Saturday, October 31, 2015

Needing bots, having bots, superseding bots

Before I talk about the mega-bubble which will eventually become the most important story on the planet, I want to put my new investment strategy in context by reviewing my history of learning about, and interacting with, the stock market.

The first time I ever paid real attention to the market was in the late 1990's when I had my first 403(b) retirement account with TIAA-CREF.  Some time around 1998 I noticed that TIAA-CREF's growth fund was outperforming its value fund, and so I naturally moved all of my savings over to the growth fund(?!).  Soon after that I started reading and following the Motley Fools to try my hand at individual stock picking, and in 2000 I invested in my first four companies, all of them members of the Dow 30.

Everybody knows what happened next; the stock market tanked.  Although the worst damage was done to the dot-com stocks in the NASDAQ exchange, growth stocks in general and the large companies of the Dow 30 were pretty much the next worst places to be.  By 2002 I was thoroughly discouraged, and I put my stock market research on ice.

Around 2005 I learned that an investment adviser named Bob Brinker had predicted both the market top in 2000 and the market bottom in 2003.  I subscribed to his newsletter after that, but more importantly I realized that it was indeed possible to time the stock market, and thereby avoid losses during bear markets.  Since my natural talent is for finding patterns in complex data, I immediately set out to learn why Bob Brinker's method worked, and then to improve on it if possible.  After a couple of years I was back in business; I had found additional market-timing factors which (to my knowledge) were not used by Bob Brinker, including a pre-crash signal in market data that I've never seen anyone else illustrate or otherwise talk about.

In 2007 I started going public on this blog with my own buy and sell signals, albeit still backed up by Bob Brinker's overall view of the market.  Unfortunately I was still doing everything by eye, rather than by impartial calculations, meaning all of my decisions still had to pass through my own emotional filter and hubris.  Even though I had discovered an important pre-crash signal that preceded the crashes of 1929 and 1987, I didn't notice when it happened right under my nose in late 2007 right before the plunge of January 2008.  Once again I was suffering during a bear market despite having put considerable effort into avoiding just that.  To my additional horror, the great Bob Brinker remained 100% invested in stocks all the way through the 2007-2009 bear market.  So much for Brinker's method.  Fortunately I gathered my wits and clawed back with timely bear fund purchases over the next several months.

I emerged from two stock market bubbles and two bear markets with the following perspectives:
  1. Sometimes economic distortions cause parallel distortions in the stock market, as happened in the late 2000's with the sub-prime housing bubble, but sometimes the stock market experiences a "mania" bubble just from hype, as it did in the late 1990's.  (I'm less convinced about this latter point now.)
  2. Regardless of whether particular market moves are driven by real economics or short-term enthusiasm/panic of the herd, I had found market data "indicators" that correctly signaled market tops and market bottoms in each case.  In other words, it's possible to see the beginning of a buying frenzy or a selloff before it's reflected in the price of stocks, regardless of the cause.  (I remain convinced of this.)
My next goal had to be the design and implementation of an automated market timing method that, once running on a computer, wouldn't rely on me personally to collect data, interpret data, or produce a forecast. After much effort and several starts and stops, the first version of my "market bots" went online in June 2013.

Oh, if only the perfect stock market bot was the only thing we needed to maximize our retirement savings!

Incredibly, now that I have the exact tool I that I've wished for since 1998, I'm suddenly convinced that it's going to be moot when the next bubble pops.  The dot-com bubble was focused on a subset of U.S. stocks; the sub-prime bubble combined a housing bubble with a global stock market bubble; and now I fear the next bubble involves ... just about everything.   Most importantly for investors who wish to preserve a nest egg for retirement, I think the next bear market will include a steep plunge in the value of the U.S. dollar, meaning that even if you preserve the numerical value of your 401(k) by staying out of plunging U.S. stocks, you will still lose your purchasing power anyways because the dollars you managed to hang on to will become almost worthless.

This mega-bubble and my strategy for avoiding it will constitute the next few posts.

Bots back to bullish

The S&P 500 bots turned bullish again on Monday, October 26 (apologies for the delayed post) due to a rare seasonal factor, and I sold all of my shares of HDGE on Tuesday morning.  I anticipate that this seasonal bullishness will gradually fade away by early 2016.

