03/11/12 – Stock Market Update © ™

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WHAT’S HAPPENING?

  • Long Term
  • Mar 2009 To Present – UP
  •  Large Step 3 Up Has Begun
  • From the bottom in  March 2009
  • Large step one up ended in May 2010
  • Large step two up ended in May 2011
  • Large step three is underway

03-11-12 DJI WEEKLY

Jeffrey Saut commented in one of his recent columns:

With the S&P 500 (SPX/1369.63) up more than 100% since the March 2009 “lows” it makes this one of the longest bull markets ever. As the invaluable Bespoke Investment Group writes:

“Going all the way back to 1928, the current bull market ranks as the ninth longest ever. Even more impressive is the fact that of the nine bull markets that lasted longer, none saw a gain of 100% during their first three years. Based on the history of prior bulls that have hit the three-year mark, year four has also been positive.”

History is telling us that the chances are good that we have further to go in this bull market.

I remain in an “overall” uptrend theme as per previous updates.  Overall uptrend means there is some zig-zag and not straight up.  I think we are going to zig-zag very soon and we need to “think” about corrections.

Since February 21, 2012 the SP 500 has gained 9 points or 6/10 of one percent.  The closing peak occurred on February 28th and since then the SP 500 has declined one point.  So there’s not much happening in the last three weeks.

It’s obvious that the market has been steadily losing momentum and should begin (or has already begun) a small correction.  The SP 500 count indicates that we have just completed step 2 up counting from the late November 2011 bottom (see SP 500 in the chart below).  If this count is correct, we should have one more stab at last week’s highs before the market rolls over into a correction that will last more than a few days.  BUT looking at the count in some of the other indexes could lead one to believe that the count is complete on the upside and the correction will be underway soon.  Either way we are in the final stages of an advance that began in November.

One alternative to a decline is that the market continues to tread water as it has the past three weeks.  If this were to continue it would work off any longer term overbought issues and rebuild the market’s energy for a renewed advance.  There was similar market action during 2004 when the market correction was very limited on the downside (about 70 SP 500 points from peak to low).  Perhaps the market will just take a breather and not lose enough ground to be meaningful.

03-11-12 INDEXES 60 MIN

The chart below shows an upward wedge in the Dow Jones Industrials (60 Minute).  When upward wedges occur in the last step up, they resolve themselves powerfully to the downside.  Wedges in other positions can resolve themselves in either direction with an up or downside breakout.  This wedge is breaking slightly to the downside.  Unless I have made a serious mistake in the count, this wedge shouldn’t be an indicator of a powerful move to the downside.

03-11-12 DJI 60 MIN

Money market funds can be a good indication of investor’s attitude towards the stock market.  When fear is prevalent, investors move their money out of the stock market and into a money market fund.  Alternatively, when investors are confident that the stock market will continue to rise, they move money from a money market fund into the stock market.  Bottom line, money market assets move in the opposite direction of the stock market.  As an indicator, money market asset levels are usually most reliable when the asset level is at an extreme.

So what are investors present attitudes towards the stock market???  They are extremely confident that the market is going to continue rising.   This is reflected in a very low level of assets invested in money market funds.  The current level of assets is at a multi-year low and is lower than before the May 2011 stock market peak.  The last time money market assets were lower was at the stock market peak in 2000.

The next chart is the “Rydex Government Money Market Fund”, courtesy of The McClellan Market Report.  McClellan Market Report is a good service and has a host of unusual indicators.

CLICK ON CHARTS TO EXPAND

03-11-12 MONEY MARKET FUND ASSETS

The following chart of the weekly NASDAQ is not particularly good reading.  See the notes on the chart to understand  the significance of the line connecting the tops since the 2002 bottom.

03-11-12 NASDAQ WEEKLY

The following is the Goldman Sachs expectations for 2012.  Goldman is expecting the stock market to be 8% lower a year from now.

30-11-12 GOLDMAN SACHS FORECAST

The real-time economic indicators have been in the doldrums for the last few weeks.

