Tuesday, December 17, 2013

The next obvious short play

Two extraordinary things have happened in the field of health care this decade.  The first is that Congress passed, and the Supreme Court allowed, a law that will effectively kill private health insurance companies by squeezing them financially from multiple angles.  Just last week the Secretary of the Department of Health and Human Services, Kathleen Sebelius, piled on by "requesting" that insurance companies provide coverage for customers who haven't yet started paying their premiums.

You don't need to be a mathematician to figure out that an already boxed-in insurance company can't afford to cover people for free.

The second extraordinary phenomenon has been the performance of health care provider stocks since the passage of the "Affordable" Care Act.  Between August 2012 and November 2013 alone, the health care provider sector has risen 50% compared to the 30% gain for the broad S&P 500 index.  Either somebody out there thinks health insurance companies are going to make more profit by making insurance more affordable, or there's some kind of artificial inflation being applied to these stocks.

Whatever the reason for the sector's recent performance, it's going to come to an abrupt halt when health insurance companies start closing their doors or filing for bankruptcy.  Proshares offers an ETF (RXD) that goes up in price when the health care sector goes down - I'll be looking to use this ETF when insurers inevitably start feeling the pain.

Friday, December 13, 2013

Indicators still neutral, rally continues

Short-term and seasonal factors are not favorable for the stock market, but long-term indicators still allow for a continuation of the rally that started in the spring of 2009.

The market bot "internal price forces" have fallen to 4.1 out of 10.  This is still comfortably neutral, and the market has rallied through lower readings in 2010 and 2011, so there's no cause for alarm at this point.

Sentiment indicators are at their most optimistic levels in more than two years, which is bearish in the short term.  A decent correction of 5% or more is likely, presumably followed by a resumption of the long-term rally.

The curious four-year stock market cycle is nearing its expected peak in May 2014, at which point returns historically turn negative leading up to the mid-term election in November.

Friday, November 08, 2013

If you like it, you can keep it.

We will keep this promise to the American People: If you like your health care plan, you can keep your health care plan.  Period.

Let me be perfectly clear.  If you like your doctor, you can keep your doctor.

No matter what you've heard, if you like your 401(k), you can keep your 401(k).

If you like your Roth IRA, you can keep your Roth IRA.  Nobody is talking about taking that away from you.

Make no mistake.  If you like your local school curriculum, you can keep your curriculum.

If you like your privacy, you can keep your privacy. I promise.

If you like your rifle, you can keep your rifle. You heard it here.

I will not take your shotgun away.  I believe in the 2nd amendment.

If you like voting, I'll let you vote. Trust me.

If you like your freedom, I'll give you freedom.

If you enjoy your life, I may let you live.

Feel better??

Economic Update

It shouldn't come as any surprise that we're still heading towards a fiscal cliff, and although I don't use any economic fundamentals in my forecasting method, I'd like to show a couple of charts here just to keep readers thinking about what to expect outside the stock market.

Since late 2008/early 2009, the Labor Force Participation Rate (the fraction of adults employed or looking for work) has been in a dramatic free-fall.  Last month (October 2013), the rate fell below 63% for the first time since 1978.
Labor Force Participation Rate from 1978 to 2013

Meanwhile, the national debt has been accelerating upwards as usual. Today the federal debt is over $17 Trillion, and more importantly the national debt as a faction of Gross Domestic Product (GDP) has passed 100% and is nearing the all-time-high of 120% that was reached at the end of World War II.
Total public debt as a fraction of GDP

Recall that the debt/GDP ratio plummeted after WWII for the simple reason that we stopped borrowing money to build tanks, bombers, aircraft carriers, and supplies for millions of troops.  In 1946 the government stopped issuing new war bonds and began to gradually pay off the war debt.  Today we face the opposite future, with promises of ever more money to growing numbers of receivers of Medicaid, Medicare, Social Security, welfare, unemployment insurance, food stamps, and soon the socialized follow-on to Obamacare.  A shrinking workforce cannot support a growing number of non-working dependents without further increasing the debt, and the debt cannot grow faster than GDP indefinitely.

Look out below.

Wednesday, October 30, 2013

How 'bout them bots!

The first version of my stock market bots went online nearly five months ago, and all versions since then have been bullish on the market every day so far.  In that time the S&P 500 index has risen from 1640 to 1775, resulting in a net gain of more than 8%.

I forgot to point out that about a month ago the "Internal Price Forces" number dropped from 5.9 to 4.9.  This change isn't enough to alter the timing of any impending "sell" signal, but if the number continues to crawl downwards, don't be surprised if the bots switch their investment stances.

As you might have figured out already, version 2 of the system isn't online yet.  I had big plans a couple of months ago, but my day job has gotten very busy recently, so the upgrade has been on hold.  Hopefully I'll have time over the holidays to make some progress.

