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.

Wednesday, August 26, 2015

A preview of the U.S. with a Greek twist

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:

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.