Meanwhile about two-thirds of my total retirement portfolio is in a combination of foreign stock and foreign bond funds, as I will detail in an upcoming post.

Sunday, October 11, 2015

Is it really a bubble? Fair dinkum, mate!

How can anyone really know if the stock market is overvalued or not?  Times change; numbers can be interpreted any number of ways or even be fudged; and some prognosticators are naturally pessimistic while others are optimistic.  Maybe the stock market is just fine, even if the yield is only 2%.  We've already had two bubble peaks that were followed by crashes in 2000 and 2007 - how could we possibly have a third bubble in less than two decades?

Australia, a country that is similar to the U.S. in many ways, can be thought of as a control group in an experiment, and Australia's stock market (All Ordinaries Index) is a nice baseline that we can compare with our S&P 500 Index.


In this chart that spans from 1995 to 2015, we see three massive stock market rallies in the S&P 500, shown in red.  The first rally from 1995 to 2000 was the infamous dot-com bubble which deflated from 2000 to 2002.  The dot-com mania was a mostly American phenomenon centered in Silicon Valley and the NASDAQ stock market, and was sparked in part by low interest rates, particularly a Fed Funds rate of 3% throughout all of 1993.  Australia had neither the glitter of Silicon Valley nor the low interest rates (6% in 1993), and accordingly its stock market (blue) participated in neither the bubble nor the decline.

The second stock market bubble started in 2003 while the S&P was still above the level of Australia's index.  In an effort to cushion the blow from the dot-com bust, the U.S. Federal Reserve set interest rates below 2% from January 2002 through mid-2004, while Australia's interest rate remained above 4%.  Unfortunately for Australia and the rest of the world, low U.S. interest rates encouraged the invention and exportation of sub-prime loans, mortgage-backed securities, and trillions of dollars worth of risky derivatives. Australian stocks, like stocks everywhere, eventually caught up with the U.S. in 2007 as part of the global financial bubble, which then burst in 2008.

Amazingly, at the end of the 2007-2009 bear market, and 14 years after the dot-com bubble began to inflate, the S&P 500 Index and All Ordinaries Index re-aligned.  As the above chart shows, both the S&P and Ordinaries gained about 70% from 1995 to 2009.  At some fundamental level it seems similar economies tend to grow at similar rates over the long haul, despite short term financial turbulence.

But getting back to the turbulence...

The Federal Reserve loves to lower interest rates after bubbles burst, and the bigger the bursting bubble is, the lower the Fed sets the rates afterwards.  As we now know, the entire global economy was in real danger in 2008, and central banks around the world took drastic steps to keep private banks, corporations and countries from going bankrupt.  In December 2008 the Fed lowered interest rates to below 0.25% ... and it hasn't raised them since then.  In addition the Fed has been making trillions of dollars of cash available for banks to borrow in a never-ending series of maneuvers called "Quantitative Easing".  Not surprisingly, the even lower interest rates over an even longer period of time coupled with money printing have fueled another huge rally in U.S. stocks.  Thanks to the Australian stock market, which is dealing with relatively large 2% interest rates and relatively little money printing, we can safely draw the conclusion that yes, we are indeed in a third stock market bubble here in the U.S.


Since early 2010 the S&P 500 has gained 80% in value, while the All Ordinaries Index gained only 5%.  Dividend yields provide further evidence of the discrepancy: the iShares Australia ETF (ticker: EWA) has a whopping 6.9% dividend yield, compared to the paltry 2.1% yield of the SPDR S&P 500 ETF (SPY).

With no other information at hand, there is one play on this Yankee-Aussie split that is likely to win in the long run: betting on the S&P and Ordinaries to meet up again at their long-term trend like they did in 2009.  Equal investments in the U.S. bear market ETF (HDGE) and the Australia ETF (EWA) would result in a net return as long as U.S. stocks and Aussie stocks move back together.  This could happen if Australian stocks rise, but more likely U.S. stocks are poised to fall soon, and they would have to fall about 50% to return to today's Australian market level.  (HDGE would gain ~50%.)  As a bonus, if the U.S. dollar collapses in value relative to the Australian dollar, which is likely to happen if the Fed keeps printing money, then Australian stocks will make gains for American investors simply from the moving exchange rate.

