Friday, December 09, 2011

Like watching paint dry

Nearly thirteen years ago on December 21, 1998, the S&P 500 index first crossed above 1200. Today it's hovering around 1250. Lately the S&P has been reluctant to pick even a medium-term direction - for the past 15 months it's been stuck between 1100 and 1350.

Trend lines blah blah blah 1175 yadda yadda 1250 whatever.

Thursday, December 08, 2011

The President opposes Capitalism

In between some token nods to innovation and hard work, the Teleprompter allowed the 44th President of the United States to boldly proclaim that free market Capitalism doesn't work and has never worked. I'll let readers draw their own conclusions.

"The market will take care of everything", they tell us. "If we just cut more regulations and cut more taxes, especially for the wealthy, our economy will grow stronger. Sure," they say, "there will be winners and losers, but if the winners do really well, then jobs and prosperity will eventually trickle down to everybody else. And," they argue, "even if prosperity doesn't trickle down, well that's the price of liberty." ... We have to admit it's [a theory] that speaks to our rugged individualism and our healthy skepticism of too much government - that's in America's DNA. ... But here's the problem: It doesn't work. It has never worked.

Tuesday, November 29, 2011

Hiding cash

A deflationary resolution to the global financial crisis may, in the best case, see banks limit the amount of money that account holders can withdraw. In the worst case, large banks will go bankrupt and debt-burdened governments won't be able to bail them out, and savings accounts will be decimated as a result. Either way it might make sense to keep actual cash on hand to pay for basic necessities when the collapse happens.

The trick with hoarding cash is that a thief can steal it, so if you're going to hoard it, hide it well. A two-part post by Jeffrey Strain, "Conversation with a Burglar" (part 1) (part 2) has some savvy advice about this, particularly regarding the places one should avoid hiding valuables. The key points are these:
  • Most of the places you think are good hiding spots are actually the first place a burglar will look.
  • Besides a bolted-down safe, the best defense is to leave a small fraction of your stash in obvious hiding places (in a drawer or the back of a closet for example) so that a thief will think he's found most of the money and then leave quickly.

Tuesday, November 01, 2011

The house of cards will collapse

If Greece decides to default on its debt in an orderly fashion, or if it simply descends into chaos, it may be the spark that that finally collapses the global financial Ponzi scheme. Or Greece may ultimately agree to the EU's terms, thereby delaying and exacerbating the inevitable pain for a little longer. There are simply too many players involved and too many weak points in the system to know exactly when and where the triggering event will happen, or how the collapse will unfold, (inflation vs. deflation) but the collapse will happen one way or another.

I've made some preparations for both a deflationary spiral and hyperinflation, and beyond that I've resigned myself to the fact that I have little power to affect or predict the final outcome.

Monday, October 31, 2011

The correction isn't over yet

Just one month ago the S&P 500 index stopped a few points short of a 20% drop, thereby avoiding official bear market territory. Since then it's rallied dramatically, but now there are a couple of resistance trend lines to overcome.

A closing price above about 1330 would officially end this 19% correction.

Tuesday, October 04, 2011

Tease, tease, tease

A closing price below 1090 on the S&P 500 index would officially announce the birth of a bear market, but we're not there yet, despite the temporary dips below that key level. The sudden rally in the last ~30 minutes of trading today was highly suspicious - almost as if "someone" was working to prevent the official onset.

Saturday, October 01, 2011

I'm really bored now

After finally falling below 1250 in early August, the S&P 500 index has been rattling around between 1220 and 1120 ever since, seemingly going nowhere.

I'd like for the market to break out of this channel one way or another and start an invest-able trend. The mid-September bear market signal would suggest that the market will decline out of this pattern, but the overwhelming pessimism of investors suggests that most of the emotional selling has already happened. Thus I have nothing useful to say about which way the market will go from here.

Wednesday, September 14, 2011

Bear market indicated

One of the methods I use to signal that stock prices have changed from a bull market to bear market has tripped, meaning it's now likely that the S&P 500 will fall well below the 20% loss threshold of 1090 before resuming any kind of rally. However I'm not going to invest in a bear fund yet - I'm waiting for a signal that the market has reached a medium-term top within the long-term decline.

