Monday, August 24, 2015
I reluctantly gave an early bear market warning to a close family member on Thursday night, based on several indicators turning bearish and on the S&P 500 breaking down out of its 6-month price freeze. I was reluctant because key long-term trends were still technically bullish, and because a particular pattern that preceded nearly every major market crash had not materialized. In other words, by making a bearish call, I was going against the method that I programmed in to the "market bots". Indeed, when I made the call, the response back was, "Why are the bots still bullish? Are they stuck?" I've actually always suspected that the bots needed a re-design - it's the main reason I haven't yet built a paid subscriber list to my email alerts.
Over the weekend I then saw additional indicators turn bearish, and noticed that the S&P 500 had broken down through yet another trend line, and on Sunday I emailed my official "I'm cashing out" message to extended family and close friends. Again, the bots were still bullish.
Based on the lack of a crash signal and the sudden steep decline that usually occurs in corrections, I still expect that the current decline will turn out to be just the first bump at the start of a bear market similar to the 2000-2003 or 2007-2009 markets, rather than the beginning of a cliff-like crash a-la October 1987. If the market does indeed crash from here, then I'll be very happy that I rode it out in cash, but I'll be disappointed that the purely mathematical methods I've been trying to develop failed to see the crash coming. If, on the other hand, the market recovers part way and the bear market comes on more slowly (or the rally resumes!) then the slow reaction of the bots will be vindicated, and at least some my previous work will have paid off.
Sunday, August 23, 2015
Here's a simple summary of my investments:
- As of Monday morning I'll be out of all stocks and stock funds.
- I'm acquiring gold and silver coins to accompany my cash stash.
- I anticipate eventually moving my IRA savings to bear funds, overseas stock and bond funds, and perhaps gold ETFs.
I'm moving my savings out of stocks, out of the dollar, and at some point out of the country.
Friday, August 21, 2015
How many bear market signals can occur in one week? In addition to my favorite trends and internal indicators turning bearish, and the S&P 500 index breaking out out of a six-month narrow trading range, it turns out that just today the S&P 500 finally crossed below a rising minimum trend line that's been in place for four years.
Even if this isn't the start of an official bear market (I think it is) there's little doubt that the four-year nearly-linear market rally from 2011 to 2015 is over, and the S&P has probably started a phase of slower gains, if not losses.
Knowing exactly when to buy or sell the stock market has nothing to do with fundamentals such as economic growth, the unemployment rate, corporate earnings, or interest rates. Rather, market timing is about noticing the first indications of a change in patterns of buying and selling stocks. There are any number of reasons for patterns to change, but for a market timer the only thing that matters is the behavioral change of buyers and sellers, not the cause of it.
That being said, fundamentals can provide a long-term forecast of possible resolutions of a rally or of a bear market, and to put it mildly, our fundamentals are very bearish. Rather than fill this page with charts and explanatory text, I'll outline the big issues here as concisely as I can and leave deeper discussions for later:
- The Federal debt-to-GDP ratio is about as high as the previous record level that was reached at end of WWII, and unlike a victorious U.S. that was able to stop building war machines cold-turkey in 1946, today future government payments (Medicare, Medicaid, Social Security, Unemployment, Welfare, Obamacare credits...) are supposed to keep rising indefinitely. That simply can't happen unless the value of a dollar is allowed or forced to collapse.
- The Federal Reserve interest rate has been at 0% for more than six years, meaning the Fed is now boxed in to a corner if the economy starts to sag again. Raising rates would only worsen the economic decline.
- The Federal Reserve has printed more than $3 Trillion (bought more than $3 Trillion of government debt) since the most recent financial crisis in order to prevent defaults, and it will probably print even more if the economy starts to decline. If the policy isn't changed, eventually all that
counterfeited- er, printed money will crush the value of the dollars sitting in your bank and retirement accounts.
- Zero-percent interest rates and money printing have simply re-inflated bubbles. It's easier to afford a house when interest rates are low and banks are flush with cash, so this has kept home prices artificially high along with the supposed net worth of lending banks.
- Corporations have used the low interest rates to borrow money and buy back stocks, and this has inflated the stock market to maddening valuations. Today the S&P 500 index has a P/E ratio (assuming the data isn't fudged) of 21 and a dividend yield of 2%. Historically the P/E averages around 15 and the yield averages about 4%. Prices would need to fall 30% to 50% from here just to return to average, leaving alone the fact that the P/E ratio sometimes falls below 10 and the yield sometimes surpasses 6%.
- Speaking of the economy, things do not look rosy. The fraction of working-age U.S. citizens who are employed is 62.6%, which is the lowest fraction since 1977.
- Recent college graduates have college loans totaling $1.4 Trillion. They'll have a hard time paying them off - interest notwithstanding - if the employment rate keeps falling.
- Retirees, or people who wish to retire, have few options for generating cash flow from their savings. For them, low interest rates mean low retirement income, which forces them either to retire in very modest conditions or keep working well past retirement age.
- Recent estimates of economic growth (GDP) are less than inspiring, and past estimates of growth have a funny way of being revised downwards on a regular basis. This lackluster performance has come despite the Fed's frenzied
There's much more that I could add, but the above list covers most of the big quantifiable factors. In short, a big economic storm has to hit eventually - it's just a matter of when, how much pain there will be, and where the government allows the pain to hit.
The S&P 500 finally broke out of its rut, and it broke out to the down side by closing below 2040 for the first time since February. Every key indicator that I watch has either turned bearish recently or is on the threshold of turning bearish. In addition to the those quantifiable "internals", there are other seasonal reasons to be weary:
- August 2000 was the starting point of the dot-com collapse.
- October 2007 was the stock market peak preceding the financial crisis and crash of 2008-2009.
- October is also the month of the big crashes: 1929, 1987, and 2008.
My old place-holding market bots, which do not use all of the numbers that I track today, are designed to have delayed reactions in order to avoid whip-sawing during corrections, so they may not turn bearish for a couple of weeks even if this turns out to be the market top. Despite the slow response time of the bots, I'm almost convinced now by the totality of internals, trends, and historical precedents that the six-year bull market is over, and that a new bear market is upon us. Barring an amazing turn-around in the market in the next couple of days, I anticipate that last couple of indicators will flip to bearish shortly, and at that point I'll start buying shares of AdvisorShares Bear ETF (HDGE).
Wednesday, August 05, 2015
All the way back in 2007 when I was still learning how to read stock market signals, I noticed that growth and value stock prices were separating. Even within the family of value stocks, high-dividend stocks were separating at a higher rate, and REITs were falling even faster. The combined price charts reminded me of a squadron of WWII fighter planes pealing away from their formation before an attack.
Today the market is doing something similar, although not yet as severely. Up until the end of 2013, value and growth stocks were moving almost in lockstep. Even boring dividend-paying stocks were keeping up with the usually high-flying NASDAQ. Then about 18 months ago these styles all began separating in the same order that they separated in 2007. Not only are growth stocks outperforming value, but the NASDAQ (the high-tech subset of growth stocks) has been doing even better while dividend stocks have lagged behind the rest.
This doesn't necessarily mean that the repeat of the 2007-2009 bear market is upon us, but I'd be foolish not to look out for it.