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Market in DOWNTREND, September 4th
The model switched back to downtrend last Friday September 2nd. For those of you who are new to this model, that means that you do not want to own or buy shares. The odds are stacked against the bulls right now and chances are much higher that you will make money shorting the market. Since the crash in August, all signals seem to indicate that the bull market that we have been in since March 2009 has ended, and that we are entering another bear market. That again means that you should be doubly cautious owning stocks.
The jobs report that came in on Friday added zero jobs, a negative since we need at least 125,000 jobs a month just to keep up with population growth. Over the last three months the official numbers have furthermore been revised down 58,000. The national manufacturing activity report from the Institute of Supply Management (ISM) came out Thursday at 50.6, which is just a tad above a contraction. This was the third straight month in which inventories rose more than new orders.
The business outlook survey (BOS) from the Philadelphia Fed does not look much better (chart below). The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a slightly positive reading of 3.2 in July to -30.7 in August. The index is now at its lowest level since March 2009.
The last two times the index reached -20 or lower, in January 2001 and August 2008, the stock market responded with crashes. In 2001 the market corrected 41% until its bottom on October 10th, 2002. After the second low reading in August 2008 the market fell 45% until its low in March 2009. You should off course not base your investment decisions on just a few observations, but the ISM and the BOS are both very good starting points. Take also another look at the other data points from my previous post which also indicate that we are heading towards a new economic recession.
Based on my reading of the market at this juncture; the risk reward in stocks is not favoring long-term holders. For those of you with a 401(k) or any other savings in the stock market for that matter, you should strongly consider exiting those investments now and moving into cash. Cash, you might say, offers no yield, why would you want to invest in that? I think we are heading into an era when you will be happy by loosing as little as possible and were everything will be about relative returns. If the stock market falls 50% and you have kept your savings in cash, your purchasing power in terms of stocks has just doubled! Same goes with any other asset class that deflates relative to cash. I believe that the purchasing power of your cash will increase relative to almost all asset classes over the coming years, if this is in fact, which it seems to be, the start of a new bear market.
Market timing is extremely difficult. Hitting the exact top or bottom is for all practical purposes impossible, but still many investors are extremely hesitant to exit their positions if their portfolio is lower than it was at the top. Here is a story that can illustrate this behavior (the story is from William O’Neil’s excellent book How to Make Money in Stocks):
“A little boy was walking down the road when he came upon an old man trying to catch wild turkeys. The man had a turkey trap, a crude device consisting of a big box with the door hinged at the top. This door was kept open by a prop to which was tied a piece of twine leading back a hundred feet or more to the operator. A thin trail of corn scattered along a path lured turkeys to the box. Once inside, the turkeys found an even more plentiful supply of corn. When enough turkeys had wandered inside the box, the old man would jerk away the prop and let the door fall shut. Having once shut the door, he couldn’t open it again without going up to the box and this would scare away any turkeys lurking outside. The time to pull away the prop was when as many turkeys were inside as one could reasonably expect. One day he had a dozen turkeys in his box. Then one sauntered out, leaving 11. “Gosh, I wish I had pulled the string when all 12 were there,” said the old man. “I’ll wait a minute and maybe the other one will go back.” While he waited for the twelfth turkey to return, two more walked out on him. “I should have been satisfied with 11,” the trapper said. “Just as soon as I get one more back, I’ll pull the string.” Three more walked out, and still the man waited. Having once had 12 turkeys, he disliked going home with less than eight. He couldn’t give up the idea that some of the original turkeys would return. When finally only one turkey was left in the trap, he said, “I’ll wait until he walks out or another goes in, and then I’ll quit.” The solitary turkey went to join the others, and the man returned empty-handed. The psychology of the normal investor is not much different. They hope more turkeys will return to the box when they should fear that all will walk out and they’ll be left with nothing.”
This is the type of stock market that we have likely entered into. It is a big likelihood that those of you waiting to get 12 or 13 turkeys now will have to wait for a decade or longer and in the meantime see your portfolios halve or worse (this off course could change if the Fed decides to print a few more trillion USDs). So how should you exit your investments? I would say for most people the best thing is to just get out and be over with it. But if you are not following my model and feel some resemblance to the old turkey hunter in the way that you would be unwary if the stock market was to recover towards the end of the year, I would recommend that you exit your portfolio over time. One way to do this would be to exit your portfolio in equal portions over a fixed time period. Let’s say that you decide to start exiting this week and want to be fully out by the end of the year. There are 17 weeks left of the year, which means that you would exit your portfolio in 17 equal portions until the last week of the year. Assuming that you have a total of 10,000 shares/units, it could for example mean that you would sell 590 shares once a week the next 16 weeks and then 560 shares the last week of December. The length of your period should be whatever you are comfortable with and depending on how long you think a potential bear market rally will last. If you think that this is just another correction in the bull market from March 2009, then you should sit tight and wait for another uptrend signal.