Thursday, September 01, 2011

The looming collapse explained in 5 minutes

A better way to describe borrowing money from other countries is that we buy things from them with dollars, and then they turn around and use those dollars to buy our bonds. The net exchange is that other countries are making things for us in return for I.O.U.s.

Thursday, August 18, 2011

No more hedging about HDGE

On February 1st of this year I noticed a new bear market ETF and immediately christened it as my new top Armageddon fund. This move might have seemed premature to some given the short track record at the time, but the performance of the Active Bear ETF (HDGE) has now exceeded even my optimistic expectations. As of today's market close (August 18, 2011) HDGE has bagged a six-month gain of 19.6%, while the S&P 500 index has lost 15.1%.

So far HDGE has not only risen during a market decline (a basic requirement of any bear fund) but it has actually gained more than the S&P 500 has lost. It may be that the fund managers have simply picked more volatile stocks rather than the best candidates for short selling, but regardless of the reason, I'm pleased with the results. HDGE remains securely at the top of my list of Armageddon funds.

Tuesday, August 09, 2011

Correction update

The decline of the S&P 500 index from its April 29 high is now 18% and counting, which is only 2% and 20 points away from triggering a bear market signal. This has wiped out the gains from the previous 12 months, and in the bigger picture yesterday's closing price of 1119 is a point below the closing price on April 2, 1998.

I'm very pleased to see the market decline like this, and I hope it continues. The stock market is still highly over-valued by historical standards, and even at these lower prices the dividend yield of the S&P 500 is barely above 2%. On a personal note it has been frustrating to sit on the sidelines in cash while the market continued to creep and occasionally surge upwards against all fundamental logic, so this is a psychological relief as well. My difficult choice to neutralize both bullish technical signals and bullish sentiment indicators with unprecedentedly bearish long-term economic fundamentals has, for the time being, been partly vindicated.

If this correction turns out to be the beginning of a bear market, then it was one of the stealthiest bear market onsets from the perspective of the technical methods that I use. The only analogous event I can think of is the market crash of May 1940 that came out of nowhere when Germany invaded France. Even the 1987 stock market crash sent a clearer precursor signal than the current decline. If the market turns around here against my wishes, it means ironically that the track record of my purely technical bear market prediction method will remain in good standing, so it will be a mixed bag for me either way.

Monday, August 08, 2011

Large correction & bear market watch

The S&P 500 index is hovering around 1150 as I write this, which is a 15% drop from the high point in April. That qualifies as a large correction. An official bear market requires a 20% drop, which would occur at an S&P price level of 1090.

Tuesday, August 02, 2011

Back near 1250

Here we are again. The S&P 500 index has closed at 1254, right at the floor of its 2011 range.

If it closes much lower than this in the following days, then the lower support level near 1250 will be officially breached.

However, stock market sentiment is solidly pessimistic right now, as you can see in much of the financial news this evening. This is the lowest closing price all year, and the market has fallen below the 200-day moving average, and that's apparently caused a slight panic. Neither of those stats means anything of course, but it sure makes for exciting, breathless news. Honestly, I wish this were the start of a bear market so that I could safely ensconce my money in some bear funds - but that's just another example of market pessimism.

Pessimism more often than not translates to increasing prices, so my guess is that the market is poised to bounce again. I'm staying in cash for a little longer at least. If the S&P closes below 1240 or so first, then I'll be proven wrong about the bounce, but that still won't be an official bear market signal.

In the more distant future, global financial collapse and/or hyperinflation still looms, particularly now that the U.S. government has decided to add trillions of dollars to our national debt. The timing and form of the collapse will be as much a political decision as an economic one, so it's impossible to predict what will happen and when.

Wednesday, July 27, 2011

Still not a rally

Today the S&P 500 index closed at 1305, a level which has acted as a quasi-price floor for much of 2011, with the exception of the corrections in March and June.