In place of the Australia-only ETF I'm actually going to use Pacific ex-Japan ETFs (EPP, DVYA), which also include stocks from the relatively healthy economies of New Zealand, Hong Kong and Singapore, as the bullish counterbalance to HDGE.

Friday, October 09, 2015

Dollar testing support again

The exchange rate of the U.S. Dollar against other currencies has been bouncing up and down between two converging trend lines for most of 2015.

The dollar has bounced up off of the lower support line four times already (red arrows) in May, June, August, and September.  (It actually fell below the support for one day in August before returning to the range.)  Eventually the trend lines will intersect and by then the dollar will probably start a new upward or downward trend.  It's now reached the lower support line for a 5th time, which raises the possibility that the dollar will break out to the downside here.

If the dollar breaks down, it could be the event I've been waiting for.  At that point I'll move the bulk of my investments overseas with foreign stock and bond ETFs.  Presumably gold and silver could start rising as well, so it would also be a good time to buy the Gold Miners ETF (GDX).

Monday, September 28, 2015

Bots declare BEAR MARKET

My old automated market-timing bots have finally switched to a bear market stance.  This is hardly a surprise since internals have been negative for weeks while the long-term trend has been turning south.

With this objective reading of the market I'm going to start buying shares of the Ranger Equity Bear ETF (HDGE, formerly known as the Active Bear ETF); the same ETF that gave me my 15 seconds of fame in the Wall Street Journal.

Given the worsening news from around the world - both economic and otherwise - I have almost no qualms about shorting the U.S. stock market at this point.  The only thing that could rain on a bear's parade would be an announcement by the Federal Reserve that it's starting the 4th round of counterfeiting money-printing Quantitative Easing (QE4), and I agree with people like Peter Schiff that the Fed will almost certainly start QE4 at some point in order to maintain the illusion of a strong economy.  If I'm still in a bearish bet with HDGE when the Fed announces QE4, I will seriously consider moving back to cash.

Tuesday, September 01, 2015

Market Bots on the threshold of shorting the market

My old Market Bots just moved the "internal price forces number" down to 1.8 out of 10.  That's the lowest reading in ten years - lower even than it ever reached in the 2007-2009 bear market.  The long-term trend and investment stance are still positive and bullish, respectively, but it's close to switching.  If the internal number drops below 1.0 then the bots will turn bearish on the S&P 500 Index regardless of the price trend.

Reminder: I'm mostly in cash (Money Market) with a dash of real estate and longer-term bonds.  I anticipate my next investment moves will be, in no particular order: (1) going bearish on the dollar with UDN, (2) going bullish on gold with GLD, and (3) buying foreign stocks and bonds with up to a dozen ETFs.

Monday, August 24, 2015

Is my eye better than my algorithms?

I reluctantly gave an early bear market warning to a close family member on Thursday night, based on several indicators turning bearish and on the S&P 500 breaking down out of its 6-month price freeze.  I was reluctant because key long-term trends were still technically bullish, and because a particular pattern that preceded nearly every major market crash had not materialized.  In other words, by making a bearish call, I was going against the method that I programmed in to the "market bots".  Indeed, when I made the call, the response back was, "Why are the bots still bullish?  Are they stuck?"  I've actually always suspected that the bots needed a re-design - it's the main reason I haven't yet built a paid subscriber list to my email alerts.

Over the weekend I then saw additional indicators turn bearish, and noticed that the S&P 500 had broken down through yet another trend line, and on Sunday I emailed my official "I'm cashing out" message to extended family and close friends.  Again, the bots were still bullish.

Based on the lack of a crash signal and the sudden steep decline that usually occurs in corrections, I still expect that the current decline will turn out to be just the first bump at the start of a bear market similar to the 2000-2003 or 2007-2009 markets, rather than the beginning of a cliff-like crash a-la October 1987.  If the market does indeed crash from here, then I'll be very happy that I rode it out in cash, but I'll be disappointed that the purely mathematical methods I've been trying to develop failed to see the crash coming.  If, on the other hand, the market recovers part way and the bear market comes on more slowly (or the rally resumes!) then the slow reaction of the bots will be vindicated, and at least some my previous work will have paid off.

