Saturday Oct 29, 2011
Initial relief over Europe's latest attempt to end its debt crisis faded on Friday as investors fretted about the plan's lack of detail and grew more skeptical about Italy's turnaround effort.
Weekend WSJ Front page 10/29/11
Note, The two posts Friday are an integral part of our message. We showed that rallies similar to Thursday occurred in 2001 and 2008. Such violent rallies are typical of overall bear markets which is what we are in. Already as the quote above indicates, the belief is unravelling. The Weekend WSJ is chock full of stories about despair in Greece and Spain, not he mob scenes in Spanish squares.
THe Euro deal is already looking like window dressing. The Financial Press is full of speculation that
if Greece can walk away from half its debt, does anyone think Spain and Italy won't want the same deal?
Who ever met an austere Greek?
Friday we demonstrated that similar rallies of 200 SPX points took place in March 2001 and 2008, with later disastrous results.
So, let's begin with the most emotional of markets-crude oil. Just yesterday I heard a female on FOX confidently announce that oil prices had surged due to expectations of a strong economy. Other analysts suggest that junk bonds and stocks predict the same thing. Well, again, that was not the case in March of 2001 and 2008. Money moving into oil, junk bonds, and stocks is once again proof of the All One Market Theory AOM. This is hedge fund, retirement money chasing perceived yield or gains. Nothing can be made at the bank, the Euro thing seems damped down for now, back to risk on asset plays. That's what is happening.
Oil and the Dollar
Above just as we showed with stocks this past week, crude oil bottomed October 3-4 along with a top in the US Dollar. Oil has surged since as the US Dollar fell back. At bottom crude oil has a high correlation with the stock market via SPX.
If there is anything one learns writing a blog like this it is that money goes somewhere. August through October saw a seasonal flight out of risk assets and into government bonds. This was confirmed by a sharp rise in the VIX, we documented it all here. Now money drains from TLT, long dated bonds, back to risk assets, the AOM place of oil, stocks, and junk promises.
Junk Bonds and the VIX - Demonstration of Proper Strategy
From the top panel we have the VIX, an fear indicator that rises as the markets fall. VIX represents net put buying a bet that stocks go lower. The main panel is JUNK, a fund of low rated bonds. At bottom the correlation coefficient shows the like nature of stocks and JUNK bonds. I posted these first two charts to demonstrate just how accurate the AOM theory is.
Now let's talk about strategy. Go ahead, count the number of days, bars, into the lows of August 8 and October 3. From the breakdown to the lows on those dates it was a mere three or four days. And then the market recovered just as quickly. I put green arrows spaced evenly to suggest where one should have placed orders. This placing of a succession of orders, each with a similar percentage of money is the way to invest. This dollar cost averaging is the only rational way to buy into the lows.. Sure, JNK could have gone lower. That is why one does not bet the farm at amy one price point. But in combination with other internal indicators like the Summation Index, we knew that markets were near previous panic low conditions. Not knowing he exact bottom or more important, where the violent reversal would take place, all one could do is place a succession of orders.
Believing that
somehow you will be at your computer at the lowest price in the market
you will recognize the lowest price
you will cleverly get a massive order off at the right moment to catch the low
is the stuff of Bonfire of the Vanities, and vanity it is, to think you can outsmart the entire market.
One can however plan ahead with a succession of lower orders.
And it makes a lot of difference. Those that bought Thursday have simply done so near the highs of the year. An average price of say 36, not unreasonable with the green arrow buys, means one is ahead by 3.5 points, about nine percent. And that is what investing, as opposed to following the crowd is all about.
Market Internals - The Master Indicator the NYSE Advance Decline Line
Friday we showed you rallies in March of 2001 and 2008. Both were about 200 points on the SPX, similar to the one we are in now. Okay, compare the A/D line now with the performance at the blue arrow back i mid 2008. From a low, the A/D rallied nicely, and failed. Now the indicator has not broken down as much. But the RSI at bottom suggests that strength of the overall move is much much less than it has been. This is all a warning signal of weakness to come next year. The weakness in the banks, the housing market, the endless attempts to prop up under water mortgages, same in Europe for sovereign debt, indeed the warning signs are all here.
As with politicians, in writing TMP, I note that other financial bloggers and such never admit an error. They simply stop talking about incorrect predictions and pick up as though they had never said anything. Note how many predicted lower prices for the SPX to 1000 and below. Now they simply don't mention that it never happened. And importantly the chance to buy at those levels never happened. This is why placing a succession of orders prior to lows is important. Another case in point is GDXJ.
I thought we might get a chance below 28, but the market ran up to 32. Now GDXJ is at the lower level of its entire range for the year.
Again notice that the move to the low at 26 was a matter of four or five days. And the rebound was even faster. So if the orders were not in prior to the low, it is doubtful one would have snatched the bargain.