The S&P has been in neutral for most of 2011, having yet to rise above the April 29 high of 1364, or to pass below the absolute floor of 1255. This is a narrower-than-average trading range for a seven-month period. Surprisingly, sentiment is also neutral right now despite the news of a potential government default, so I won't attempt a short-term stock market forecast.

I hope all good folks out there have made preparations for national/global financial turmoil. Even if Congress and the President reach a stopgap budget agreement by August 2, the long-term prospects for national solvency do not look good.

Thursday, June 30, 2011

S&P stays above 1250, but is it a rally?

As predicted from the extremely high pessimism in the market, the S&P 500 index hasn't yet crossed the 1250 threshold. In fact the index hasn't even closed below 1265 during this recent dip, and is now rising towards potential overhead resistance in the form of a declining tops trend line:
Sentiment is still very pessimistic, so my guess is that the S&P will rise through this trendline and officially start a new rally.

Tuesday, June 07, 2011

S&P 1250 is key

The S&P 500 index has been declining towards two trend lines - one long term rising support line which goes back to the March 2009 low, and a short term support level at 1257.

Long term:
Short term:
These two trend lines have basically met at the same price level now, meaning that if the S&P declines through 1250, it will simultaneously violate two supports, leaving the door open to a large continuing decline. However, since sentiment is quite pessimistic right now, my guess is that the stock market will bounce off of these support lines and continue the rally. Time will tell.

Friday, May 20, 2011

Peter Schiff on the inevitable collapse

He's spot on that raising the federal debt ceiling will just delay the collapse and make it worse to boot. Unfortunately few politicians want to be held personally responsible for firing federal employees and cutting payments to retirees and unemployed workers, so it's doubtful that there will be a controlled rollback. Schiff is predicting that the ultimate outcome will be hyperinflation - in other words, that the Federal Reserve Bank will keep printing money indefinitely.

Monday, May 16, 2011

Treasury Takes Pension Funds

Sometimes I hate being right. The U.S. Treasury, which officially hits the legal "debt ceiling" this week, is now starting to borrow money from federal pension programs. The only thing that surprises me about this story is that *any* federal program still had an actual positive balance of funds that could be borrowed from in the first place. No matter - once these pension funds are completely replaced with I.O.U.'s like the Social Security Trust Fund has, we'll be one step closer to a similar raid on our private Roth IRAs and 401(k) retirement accounts.

Yes we can (lose everything).

Friday, May 06, 2011

Inflation, Deflation, and Speculation

The most critical economic uncertainty over the next five to ten years is whether there will be hyper inflation, a deflationary spiral, or something in-between. Hyper inflation generally results from a government that creates ever-increasing amounts of currency, which causes the prices of all things to rise and the value of a fixed amount of money to correspondingly decline. A deflationary spiral has the opposite cause and effect; a shrinking supply of money causes prices to decline and the value of money to increase. In our economy a great deal of virtual money is dependent on regular payments to bond holders and mortgage lenders; when these payments are interrupted, retirement accounts are decimated by collapsing bond prices, and banks go bankrupt - money literally vanishes.

The centerpiece of the inflation/deflation question is the Federal Reserve Bank and its chairman Ben Bernanke. If the Fed continues to buy a trillion dollars worth of Treasury bills every year (i.e., printing money) then hyper-inflation is a very real possibility. On the other hand, if the Fed stops the "quantitative easing" programs altogether, then deflation is a risk as the federal government would have to choose between defaulting on Treasury bills (debt payments) or defaulting on promised payments to Social Security, Medicare, Medicaid, etc.

Congress has the power to affect the outcome on its own terms if it wishes, particularly in the timing of changes in the value of the dollar. In the unlikely event that Congress ever slashes the federal budget by 30% or more, the inflationary effect of spending government-sanctioned counterfeit money will vanish, and a deflationary spiral could begin almost immediately. Since Congress doesn't need to issue bonds when the budget is balanced, the Fed's power to create more money would be limited. However, if Congress continues down the path of ever-greater spending and ever-greater debt, then the inflation/deflation ball will be fully in the court of potential bond buyers, including the Federal Reserve Bank.

