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.

 

August 16th, 2012

Scaling the Wall of Worry

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

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

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

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

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

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

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

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

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

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

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

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

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.

May 24th, 2012

Moving Averages: Trend Inidicator or Resistance/Support Level

There are almost many discussions in technical analysis circles as to whether moving averages are predictive and form resistance and support levels or whether they instead exclusively depict historical information (like, the average price of a stock over the past 200 trading days) and indicate trends (like, the average price over the prior 200 days continues to improve).  I’m not going to take either side other than to say you can’t use one to the exclusion of the other.  What I can say is that the 200- and 300-dma’s have performed extremely well as support over the past week (click on image to enlarge):

It could purely be happenstance or it could be that the close proximity of the two moving averages intensifies their support support capabilities or it might just be that a few more trading days will see the Index cross both moving averages indicating a dramatic deterioration in the market’s health and future prospects but for the time being it does break some temporary comfort and relief to those of us who are of the “technical persuasion”.

Where to from here?  Your guess is as good as mine.  But what I do say is that I’m relieved that I have a discipline that insulates me from all the speculation we’re bombarded with daily in the business media by neutralizing the day-to-day volatility and helps me focus on the longer term picture.  My Market Momentum Meter distills the market’s trend over a number of time horizons and translates the analysis into a single number which, when compared to experience over nearly 50 years of market data, indicates what market tactic (all cash or fully invested) which will like generate the best likely outcome.

My Market Momentum Meter is at the borderline and may soon suggest a more conservative, risk-off approach but for the time being it still indicates that the market’s longer-term trend continues to be “provisionally, moderately bullish”.

 

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May 16th, 2012

The Difficult Choice

The times aren’t easy for market timers.  The market has declined around 6% since the April 2 peak of 1419.04 and the anxiety level is rising.  The question of every market  timers lips are: “Should we sell into this decline and, if so, how much?  Is this a collapse similar to the stealth bear market brought on by last year’s Federal budget deficit crisis, the S&P downgrade of US debt and the deepening lose of confidence in the Euro currency?  Or, as many have discussed before, are we merely going through a typical “sell in May” correction which, if we stay put, we’ll recover from relatively unscathed in the fall?

Contrarians might take the opposing side and ask “Should we take advantage of the opportunity presented by lower prices and begin to pick up some bargains while we have the chance?”  As the saying goes, that’s what makes a market.  Two diametrically opposing views leading to two opposite courses of action, both coming from the same set of facts.

Unfortunately, the chart of the S&P 500 doesn’t provide much insight as to the best course of action.  I first began surveying what I called a “congestion zone” on April 12 in “Identifying the Boundaries of Stock Chart Congestion Areas” and followed that up on April 23 with “The Lower Boundary is Becoming Clearer“.  Here we are, just over a month later, and without any clearer idea of what the boundaries of the zone are or whether we may have actually fallen through the bottom of the zone and began a downward trend.  The striking thing is the apparent similarity between March-April hump this year and the April-May hump last year.  Let’s hope the slide when the Index crossed below the 200-dma last year isn’t repeated this year.

The market index has fallen through the lower boundary of what could have been a flag pattern.  It fell below what I was hoping would be the neckline of a small head-and-shoulders pattern.  It fell below the 100-dma and is quickly approaching the 200-dma (which, coincidentally lies just above the 300-dma).  If last year is any example, then the selling could again be quick and deep.  But the recovery 4-6 months later was just as sudden and it may be so again this year.

The Market Momentum Meter was tested against nearly 50 years worth of stock market history and in the process identified the conditions (as reflected in the relative positions of the moving averages and the Index itself) under which exiting the market was the best strategy.  At other times, staying in the market, regardless short-term fluctuations, was the best long-term strategy.

So far, the Meter is still signalling a full commitment.  However, extrapolating further straight-line declines of an average -0.168% per day (the average daily rate of market declined between March 26 and yesterday’s close), the signal would turn a Cautious/Yellow when the Index hit approximately 1290 and a Bear/Red at 1240.  Coincidentally, those are the approximate levels of the 200-dma and of a long-term trend line that has been the locus of multiple pivot points since the Tech Bubble began in 2000, respectively.

Last year, however, the market’s decline was so steep and rapid that the Meter’s exit signal was too late.  Furthermore, the recover was rather quick so that it failed to signal a timely return.  Unfortunately, the difficult choice being faced is between violating our discipline and sticking to the discipline and risk further losses.

February 14th, 2012

Is the Market Overvalued and Overbought?

