Friday, October 31, 2008

Last days of the 401(k)?

A policy change being discussed by the political classes could affect the profitability of investing in stocks, and could therefore create long-term downward pressure on stock prices. Congress is considering eliminating the tax savings on 401(k) contributions and returns, and is discussing a plan to allow workers to replace current 401(k) holdings with a guaranteed retirement account composed solely of government bonds.

If these plans were put into effect, there would have to be another wave of sell-offs in the stock market as investors pulled out of their 401(k) stocks and mutual funds. There would also be reduced buying pressure in the stock market over the long haul since monthly deposits normally destined for 401(k) stock purchases would be going to the new guaranteed government plan instead.

With that potentially seismic change looming, I'm in no hurry to declare that the bear market is over.

Thursday, October 30, 2008

O.K. - It's a breakout.

The S&P 500 has officially broken above the declining tops line.

If this "rally" gets momentum behind it, then I will wait for it to top out and invest in the Leuthold Grizzly Fund (GRZZX) to make money on the next slump. I know some of you have already opened bull market positions to make money now, and I wish you luck.

Tuesday, October 28, 2008

Big up day #837

There are two reasons not to get too excited about today's nearly 11% gain in the S&P 500 index.

First, huge up days like this are not healthy for the market in the long run, as has been made painfully obvious several times earlier this year.

Second, the breakout above the declining tops line is tiny at best, and could be just another head-fake.

Saturday, October 25, 2008

Reader poll: Reduce government control

The poll on government controlled corporations has closed. Out of 43 respondents, 32 answered that the number of companies controlled by the government should be reduced. Perhaps there's still hope for free- market capitalism after all.

Friday, October 24, 2008

Running out of wiggle room

For the past two weeks, the S&P 500 index has wandered between a declining tops line and a (presumably) lower support line at 840.

One of these limits will be broken in the next week or so. If the index passes above the declining tops line, then that would signal that the 840 support line will last for a while. A dip below the 840 support line, however, would open the door to further losses.

In early August the chart pattern was the reverse of this, with a resistance line at 1292 over a rising bottoms line. The S&P 500 actually did a head fake in that case, as it rose through the resistance line on August 11 before turning around and beginning the plummet that we're still in today.

Thursday, October 23, 2008

First rule in a bear market: RELAX

IT'S UP!
IT'S SIDEWAYS!
IT'S DOWN!

WHAT DO I DO????

Relax. Keeping your head clear in these market conditions will give you a big contrarian advantage over all of the other investors who are pulling their hair out right now. When everyone else is complacent, like October of last year, that is a far better time to be on edge.

Because bear markets are relatively unpredictable, I only put my money in a bear fund when it's obvious that the next drop is coming, like it was on May 21st and August 19th.

Until the indicators align like that again, I will remain in cash.

"But what if the market goes down? You should be in GRZZX!"

"But what if the market goes up? You should be in SSO!"

No-no-no. That's a great way to get an ulcer and big doctor's bill. Here's how I see the future when I'm floating on my peaceful pile of cash (or short-term treasury fund):
  1. If the stock market goes up from here, then that will simply set up the next predictable drop, and I'll make money on the downside with GRZZX.
  2. If the market falls from here, then that will make the dividend yield of the S&P 500 even higher when I eventually get back in to stocks.
  3. If the market goes sideways like it has been recently, then who cares?
Sure, this means I'm in cash sometimes when the market makes a big move, but more importantly it means that I'm much less likely to suffer a big loss by going out on a limb when the indicators aren't in alignment.

Yes, I'm Baloo the Bear when it comes to timing a bear market. Day traders and risky-rally-riders will have to look elsewhere for advice.

Tuesday, October 21, 2008

Nothing decisive in the charts

I don't think the market has picked a short-term direction yet. If that's a breakout above the declining tops trend line then it's not a very convincing one.

Sentiment indicators are on the pessimistic side, which forecasts a rally, but that's been the case for the past few weeks. So much then for sentiment forecasts during a bear market!