Below is an updated version of the chart that I posted in the newsletter from August 7th.
S&P 500 weekly high-low bars
The last uptrend was not able to push the index upwards to the resistance level. I will continue to update this chart regularly going forward. I would not be surprised to see this downtrend or the next one push the indexes below the August lows. Markets typically correct between 40-60% in bear market rallies so if we see a new low in September it would be normal to see such a rally last maybe towards the end of the year. Remember that this is rough estimates based on how the markets look today. It could change on very short notice. You will be much better off by following the signals of the model than to try to guestimate what the markets might or might not do in the future.
You will find the performance of the model by following the link here.
Market in UPTREND, August 24th
Yesterday’s strong market action turned the model around and we are therefore as of today in a new uptrend.
The correction we have seen in the market over the last few weeks has the third-steepest descent since at least 1970, only Black Monday in 1987 and the October 2008 were worse. Only time will show if this was a correction like in 1987 or if we are heading into another bear like the most recent between October 2007 and March 2009.
There are several indications that point to this being the start of another bear market:
- The Philadelphia Fed State Coincident Index is dropping like a stone. From 90 in April down to 32 in the latest report. Every single time the indicator has fallen like this over the last 30 years we have gone into a recession. So it has correctly “anticipated” five of the last five recessions.
- The consumer confidence is at 54.9. This is lower than anytime during the Financial Crisis, and the lowest it has been since May 1980.
- Strong volume on a sell-off and weakening volume on a rebound make for the opposite of what bulls want to see.
- S&P 500 is down more than 20% measuring intraday low vs. high over the last few months.
- The 200DMA is sloping downwards.
- The 50DMA has crossed below the 200DMA.
- The bigger problem in today’s economy are credit related and currently the bank index, DKX, is leading the market lower.
If this correction turns out to be the start of a bear market, then the recent action is historically typical. In the past four bear markets, the first aggressive swing down was followed by a rebound. The indexes erased anywhere from 20% to 58% of the initial loss before they made a fresh move down.
We might be in one of those rebounds now, so be careful not to jump straight bank into the market even if the model has turned to an uptrend. In a bear market the upturn signals does not as often as in bull markets, which we have had since March 2009, lead to sustained uptrends.
I believe that markets could be waiting for what Benny B has up his sleeves and hoping that his speech on Friday could reveal something positive for the stock market. If the Fed decides to launch a third round of quantitative easing it could be the fuel that will drive stock markets higher.
If you decide to enter the market now, look for those stocks that bounce the most in the shortest amount of time, these are most likely the ones that are going to be the leaders of the new advance. And pyramid into your positions. This is a high risk market to be invested in.
Follow this link if you would like to see the performance of the model.
I just recently posted the latest newsletter that can be found here. I would specifically recommend that you take a look at the following chart and follow how the indexes behave when they reach their respective resistance lines.
Newsletter #2, 2011: Last week was brutal, but what can we expect going forward?
The S&P 500 was down 7.2 % last week, which was the largest selloff in 32 months! This selloff has in a little over a week wiped out USD 2.0 trillion, almost the same amount as the combined size of QE1 and QE 2. This just shows how fast asset values can deteriorate in a stock market downtrend. In other words this was a big event.
I have not sent out a newsletter for many months now, the last one was on March 25th, but I feel that the performance of the market over the last few weeks calls for another one now. Before I get into what I will discuss today I want to remind you to pay close attention to the model I use to calculate the turning points in the market. The model does not perform that well in a choppy market like we have had for most of this year, but in a longer time frame, as the chart below indicates, it has performed pretty OK.
Performance of the model since its inception in May 2008. The line is BLUE those days that the model indicates that we are in an UPTREND and RED those days that it indicates that we are in a DOWNTREND.
S&P 500 daily closing prices 
I am covering the following topics in today’s newsletter:
- The implications of the US credit downgrade and why the US should attack Switzerland
- Still no sign of leadership from Washington
- Official numbers say that unemployment is falling, but does that really matter?
- Is this market correction the start of another bear market?
Market in DOWNTREND, July 28th
We have had an unusually high number of high volume down days lately, which were topped off with a massive down yesterday, July 27th. The Nasdaq with its 2.6% had its largest loss in five months. Market action in the major indexes constituted yet another 90% panic selling down day.