Wednesday, September 11, 2013

August "correction"

After closing at an all-time high of 1710 on August 2nd, the S&P 500 index fell to 1630 on the 27th (a 4.7% drop) and has risen back above 1680 since then.  I don't think of a decline as an official correction until it reaches at least 5%, so the August drop doesn't quite count.

Tuesday, September 10, 2013

Dubious Dow gets another arbitrary change

Today's news is an example of why I don't give a damn about the Dow.

The Dow Jones Industrial Average - a.k.a. the Dow 30 - is getting one of its periodic overhauls on September 23rd.  A committee has decided that Alcoa, Bank of America, and Hewlett-Packard will be replaced in the lineup by Goldman Sachs, Visa, and Nike.  Because the Dow is weighted by the price of one share rather than by the size of each company, the new components (share prices of $165, $185 and $67, respectively) are going to become instant heavyweights in the average relative to the shares they're replacing (priced at only $22, $14, and $8) and relative to the other 27 companies they're joining.  In other words, when the market opens on Monday the 23rd, there will be an index with the familiar "Dow" monicker, but it will not be the same index that closed on Friday the 20th.

This type of quantum change doesn't happen with the S&P 500 index.  Since membership in the S&P 500 is based in part on the size of a company (market cap) the rules for swapping companies into and out of the index are less arbitrary.  More to the point, the companies that participate in the shuffle are likely to be among the smallest companies in the index, because shrinking below the market cap requirement - or growing above it - gets one removed from- or can get one added to the index, respectively.  Since the S&P is weighted by the size of each company, these periodic changes down at the bottom have an insignificant effect on the overall index.  The evolution of the S&P 500 over time has thus been more gradual and organic than that of the Dow 30.

For assessing the current state of the U.S. stock market, the S&P 500 index is simply a more logical choice than the Dow 30.

Sunday, August 18, 2013

Higher returns with fewer trades

I'm getting close to finishing "Version 2.0" of my market bots, and along the way I've made a few discoveries that I've been able to incorporate into the soon-to-be-obsolete bots that are are currently operating.  Today I made an additional modification (now up to bot 13_20) that both increases the average stock market returns and reduces the number of trades required.

Market conditions are pretty much unchanged since my first bots began operating.  Internals are on the bullish side of neutral, and the long-term trend remains positive.  Since closing at an all-time-high of 1709 on August 2nd, the S&P 500 index has fallen 3%, which doesn't yet count as an official correction in my book.

Friday, August 02, 2013

Better and better

Not only has the S&P 500 index recently crossed above 1700 for the first time in history, but I've made even more tweaks to the market bots (now at version 17), with bot A2 now returning a back-tested average of 13.1% per year.  Speaking of the bots, they've been in stocks since their creation two months ago, and the market has indeed risen.  It's not much of a track record, but it's as good a start as can be expected.

The "internal price forces" number is down to 5.9 from 6.0, but that's due to the slight differences between bot versions 15 and 17, not to any changes in the market.

Monday, July 01, 2013

Better Bots, Busted Bonds, Gold Gashed

My market bots have been staying in stocks since their creation nearly one month ago, and as the S&P 500 index has risen back above 1600, it's looking more likely by the day that they correctly called this most recent dip as being just a correction in a continuing rally.

I will always be making adjustments to the bots to improve their returns, and as of today the latest versions are bot13_15.A1 and -.A2.  Of particular note is that -.A2 is getting close to a back-tested return of 13% per year (now 12.92%) compared to 7.42% per year for the buy-and-hold method.

If I had to guess why the stock market is still rising at this point, I'd say it's because investors are cashing out of almost every other kind of investment and need a place to put the money.  Long-term treasury bonds, as measured by the iShares 20 year treasury bond ETF [TLT], have fallen more than 18% in the past year.  More spectacularly, the price of gold has fallen 37% in less than 2 years, with most of those losses coming in just the past 3 months.  If my theory is correct, then when this non-stock sell-off eventually comes to an end it will reduce the buying pressure in the stock market.  Will my market bots see this coming?

Monday, June 03, 2013


I've finally done it!  After years of planning, reams of research and plenty of trial-and-error, my first market bots are operational.  You can view the daily updates on past performance and current stock market positions here.  Both versions (bot13_10.A1 and A2) are currently long on the S&P 500 index, and the all-important proprietary "internals" are on the bullish side of neutral at 6.0 out of 10.  (In the back-test they've been long on stocks since late 2011.)  Over the next few months I'll be adding lots of information to the nowcast/forecast page as well as tweaking the bots themselves to improve the returns and reduce the frequency of buying and selling that they require.

My motivation for making an automated method for choosing when to buy and sell the stock market is to take my own biases and emotions out of the equation.  As much as I've learned about how technical analysis can predict future market performance, I'm still a fallible human being who can be swayed by fear, greed, mob psychology, general moodiness, and the 24-hour news cycle.  My plan is to obey the bots, much as a pilot relies on his instruments when flying on a cloudy night.

