As we move off last Thursday's 55 day cycle low in the stock market, we turn our attention to the next high. I think a good case can be made for a blast off into December, but there is a legitimate concern about an "energy expenditure" timeline into October 6th, a week from today. This is the trendline from the April low through the July low to the price horizontal of the August high, on constant 3 month forward SP futures using a geometrically neutral 5 day per week chart. (These are the parameters for my charts.)
In a bull market, sell signals do not always register in reality, as we saw this past summer, but one must give them the respect of awareness.
Curiously, December 22-23 is the exact geometric timer line date for the outside uptrend line from the March 2003 low to reach the 2005 high price. On the chart that line is the forest green line from the March 2003 low through the April 2005 low to the lime green horizontal line from the August 2005 high. The cross at December 22-23 is marked by the black skull and bones and the black down arrow.
It's quarterly rollover time again for stock index futures, futures options, options on stocks and stock indexes, options on stock ETF's and Lord knows what else.
I'm seeing several unusual events which are somewhat contradictory. In SP500 futures the on-balance volume of trading is sharply breaking below the three month (65 day) moving average for one of the first times since March 2003. And the uptrend of SP500 futures open interest may be above the open interest for the second consecutive quarterly "extirpation". These two events suggest that the majority are getting nervous and short.
However, the CFTC Committments of Traders commercial hedger category has been lifting short hedges (getting more exposed to the long side) for the past few weeks.
Also on intra-market internals and sentiment measures I am seeing the extremely bearish readings that one sees at extreme sold-out low prices. Clearly the public and especially the media are totally panicked by Hurricane Katrina, Iraq, and gasoline prices or possibly (?) for political reasons. This could explain these striking dichotomies of opinion amongst different types of investors. The panicky element is normally nearly always wrong, but if they get too terribly spooked and take off running, they can stampede everyone, and it's wise not to discount this possibility entirely.
Nevertheless, I have had some substantial hard-won but fruitful outcomes from following my indicators in similar situations, and I believe we will go up. We may chop around for a week, but with next week's 11 week cycle low looming (September 22), I see a big rally coming. The market could go a bit lower first but I won't get too greedy for bargains and miss the move up.
Click on the image for a larger pop-up version.
I am going to be on the road for the next ten days and may be unable to update the blog.
Gold remains in a great rally and is rising against all currencies. I am always reluctant to buy assets which are rolling up unless it is part of a long term regular monthly plan. I'm happy with the gold positions I have for now, but will always look to add on breakdowns for the long run. This is one area where I have been in "buy and hold" position since the late 1990's.
Oddly, both gold and bonds have done quite well since 1999. This does not exactly fit my long term inflationary view, and I'll get into that subject another time. Personally I think bonds are overvalued, but I would never short them until they prove my idea right.
Having read and been excited by Nicholas Darvas's book as a market baby in the late 1960's, I appreciate Carl Futia's work with price boxes for trading. I think they are far too subjective to be reproducible by most traders. But as an anecdotal sentiment reader, Futia is hard to beat. And maybe that is the real connection to boxes.
Take a look at Carl's take on the New Orleans blame game, and look around his blog site if you haven't before. If you need some encouragement to stay long and stay "centered", Carl's your man.
A letter to the editor of the Chicago Tribune by political and market analyst, Grant Noble:
""To The Editor, September 5, 2005
Since 1900, the U.S. Gulf Coast has been hit with 17 Class 4 hurricanes (Galveston was demolished by one in 1900). One Class 5 monster, Hurricane Camille in 1969, came within a hundred miles of New Orleans. The people of Louisiana have known for over 100 years they needed to have (at least) Class 4 hurricane protection for New Orleans.
The $2.5 billion (in today’s dollars) that was needed, with congressional barons from Louisiana like F. Edward Herbert and John Breaux, could have come mostly from the Federal government, but nothing was done. Even the “Class 3” protection they supposedly had failed. Engineers were astonished to see that, instead of the feared Class 4 wave surge pouring over the top of the levees, the levees broke a day after the hurricane left, indicating improper construction or maintenance.
The Louisiana Governor, Kathleen Blanco, admitted in a Sunday morning press conference that President Bush called her on Saturday to plead with her to issue a state of emergency for Louisiana and a mandatory evacuation of New Orleans. A year ago when Hurricane Ivan barely missed the city of New Orleans, both the Governor and city planners took heavy criticism for the inconvenience they caused their population when hurricane Ivan didn't hit their city. When Bush called on Saturday to ask what the heck was going on, the governor finally issued a state of emergency proclamation because she now had her scapegoat should Katrina not hit the city.