Gasoline below $3

It happened so quietly I almost didn't notice it, but for the first time since February, the average price of gasoline in the U.S. has fallen below $3.00 per gallon. In an earlier poll on this blog, only five out of 54 respondents predicted that this would happen, so congratulations to those contrarians.

I don't usually try to predict prices based on future world events, but in this case I'm going to make an exception. Even with a slowdown in the economy, I don't think that these lower oil and gasoline prices will last any longer than a few months. The Middle East has been unusually quiet recently, and that reminds me of the optimistic/complacent conditions at stock market tops. The more complacent people feel now, the bigger the effect will be when panic returns.

Wednesday, October 15, 2008

Back to the low point

The stock market has returned to the bear market lows of last Thursday's and Friday's closing prices. Either this concludes a very quick sucker rally on the way to new lows, or the market is testing these levels again before a more significant bear market rally gets going.

Did I mention I'm staying in cash?

Monday, October 13, 2008

Huge bounce at 8500; Sucker rally begins; GRZZX awaits

I think we're at the bottom of the first waterfall.

The Dow Jones Industrial Average (Dow 30) closed at 8579 on Thursday and 8451 on Friday, and then rallied more than 11% today to close at 9387. This looks to me like the start of the next sucker rally in the bear market, and that puts the first big bounce less than 1% away from my bottom call (8500) made back in January.

I don't think that this is the bottom, and I don't think that the bear market is over. In fact, if my market indicators cooperate in the coming days and weeks, then my plan is to buy GRZZX at the next top (no higher than 11,000) and then ride the market down to the next low, which should be in the vicinity of 8500 or lower.

Pick up the pieces

Consider how much effort has been wasted by stock pickers and market experts over the past several years.

My early mentor Bob Brinker has held on to his Market Timer mutual funds for this entire drop in the stock market, and it has nearly wiped out all of his gains since the previous market bottom in 2002-2003. Month after month, for $185 per year, he's discussed inflation, money supply, unemployment rates, earnings forecasts - and he never once concluded that stocks were over-priced.

In the middle of the day on Friday I visited the Motley Fool website and was bowled over by what I saw. They have several monthly stock- picking news letters with multi-year track records, and as of Friday all but one had resulted in net lifetime losses for their subscribers. The only winning newsletter was sitting on a total gain of 3%.

Over the years the Fools have made hundreds of stock picks, written thousands of pages of analysis and earnings calculations, and conducted dozens of interviews, and yet they would have done their subscribers better to simply recommend cash or Money Market funds until stocks reached more reasonable valuations. Instead, the Motley Fools have been some of the most vocal proponents of stock buybacks, and have always managed to conclude that stocks were good investments -even at the tops of both the 2000 and 2007 bubbles.

The folks over at Bespoke published an eye-opening table on Friday showing the forecasts for the S&P 500 from the top investment strategists on Wall Street. In January, when I made my S&P 940 call, the "experts" were predicting anything from 1525 to 1700. Even on Friday the forecasts were still between 1300 and 1500.

I don't know if Bespoke is a proponent of Fibonacci grids or not, but they've also published a chart of the Dow 30 diving through Fibonacci support levels like the phantoms that they are.

It's strange that people cling to various fantasies about how the market works, but those of us who know better can take advantage of the bubbles and crashes that happen as a result.


Saturday, October 11, 2008

Election prediction: comfortable win for Obama

This is a follow-up to a previous post on the Presidential election polls, and will probably be my last word on the election. John McCain's poll numbers have fallen through the rising bottom trend that represented his last chance to keep the election close, and his next lower "support level" is around 41%. Barack Obama's poll averages meanwhile have reached the 50% threshold, and his lower support level is around 45%.

Assuming that the final election results fall in the middle of the long-term channels for both candidates, my prediction is a 3% margin of victory in the popular vote for Obama on November 4. There's a good chance then that, for the first time since 1996, we'll know who wins the election before midnight on Election Day. Imagine that!

Friday, October 10, 2008

Prediction comes to full fruition: Dow passes 8500

Who woulda thunk it? Maybe I should stop calling my long-term forecasting method "experimental" and move on to "working prototype."

