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 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.

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.