Thursday, April 16, 2009

Short-term bearish, long-term not so bearish

These have been the most difficult stock market conditions for at least the past year.

The S&P 500 index has crossed the first of two key thresholds that usually forecasts the end of a bear market, so my long-term forecast is now "unconfirmed end of bear market." However, assuming that the market turns around soon, my long-term forecast will switch back to "bear market" when stock prices cross back.

Meanwhile, sentiment remains bullish, which is almost always bearish for stock prices on short-to-medium time frames. I admit that I did not expect such a strong rally in the face of overwhelming optimism, but one case of contrarian market-timing investing opposite to a large rally is not a reason to dump the method. If anything, it may cause other contrarian investors to give up, which would actually help to make the method more effective again. Time will tell.

Adding to my short-term bearish conviction is the formation of a rising wedge formation.

These almost always end with a violation of the lower trend line and a decline in prices, so I'm staying fully invested in GRZZX. Thanks to the wedge formation, I think the wait will finally end soon.

13 comments:

Tim said...

Jody you said in the title "long-term not so bearish"

What does that mean? What is long-term?

Jody Wilson said...

At any given moment in time, stock market prices can usually be characterized as being in either a bear market (going down over a period of a year or more) or bull market (going up over a year or more). They've been in a bear market since late 2007. For the first time in this bear market, the long-term component of my model is signaling that the bear market may have come to an end. However, it's not confirmed, and I don't think it will last.

Tim said...

Jody, in the decline of 00-03 there was a period when the NASDAQ held relatively steady over ten months

http://dshort.com/charts/bears/four-bears-large.gif

This meant nothing looking back but I am sure many people thought we were bottoming.

This decline has lasted for about a year and half I feel we have at least another year or more to assess the fallout. IMO of course

John from Colorado said...

It appears that mutual fund managers and investment advisors (newsletters, etc) are telling people to get back into the market. "The worst is over but use caution". I've also read a number of bears saying that the rally won't last. The fundamentals of the economy have really not changed much over the past few months. The second derivative suggests the economic decline is decelerating. Earnings are "not as bad as expected" but still not good. Mixed signals in my mind. So, my take is that the market will experience some small declines in the short run, only to "fake" the bears into positions. But the market (still in the short/medium run) will move to 950 or maybe 1000. Ally ally in come free will be called (maybe around summer). Then look out as second quarter earnings look bad and the "hope" of better earnings later this year fade and economic realities become reality. Sometime between now and the end of year I expect the S&P to be around 550-600. If the government can't "inflate" the economy in the short/ medium run, I predict economic armagaddon. We (the US govt) won't be able to borrow enough to bail out the economy. I might be one of those buying a gun and ammunition. Well, at least a couple good water filters to purify Colorado creek water. If the govt can inflate the economy, I expect a rerun of the 70's and early 80's. If so, I'll have to buy bell bottoms and a couple leisure suits, one powder blue, the other rusty brown.
John from Colorado

Anonymous said...

To John from Colorado,
I agree with your outlook. 950 to 1000 short-term; probably 400 long-term. But, I had to chuckle at your observation that mutual fund managers and investment advisors are telling people to get back into the market. I never heard those people say to get out of the market in the first place! I recently looked at the most recent quarterly newsletter for my retirement plan at work, just out of morbid curiousity. It just regurgitated the conventional wisdom that you should dollar cost average into these mutual funds because you'll be in such great shape "when the market bounces back." Then, in support of this stay-the-course nonsense, it explained how well you would've done from 2003 to 2007! It conveniently omitted that fact that if you factor in '07 to '09, you're right back where you started. I really think we have a "401(k) bubble," if you will. These poor people, i.e. most Americans, who frankly know nothing about financial markets, and just put $100/month into mutual funds and then concentrate on American Idol, are just going be financially ruined.

John from the state of Confusion said...

It's approaching two weeks since your last post and the financial news continues to be confusing to me. It appears that most of the earnings announcements are "better than expected" given very low expectations but actually quite bad but not as bad as they have been. How's that for confusing. Then the fundamental economic news is a mix of "not as bad as expected" or "worse than expected" (like Q1 GDP)but generally "bad". Yet the market has moved sideways to slowly up. Most of the "talking heads/analyists" are saying "the waters fine, come on in". Yet I keep seeing fins in the water, circling. I'm sticking with my comments from April 16 but that is based on nothing more than my observations and intuition. I prefer your more scientific model.
So Jody, what is your model showing now? Is there any greater clarity? A change in sentiment one way or the other? I'm willing to be patient but I have 50% in cash and would like to realize some gains if possible. As always, any thoughts are appreciated.

BK said...

Jody,

I assume you are still hanging on to your position in GRZZX. You haven't given into the Bulls. Its amazing to watch this Bear Market Rally - even bad news is good news for a Bear Market Rally.

I own some GRZZX - this rally is getting hard to stomach.

Regards.

Anonymous said...

its been awhile since you posted.. any updates?

Anonymous said...

Since you have not updated otherwise, it seems safe to assume that you are still in GRZZX.

If so, what is going on that keeps you in that position?

It seems that the sustained momentum of this rally, the volume in this rally and more important to my models, the future rat of dividend growth.

Is it simply what the short term traders are doing that keeps you in the bear camp? I know they are betting heavy against financials now.

We all look forward to your next update.

Bill in TX

RO said...

Since the IRA contribution was reset on Apr 15th, did you allocate it to buy more GRZX funds since the market is still ticking upwards?

Anonymous said...

Tons of optimism out there... lets see if we fall again very soon.

John from Colorado said...

Jody;
I was thinking about a comment/question made by a reader in a past posting. The reader asked who was left to sell equities. Hindsight is 20/20 but it apears that most everybody had sold that were going to sell. The tide has certainly shifted but I am continuing to wonder why. Consumer dept is almost 100% of GDP (an all time high by a long way) and govt dept is growing very fast so what fuels growth over the next couple years? I see no way around significant deleveraging by consumers. So I still see two scenarios and neither of them is bullish over the next 4 years. One plays out over the next 2-6 months (things are still bad scenario) and the other (inflation scenario) plays out over the next 4 or so years. Your model has proven very accurate over the past few years but somehow missed this significant shift. Could your model account for the "too few people/institutions left to sell" situation, so that despite the positive sentiment, so positive sentiment is driving the market up in the short run (the past month or so). I agree with you that one false signal in the model doesn't mean you throw away the model. Are you continuing to refine it? I would like to offer words of encouragement but I know it sucks losing money and maybe more importantly seeing something you put a lot of time and effort into looking less predictive than it did just a couple months ago. I hope you are not giving up on the model but rather looking at refinements.
John

Anonymous said...

Jody;

Has your thought on the overall trend changed now that the S&P is at 923 (interday on the 8th)