Individual investors like us can't predict what the Fed or Congress will do this year, next year, or five years from now, so there's no guaranteed way to protect our wealth. I've stashed away actual cash as insurance against a deflationary spiral, but many other investors have instead been betting on high inflation, as evidenced by recent rises in the prices of metals like gold and silver; these buyers are looking for something that will still have bartering value if the dollar collapses.

The price increases in gold and silver are mostly speculative right now because the actual rate of inflation has been remarkably low despite the recent printing spree by the Fed. Indeed, the core inflation rate in the U.S. is barely higher than 1% right now, and hasn't been over 2% since 2008. (Recent reports on the decline of the dollar are referencing the exchange rate between the dollar and other currencies like the euro and yen, rather than the actual domestic buying power.)Meanwhile the price of gold has doubled and the price of silver has more than quadrupled in the same time span. Anyone who bought gold and silver in 2008 now has the opportunity to cash out and make a tidy profit, regardless of the inflation/deflation question. Being a buyer today is rather risky though, particularly if we succumb to deflation instead of inflation. The recent 30% drop in the price of silver may be due to precisely these realizations by investors.

Interestingly, this correction appears to be returning silver to the long-term price trend that it used to share with gold up until 2008.

Given the tame inflation rate so far, the present lack of printing by the Fed, and the potential bubble in metal prices, I'm not going to make a bet on high inflation at this point. Conditions could change quickly due to political shifts in Congress and actions by the Fed chairman, so it pays to keep a finger to the wind.

Tuesday, April 19, 2011

S&P Delicately Downgrades our Debt. Duh!

Yesterday Standard and Poor's changed the outlook on their rating of US sovereign debt from "stable" to "negative". This caused a spike in the number of visitors to my blog, so there seems to be some concern out there. Yes, bondholders should be worried about the government's long-term ability to keep its payment promises, but the move by S&P yesterday was a pathetically small gesture. In fact, Standard and Poor's have not downgraded America's top AAA credit rating; they're only saying that there's a one-in-three chance that they will downgrade us from AAA to AA+ some time in the next two years.

In addition to being only a possibility, the downgrade wouldn't mean much even if it happened. The following table from Wikipedia puts this possible downgrade in perspective:
As you can see, even if they downgraded us to AA+ there's still a long way to go before they start warning that economic conditions could threaten future bond payments.

There are two reasons to be skeptical of either a AAA or AA+ Treasury bond rating. First, unlike every other dollar borrower on the planet, the U.S. government has the power to create dollars out of thin air through the Federal Reserve Bank, which reduces the value of each dollar. In effect, the government can borrow money and then re-define what money is before paying it back. It's a lot like government-sanctioned counterfeiting. This may not fit the technical definition of defaulting, but it is effectively defaulting, and it's already happening. By this measure our credit rating should already be "D".
D: An obligor has failed to pay one or more of its financial obligations when it became due.
The second reason not to trust the bond ratings comes from recent history. The ratings agencies played a major role in the real estate bubble of the last decade and subsequent financial collapse. Back in the early 2000's, Freddie Mac and Fannie Mae were grouping together risky mortgages (sub-prime) into single investment packages known as mortgage-backed securities, and Standard and Poor's and Moody's were giving many of these securities AAA ratings. How far off were the ratings? According to Paul Krugman of the New York Times, 93% of these sub-prime AAA securities have defaulted as of 2010.

In other words, it's pointless for S&P to try to rate U.S. government debt on the same scale as private borrowers who can't print money, especially when a "AAA" rating still leaves open the possibility that a large category of bonds can default en masse.

Sunday, April 17, 2011

That 70's Dow

Over the past 14 years the S&P 500 index has twice risen from 800 to 1500 and then fallen back to 800.
Now the S&P is less than 200 points from completing a third 800-1500 climb. The question now is whether it will fall to 800 again, or finally break through 1500 for good. The pathetically low dividend yield of 1.85% suggests that a third fall is inevitable. Unless the Federal Reserve Bank prints us into high inflation (which seems increasingly likely) I foresee a repeat of the 19-year flat performance of the Dow Jones Industrial Average from 1963-1982:
So the choice is either high inflation or another 40%+ downward oscillation in a flat stock market. One way or another the fake wealth of our debt-dependent economy will find a way to disappear.