Historic

This will be something to tell your grandkids about.

It's obvious now that our economy was propped up on a mortgage bubble that made people feel more wealthy than they actually were, and this probably affected the prices of all kinds of things beyond houses - including stocks. However, every stock market bubble also requires some kind of fake justification in order to form, because even rich people don't want to buy something that they think is worthless. The 2000 tech bubble was propelled by creative earnings calculations (Enron for example) and by an awe for all things dot-com, as if human enterprise would suddenly expand at breakneck speed because clicking had replaced the mail order catalog. The buyback bubble that's almost in our rear view mirror was justified by "experts" who assured us that higher stock prices - inflated by share repurchases - were just as good as the dividends we used to collect.

When it comes to investing, nothing beats simple cash payments from profitable corporations to stockholders. As the old saying goes: a bird in the hand (cash dividend) is worth two in the bush (expensive unsold stocks).

Thursday, October 09, 2008

The market will not be denied

Marvel at what we have witnessed:
  • A $700 billion bailout
  • Countless "liquidity injections"
  • Bans on short selling
  • Multiple interest rate cuts
  • Nationalizing mortgages (Freddie Mac and Fannie Mae)
  • Nationalizing insurance (AIG)
  • Nationalizing banks (potentially)
None of it made squat bit of difference when it came to the prices of stocks. Buyback-inflated prices are inflated prices no matter how much money gets passed around from the taxpayer to the Treasury to the Fed to a mortgage-strapped bank. I'm convinced that one reason I was able to foresee this huge stock market drop - even though I wasn't yet aware of the magnitude of the mortgage meltdown - was because I realized that stocks were overvalued relative to the good old boring dividend yield. The facades of buybacks, low yields, and P/E ratios over 15 are finally crumbling before our eyes. Good riddance!

I want to calculate the amount of money wasted on buybacks over the years, but the market keeps dropping and expanding the time range over which the wasted buybacks were made, so I'll just wait for the first bottom to form.

Right now the S&P 500 is lower than it was on July 3, 1997, and is also approaching the vicinity of the absolute bear market lows of 2002-2003. If the market keeps dropping, then average stock yields could rise to the historical upper range of 6%, or even the rare level of 10% not seen since the Great Depression. If that happens, then you won't need me or any other guru to tell you what to do; for the first time in 25 years, stocks will be good investments that you can buy and hold and forget. We're not there yet, however, so market-timing is still the way to go for now. I've been in bear funds and cash ever since my January forecast, so I've fared better than most so far this year.

One half of my long-term prediction comes true: S&P 500 index passes 940

It was all the way back on January 22nd that I made an experimental long-term forecast for the stock market. I predicted that the Dow would fall to 8500, and the S&P would reach 940.

The S&P 500 index has crossed the threshold today, and as I type the Dow isn't far behind at 8700.

I am not calling a market bottom today. For all I know the Dow could keep plunging to 5000 from here, and then my forecast would only be semi-prescient.

Tuesday, October 07, 2008

Groundhog Day

The S&P 500 index passed below 1000 today, closing at 996 and falling ever closer to my low prediction of S&P 940 made all the way back in January. The very first time that the S&P 500 closed above 1000 was . . . .

February 2, 1998.

The steepness of the stock market's fall - 20% in 12 trading days - is finally starting to resemble the action at a major low. However, even if a multi-week rally begins tomorrow, this low will not necessarily prove to be the low. I will remain in cash until the end of the next rally (whenever it occurs) at which point I will make my first investment in GRZZX, the derivatives-free bear market mutual fund. I don't know when that opportunity will come, so I'm not holding my breath.

The thing about being 100% in cash is that, no matter what other investors are going through, every day looks exactly the same to me.

Monday, October 06, 2008

One step closer to a bull market

One of the requirements for changing a bear market into a bull market is for large numbers of normally bullish investors to change their minds, give up on the stock market, and cash out of their stocks and funds. This event causes prices to plummet to more reasonable levels, and also creates a reservoir of reluctant sideline cash which will fuel future price gains.