I have said several times earlier that third year bull markets typically are trendless, and this year is continuing to prove to be typical in that respect. The S&P 500 has mainly traded between 1,250 and 1,350 all year. IBD illustrates the lack of trend in the market well in today’s newspaper: “Last year, the Nasdaq had an eight-week win streak in the first half and then rose in 10 of 11 weeks in the second half. Those kinds of streaks make for good trading. So far this year, the longest up streak on the Nasdaq has been three weeks.” This market action calls for increased patience and continued adherence to your trading rules. Remember that a new trend will eventually emerge.
The reason for increased volatility lately is due to the lack of agreement between US politicians on how to handle the debt situation. But such discussions are not a new phenomenon; they have been going on for about three quarters of a century. As Ritholtz.com reports: “The regular debt ceiling limit dance seems to evoke a fairly standard set of behaviors in the two major US political parties: Whichever party is out of power (White House, or Congress or both) threatens not to support raising the debt ceiling. Which ever party is in power talks about how irresponsible and dangerous such a move would be.”
I don’t think the market has much to fear as I assume that they will reach a solution shortly. Yet another short-term solution that is. But yesterday, uncertainty became a little too high for the market participants to handle and a enough collected their chips to turn the market around. There is a clear risk that the US will be downgraded, and as I have stated many times before I believe this will eventually happen, and I also believe that the US will go bankrupt, or come into a situation that would seem like a close relative to it. But if that decline to bankruptcy starts with this downtrend or not I cannot tell. History shows that no systematic changes are made until our whole financial system collapses, first at that point is there enough political will to make any substantial changes. And substantial changes are what is needed. The way we run our economy, on borrowed and printed money, is not sustainable in the long term. This is an economic experiment that we to a more or less extend have been running, and gotten addicted to, since the Great Depression. The longer it has run the more we have gotten addicted to it. If you feel like reading more on this topic read this excellent column from Bloomberg News.
I have no clear perspective on the exact time for this collapse, and since I do not do any short term forecasting (only medium term and long term) I continue following my model which will in due course indicate when it is safer to enter a long-position in the market again. Remember that this is the same model that kept you out of the stock market during the crash of 2008 and indicated that it was “safe” to enter the market again on March 16th, 2009 just a few days after the market bottomed out. The model would have helped you avoid one of the last 100 year’s largest declines and also let you know when to return to the market again to participate in one of the last 100 year’s most rapid upturns!
Market in UPTREND, July 5th
Friday July 1st was a 90% panic buying up day, indicating that more investors are entering the market. The S&P500 was testing resistance off the 200DMA between June 15th and June 26th and has been moving upward since then. The upward move has not been as strong as I would prefer to see it (going up in below average volume), but it has crossed through the 50DMA and stayed above this line. The major indexes are now 6-8% off the recent lows. All in all the market action has turned my model into UPTREND which historically has significantly proven to redue risk when buying stocks.
The stock market has been really choppy this year, which research shows is very typical for third year bull markets. There’s no guarantee the choppiness won’t continue. What usually happens in the market is that we have seasonal strength in January, then weakness in February, strength in March-April, and weakness in May-June and then again a summer rally in July until early August. We can hope that the choppiness lessens and that we will get a healthy market over the summer. But no one has ever made money over time by relying on hope. Time will tell if this will be a typical summer, but the market will clear signals as to wether it holds up or not. Until the next market update is out (indicating a new downtrend), things to look for includes the next levels of major resistance which sits at 1,350.
Looking to other asset classes for indication for how the stock market will do in this uptrend and over the next summer months can also give a good indication for what we have in store. It is unfortunately not pleasant reading. See chart below of the RJA (Elements Rogers Intl Commodity Index).
Source: Google Finance
Agricultural commodities have been leading the stock market by several months during QE1 and QE2. They peaked in February 2011, well ahead of the stock market’s May 2nd peak. Since that February peak they have crossed below the 50DMA and met resistance to this line from the downside several times before eventually also breaking down through the 200DMA on June 22nd. They are now well below the 200DMA and in addition the 50DMA is very close to crossing the 200DMA. That would be another negative if it were to happen.
The picture for several other commodities including oil looks equally bad. As I have written many times before, which still holds true: gold is the only market with no major breakdown since the start of the financial crisis. Gold is still the go-to-market for financial safety.
I remain cautious and keep looking for signs of further strength and weakness both in the stock market itself and in other markets attracting capital, despite the fact that we are in an uptrending market.
Market in DOWNTREND, June 2
It only took the market one day to understand that the reason why they partied, possible extension of the Greek bailout, was indeed not a reason to party, but rather to mourn.