I was struck by a post on Slope of Hope entitled “An Ongoing Balloon Ride” the major premise of which was that the the market has risen too far and diverged too far from its 400-dma such that there’s no questions “if this debt-filled balloon will disintegrate, but when“.  The writer’s premise is that the several times in the past when the Index has diverged as far as it has from its 400-dma have all been followed by a drop or correction.

I have my own database and decided to do my own research and gather my own facts to see whether I could replicate those results and come to the same conclusions.  My database goes back to 1963 and the moving average I rely on is the 300- rather than the 400-dma (but what difference does a hundred days make between friends).  The Slope writer visually picked the areas when the index diverged significantly from the moving average and eyeballed the subsequent change.  What I discovered was:

The S&P 500 Index is currently 6.38% above the 300-dma.  In the 12,089 trading days between March 12, 1963 and March 11, 2011, a spread between the index and the 300-dma of 5.00-7.99% occurred on one out of every 6 days, or 16.89% of the time.  One could almost say that this spread is “typical”, not large or overbought or stratospheric.  Actually,  it’s fairly typical.

One can look at both tails of the distribution as indications of how extreme the spread defining overbought or oversold situations, times when one needs to sell or has a true opportunity to buy.  In 2008 and 2009, at the depths of the Financial Crisis Crash, the market was over 35% below the 300-dma …. we should have all bought then but few had the nerve.  In August, 1987, the market was 24% above the 300-dma; a few months later, the market suffered it’s largest single daily decline in the October Crash …. we should have sold.

The market was more than 20% above the 300-dma also in 1983 as the market rocketed in celebration of its exit from the secular bear market of the 1970’s.  Rather than crashing, the market went into a horizontal consolidation lasting 15 months (just like the past 15 months?  I’ll leave that determination for you to make.)

So is the market now overbought?  Not if you use the 300-dma as a benchmark.  Did the Slope of Hope contributor select a seldom used 400-dma benchmark to prove his point?  It’s possible.  Where would the market have to be for it be overextended or overbought by these measures?  Somewhere around 1500-1550 …. interestingly, exactly the level of the market’s all-time high as measured by the S&P 500.

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February 8th, 2012

Market Momentum Turning, But Will It Accelerate?

Many decry the lack of volume, conviction on the part of most individual investors, the lack of excitement about a market that just doesn’t seem to want to turn lower but instead inexorably continues to move higher.  Beneath the surface and behind the scenes, however, something is happening.  Many aren’t aware of it because of their focus always on today’s “Breaking News”, earnings reports or press releases.  What most don’t see is the change that’s taking place in the form of a slow turnaround in the trend of market momentum as measured by the moving averages.

In a piece entitled “Sweet Dreams” way back on October 14, 2010, I wrote:

…… have you taken a look recently at how the four moving averages (50- ,100- ,200- and 300-day) are converging as they were all trying to squeeze through the neck of a bottle? (click on image to enlarge)

First, it’s important to note that sometime next week, the dreaded “Death Cross” of the 50-dma crossing under the 200-dma that we were so fearful of at the beginning of July will be reversed and, by definition, will become the “Golden Cross”.

Also note that the four moving averages are transforming themselves into a bullish alignment so long as the Index itself remains above them all for the next month or so. That’s pretty monumental because it is a solid confirmation that a bull market is in place.

A few days before I’d written this piece, Europe’s Finance Ministers approved a rescue package worth €750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF); six months later (May 2011), our stock market was 16% higher.

But the situation in Europe appeared to continue deteriorating. It became evident then that due to its severe economic crisis, Greece’s tax revenues were lower than expected making it even harder for it to meet its fiscal goals. Following the findings of a bilateral EU-IMF audit in June, further austerity measures were called for while Standard and Poor’s downgraded Greece’s sovereign debt rating to CCC, the lowest in the world.  Simultaneously, our stock market seemed to hit a wall; it cratered in August 2011.

The market now seems to be again trying to squeeze through the neck of that same bottle.  Last week, the Black Cross again turned back to Gold and  all four moving averages finally turned up this week.  Within a month or six weeks, the four moving averages will right themselves and we’ll see them in a perfect bullish alignment again.  Note the similarity between the 2010 above and what it looks like today:

I wrote to my members at the end of January that

“Going back 50 years, there haven’t been many periods when this convergence [of moving averages] has existed outside of market turns and that’s why I believe the market will soon begin trending higher. Obviously my anticipation isn’t based on an astute distillation and analysis of domestic or international economic and financial data. This prognosis is based on my read of the history of market psychology and behavior.”

The convergence continues to unfold.  Psychology is changing to match the more positive economic news.  We have begun adding to our positions with focus on select Industry Groups.  If there won’t be another surprise to hit us from left field (not intended as a reference to the elections this November) then we should continue putting cash to work as momentum begins really accelerating.

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