, on the other hand, the analog may still be in play and we’re looking at a possible reversal for the remainder of 2012 in order to get back closer to the analog.

I guess if I had to choose between swallowing my pride at having missed a “forecast” and accepting the upside break out or meeting the forecast but delaying the opportunity of seeing a higher market again ….. I’ll live with having missed a forecast.”

I guess we didn’t dodge the bullet since we’re just about back to where we were when the above was written. But now, six months latter, what does the analog look like now (click on image to enlarge)?

The black line is the actual index and the blue is the projection based on the exit from the 70′s secular bear market. The 70′s secular bear market low point was in September 1974 and a new high wasn’t established until 1980, over 5 years later. The analog assumes that the low of the current secular bear market was the 2009 Financial Crisis Crash; overlaying the 1970′s track beginning at that low point produces a new high sometime in 2015.

In the Weekly Recap Report sent to Members yesterday, I indicated 5 possible support areas on which the market could pivot and begin another leg higher. However, the sixth lower level is the bottom boundary of the “Reversal to the Mean” channel indicated in the chart above. While the 1970′s analog foretells of a nice bull market to 2015 and beyond it also implies that the current correction could stretch all the way down to around 1000 in the S&P 500.

The similarities between the exit from the 1970′s secular bear market and today are many. What we do know is that the exit process takes a long time. Let’s hope that one of the trendlines indicated yesterday offer firm support and the market won’t need to revert all the way back to the lower boundary as it did in the months immediately preceding Ronald Regan’s election.