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:

Friday, October 31, 2014

That was fast

The stock market correction that started on September 19th reached its nadir on October 15th with a dip of 7.4%.  As of today (October 31) the correction is already over, and the S&P 500 index has reached a new all-time high of 2018.  I predicted in my previous post that the market was destined to continue rallying in the next few weeks, but I didn't think it would resume this quickly.

Short-term investor emotion is still pessimistic (which is a bullish indicator), internals are still bullish, and the seasonal cycle is at its peak bullishness.  Thus, despite our serious economic problems, the objective technical forecast for the stock market is UP.

In other news, the price of gold has reached a 4-year low, which is what one would expect in a deflationary scenario, rather than the inflationary situation that we've been in thanks to the counterfeit money printing quantitative easing by the Federal Reserve Bank.  This counter-intuitive behavior is yet another example of why I try not to make forecasts based on economic fundamentals.

Monday, October 13, 2014

A real correction at last

"Real" stock market corrections - declines of 5% to 20% within a rally - have been rare lately.  When the S&P 500 index closed at 1906 on Friday, it marked a 5.2% drop from the all-time high mark of 2011 reached on September 18th.  The last two corrections before that were in February of this year and June of last year, and both of them bottomed-out at around 5.5% below the previous highs, meaning they barely qualified as corrections.  We're overdue for a bigger correction of 10% or more.

The place-holding version-1 marketbots are now pegged optimistically at an internal price forces number of 10 out of 10.  This is due to a dependable multi-year seasonal factor that tends to trump almost every other indicator.  Even so, the other internals that the marketbots are now ignoring are still mostly bullish, and there's no sign of a pending crash signal, so the long-term prognosis for the market is now about as favorable as it can be from a technical perspective.  Of course, if World War 3 breaks out tomorrow then all bets are off - some events can't be predicted by market data.

Yes, the S&P may continue to fall for the next couple of weeks and complete a more significant correction, but objective seasonal factors and internals favor a continued rally in the long term.

Tuesday, September 09, 2014

Why 2K?

The S&P 500 index passed 2000 on August 25, and closed above 2000 for the fist time on August 26.  Since then the index has stuck to within 10 points of the psychologically significant 2K mark.

The marketbots continue to be bullish on stocks, with the Internal Price Forces number still on the bullish side of neutral at 5.9.

Friday, June 27, 2014

Why I don't watch "fundamentals"

The stock market's performance has little to do with the newsworthy economic factors that most people fret over, and even if it did, economic "data" is plagued by inaccuracies, guesses, and political massaging.

A recent example of the uselessness of economic data is the growth rate of the US economy in the first quarter of 2014.  As recently as April 30th - less than two months ago - the Bureau of Economic Analysis announced that the nation's economic growth rate was 0.1% in the first three months of the year.  It was a small number to be sure, but at least it was positive.

By the end of May, the first-quarter growth had been revised downwards to a shrinkage of 1.0%.  Now the latest revision has the economy shrinking by 2.9% from January through March, which is not only characteristic of a recession, but also represents the largest downward revision in GDP growth on record.

So, what did the S&P 500 Index do during this horrendous quarter?  Why, it rose of course!

For those of you who think the stock market does (or should) fall during economic contractions, and that savvy investors therefore should get out of stocks when the GDP falls, the first quarter of 2014 presents two conundrums:
  1. The stock market actually made a small net gain when the economy fell at an annual rate of nearly 3%.
  2. We didn't even know the economy was contracting until months after the fact.
So I don't worry about GDP growth, the unemployment rate, interest rates, or any of the other numbers that get breathlessly reported on cable TV or announced in bold font on financial websites.  The simple reality is that stock prices rise when a majority of investors are buying, and they fall when most investors are selling; it may sound like an obvious rule of thumb now, but it's easy to forget sometimes in the deluge of 24/7 news.

Friday, June 06, 2014

70th Anniversary of D-Day - June 6, 1944

We have few leaders today who understand what we did then or why we did it, and I fear today's ceremonies will be heavy on glitz and light on wisdom.

President Reagan's understated address on the 40th anniversary in 1984 stands the test of time.

Monday, April 28, 2014

No correction after all

The stock market has actually rallied back since the April 10 "day of panic", and the S&P 500 index only managed to fall 4% below its recent all-time high before recovering, so we didn't have an official correction.  As of this afternoon, the S&P is only 1% away from returning to the April 2nd high mark of 1890.

Short-term indicators are still bearish, as the recent market action was not sufficiently scary to panic traders.  I expect another real correction (> 5%) to manifest sooner than later.