Saturday, April 20, 2013

Rallying past the record - or not?

The S&P 500 index record closing price of 1565 held for more than five years since October 2007.  Then on April 10th the S&P shot up to a record close of 1587, looking like it might be a decisive start to a rally.  However it stayed flat for the next couple of days, and then on Monday - an April 15th which will live in infamy - the S&P fell back to earth to close at 1552, accompanied by the largest one-day decline in the price of gold in decades.

If you're wondering what the stock market is going to do next, then join the club.  We're "due" for a modest correction soon, and sentiment is still leaning towards optimism, which is bearish.  However other indicators, such as volatility and volume-related metrics, are still bullish.  Hopefully the market will pick a direction soon and pull most of the indicators into agreement one way or another, at which point a more confident forecast may be possible.

The beginning of the end of the IRA is here

A couple of years ago I predicted that individual retirement accounts (IRAs) were ultimately doomed due to warped socialist ideas of "fairness." If the president's 2014 budget is approved as is, then the IRA's death scene has already begun. The budget includes an annuity-rate-dependent cap on the total savings in all of one's IRA accounts which assumes that an annual annuity payout of $205,000 is sufficient for all retirees.

As always, big things have small beginnings, and there's no doubt that if this IRA cap is passed, the "fair annual payout limit" - and therefore the limit on the amount of savings - will descend to lower and lower levels in subsequent budget years as the government scrounges for more money to pay the ever-increasing bloated federal budget.

These moves by the government are perfectly predictable if you think like a socialist.

Tuesday, March 26, 2013

The next phase of the collapse is starting

In my headline post titled "The Collapse," I speculated that eventually every nation will suffer one of three fates: (1) the fortitude to pay down public debts and allowance for orderly bankruptcies, (2) continued bailouts ending in bond defaults or hyperinflation, or (3) raising taxes to pay for everything until the economy collapses.  Now it looks like the trend being set in Cyprus and the European Union is some combination of the above.

It's not exactly clear yet what's going to happen with the Bank of Cyprus, but it appears that the government will freeze all savings accounts over a certain size limit (perhaps 100,000 Euros) and then confiscate some fraction of those accounts (perhaps 40%) to pay down debts.  One interpretation is that this is a new property tax on the rich, where your property is now your savings account instead of your home.  To wealthy depositors it will also feel like an unfair default that only hurts those who put the greatest amount of faith in the bank.

Sure, it's only in Cyprus for now, and it's only large accounts for now, but there's a lot more debt out there in Europe and around the world, and once this money-confiscating precedent is set, it can be expanded to other banks, and the "large account" threshold can be lowered.

Savings accounts in Spain, Italy and other European countries will be raided if needed to preserve Europe's single currency by propping up failing banks, a senior eurozone official has announced.
If you think that this phenomenon is not coming to a bank near you - and soon - then I've got a bridge I'd like to sell to you.  It's time to question whether your "savings" account will really be yours in the near future.

Tuesday, March 05, 2013

Technical forecast: Up, up and away

This is something to see.  As the stock market reaches towards an all-time high, short-term sentiment is becoming more pessimistic.  This is an uncommon but not unknown phenomenon sometimes referred to as "climbing the wall of worry," because the negative sentiment actually helps to maintain the rally.  Money flow has also recently crossed to the bullish side, so if the S&P 500 and Dow 30 really do rise decisively into record territory, then I'll have no choice but to make a bullish bet with my money.

The idea of betting on a continued rally scares the **** out of me, but it's usually best to bet against one's emotions, so that will be my only reassurance.

Wednesday, February 06, 2013

So it's come to this...

In the long run, it was inevitable that both the S&P 500 index and Dow Jones Industrial average would return to the important resistance levels of their all-time highs.  I just didn't think it would happen this soon.  The Dow 30 has now reached the vicinity of 14,000 for the second time in history,

Dow 30

while the S&P 500 index has poked above 1,500 for the third time.

S&P 500

If I had to place a bet at this point (fortunately I don't) I'd say the stock market has finally reached a price too far and is poised to reverse course for a while, but I'm still staying in neutral cash for now.  If these two indices jump above these lines significantly, meaning the stock market has reached a general all-time high by any definition, then the last long-term resistance line will be out of play, and I would be hard pressed to make a bearish argument from the perspective of a price trend.

Wednesday, January 09, 2013

Pausing at the top?

After the announcement of the New Years Federal budget deal, the S&P 500 index rocketed up to the overhead resistance line near 1460 - and there is has remained for the past five trading days.
 This rapid rise and subsequent stall look bearish for the short term.  In addition, market sentiment, money flow, and volatility all point to a bearish forecast.  The big question now is whether the market will put in a simple correction like the one following the September-October top, or something bigger that will allow me to make use of a bear market fund.