Sunday, August 23, 2015

IRAs in cash; building emergency coin stash

Here's a simple summary of my investments:
  • As of Monday morning I'll be out of all stocks and stock funds.
  • I'm acquiring gold and silver coins to accompany my cash stash.
  • I anticipate eventually moving my IRA savings to bear funds, overseas stock and bond funds, and perhaps gold ETFs.
I'm moving my savings out of stocks, out of the dollar, and at some point out of the country.

Friday, August 21, 2015

Major trend line crossed

How many bear market signals can occur in one week?  In addition to my favorite trends and internal indicators turning bearish, and the S&P 500 index breaking out out of a six-month narrow trading range, it turns out that just today the S&P 500 finally crossed below a rising minimum trend line that's been in place for four years.

Even if this isn't the start of an official bear market (I think it is) there's little doubt that the four-year nearly-linear market rally from 2011 to 2015 is over, and the S&P has probably started a phase of slower gains, if not losses.

A rare look at fundamentals

Knowing exactly when to buy or sell the stock market has nothing to do with fundamentals such as economic growth, the unemployment rate, corporate earnings, or interest rates.  Rather, market timing is about noticing the first indications of a change in patterns of buying and selling stocks.  There are any number of reasons for patterns to change, but for a market timer the only thing that matters is the behavioral change of buyers and sellers, not the cause of it.

That being said, fundamentals can provide a long-term forecast of possible resolutions of a rally or of a bear market, and to put it mildly, our fundamentals are very bearish.  Rather than fill this page with charts and explanatory text, I'll outline the big issues here as concisely as I can and leave deeper discussions for later:
  1. The Federal debt-to-GDP ratio is about as high as the previous record level that was reached at end of WWII, and unlike a victorious U.S. that was able to stop building war machines cold-turkey in 1946, today future government payments (Medicare, Medicaid, Social Security, Unemployment, Welfare, Obamacare credits...) are supposed to keep rising indefinitely. That simply can't happen unless the value of a dollar is allowed or forced to collapse.
  2. The Federal Reserve interest rate has been at 0% for more than six years, meaning the Fed is now boxed in to a corner if the economy starts to sag again.  Raising rates would only worsen the economic decline.
  3. The Federal Reserve has printed more than $3 Trillion (bought more than $3 Trillion of government debt) since the most recent financial crisis in order to prevent defaults, and it will probably print even more if the economy starts to decline.  If the policy isn't changed, eventually all that counterfeited - er, printed money will crush the value of the dollars sitting in your bank and retirement accounts.
  4. Zero-percent interest rates and money printing have simply re-inflated bubbles.  It's easier to afford a house when interest rates are low and banks are flush with cash, so this has kept home prices artificially high along with the supposed net worth of lending banks.
  5. Corporations have used the low interest rates to borrow money and buy back stocks, and this has inflated the stock market to maddening valuations.  Today the S&P 500 index has a P/E ratio (assuming the data isn't fudged) of 21 and a dividend yield of 2%.  Historically the P/E averages around 15 and the yield averages about 4%.  Prices would need to fall 30% to 50% from here just to return to average, leaving alone the fact that the P/E ratio sometimes falls below 10 and the yield sometimes surpasses 6%.
  6. Speaking of the economy, things do not look rosy.  The fraction of working-age U.S. citizens who are employed is 62.6%, which is the lowest fraction since 1977.
  7. Recent college graduates have college loans totaling $1.4 Trillion.  They'll have a hard time paying them off - interest notwithstanding - if the employment rate keeps falling.
  8. Retirees, or people who wish to retire, have few options for generating cash flow from their savings.  For them, low interest rates mean low retirement income, which forces them either to retire in very modest conditions or keep working well past retirement age.
  9. Recent estimates of economic growth (GDP) are less than inspiring, and past estimates of growth have a funny way of being revised downwards on a regular basis.  This lackluster performance has come despite the Fed's frenzied counterfeiting money printing.
There's much more that I could add, but the above list covers most of the big quantifiable factors.  In short, a big economic storm has to hit eventually - it's just a matter of when, how much pain there will be, and where the government allows the pain to hit.