Every state governor has a National Guard at their disposal, not to mention all the State Police and law enforcement agencies at their call. Louisiana still retained 66% of their National Guard for a crisis just like this. After the state of emergency declared by the president on Saturday, the governor not only has the power to request federal resources, she can request the National Guard from surrounding states. She did neither before this storm, nor did she order a mandatory evacuation.
But what makes matters worse is Blanco failed to use her own National Guard for the purposes of law enforcement. This was a political decision because she did not want to be the person giving orders that might result in the shooting of "poor, black people." Instead, the Attorney General of Louisiana justified the looting. On Tuesday, while water was pouring into New Orleans (and over hundreds of idle school buses that could have been used for evacuation the Monday after the hurricane left), the Mayor insisted everything was under control. On Wednesday, after shooting and looting broke out all over the city, the Mayor was screaming for Federal help.
Bush should have been ready at that moment to send in Federal troops. But I can understand his hesitation. Even then, if somehow the local and state authorities got things under control before the Federal troops arrived, he would have blamed for “political grandstanding”.
The moral of the story is never trust a politician with a life and death decision.
Like the need for better hurricane protection in New Orleans, it’s obvious something catastrophic is going to happen to our government finances if something isn’t done now about out of control spending, Social Security, government agencies like Fannie Mae or our huge trade deficit. But here’s the dirty little secret of government---it loves to create problems it can “solve”. The voters will probably get rid of Blanco and Mayor Nagin, but the Louisiana political establishment will cash in more on the hundreds of billions spent on reconstruction than they would have if things had stayed the same. Something to think about the next time a politician promises a new program to “solve” some problem the government created in the first place.
Andrew Lo, professor at the Sloan School at MIT, is well known to technical analysts of market prices for having provided statistical proof for the TA belief that certain chart price patterns are predictive. His research on hedge funds, one of which he runs, leads him to believe they are near a crunch time like that in the summer of 1998. See the reference to his full paper in the trext of the NY Times article:
Most of my own short term sentiment measures reached "buyable" levels on Friday, August 26, which day was the third sub 7.0 reading in the sentiment oscillator (2SO), which is a recurrent pattern at tradeable lows.
Several weekly indicators made their extreme readings a week to ten days earlier. This is counter-intuitive for many sentiment watchers, but there is often a "divergence" of sentiment in favor of the soon-to-be-new-trend for a week or two before the change in trend. Learning this the hard way and coming to watch both these and shorter indicators has been valuable in teaching me the virtue of patient watching instead of "being right too soon".
Several sentiment professionals, one in index ETF options, the other in stock index futures and futures options, also now have short to intermediate buy signals in place, although both are bearish a month to three months out.
The timerline buy on the most recent SP futures chart posted farther down the page is still valid.
My trade entry system, which I have used for 26 years, recently taught me a new buy signal pattern I had never recognized before. The system has only five recognized buy or sell patterns, and I thought I knew everything there was to learn about the system, so for me this is a major point of recognition. I will need to go back in time to see if I have simply missed these before, or whether they were also associated with one of the basic patterns and therefore not appreciated as they were not needed at the time.
The trade entry system is volatile and can change direction on any given day under any one of the five (now probably six) conditions. I always feel more secure when it, sentiment, and timerlines are all lined up together.
In May (2005) US short term money market funds were yielding ~2.4%. At that time I evaluated higher yield alternatives of several types. Some were very short term bond funds with very low costs (Vanguard). Others were bond funds with an accent or a "kicker".
A little over three months later, Vanguard's Prime Money Market Fund is yielding 3.24%. I mention Vanguard again because when one is dealing in instruments with low yields, costs are extremely important to net yield. If your money market fund is being billed 0.80% per year by the fund's advisor, your net yield will be 0.5% less yield per year than at Vanguard's fund which is billed 0.3% by its in-house advisor. Thus your net yield will be ~15% less at "Fund X" than at Vanguard Prime in this example, no small matter.
You may be unable to get into Vanguard's Prime where you trade, but if your short term cash balances are important enough to you, you can still shop around for money market funds with low costs and conservative principles. This is easily done with Google or other search engines.
It no longer makes sense tofor me to leave fixed income funds in short term bonds funds with effective durations of 2-4 years. If you haven't done so already, you may wish to consider putting your shorter term fixed income money or cash balances into a good money market fund. Some day, month, or year in the future, when the yield curve is inverted and rates are much higher than now, it will make sense to venture out of money market funds.
But if we cannot safely go out the yield curve to bonds or bond funds yielding 4.31% or less (for the 20 year T bond), we can still revisit the alternatives I listed in the May blog post plus one other I've been looking at.
Each of these funds is different, posited as they are on different long term outlooks on both interest rates and the US dollar. An excellent site for initial evaluation of all mutual funds is MSN's: http://moneycentral.msn.com/investor/research/fundwelcome.asp?Funds=1 One of the features of this site is that it gives you not just the ten largest holdings of a fund, but the 25 largest. It's still better to go to the fund's website and look at the latest quarterly or semi-annual report to fund holders for full particulars, but MSN is a good first stop on your reasearch path.