Tuesday, March 29, 2011

The Twilight Years of the 401(k) and Roth IRA

I've suspected for a while that the federal government will eventually start taxing contributions to 401(k)s, withdrawals from Roth IRAs, and capital gains and dividends in both. In other words, there won't be any more tax benefits to our retirement accounts, and therefore there won't be any reason to have retirement accounts in the first place.

Today I no longer just suspect that 401(k)s and Roth IRAs are doomed - I'm convinced of it. I'm convinced because of the gradual implosion of underfunded pension programs that are leading to riots at state capitals. Sure, public employees will continue to fight against the budget cuts, but they are ultimately doomed because they can't fight the simple math that says there won't be any money left to pay for their retirement. When they eventually lose, they're going to turn their rage on those of us who never had pensions, but who have instead been building our nest eggs in retirement accounts. It doesn't matter that the public pensions rely on yearly payments from cash-strapped taxpayers while private retirement accounts are funded entirely by decades of saving - it will become an issue of "fairness", because "it's not fair that we have to lose our pensions while they get to keep their retirement accounts."

And that will be that.

Thursday, March 24, 2011

It happens again

It seems like every time I identify a trend it gets broken the next day. The S&P 500 index has now broken through the declining tops trendline.

This is could be the beginning of another rally.

Wednesday, March 23, 2011

Still a little too perfect

The current correction in the S&P 500 index is forming another strangely precise pattern - this time a declining tops trend line.

If I were looking for a medium-term buy signal, I'd wait for the S&P to cross above this line.

Wednesday, March 16, 2011

It's not time to panic. Yet.

So far there's no technical data to indicate that the current downturn in the market is anything more than a run-of-the-mill correction.Sentiment indicators are becoming more pessimistic as expected during a correction in a bull market. Of course stocks are still highly over-valued, and the world still owes more money in private and public debt payments than it can afford, but that doesn't mean this rally can't ultimately continue.

I'm curious to see, if and when the recovery occurs, whether or not the S&P 500 index will return to the oddly precise rising trend that it's been following for the past six months.

Monday, February 21, 2011

Looks like an artificial rally

The S&P 500 index has been almost perfectly confined to an extremely narrow and straight rising channel pattern for the past six months.
Are we supposed to believe that this calm rally has continued through (1) a major shift in power in Congress, (2) an escalating series of collapsing governments in the Middle East, and (3) only the first of dozens of economic implosions at state capitals?

I don't buy it for a second.

Obviously stock prices did follow this pattern, but I don't think the collective action of mutual fund managers, day traders, hedge funds and individual investors could produce such a regular pattern for so long. I don't think the normal forces of supply and demand, buying and selling, or bidding and asking are at work here.

The good news is that, in the long run, it won't matter whether or not this overpriced rally was caused by illegal price manipulation or not. The higher the stock market goes into bubble territory, the harder it will eventually fall, and the more money I can make with a bear fund like HDGE when the time comes.

Wednesday, February 02, 2011

Two cycles complete

I began investing in the stock market in the late 1990's with very little idea of what I was doing. The 2000-2002 bear market then discouraged me so much that I stopped paying attention for several years. By 2005 the S&P 500 index had returned to my original investing starting point, and I started paying attention to stocks again, this time with the intention of learning how to time the market. Cycle 1 was complete.

By 2007 I'd learned enough to cash out (temporarily) at the precise market peak in October, and to switch to a bearish stance by January 2008. It was during the 2007-2009 bear market that I learned one of the most important lessons in market timing: stock valuations (P/E ratios) are meaningless. However, as I'm sure many people have done in previous bear markets, I found reasons to believe that "this time it's much worse than before", and could not get myself to take a bull market stance when prices turned around in 2009. The housing market was still tanking, the derivatives market was a house of cards, the federal government was $13 trillion in debt, unemployment was hovering around 10%, and our first socialist president had just been elected - I was surprised that enough people still had spare funds with which to buy stocks. (To be fair, I also had some career issues in 2009 and 2010 that contributed to my lack of attention to the market.) However, in the subsequent rally that's still going on, I've finally seen first-hand that the stock market is blind in both directions, and that a rally can occur despite obvious economic warning signs. The S&P 500 index is now back to the point where I originally started thinking about market timing. Cycle 2 is complete.