The hibernating bear will eventually wake up

The S&P 500 finally broke out of its rut, and it broke out to the down side by closing below 2040 for the first time since February.  Every key indicator that I watch has either turned bearish recently or is on the threshold of turning bearish.  In addition to the those quantifiable "internals", there are other seasonal reasons to be weary:
  • August 2000 was the starting point of the dot-com collapse.
  • October 2007 was the stock market peak preceding the financial crisis and crash of 2008-2009.
  • October is also the month of the big crashes: 1929, 1987, and 2008.
My old place-holding market bots, which do not use all of the numbers that I track today, are designed to have delayed reactions in order to avoid whip-sawing during corrections, so they may not turn bearish for a couple of weeks even if this turns out to be the market top.  Despite the slow response time of the bots, I'm almost convinced now by the totality of internals, trends, and historical precedents that the six-year bull market is over, and that a new bear market is upon us.  Barring an amazing turn-around in the market in the next couple of days, I anticipate that last couple of indicators will flip to bearish shortly, and at that point I'll start buying shares of AdvisorShares Bear ETF (HDGE).

Wednesday, August 05, 2015

Style indexes are diverging

All the way back in 2007 when I was still learning how to read stock market signals, I noticed that growth and value stock prices were separating.  Even within the family of value stocks, high-dividend stocks were separating at a higher rate, and REITs were falling even faster.  The combined price charts reminded me of a squadron of WWII fighter planes pealing away from their formation before an attack.

Today the market is doing something similar, although not yet as severely.  Up until the end of 2013, value and growth stocks were moving almost in lockstep.  Even boring dividend-paying stocks were keeping up with the usually high-flying NASDAQ. Then about 18 months ago these styles all began separating in the same order that they separated in 2007.  Not only are growth stocks outperforming value, but the NASDAQ (the high-tech subset of growth stocks) has been doing even better while dividend stocks have lagged behind the rest.

This doesn't necessarily mean that the repeat of the 2007-2009 bear market is upon us, but I'd be foolish not to look out for it.

Wednesday, July 29, 2015

MOVE already!

The S&P 500 index has been bouncing around between 2040 and 2135 since February 3rd.  This maddening rut is only 4.5% wide and has been in place for 6 months.

The only interesting feature in the S&P's price pattern is a change from rising price lows in March, April and May to falling price lows in June and July; but since these are such small moves, I don't think they mean anything.

The bots are still bullish overall, but see neutral internals.  My own read is that average internals are moderately bullish, and the long-term price trend is still bullish thanks to the correction in October of last year.

Wednesday, July 08, 2015

The Chinese stock market bubble and crash

There are a few reasons why I haven't paid much attention to foreign stock markets up to this point.  First is that the U.S. economy dwarfs all others, meaning that an economic event in the U.S. tends to have a larger impact on another given country than the other way around. In theory a crash in U.S. stocks could propagate to an otherwise healthy foreign market and show up there as an "out of the blue" anomaly.  Thus, theoretically, as long as I can predict the U.S. market I'll more or less be predicting major moves in other markets as well.

A second closely related reason for focusing on U.S. markets and the S&P 500 index in particular is the sheer number of companies and total market capitalization of the NYSE and S&P index compared to other stock markets and indexes.  The Nikkei average comprises 225 Japanese companies; the British FTSE index tracks 100 companies; the French CAC index tracks 40; and the German DAX index, like the Dow Jones Industrial Average, tracks only 30.  Given that it is easier (in my experience) to predict a collective index than the stock price of an individual company, it follows that an index that averages 500 prices should be more "well behaved" than one that averages only 30.

Finally, I've also focused on U.S. stocks thanks to the greater availability of historical data.  Presently I have prices for the Dow Jones Industrial Average dating back to 1896, along with more recent ancillary data that I use to help predict future market directions.  By contrast the CAC 40 index (as an example) was first computed and published in 1987.

Today however, I'm realizing that by ignoring foreign markets I've missed an opportunity to show off my market timing skills.  The incredible rise and fall of the Shanghai stock market over the past year - up 100% in 8 months and now down 27% in one month - would have been an ideal showcase of crash prediction during a period when the U.S. market has been positively boring.  Now in hindsight I see the historical usefulness of the 1990 Japanese stock market crash that occurred in isolation without a commensurate crash in either the U.S. or in any other major market.

On my list of things to do I've added: "Track and forecast the major foreign stock markets!"

Tuesday, June 02, 2015

Forget about ISIS. I'm worried about ISA.