Someone reminded me recently of Peter Lynch's remark that most people spend more time researching an electric toaster they are buying than a stock or mutual fund, so I hope you will prove him wrong.
Hussman Strategic Total Return Fund holds primarily short duration Treasury Inflation Protected T notes (TIPS) plus cash, a few utilities, and some gold stocks. The idea here is safety plus some exposure to higher yield (utes) and dollar erosion (golds). HSTRX has been operating for about 2.5 years. (As always, click on the image for a larger pop-up version.)
Permanent Portfolio Fund PRPFX and Prudent Bear Global Income PSAFX have been operating since the 1980's and early 2001 respectively, and have total return yields of 11.0% and 9.4% for the past five and 4.5 years. Both funds feature exposure to non-US sovereign T bills, US T bills, gold, and some stocks. I like both of these funds for their yields, histories, and their focus.
PIMCO has taken a different tack, as befits this dominant bond house advisor. If you read, and you should, Bill Gross's and Paul Mc Culley's monthly posts at http://pimcoadvisors.com, you'll understand why a US bond house needs to think long and hard about the implications both of inflation and US dollar erosion. Neither event is cause for joy amongst regular long term bondholders.
In my May post I mentioned PIMCO Commodity Real Return Fund PCRDX, which I have been in for several years. It is basically a US TIPS fund with a Dow Jones AIG Commodity Index option (unleveraged) on top. I like the Dow Jones AIG Index for several reasons, compared to the CRB Index and the Goldman Sachs Commodity Index. First of all DJAIG is a broader index not excessively weighted to crude oil as is the Goldman Sachs index. The Dow Jones AIG includes 23 different commodities including all US-traded commodities plus three metals traded in London. DJAIG bests both the CRB and and GSI by having an annual rebalancing, which is an automatic way of taking profits in one sector and re-deploying them in sectors which haven't had runs. If this fund interests you (19.4% annualized returns for 2.4 years), and you believe commodities have a long run ahead of them, as I do (but not necessarily a straight line up), check out the background papers on the concept at the PIMCO Advisors site.
What PIMCO did for commodities they have also done real estate and a host of other asset classes and fixed income sectors. In most cases PIMCO overlays a TIPS basket as above with an index option or swap in an unleveraged fashion. With fixed income they have some exotic actively-managed bond funds, for which they are famous, with short durations. The MSN URL gives the current list of sub-funds they are putting into the master PIMCO All Asset Fund:
They have hired sub-advisor Robert D. Arnott, Chairman of Research Affiliates L.L.C. and an expert on tactical asset allocation, to choose which sub-funds and how much of each to allocate to the master fund. While "funds of funds" have a mixed mutual fund history (read up on Bernie Cornfeld of the 1960's some time), I believe PIMCO is doing a great service making this fund available to those of us who are not throwing institutional million dollar increments into hedge funds. The sub-funds being used ARE institutional which gives one enormous advantages in costs, especially if we purchase the no load All Asset D class fund, PASDX. This gets us into an extremely well-conceived and well-run interest rate hedge fund for 1.50% per year.
If this approach fits into your investment scenario, as I have briefly outlined, and you do your homework, as I always recommend, you can buy PASDX through many brokerages for no transaction fee ("NTF") if held for a year, with an initial minimum of $5000 or $2500 for self-directed retirement funds (IRA's, etc.).
My history, bias, and research has led me to buy three of the above funds as I have gradually become aware of them and bearing in mind my outlook on inflation and dollar erosion over time. However, such an outlook is compatible with intermediate term (months to a year or more) contra-trend moderations or reversals of those trends. As with most investments it's better to buy them when they are down from highs or to buy them in pieces over time ("dollar averaging").
As always this report is only research which I have done for myself, and NOT investment advice. I am not employed or paid by anyone in the investment industry, and I do NO consulting except for myself and close family investing.
When I was a graduate student in biological sciences, we lab folk used to joke about eventually publishing in the "Journal of Negative Results" when we had disproved our own hypotheses. (I did.) Here is a presentation on why even positive results are subject to doubt, as we all know to be true empirically.
In market analysis we have even less of a chance of being correct, unless......:)
T'is a good thing in investing and speculating to be humble, quick to admit error, and move on. In medicine we may have to a wait twenty years to learn that NSAIDS kill many thousands by gastrointestinal bleeding and hypertension.
Will all those wealthy Garden District folks come back to live and contribute if their homes have been wantonly looted without a finger lifted by the police? I think not. Idiocy, corruption, and incompetence have done it in.
Read some Julie Smith fiction on the real New Orleans and you'll get it.