In hindsight, my biggest market-timing obsession - and my biggest obstacle to making a straightforward mathematical timing model - was to find a method that would turn bearish before a stock market crash like the one on October 19, 1987. I found a method alright, but it was difficult to integrate it with the schemes that worked better during the remaining 99% of the stock market's history. I think that finding such a method was more a point of pride than it was a way to improve returns, since such crashes are exceedingly rare, and because I already knew of signals that would at least tell me to cash out to a neutral position before that particular crash. I'm not worried any more about being bearish before the next 20%-in-one-day crash - I'll be happy to be in cash if it happens again.

Tuesday, February 01, 2011

The New Armageddon Fund

By an amazing coincidence, in the same week that I decided to resume my market timing analysis, a new type of bear market fund has emerged. AdvisorShares has created the first short ETF that actually sells stocks short: the Active Bear ETF (HDGE). I've been waiting for this ETF for more than three years, and it's almost the perfect bear fund.

As discussed in a previous post, my ideal Armageddon fund would (1) short a market index like the S&P 500 rather than a managed portfolio of selected stocks, (2) be easy to buy or sell in minutes without trading penalties, and (3) gain value in any bear market even if the derivatives market collapsed.

The following table shows how HDGE stacks up against other bear funds that I've used before:

Min. Invest None None $2,000 $10,000
Min. IRA None
None $1,000 $1,000
No Yes
Expense 1.85% 0.95% 1.73% 2.86%
Trading penalty None None 1% (30 d) 2% (5 d)
Long stocks No No Yes No
Managed Indexed Managed Managed

Although dozens of inverse/short ETFs like SDS and SH have become popular investment tools, they may be extremely risky in a serious bear market due to their use of derivatives in place of actually selling stocks short. Indeed, during the worst part of the bear market in 2008 some of these ETFs temporarily stopped trading. My wish to avoid derivatives led me to search for less popular but safer alternatives to these funds.

The Federated Prudent Bear mutual fund (BEARX) was the first bear fund I found that actually held short positions in some stocks, but since BEARX also has long positions in some stocks and uses derivatives, I later dropped it in favor of the Leuthold Grizzly Short fund (GRZZX) which strictly sells stocks short. Neither of these was a completely satisfactory replacement for the derivative ETFs however, because they aren't indexed to the S&P, and because mutual funds take more than one day to complete a buy or sell order and come with hefty short-term trading penalties.

The Active Bear ETF meets my requirements for simple instant trading and the safety of real short positions in stocks. It would be nice if it were an index fund instead of a managed fund, but so far its price movements are close enough to the inverse of the S&P 500 index that its a pretty safe bet it will gain some value in bear markets - and that's the most important property of any bear fund in my market timing strategy.

Monday, January 24, 2011

Great. Another stock market bubble.

The S&P 500 index is only 10 points away from the 1300 level, and has erased the losses of late 2008.

Unfortunately there's little data to support the idea that stocks are worth what they're trading for today. The dividend yield of the S&P is only 1.85% right now; typically the yield has varied between 3% and 6%, so by historical standards the S&P is worth between 400 and 800 today.

On the technical side, optimism is at a multi-year high, so I expect at least a correction soon before this speculative rally continues much higher.

Friday, January 21, 2011

One month of winter down, two to go

I suspect that this not-yet-fully-grown snowdrift at the end of my driveway will survive well into spring.

Thursday, January 20, 2011

30 years ago today

Ronald Reagan's prophetic first Inaugural Address:

Unfortunately the Democrats maintained the majority in the House of Representatives throughout his presidency ... so much for balancing the budget.