03-11-12 REAL-TIME ECONOMY

Junk bond sentiment, which I have called the canary in the coal mine for indicating economic conditions is still moving up in relationship to Treasury bonds but the pace is slow.

03-11-12 JUNK BOND SENTIMENT

The market became oversold last week and has rebounded to neutral territory presently.

03-11-12 McClellan OSCILLATOR

Final Words:  We can’t argue with the trend and until proven different, it is in an uptrend.

JEFFREY SAUT

Jeffrey Saut is a very savvy guy and one of the few people that I follow.  the following is from one of his recent columns.

Raymond James Investment Planning

The book Jeffrey remarks about is a HIGHLY RECOMMENDED book.  It’s $10 at Amazon “One Way Pockets”

“Street Smarts”
March 5, 2012

Some people can have a lot of experience and still have good judgment. Others can pull a great deal of value out of much less experience. That’s why some people have street smarts and others don’t. A person with street smarts is someone able to take strong action based on good judgment drawn from hard experience. For example, a novice trader once asked an old Wall Street pro why he had such good judgment. “Well,” said the pro, “Good judgment comes from experience.” “Then where does experience come from?” asked the novice. “Experience comes from bad judgment,” was the pro’s answer. So you can say that good judgment comes from experience that comes from bad judgment!

. . . Adapted from “Confessions of a Street Smart Manager” by David Mahoney

Years ago I read a book that a Wall Street professional told me would give me good stock market judgment by benefitting from the bad experience of others who had suffered various hard hits. The name of the book was “One Way Pockets.” It was first published in 1917. The author used the non de plume “Don Guyon” because he was associated with a brokerage firm having sizable business with wealthy retail investors and he had conducted analytical studies of orders executed for those investors. The results were illuminating enough to afford corroborative evidence of general investing faults that persist to this day. The study detected “bad buying” and “bad selling,” especially among the active and speculative public. It documented that the public tends to “sell too soon,” and subsequently repurchase stocks at higher prices by buying more stocks after the stock market has turned down, and finally liquidate all positions near the bottom; a sequence true in ALL similar periods.

For instance, the book shows that when a bull market started the accounts under analysis would buy for value reasons; and buy well, albeit small. The stocks were originally bought for the long-term, rather than for trading purposes, but as prices moved higher on the first bull-leg of the rally investors were so scared by memories of the previous bear market, and so worried they would lose their profits, they sold their stocks. At this stage the accounts showed multiple completed transactions yielding small profits liberally interspersed with big losses.

In the second phase of the rally, when accounts were convinced the bull market was for real, and a higher market level was established, stocks were repurchased at higher prices than they had previously been sold. At this stage larger profits were the rule. At this point the advance had become so extensive that attempts were being made to find the “top” of the market move such that the public was executing short-sales, which almost always ended badly.

Finally, in the mature stage of the bull market, the recently active and speculative accounts would tend not to over-trade or try to pick “tops” using short-sales, but would resolve to buy and hold. So many times previously they had sold only to see their stocks dance higher, leaving them frustrated and angry. The customer who months ago had been eager to take a few points profit on 100 shares of stock would, at this stage, not take a 30-point profit on 1,000 shares of the same stock now that it had doubled in price. In fact, when the stock market finally broke down, even below where the accounts bought their original stock positions, they would actually buy more shares. They would not sell;, rather the tendency at this mature stage of the bull market and the public’s mindset was to buy the breakdowns and look for bargains in stocks.

The book’s author concluded that the public’s investing methods had undergone a pronounced, and obvious, unintentional change with the progression of the bull market from one stage to another; a psychological phenomena that causes the great majority of investors to do the exact opposite of what they should do! As stated in the book, “The collective operations of the active speculative accounts must be wrong in principal [such that] the method that would prove profitable in the long run must be reversed of that followed by the consistently unsuccessful.”

