More Market Guesses for the Rest of the Year

Several weeks ago I guessed there was a possibility that US stock markets could top out early last week. The guess was based on market volume studies and market participant behavior and not on the stars or even the tides. And it required the market to do certain things to get to a sell. Clearly that was a bad guess from a short term trader's point of view. The market stalled a bit and the volume and behavior signals were pushed out in time at least to this past Friday.

 

S&P500 24 hour December futures made a high of 1095.50 last Friday, October 16, and by tonight they have been down as low as 1076.25 so far. That is just two ticks under the high of last Monday, October 12. Market irony, no?

 

In the meantime my favorite and very simple 2CS didn't quite get to the 70's, but it did drop to 81.90 on Friday from  129 on October 2, the Friday before my Sunday guess. Also my favorite volume study rose greatly from October 2 to October 16 at least into an exuberance range although toward the low end of that exuberance range.

 

As you know if you've been reading me a while, I tend to phase in and out gradually, so I did get out of some of the more volatile energy and gold holdings last week. But there is still more to sell. The only question is how "urgently" to do it. Again this involves a semi-educated guess. Friday's one day 2CS number was slightly under the average for the week even though Friday was a down day for S&P500. So there was definite exuberance during a pullback. It's normal to get increased exuberance in a pullback after extended advances, and this is the first one I've seen since March. It's a sign of the first admission of defeat by the bears. Often the bulls will take this as a way to force the bears into the market by rallying some more.

 

Personally I am taking this as reinforcement of my plan of gradual exit of equity and commodity related investments. I am going to have to sell down somewhat more in sub-investment grade bond vehicles and in some stock/bond funds whose bonds are mainly investment grade.

 

I don't think the bull move from March 2009 is over, but we may get a bigger  correction  than we have had to date. Naturally I am well aware that I may be wrong and too early. Declining now goes against the stocks seasonal but not the October decline history of recent decades, so this may just go a few weeks to a month if it happens at all. Plus, the seasonal has been wrong all year since March.

Comments

[Heath Rux]

Tom- when you have time can you please post an update of your current portfolio allocation? Thanks

BTW, I do not recall if you had time to look into Andrew Lo's new hedge like mutual funds however they appear promising from the onset.

[Owsley]

Tom,

The special oscillator that I use gave a fairly good sell signal on Friday. I could see it coming so I exited my long position on Thursday and went short the IWM via TZA on Friday.

This oscillator reacts to underlying strength or weakness in the market. It never did confirm the buy signal it gave on Oct 2nd because this last rally leg had no real strength to it.

Because being short the market is counter trend and extremely risky, I have a very small position. At most I expect a multi-day pull back that will lead to another dip buying opportunity.

A 20-30 point rally today won't reverse the sell signal this oscillator has given. A rally of 60 or 70pts probably would.

[Joe]

There was no chance for me to go long per this tidal trade as the low was outside trading hours. I'll sit out this rally and may go short very lightly for the coming pullback (if it materializes).
Joe

[Tom Drake]

Thanks, Owsley and Joe, for your comments on your trades and ideas. I am trimming off pieces of funds in various partfolios like LSBDX (Loomis Sayles Bond--quasi-high yield) and VWINX (Vanguard Wellesley--40% blue chips, 60% corporate bonds). Also trimming GIM (Templeton Global Income-mainly sovereigns) and IRR (ING Resource--put and call managed). In some cases I am merely booking the considerable profits from the funds this year and keeping a good position. Also I am selling out totally from VWO (Vanguard Emerging).

Even though I just wrote about GLD and bought some last week, I am taking small profits on one-half and want to see how gold responds to the possible stock market decline. NONE of the basic gold is ever sold. I'm not entirely sure whether people will go back to Treasurys for "safety" or into gold if stocks go down now. HSTRX (Hussman Income), and PTTRX and PAUIX (Pimco Bond and Pimco All Asset/All Authority) have all three put more into Treasurys lately, so I am going to stock with them and the basic gold position for now.

If all this gets done today or tomorrow (two-thirds is already), I'll end up with about 20% in cash which used to be "just as good as money" as Yogi says....I may put part of it in SHY (iShares Barclays 1-3 Year Treasury Bond) which is paying about 2.7%.

I don't short much anyomore, but I might buy a small position in SDS (ProShares 200% short SP) for "fun" and since I won't be traveling anywhere for the next few months and can watch it.

Earlier today it looked like 2CS would drop under 80 today but the P/C ratio has now moved up more than VXO has fallen....so far. Even if 2CS does get under 80 we don't necessarily immediately get flashing red lights and bells ringing, but it raises the probabilities quite a lot. Also read Hussman's weekly "sermon" if you get a chance and/or Terry Laundry's--see "Blogs I Like" on the left column and click over to them. They have both more or less written off the current rise and are totally hedged (Hussman) or flat (Laundry).

Tom

[Jim Pitinii]

Hi Tom

If you look at the longer moving averages for the DJI ie 65 wk or more, you will see that the Mar 2009 lows were lower than anytime since 1929.

For example, the 65 wk low in Mar 2009 was 62%. The next two higher ones were the Mar 1938 low at 68% and the Oct 1974 low at 70%.

It looks like it is hard to get more than a one year rally from these low levels.

[Tom Drake]

Hi Jim and thanks,

This weekend I'll check that out. I can't really say much about the long term, but I'm still expecting some sort of decline in stocks in this time frame. But here is a powerful seasonal uptrend from November to the New Year.

My own intermediate term indicators as well as those of James Stack and Terry Laundry remain positive after a possible decline, so I'm trying to ignore all the daily news as being the "wall of worry". But I pay close attention to what the market does, and I can change quickly if I need to.

Please feel free to post any ideas or indicators at any time.

Tom

[Jim Pitinii]

The following is a repost.
I posted it to wrong subject.

Hi Tom

I don't think it falls right away. It could go more or less sideways until early 2010.

Then a 25% plus collapse.