Monday, August 11, 2008

Breakout

As predicted, the S&P 500 has broken through the upper resistance line at ~1293.
The Dow has also broken out of its own triangle formation, so I'm reasonably confident of this interpretation.

The further this rally climbs before eventually turning around, the better it will be for my next SDS (inverse S&P500) purchase. Sentiment is already moderately optimistic, and each additional up day from here will help to increase the optimism among traders, which will increase the downward pressure on stock prices. I don't know how much higher the market will climb before the next bear market slump begins, but I am willing to predict that it won't reach the previous peak of S&P 1440, Dow 13,100.

I'm almost tempted to put a little bit into SDS right now in case this rally comes to a quick end, but there are too many non-sentiment indicators saying that the rally isn't finished. So I remain in cash.

7 comments:

Dan said...

Jody,

Thank you for your market update.

John from CO said...

Jody;
Any thoughts on TWM (ultra short Russell 2000) when the market turns down? It is at its year to date low at just under $65. One year low (Oct 2007) is $59. March 2008 high of $95 and July 2008 high of $85. The other thought was SKF currently at $110 and possibly headed to $100 with a YTD high of $211. Thoughts?
John from Colordo

Jody said...

You're welcome, Dan.

Colorado John,

Small caps (Russell 2000) have been moving more or less in parallel with large caps (S&P 500) in this bear market, so I don't think TWM has much of an advantage over SDS right now.

Ultra-short financials (SKF) would be a much more exciting ride, but they will be correspondingly more difficult to time for buying and selling, so you wouldn't necessarily get a greater return when all is said and done. The real question is how much of a roller coaster ride you can tolerate!

JO said...

Why do you not invest in the upward rallies, but only in the downturns(with SDS)? Is it "easier" to identify the short term peaks?

(Just started looking at investing and just found your blog. It's fun, love it.)

Jody said...

Thanks Jo,

We're in a bear market right now. During a bear market, the downward phases are bigger and take longer than the rallies, so a rally is a small target to hit compared to a retreat. The opposite is true during a bull market.

Sure, there's a tiny possibility (ha!) that I could make a mistake in the timing of an SDS purchase, but it would be no big deal, because I could just sit tight and wait for it to eventually go up in price when the bear market resumes.

But were I to make a mistake with the timing of an SSO purchase, (maybe the rally ends sooner than I expect) then there's no way to recover. I'd have to sell at a lower price and eat the loss.

Daren said...

Hi Jody,

First of all I'd like to say that this is a very interesting blog.

I was just wondering how you come to the conclusion that sentiment is "moderately optimistic"? Sentiment isn't really something I have a very good grib on. I get most of my sentiment opinion from talking to people and reading commentary written by broker dealers. So its all heresay and nothing concrete like data which can be quantified. Currently I still see sentiment as negative, moderate at best. Wondering if you wouldn't mind sharing how you come to your conclusions about sentiment. Pardon me if I'm asking for something that's too privy.

Jody said...

Hi Daren,

There are several objective measures of sentiment which are free of any survey bias. I use five different sentiment indicators, and I'm working on combining them into a single proprietary market-timing model. I'm pretty sure the use of this combination is unique.

My method of *interpreting* the sentiment data also seems to be unusual. For instance, Bob Brinker reads some of the same sentiment data that I do, but he's been calling the market "pessimistic" for for the past two years at least. I, on the other hand, have been seeing swings between optimism and pessimism in the same data, consistent with the cycles of corrections and rallies.