Bullish sentiment, as I measure it, is off the charts tonight in a fashion it hasn 't shown since December 2004 and the first quarter of 2005. There are eight measurements I take and keep by hand daily. The five day 2CS which I show from time to time on charts is heading back to the extremes of several weeks ago. All of the one day readings of the others are in sell territory as well.
As I always wish to underline and make clear, these are not timing devices. They are more like a weather storm report. They suggest you wear a raincoat instead of shorts and a t-shirt. The storm could blow over or be later than expected, but beware those clouds on the horizon.
The big boys like to unload inventory into bullish enthusiasm, so they sometimes take a while to get it done. Besides the timerlines for this week, some work from another and honored source suggests the end of this week could be vulnerable.
So far I am making no changes in my plan which has been in place now several months. Very slowly and selectively I am selling highly appreciated stock funds on good strength days and holding short hedges. With that strategy, raising cash (now to 39%), and with modest metals and energy longs, total account values are rising nearly every day. But the risk is declining. Even with these large cash balances (earning 4.1% at Vanguard Prime Money Market), we are up 2% on the year, which is nothing for gunslingers but great peace of mind and decent cash flows for retired gunslingers.
There are two timelines in play, both shown on the chart in the black oval: one was for Friday or early Monday, the other for Thursday February 2, also known as "Groundhogs Day". The first line cross is so close to the low of last Thursday that it might be a late buy.
Click on image for larger view.
This is an exciting position since I am at a riskless edge but with lots of cash for buying if I find I am wrong. My best guess still is that we go down into the 23rd of February's 77 week low. Sentiment as I measure it maintains its downward pressure. Loekke's work and my own attempts at "reverse engineering" suggest a low in February and a secondary rise into spring or even early summer.
I am trying very hard to resist the urge to buy something that is outperforming, but everything I see looks overvalued or vulnerable except dollar cash. In the long run gold, silver, and stocks are excellent. I can't see the current situation lasting very long.
He is looking for surprising strength into April followed by a (serious?) bear phase.
Simon, the 1935-37 scenario was based almost entirely upon a chart pattern. The more I looked at it, the more dissimilar the two times seemed in terms of stock market valuations, interest rates, inflation rates, etc. Valuation in particular is not conducive to a major expansion of prices **barring a hyperinflationary bubble**.
Harry Dent ignores all of that and favors the FED/IBES valuation model, like fellow hyper-bull Don Hays, and an 80 year cycle. Dent does make a good case that the chart pattern of a high level consolidation horizontal channel is a bullish pattern. His favorite is 1923-24 after the post-WWI crash and recovery.
The 77 week cycle has been dominant for a long time now, and except for late March 2000, it has coincided with lows, not highs. Given the four year US presidential cycle, also due this year, I felt that the internal weakness I was seeing in the stocks was compatible with an early 2006 high and possibly a scary decline into late February 2006 when the 77 week cycle would normally be due.
If that were to happen, we could then go on and have a 1935-37 bull market analog. And we may. But I have naturally had in mind what could happen if the stock markets continued to run up into February or March instead of falling. This is where Helge Sundar Loekke's big cycle update fits in and causes me concern. I don't recall ever seeing his projections after last October, so I am really grateful that you posted the URL to his update. His work is another piece of the puzzle, but an important piece, especially as the mometum peak of his master cycle is precisely in the 77 week cycle time. Of course I have no knowledge of how he makes his "soup", but I have always liked it .
I sent Loekke an email overnight, and he confirmed his bullishness which he feels will have the momentum to last into April or May. I sent him the SP500 chart with the 77 week cycle (dash-dot blue vertical lines). He didn't comment on the cycle, but said SP500 might even get up to my red/pink line, which is over 1400!
My belief and bias is that we are in a long inflationary economic cycle wave up from the disinflationary saucer bottom of 1998/99 to 2001/03. This is the Kondratieff Wave, which has been much abused over the past 15 years by revisionists of several types. In the K Waves of the past 200 years, the hyperinflationary component came later in the 20-30 year upgrade. But this is the first possible non-"Western" cycle, so perhaps we will have early hyperinflation instead of late. I still don't think so, although the past few months experience with gold, which I own and won't be selling for years, is trying to convince me otherwise.