This morning Jim Cramer, an influential stock picker on CNBC, officially declared himself long-term bearish. To the extent that his followers take his advice and cash out, this will help to accelerate the bear market to its conclusion, and start the next bull market that much sooner.

Is today a good day to get out of stocks?

Unfortunately there's no good answer to this question. At panicked times like this it is likely that (1) if you stay in stocks, the market will keep falling and you will lose more money; yet (2) if you cash out of stocks, the market will quickly turn around and have a short-term rally, and you'll be kicking yourself mercilessly. This is not evil karma, but is actually how the market works. It's why I've spent so much time in cash recently.

The best days to get out of stocks are the days when NOBODY is panicking, like May 21 (Dow 12,601) and August 19 (Dow 11,348) - two times when I went even further and bought or held an inverse/bear fund.

Please understand I am not trying to rub anyone's noses in anything. There are many market refugees checking in today, so it's a logical opportunity for me to explain to some new visitors how things work.

Another Big Monday

Here we go again. It's Monday morning, and we're waking up to huge stock market losses in Europe, Asia, and U.S. stock futures.

I don't wish investment losses on anyone. It reduces wealth, delays retirement, and generally disrupts life. However, these stock market losses are going to happen eventually - it's simply a question of who cashes out first and when. The sooner and steeper the plunge, the sooner stocks become good investments again, and the sooner the bear market comes to an end.

Remember that there are at least two bubbles being burst simultaneously in this bear market: the mortgage/financial bubble, and the buyback bubble. That's a lot of hot air to get rid of.

Friday, October 03, 2008

Bailout passes Congress - Market falls to new low

How about that? Congress passed the $700 billion bailout bill, the President signed it ... and the S&P 500 fell below 1100 to a new bear market low anyways.

It's time to repeat some talking points:
  • A bear market is a bear market is a bear market.
  • I never go long (I don't invest in stocks, SPY, etc.) during a bear market, even if short-term indicators say that a rally is on the way.
  • I never let big news items influence my investment decisions. The only information that matters comes from the stock market itself.
By the way, today's close of S&P 1099 is only a 14% drop away from my January prediction of S&P 940. The Dow meanwhile is 18% away from my prediction of 8500.

Thursday, October 02, 2008

Poll trends

This has nothing to do with the stock market, but I'm interested to see if trend lines can be as predictive in election polls as they are with stocks.

The 2008 Presidential election polls - as computed by the Real Clear Politics website - do indeed seem to be following trend channels. Barack Obama's average poll numbers (blue) have been rising about 3% per year, in a channel about 5% wide. John McCain's major trend channel (red) is almost 8% wide, and has also been rising at a rate of 3% per year.

On shorter time frames, McCain's average poll numbers have formed two sub-trends. (yellow) A declining tops pattern began in January and was broken just after the conventions. A second rising bottoms pattern began at the end of June, and McCain's latest poll average is now sitting right on that line.

If I can apply the same rules to these trends, then I think next week could decide how tight the election will be. If McCain's ratings bounce off of the new rising trend line then it would confirm that McCain and Obama are in the same neighborhood, and would make for a close outcome. However, if McCain's average numbers fall below the trend line at 43%, then that would bring the long-term 8%-wide channel back to life and give Obama the clear edge.

Maybe I'm crazy to even try this, but there's no denying that poll numbers and stock prices are both determined by news-driven decisions of millions of emotional people. We'll see in a month.

Wednesday, October 01, 2008

Temporary ban on short selling extended

The SEC's temporary ban on short selling of 800 stocks has been extended to "no later than October 17." So sleep tight, everyone. There's nothing to see here.

Typical turbulence

The bumpiest part of any trip over a waterfall is at the bottom, and the same is true for any large decline in the stock market. The current leg of the bear market began on August 11 at S&P 1305, and was as low as 1106 (-15%) after the market close on Monday. The big bounce on Tuesday (+5.2%) following Monday's historic plunge (-8.8%) dovetails with the theory that the market is near a short-term bottom.