So, as I am sure that most of you have correctly anticipated, yesterday’s market action quickly ended the uptrend that was initiated by the positive signals from the previous days. Very frustrating, but this is how the stock market is sometimes. The markets yesterday saw their biggest declines for the year and not since August last year have the indexes fallen this much. All three indexes ducked under their 50-day moving averages again. Yesterday was another 90 percent panic selling down day, quite surprising after indicators signaled a new uptrend on Tuesday. So we are back in a DOWNTREND again after the shortest uptrend possible.
Research shows heavy selling days on the first or second day after a new uptrend signal will end it 95% of the time. This means that another uptrend is still a possibility in the coming days. But as I stated in the previous market update, sometimes 90 percent panic selling days come towards the end of declines: When that selling was what was needed to exhaust the bears.
Watch the trend-lines on a chart for help to see were the market is heading. A decisive break below that lower boundary trend-line would be bearish, and would raise the likelihood for a further fall. If bottom boundary holds, and prices rise decisively above the upper boundary of that declining trend-channel, it would suggest that we will likely take out the tops from April.
The market’s message for now is to be cautious as further downside becomes a higher probability.
Greek debt default will trigger bank meltdowns
There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis. Just look to Greece and the financial industry as an example.
Moody’s is getting closer to seeing Greek’s debt the same way as I am. Greece was downgraded them from B1 to Caa1. This is the same rating as Cuba has. As expected the rescue in 2010 failed to prevent Greece’s default risk to be reduced satisfactory, and now another discussion for a second round of funds are being discussed. 50 percent of of those who receive a Caa1 rating have according to Moody’s defaulted on their debt.
The reason why the EU is so afraid of a Greek debt default now is because so many European banks are stuffed with this junk debt on their balance sheets, and most of these banks don’t have the financial strength to take any such writedowns at the current time. And the European Central Bank is so afraid if its implications that it has refused to entertain any talk about the holders of Greek sovereign debt taking a haircut — even in the form of Greece stretching out its payments. This is serious stuff. It is about time we realize that we don’t solve an alcoholics problems by serving him more Ouzo.
Economic indicators slow for April and May
Economic data recently published does not show signs of improvement either (nothing new in other words).
Back in the States, the housing double dip is now “official.” The Case-Shiller home price index fell 0.8% in March. The year-over-year fall is 3.6%, and the index is now lower than its previous bottom in April 2009.
The Chicago PMI fell to a reading of 56.6% in May, the lowest reading in 2.5 years, from 67.6% in April. While that reading is still significantly above the 50-line indicating growth, the eleven-point drop is the biggest one-month deceleration since Oct. 2008.
Consumer confidence slumped last month. The Conference Board’s index drooped from a revised 66 in April to 60.8 last month.
The monthly ISM manufacturing index fell below 60 in May for the first time in 2011. It fell to 53.5, which is the lowest reading since September 2009.
The official China Federation of Logistics & Purchasing Managers’ Index eased to 52.0 from 52.9 in April, marking the slowest pace of growth in nine months.
Market in UPTREND, June 1st
I indicated in my last post on May 24th that the market action that triggered my models into a downtrend was also action that we sometimes see near bottoms in the market. This turned out to be one of those times. The market has proved to be strong since then, breaking through its 50 day moving average and yesterday spiking up in significantly higher volume. This turned enough of my indicators to buy signals to indicate that we are now in a new UPTREND.
But as there were some cautionary signs to the downside last week, so there are in this uptrend. We typically like to see higher percentage gains in the indexes than we did yesterday. Another cautionary factor is that we are now in a third year bull market, and market action typically tend to be choppy with modest gains in such years.
Monitor leading stock for further indication to the strength of this new uptrend.
The strong market action yesterday was set off by indications that a new plan to save Greece was near. The market has chosen to party, at least now in the short-term. And I hope investors enjoy it while it lasts because I am certain (to the degree that anyone can be certain about anything regarding the financial markets and government action for that matter) that helping out Greece will do nothing else than cover over the cracks of the underlying structural problems which in due course will implode and cause even greater harm further down the road. I am confident that neither Greece, Portugal nor Spain will not be able to recover its debt ridden economies without going through debt defaults on a grand scale first, which will have severe global implications.
But for now, lets enjoy this last uptrend which is likely to take the markets above recent highs.
Market in DOWNTREND, May 24
The market went into a downtrend yesterday on May 23rd. Despite me being very negative to the long-term outlook for the stock market I do believe the S&P500 will have another go for the top from April 29th, which eventually will make it also go higher. It is impossible to say if and when this will happen, but you should be cautious with your investments until we get another confirmed uptrend. Yesterday was however a 90% downday which sometimes arrive near to bottoms in the market.