If we are to have a meaningful stock market bottom in February or March we must start down soon, and I persuaded myself that we would do so after the normal seasonal high passed for stocks: close to New Year's Day for SPX and Dow and close to mid January for Nasdaq. However, cycles work for years and then they don't work, so the 77 week isn't from sacred text. If Helge is correct and we top in late winter, we could go down until fall and still register a 4 year cycle low and a 2007 bull market. Or we could do a bear scenario.
My approach over the second half of last year has been to hedge both my opinion and my portfolio after being pretty bullish for three years. January 2004 to now has been flat in some ways, although I have made a lot of money in very dynamic niche markets. We are going to break out one way or the other from this fairly flat range. I can make a case for either side, and I can't pretend to know the future, except for the advantage that the long economic wave gives me. Right now I could remove all the hedges I have in thirty minutes and be totally exposed to the long side, or I could double those hedges and be net short. But I don't want to be day trading hedges.
From now until late February is very important as I see it, but it's getting a little late for it to be a major low leading to the 1935-37 bullish scenario.
I like Don Hays who was one of the few who was bullish, if early, into the 2003 low and who encouraged me greatly then, as did Joe Rosenberg of of Tisch/Loewe's/CNA. Hays was short or flat into the 2000-2002 crash and lost his job over his convictions, which lends credibility to his opinions. I read Harry Dent's 2000 book in the late '90's, but it didn't quite work out as he expected, so I feel less confident in reading his work.
If you've been reading this blog for a while you know I began to "look for the exits" several months ago. I was bullish coming out of the October low. But as soon as an upmove was signalled as confirmed, I felt that it would top out by year end. This conviction was based upon fundamentals (see earlier articles) as well as technical and sentiment findings.
George Slezak http://www.cot1.com/ has a "way with words". He recently rather colorfully summarized the fundamental outlook this way:
"My thoughts on the market for the coming year, in light of the crushing consumer debt, failing real estate market, crippling energy prices, inverted yield curve, and soaring Gold price, and second year of a Presidential term is
NO PROBLEM FOR THE COMING YEAR!
No problem, as long as you are short!"
The problem for me at this point is that nearly everyone of any analytical stature, including George, expects a down year to one degree or another. About the most optimistic outlook I see around in public spots is that we will bottom in January or February for the four year or presidential cycle plus the 77 week and 11 week cycles, and then go back up. This past week everyone was spooked by the yield curve inversion, measured by the two year treasury yield going above the ten year yield.
It is so easy to get committed to a fundamental market opinion which then takes over like an evil spirit and dooms you to ignoring reality if the market goes against you. We all see that a lot in internet chat sites and everyday "real life". It's a good idea to have two (or more) market scenarios in mind which you can choose from to represent you as technical conditions warrant. As this is generally what I do anyway, I think it's a brilliant approach!
As I see it, the evidence still points to at least an intermediate term one to two month swing down. With Santa's rally being front run by the Grinch, the pullback has most likely already started. The December 23 time line (at blue down arrow on the second chart below) that I mentioned many months ago seems to have been nearly exactly on the money for a final turn down.
I'll give you three ways to see these longer term and shorter term charts: click on the small images to get a somewhat larger pop-up image and/or click on the URL's for full-sized versions:
The first chart contains the longer term bullish scenario which remains viable unless and until the October lows are exceeded on the downside. Ill go into the bullish fundamentals another time as right now the big chore is to get the down move confirmed (or not) as really underway.
The second chart runs from the 2003 low to present. It details the SP futures on-balance volume warning of the past year along with the Twocents Sentimeter (2CS, in red numerals) which has reached all-time lows of bearish sentiment, and which is therefore market bearish.
So in the end, I am taking a conservative approach at this time. I am calling for a down move but am not committed to a "CRASH NOW" with foot stamping and screaming. Crashes are always possible but with very low probability unless odd externals come into play. My best guess is a pullback which might even be scary into February cycle times. If the Elliott Wave count from 2003 is wrong, then we could go below October's low.
My investment positon is nearly completely hedged on stocks and stock funds, with lots of cash (nearly 40%), and with the US dollar partially hedged via gold and other inflation protections. I have virtually no bonds since money market rates in Vanguard's Prime Money Market Fund at 4.01% currently (7 day yield annualized) make bonds hyper-risky for no greater yield. If stocks go down and a recession fear takes hold, then I would reverse the gold and bond positions.