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

EVERYBODY PANIC! (Not)

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.

Friday, November 08, 2013

If you like it, you can keep it.

We will keep this promise to the American People: If you like your health care plan, you can keep your health care plan.  Period.

Let me be perfectly clear.  If you like your doctor, you can keep your doctor.

No matter what you've heard, if you like your 401(k), you can keep your 401(k).

If you like your Roth IRA, you can keep your Roth IRA.  Nobody is talking about taking that away from you.

Make no mistake.  If you like your local school curriculum, you can keep your curriculum.

If you like your privacy, you can keep your privacy. I promise.

If you like your rifle, you can keep your rifle. You heard it here.

I will not take your shotgun away.  I believe in the 2nd amendment.

If you like voting, I'll let you vote. Trust me.

If you like your freedom, I'll give you freedom.

If you enjoy your life, I may let you live.

Feel better??


Economic Update

It shouldn't come as any surprise that we're still heading towards a fiscal cliff, and although I don't use any economic fundamentals in my forecasting method, I'd like to show a couple of charts here just to keep readers thinking about what to expect outside the stock market.

Since late 2008/early 2009, the Labor Force Participation Rate (the fraction of adults employed or looking for work) has been in a dramatic free-fall.  Last month (October 2013), the rate fell below 63% for the first time since 1978.
Labor Force Participation Rate from 1978 to 2013

Meanwhile, the national debt has been accelerating upwards as usual. Today the federal debt is over $17 Trillion, and more importantly the national debt as a faction of Gross Domestic Product (GDP) has passed 100% and is nearing the all-time-high of 120% that was reached at the end of World War II.
Total public debt as a fraction of GDP

Recall that the debt/GDP ratio plummeted after WWII for the simple reason that we stopped borrowing money to build tanks, bombers, aircraft carriers, and supplies for millions of troops.  In 1946 the government stopped issuing new war bonds and began to gradually pay off the war debt.  Today we face the opposite future, with promises of ever more money to growing numbers of receivers of Medicaid, Medicare, Social Security, welfare, unemployment insurance, food stamps, and soon the socialized follow-on to Obamacare.  A shrinking workforce cannot support a growing number of non-working dependents without further increasing the debt, and the debt cannot grow faster than GDP indefinitely.

Look out below.

Wednesday, October 30, 2013

How 'bout them bots!

The first version of my stock market bots went online nearly five months ago, and all versions since then have been bullish on the market every day so far.  In that time the S&P 500 index has risen from 1640 to 1775, resulting in a net gain of more than 8%.

I forgot to point out that about a month ago the "Internal Price Forces" number dropped from 5.9 to 4.9.  This change isn't enough to alter the timing of any impending "sell" signal, but if the number continues to crawl downwards, don't be surprised if the bots switch their investment stances.

As you might have figured out already, version 2 of the system isn't online yet.  I had big plans a couple of months ago, but my day job has gotten very busy recently, so the upgrade has been on hold.  Hopefully I'll have time over the holidays to make some progress.

Wednesday, September 11, 2013

August "correction"

After closing at an all-time high of 1710 on August 2nd, the S&P 500 index fell to 1630 on the 27th (a 4.7% drop) and has risen back above 1680 since then.  I don't think of a decline as an official correction until it reaches at least 5%, so the August drop doesn't quite count.

Tuesday, September 10, 2013

Dubious Dow gets another arbitrary change

Today's news is an example of why I don't give a damn about the Dow.

The Dow Jones Industrial Average - a.k.a. the Dow 30 - is getting one of its periodic overhauls on September 23rd.  A committee has decided that Alcoa, Bank of America, and Hewlett-Packard will be replaced in the lineup by Goldman Sachs, Visa, and Nike.  Because the Dow is weighted by the price of one share rather than by the size of each company, the new components (share prices of $165, $185 and $67, respectively) are going to become instant heavyweights in the average relative to the shares they're replacing (priced at only $22, $14, and $8) and relative to the other 27 companies they're joining.  In other words, when the market opens on Monday the 23rd, there will be an index with the familiar "Dow" monicker, but it will not be the same index that closed on Friday the 20th.

This type of quantum change doesn't happen with the S&P 500 index.  Since membership in the S&P 500 is based in part on the size of a company (market cap) the rules for swapping companies into and out of the index are less arbitrary.  More to the point, the companies that participate in the shuffle are likely to be among the smallest companies in the index, because shrinking below the market cap requirement - or growing above it - gets one removed from- or can get one added to the index, respectively.  Since the S&P is weighted by the size of each company, these periodic changes down at the bottom have an insignificant effect on the overall index.  The evolution of the S&P 500 over time has thus been more gradual and organic than that of the Dow 30.

For assessing the current state of the U.S. stock market, the S&P 500 index is simply a more logical choice than the Dow 30.

Sunday, August 18, 2013

Higher returns with fewer trades

I'm getting close to finishing "Version 2.0" of my market bots, and along the way I've made a few discoveries that I've been able to incorporate into the soon-to-be-obsolete bots that are are currently operating.  Today I made an additional modification (now up to bot 13_20) that both increases the average stock market returns and reduces the number of trades required.

Market conditions are pretty much unchanged since my first bots began operating.  Internals are on the bullish side of neutral, and the long-term trend remains positive.  Since closing at an all-time-high of 1709 on August 2nd, the S&P 500 index has fallen 3%, which doesn't yet count as an official correction in my book.

Friday, August 02, 2013

Better and better

Not only has the S&P 500 index recently crossed above 1700 for the first time in history, but I've made even more tweaks to the market bots (now at version 17), with bot A2 now returning a back-tested average of 13.1% per year.  Speaking of the bots, they've been in stocks since their creation two months ago, and the market has indeed risen.  It's not much of a track record, but it's as good a start as can be expected.

The "internal price forces" number is down to 5.9 from 6.0, but that's due to the slight differences between bot versions 15 and 17, not to any changes in the market.