The long-term prognosis for the stock market is also unfavorable.  According to seasonal cycles, the expectations for the next six months are as bad as they can be.  In addition, a new measurement of "market health" that will be part of the Version-2 MarketBots indicates that conditions are favorable for a crash of 20% or more.  In other words, if I see a pre-crash signal in the next few months then I'll sound the alarm without hesitation.

Thursday, April 10, 2014


Yahoo Finance: Market nose dive...
Bloomberg: Nasdaq falls most since 2011...
MSN Money: Nasdaq falls 3.1%, worst since Nov. 2011...
Drudge Report: Stocks collapse - Nasdaq plunges...
CNBC: 2014 crash will be worse than 1987's: Marc Faber 

The S&P 500 index fell 2% today, which is hardly a "collapse" or "nose dive".  What the headlines don't tell you is that after the Nasdaq fell more than 3% in one day November 2011, it went on to gain nearly 80% in less than 3 years.  So much for today's drop signalling a crash.

Although we had a 5% correction (over several days) in late January, it was barely a correction, and it wasn't enough to cause real fear in the market; the resulting lingering complacency is bad for prices in the short-term.  The last correction of 10% or more was in the Spring of 2012, so I think we are still overdue for a decent fear-inducing correction.  A 10% correction in this case would take the S&P 500 index down to about 1700.

The Internal Price Forces numbers are still on the positive side of neutral at 6.1 out of 10, and I don't see an official pre-crash pattern in the S&P or in the Dow, so the bots (and my own judgement) are still bullish on a multi-month time frame.  I expect this correction to bottom out over the next few weeks, accompanied by more pessimistic headlines, after which the long-term rally will resume.

Tuesday, February 04, 2014

Health-restoring correction finally arrives

Yesterday's market decline finally sent the S&P 500 index more than 5% below last month's all-time high mark of 1848.  The last real correction of 5% or more was in June of last year, so the market was definitely due for one.  That long steady interval of market gains was probably one of the reasons that investors became so optimistic (which is bearish in the short-term) and this correction will help to clear out some of the fidgety day traders who can't stomach short-term losses.

The market bots are still invested in stocks, and the internal price forces number is now 6.5 out of 10, which is on the bullish side of neutral.

Friday, January 10, 2014

Key month for gold

The price of gold has been forming a descending triangle pattern for the past year or so, as shown by the chart for the gold ETF (GLD).

Normally these patterns end with the price falling through the flat floor of the triangle, which is at about $115 for GLD, or $1200 per ounce of gold.  Given how close the two trend lines are, the price has to resolve one way or another very soon.

I don't usually look for short-term plays in a single investment, but the clear price pattern in this case is almost too good to pass up.  If the gold price falls through the lower support line, then I'll consider jumping into the ProShares ultrashort gold ETF (GLL) that goes up in price when gold declines.

Tuesday, December 17, 2013

The next obvious short play

Two extraordinary things have happened in the field of health care this decade.  The first is that Congress passed, and the Supreme Court allowed, a law that will effectively kill private health insurance companies by squeezing them financially from multiple angles.  Just last week the Secretary of the Department of Health and Human Services, Kathleen Sebelius, piled on by "requesting" that insurance companies provide coverage for customers who haven't yet started paying their premiums.

You don't need to be a mathematician to figure out that an already boxed-in insurance company can't afford to cover people for free.

The second extraordinary phenomenon has been the performance of health care provider stocks since the passage of the "Affordable" Care Act.  Between August 2012 and November 2013 alone, the health care provider sector has risen 50% compared to the 30% gain for the broad S&P 500 index.  Either somebody out there thinks health insurance companies are going to make more profit by making insurance more affordable, or there's some kind of artificial inflation being applied to these stocks.

Whatever the reason for the sector's recent performance, it's going to come to an abrupt halt when health insurance companies start closing their doors or filing for bankruptcy.  Proshares offers an ETF (RXD) that goes up in price when the health care sector goes down - I'll be looking to use this ETF when insurers inevitably start feeling the pain.

Friday, December 13, 2013

Indicators still neutral, rally continues

Short-term and seasonal factors are not favorable for the stock market, but long-term indicators still allow for a continuation of the rally that started in the spring of 2009.

The market bot "internal price forces" have fallen to 4.1 out of 10.  This is still comfortably neutral, and the market has rallied through lower readings in 2010 and 2011, so there's no cause for alarm at this point.

Sentiment indicators are at their most optimistic levels in more than two years, which is bearish in the short term.  A decent correction of 5% or more is likely, presumably followed by a resumption of the long-term rally.

The curious four-year stock market cycle is nearing its expected peak in May 2014, at which point returns historically turn negative leading up to the mid-term election in November.