Not much has changed from 1917 and 2012, just the players, not the emotions of fear, hope, and greed; or, supply versus demand, as we potentially near the maturing stage of this current bull market. Of course stocks can still travel higher in a maturing bull market, but at this stage we should keep Don Guyon’s insight about maturing “bulls” in mind. Verily, this week celebrates the third year of the Bull Run, which began on March 9, 2009 and we were bullish. With the S&P 500 (SPX/1369.63) up more than 100% since the March 2009 “lows” it makes this one of the longest bull markets ever. As the invaluable Bespoke Investment Group writes:

“Going all the way back to 1928, the current bull market ranks as the ninth longest ever. Even more impressive is the fact that of the nine bull markets that lasted longer, none saw a gain of 100% during their first three years. Based on the history of prior bulls that have hit the three-year mark, year four has also been positive.”

Now, recall those negative nabobs that told us late last year the first half of 2012 would be really bad? W-R-O-N-G, for the SPX is off to its ninth best start of the year, while the NASDAQ (COMPQ/2976.19) is off to its best start ever! In seven out of the past ten “best starts,” the SPX was higher at year-end, which is why I keep chanting, “You can be cautious, but don’t get bearish.” Accompanying the rally has been improving economic statistics and last week was no exception. Indeed, of the 20 economic reports released last week, 15 were better than estimated. Meanwhile, earnings reports for 4Q11 have come in better than expected, causing the ratio of net earnings revisions for the S&P 1500 to improve. Then too, the employment situation reports continued to improve. Of course, such an environment has led to increased consumer confidence punctuated by the February’s Consumer Confidence report that was reported ahead of estimates at 70.8, versus 63.0, for its best reading in a year. And that optimism makes me nervous.

Nervous indeed, because the SPX has now had 42 trading sessions year-to-date without so much as a 1% Downside Day. Since 1928 the SPX has only had six other occasions where the SPX started the year with 42, or more, trading sessions without a 1% Downside Day. Worth noting, however, is that in every one of those skeins the index closed higher by year’s end. Still, in addition to the often mentioned upside non-confirmations from the D-J Transportation Average (TRAN/5160.13) and the Russell 2000 (RUT/802.42), seven of the SPX’s ten macro sectors are currently overbought but the NYSE McClellan Oscillator is now oversold, Lowry’s Short Term trading Index has fallen 12 points since peaking on January 25th (which interestingly is the day before the Buying Stampede ended), the Operating Company Only Advance/Decline Index (OCO) has nearly 1,000 fewer issues than where it was on February 1st, suggesting the rally is narrowing, the number of New Highs confirms the OCO (last April the index had similar readings right before a correction), and sticking with the April 2011 comparison shows a striking similarity to the December 2010 – February 2011 trading pattern for the SPX and we all remember how that ended (see chart on page 3). And then there’s this from my friend Jim Kennedy of Atlanta-based Divergence Analysis, whose proprietary algorithms I use on a daily basis:

“The currently developing negative divergence pattern by our Risk Indicator is a model event that historically leads to a correction phase. This correction ‘is not in play’ now, as the Risk indicator (historically) turns up again to show the final surge of the rally. Once Risk reverts down after that, the correction phase is ‘in play’. For your review a picture of the 2007 Risk negative divergence pattern and resulting correction.In 2007 this negative development led first into a smaller, trading range correction, a new higher top (with Risk diverging), and then the larger price correction of approximately 150 S&P points.This one may play out differently, but we have a nice guide to show the way.”

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The following recording is referencing an email that I wrote a few weeks prior to Jeffrey’s verbal comments on December 6, 2005.  I wrote Jeffrey about Bob Farrell and Edson Gould (two of my mentors) and the possibility of a multi-leg bear market similar to 1965-1974.  Jeffrey as usual had the near term outlook correct.  Jeffrey’s comments were after the 2000 to 2003 crash but 2 years prior to the October 2007 to March 2009 crash.

Sorry about the quality of the recording but I was still using a PC in those days and didn’t have the nifty Apple software for recording directly from “line in”.  I recorded this from the speakers and it sounds very hollow but you will be able to understand it OK.  The recording is about 8 minutes long.  Jeffrey answers my email first and then moves on to some comments about an excellent book “One Way Pockets”.  It’s worth the listen.

Jeffrey Saut’s Verbal Comments Regarding My Letter From 12/06/05

FEAR, HOPE & GREED

Due to its importance, this little chart is going to become a constant in my blog.

The driving force of how the stock market arrives at a price is emotions and the primary of these emotions is “fear, hope and greed”.  It’s difficult for people to understand this principle because it doesn’t seem logical.

A comment I hear frequently is that the earnings of a company are still going up and the stock price MUST continue rising too.  That “can” be true depending on a lot of factors but it might not stop the market from cutting the PE of your stock in half.

Rising earnings and dividends were an ongoing theme throughout the 1973-1974 bear market.  Normally earnings suffer at some point during a bear market, but 1974 was the exception.  An over-priced market (remember the “Nifty 50” from 1972) plus an unstable political climate coupled with rising earnings came together in the perfect storm cutting the PE ratio of most stocks in half.

Mentioning the “Nifty 50” gives you some idea of the old fart that’s writing this blog.  I can make it even worse by asking; Do you remember President Kennedy jawboning the steel industry over their price hike in 1961?  There were consequences for those actions as President Kennedy was widely viewed as anti-business after the jawboning incident.  Naturally the stock market didn’t like that and since it was already ripe for a correction, it willingly obliged.  The market decline began in November 1961 (I think?).  But I remember very well the climactic plunge in May 1962 when the Dow Industrials lost 35 points in one day.  The Dow average was only 612 at the time and a loss of 35 points was huge.  It was a 5.7% one day plunge.  I thought the world was going to end as I had never seen anything similar (wait until October 1987).  I was a naive kid at the time and now I’m not naive, just an old kid.

Fear, Hope, and Greed

CHARTS

  • In addition to keeping track of my blog, I would urge you to check my charts on a daily basis.  They will show you the current wave count or newest trend lines.  And for the latest update on my thoughts, my charts will always show a change to my outlook before a blog update. 
  • These are my personal charts and my playground for doodling trend lines, wave counts and other ideas.
  • I usually draw the trend lines and wave counts on a daily basis.
  • Page 1 – Index From Monthly to 5 Minute Periods
  • Page 2 – Trend Indicators
  • Page 3 – Trend Indicators & Hurst FLD Projections
  • Page 4 – Momentum Growth Stocks
  • Page 5 – Momentum Growth Stocks

WAVE COUNTS SIMPLIFIED

  • My wave counts are not Elliott Wave!  It’s different, simple and functions without a maze of exclusions.
  • There are 3 peaks (or valleys) to a completed wave count. A reversal of trend takes place after a completed wave count.   Often times it’s as simple as counting 3 bumps (or dips) on a chart . . . Other times, not so easy.
  • In a downtrend the same rules apply except you are counting 3 dips instead of 3 bumps.
  • 3 steps must stay confined to a channel.  Laying a straight edge on the chart will help you visualize the channel.
  • As the larger trend progresses, all of the steps that make up the trend will also be confined to a larger channel.  Sometimes a channel doesn’t become clear until the surge phase (vertical move) has ended and the market settles into a methodical uptrend.
  • When the market breaks its channel (regardless of the perceived wave count), the step has been terminated.  This may often be your best indicator that a wave count has been completed.
  • Sometimes ONE of the 3 waves will sub-divide into another 3 waves.  I call this an extension.  When this happens (1) the trend is still intact, (2) the overall channel will widened and (3) instead of a total of 3 steps, there will be 5 steps.
  • There are always trends within trends from the short term of a few days to the super long term trend that may last centuries.  Fitting it together gives you remarkable market perspective.
  • The correction following the second step is normally larger than the correction that followed the first step.
  • Usually I will use the terms “step” and “wave” interchangeably.  I frequently think of a step as shorter in duration and a wave as longer term; such as there are 3 steps to a wave.  But the steps/waves are all kinda the same as they fit inside one another like a matryoshka or Russian nesting doll.
  • THE FOLLOWING IS ALSO AN IMPORTANT CONCEPT
  • At the conclusion of a 3 (or 5) step move, their will be a counter move.  This counter move MUST be of sufficient strength (or duration) to BREAK THE CHANNEL of the prior move.  Breaking the channel has the appearance of breaking the “LOOK” of the prior move (channel).
  • If a channel break doesn’t occur after ALL of the counter trend steps have evolved, you have miscounted the steps and the previous trend is not finished.
  • Breaking the channel is a very important concept because this may be the only clue you have that your count was incorrect.
  • Reading the glossary helps in the understanding of this blog.  There are many other important facts in the glossary.
  • Glossary Link

ABBREVIATIONS

  • DJI = Dow Jones Industrials
  • DJT = Dow Jones Transportations
  • SPX = SP 500
  • ES = SP 500 Futures
  • COMPQ = Nasdaq Composite Index
  • TSX = Toronto Stock Exchange (Canadian blue chips)
  • SOX = Semiconductors
  • TXX = Technology

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  • Very Long Term – DOWN
  • Downtrend
  • Jan 2000 To Present
  •  Step 2 Down (of 3) Completed
  • Currently In Rally Phase From Step 2 Down

12-28-11 VERY LONG TERM

VERY LONG TERM COMMENTS

We have 3 possibilities for the future.

  • We have entered a very wide swinging market (megaphone formation) similar to that of 1965 to 1974. During that era we had three bear markets with two intervening bull market rallies.  Each bear market had a lower low than the previous bear.  The intervening bull market rallies saw new all time highs before the next bear market began.
  • We also have formed a huge head and shoulders formation since 1998.  If this formation is valid, the downside measurement calls for a bottom around Dow Jones Industrials 1,000.
  • We began a long term bull market in March 2009.
  • I favor the megaphone formation as the most likely scenario.

Since 2000 we have had two bear markets, 2000 to 2003 and 2007 to 2009. Like 1966 to 1974, the recovery from the first  bear market saw a new all time high (2007 peak). It’s possible that we may experience another all time high during the present recovery period.  This would support the megaphone formation.  A failure to make new highs would support the head and shoulders argument.  In both formations the conclusion of the present recovery would call for a third and final bear market. An estimated time for the conclusion of the final bear market is approximately 2018.

The lesser downside target of both formations is the megaphone formation as it likely calls for a bottom 1,000 to 2,000 points below the 2009 low, which would be around Dow 5,000.

In the head and shoulders formation the measurement calls for a bottom around Dow Jones Industrials 1,000.  This is almost an unimaginable event regarding the possible fundamentals to create this scenario.  If this did happen, everything that could go wrong would have to go wrong.  This scenario is so dark that it doesn’t seem possible but nevertheless, the head and shoulders formation is there and will be waiting until we pierce the all-time highs of October 2007.

Remember these are simply possible scenarios and are not embedded in fact.  Whatever the outcome, it never hurts to be a little cautious with some of your money.  But in the worst case scenario, everything that we take for granted as being safe . . . .  would not be safe.  This is something to never forget in the event things go very badly.

Hopefully we will never have to think about the worst case scenario.

This very long term thinking is almost not practical for investment strategies.  Following the long term strategy should be adequate.  But one should always keep this scenario in mind whenever we are on the verge of a new bear market.  If correct it could indicate how bad things could become.

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EDSON GOULD

  • Edson Gould, Premier Stock Market Strategist – Edson Gould had a profound influence on the development of my techniques and  indicators.  Prior to me subscribing to his advisory service, I was just one of the crowd.
  • After 40 years I still have many of the publications from his advisory service, “Findings & Forecasts”.  Fearing the loss of these hard copy reports I have recently scanned and created pdf files of these reports.
  • One of the prime indicators that I use (series #1) was mentioned by Gould only once in his market letters.  If you didn’t catch its importance, too bad, because he only gave you a peek.  I believe that he used this tool extensively and never told the world it’s importance.  Prior to Gould writing about this indicator I had been looking for one that had similar characteristics without success.  Thus when Gould wrote about it, I recognized instantly that I had struck gold.  I have modified this indicator slightly and researched it back to 1939 for the Industrials, Transportations and Utilities .  This was a lot of work as it was before computers and online data (remember when Barrons was available only on paper, still is for the distant past).
  • Edson Gould was truly a legend in his own time.  It’s too bad that today many people have forgotten or never heard of him or his discoveries.  This is a man that deserves to be remembered throughout technical analysis market history.  Below you will find the first page of some of his reports.
  • My Most Important Discovery by Edson Gould
  • It was also my most important discovery, for it explained the irrational volatility of markets that had mystified me in my early years.  During those early years I found nothing worked in predicting these irrational market swings.  But the fog lifted after reading this report and I began to understand how to begin predicting the market.  The book “Extraordinary Popular Delusions and the Madness of Crowds” is very useful in explaining crowd behavior.  This book can be downloaded for free in pdf format from Google Books “Memoirs of Extraordinary Popular Delusions and the Madness of Crowds”
  • Edson Gould’s 1974 Forecast
  • Gould’s 1974 forecast kept me bearish and short throughout 1974 until the week before Christmas 1974, during which I began making long term purchases.  After that it was ride the bull phases that transpired from 1975 to 1982.  1982 to 2000 was the greatest bull market of all time.
  • Edson Gould’s 1975 Forecast
  • Edson Gould’s 1976 Forecast
  • Edson Gould’s 1977 Forecast
  • Edson Gould’s Five Year Forecast 1977 to 1982
  • This was a remarkable forecast in 1977, where the Dow Industrials had never been higher than 1,000. NO ONE had predicted a rise of this magnitude in 1977.  Most were waiting for a resumption of the bear market.
  • As part of the 1977 to 1982 forecast I have the following story. On Wednesday August 4, 1982 I went long the market for the first time in months.  By Friday, August 6 I was worried that I had made a mistake as I was deep in the red (I was long the Kansas City Stock Market Contracts).  The Kansas City Stock Market Contract was the first of the stock index contracts (February 1982).  It was based on the Value Line Arithmetic Index, margin requirement were quite low, and it had a multiplier of 100 times the Value Line Arithmetic Index, which meant the leverage was very high.  On Friday (Aug 6), my wife and I went to dinner and I told her my tale of woe and asked her whether I should sell my long positions.  I explained that my series #1 indicator had reversed and continued higher on Thursday and Friday but the market had continued lower.  Since the key indicator was usually correct, we decided to stick it out awhile longer (I was crazy in those days).  On Monday August 9, 1982 the market took off like a rocket and never looked back.  The ignition for the 1982 to 2000 bull market was underway.  I skyrocketed out of the red and had a big profit.   In August 1982 the only people that were bullish were Edson Gould, Robert Prechter and myself (probably a couple of others but I didn’t know them).  Everyone else was extremely bearish.  It was a perfect example of extreme crowd behavior.

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TRANSACTION SIGNALS

  • All actionable signals are only for short term time frames.  These signals are not designed for intermediate or long term time frames BUT . . . . .
  • After a short term buy signal, long term tax status  can be achieved by a continuation of the upward trend, which causes short term actions to morph into long term holdings. 
  • See more details in the glossary under “Taxes, Futures Contracts” and “Money Management”.

TRANSACTION RECORD

  • In this blog a warning of an impending bottom (or top) is often issued well in advance of the formal buy or sell date.  This allows thoughtful consideration prior to a formal action signal.  To get a sense of how this works, you should read the days prior to a formal buy/sell signal.  I often buy/sell in my personal account based on the early warnings.
  • The transaction record near stock market bottoms will show that I am very skittish and usually remain so until the new direction is well underway.
  • This blog was suspended the first time on 9/17/11 due to a death accompanied by a family illness. It was suspended a second and longer time on 9/27/11 due to an extremely serious family illness.  Blog resumption with comments and charts began again on 11/27/11. Unfortunately due to illness I clearly missed issuing a formal & important buy signal closer to the 10/4/11 bottom.  Hopefully this error will not be repeated.

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MISCELLANEOUS

  • There are useful items throughout this blog.  For instance, the “Wall Street Quotes” can be very instructive.  So make sure and look all through the blog.

All Rights Reserved  © ™

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