We are not here to claim we are Masters of the Universe. We are attempting to offer a successful strategy.
I di utilize this strategy for Titanium TIE. This resulted in buys near the low at 13. TIE has rebounded to 17. But one must be consistent in making placing such orders in all categories that one wants to purchase.
Meanwhile back in Shanghai
This chart illustrates the tech principle that markets often move in channels. The rising tide lifts all boats. The move up in world markets have lifted SSEC back to the top of its down trending channel. This comes amid reports that high speed train projects are stalled, contractors are experiencing slow payments, as the index has lost 25% of its values since April. Note that SEEC has failed to break above its 50 day MA since the April high. Note also that one no longer hears about the Chinese miracle, aka the Japanese miracle about 1991.
Fundamental Error Hecla HL
Technical analysis works well with social mood at large degree, like the entire universe of the SPX or QQQs. However it does not work well with individual stocks which are subject to the vagaries of management and such. If you bought Hecla HL under 6 on our idea, you are okay as it closed at 6.53. However fundamentals, as an alert TMP reader points out do not support the idea of holding the stock. It has underperformed the group of silver miners. It would be better to take a profit and exit. At least put in a stop sell order under the current price and above your buy price.
Socionomics
We spent this past year in the Socionomic space preparing you for what we expected to be a bitter social breakdown. It is here now. Consider these headlines and comments
-Big Bailout Adds up to Years of Hardship for Greeks (it is already short term hardship for those waiting for payment from Greeks) One woman paid $500,000 euros for a dress shop, others nearby are closed
-Unions look to protestors for future support ( this is a negative promotion not a positive one)
-Obesity Fuels Custody Fights (now abuse has morphed into junk food indulgence, note the lack of personal responsibility)
-an Alcoholic Mayor wants another chance (what personal responsibility?)
-Page A 7 If the crowds are this size on a rebound in World Markets, imagine a return to Dow 6,666
-In Aventure Capitalist Jim Rogers notes the Chinese Communists are the world's best capitalists, here is the comment on their bailing out Europe, 'this investment must be decided after serious technical discussions' Which is not what the Europeans are having nor
-page A 13 is Harrisburg which borrowed itself into bankruptcy
An alert reader sent an article about our own Greece, Rhode Island, here is the latest, note how it reads just like the articles on Greece and Spain and Italy in the WSJ today
Meredith Whitney was the target of lots of criticism as the municipal bond market recovered from her assertion that there would eventually be massive defaults. The derision of Harrisburg City Council members who thought the State of PA would not let this happen is surely a delicious irony. No one knows how many more Harrisburgs or RIs are out there.
-More China Cracks page A 11, Chinese Drop tax after Riots ( see our previous graph of the SEEC)
-Peggy Noon in the Divider versus the Thinker Noonan notes that Barack plans a divisive us versus them campaign, this is what a socionomist would expect in a period of stagnation, and we are going to get it Big Time
- page B 1, Appliance Sales Tumble, Whirlpool slashes 7% of its workforce, this is the real economy, don't kid yourself that the policies are working....
during WW II FDR furloughed major league professional baseball players from military service, he recognized that Americans would need some r and r from the drumbeat of negative war news, not now, the NBA goes out on strike, Commissioner says there is no way to finish 82 game series, this is not the way for a franchise riddled with arrests and bad behavior to win public support but such is the nature of a social mood gone negative....
Here is the quote, while WW II was a period of negative world wide mood, it was a period when Americans pulled together as never before. Contrast the actual comment FDR made with the idea of NBA players, many of who are regularly featured wrecking exotic sports cars and engaging in other bad behavior, going out on strike.
On January 14, 1942, Major League Baseball Commissioner Kenesaw Mountain Landis wrote a letter to President Franklin D. Roosevelt regarding the continuation of baseball during the war, called the Green Light Letter. In this letter, the commissioner pleaded for the continuation of baseball in hopes for a start of a new major league season. President Roosevelt responds "I honestly feel that it would be best for the country to keep baseball going. There will be fewer people unemployed and everybody will work longer hours and harder than ever before. And that means that they ought to have a chance for recreation and for taking their minds off their work even more than before."
The Fall stock market lows are in, markets should experience minor pullbacks on the way to higher highs
TLT and VIX need to fall a good deal more to indicate a top
Expect more Dollar Bashing as the US Buck quietly establishes a higher low
The next big trade will likely be scaling in orders to short various stock markets. I addition we will buy back TLT but it needs to fall further. I suspect that is weeks away if not the New Year.
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The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance and no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks. Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned. Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital. No guarantee can be made to the accuracy of text or charts.
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Again all of the DOW 30 stocks were down today.
Posted by: Valentin Tristan | October 31, 2011 at 08:06 PM