I am struck that these interviewees, in any other circumstance, would be blithely labeled as "moderate Muslims" by most Americans.  They go to school, go to work, enjoy America's freedoms, wear American clothes (the men do, anyways) and don't seem to be violent.  Yet they all openly desire to live under Sharia Law, where thieves have their hands chopped off, girls can be forced to marry at 15, and cartoonists are executed.  (What's their stance on gay marriage?  What's their stance on just being gay?)

What, then, is a moderate Muslim?  If the folks shown above are neither tolerant moderates nor active terrorists, then what are they?

Wednesday, April 22, 2015

2120 or bust

Over the past ten weeks, the S&P 500 index has closed at values between 2100 and 2120 no fewer than sixteen times, but it has yet to gain that final 1% that would take it above 2120.

All indications are that the S&P will eventually make the jump.  The index low points have been rising, indicators remain very bullish, and the odds are slim that the present six-year rally would end under these conditions.

I hope by now that readers have internalized the reality that the stock market does not react logically to economic conditions.  The U.S. national debt is now above $18 Trillion, and its growth only accelerates with each new transfer of power in D.C.  Only 62.7% of Americans are employed (tying a 38 year low) and this fraction has been dropping precipitously since 2008.  Yet despite the dim long-term prospects for our economy, the S&P 500 index has more than tripled since March of 2009.

Sure, we may find out that the Federal government has been clandestinely buying stocks, or that the high frequency trading computers have been manipulating stock prices higher, but that's precisely my point.  Fundamental indicators (interest rates, earnings per share, unemployment rate) are not good predictors of stock market behavior.  Technical analysis, on the other hand, has been seeing very high buying pressure during this rally, and has correctly predicted (so far) ever-higher prices.  Indeed, this high buying pressure may turn out to be illegal/unethical market manipulation, but from the standpoint of an investor who simply wants to know which direction the stock market is going to go, who cares?  The bottom line is that technical analysis can see the effects of market manipulation (if not the cause) and take advantage of them, while fundamental investors cannot.

Thursday, January 15, 2015

Corrections happen

Any short-term drop of 5% to 19% within a long-term rally is what I refer to as a "correction".  My medium-term stock market timing method usually does not predict corrections, and that's by design.  If I were to find a method that sold stocks before every correction, I might end up buying and selling ETFs a dozen times or more per year, and that's far too complicated and full of trading fees for my taste.

The reason I stop calling it a "correction" at 20% and start saying "bear market" or "crash" isn't just because smaller drops are more common.  Historically, drops of more than 20% rarely bottom out in the 20% to 25% range - rather, 20% drops usually continue down much further before turning around, and that makes them worthy of the name "crash" (when it's quick) or "bear market" (when it takes a year or more), and it also makes it worth my while to predict when a drop of 20% or more is imminent, while not worrying about drops of 19% or less.

I'm raising this topic now because the small dip that the stock market is currently in is the kind of dip that sometimes grows into a larger correction - but NOT a crash.  The S&P 500 index closed at 1992 today, which is only 4.6% below the all-time high of 2090 that occurred last month.  It's not even a correction yet by my definition, but don't be surprised if the market falls further from here.  A secret experimental method of mine (one which I don't even use in the market bots!) says that there's a chance the S&P may fall as low as 1750 before turning around, and that would make it an almost-headline-worthy 16% correction.

My long-term indicators are still bullish, and even contrarian short-term sentiment is relatively pessimistic/ bullish, so my bullish outlook hasn't changed.  Indeed, today may end up being the bottom of the current dip.

To those investors who are uneasy about riding out a possible hefty correction to come, I ask which worst-case scenario you would rather deal with: (1) stay in stocks, ride out a correction and then benefit from the next leg of the rally, or (2) cash out now and miss part of the rally when it resumes tomorrow?  The market bots are designed to choose the former, because on short time scales the market has a tendency of doing the opposite of what we expect, and most people end up regretting trades based on short-term bets.

Tuesday, November 18, 2014

GruberGate: Who knew?

Who knew that being ruled by psychopaths could be so funny?!
Q: What happened to my health insurance?
A: It's been Grubered, you Useful Idiot!
The following video is less than 2 1/2 minutes long - enjoy it before these power-hungry liars take control of the internet, too: