Aug

28

Investing Systems Research Lab Blog for Week of August 30th, 2010

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Last week was pretty typical in the market. Choppy trading with the bias to the downside. The weekly candle was pretty much contained in the red zone of last weeks forecast.

The Weekly chart below shows that the market is in a range bound, choppy, and somewhat sideways mode. If anything it’s not surprising that the bias has been to the downside as the economic indicators point to the fact that the so called “recovery” was partly illusion. I mean seriously, how do you come out with a 2.4% GDP number when it was actually 1.6% ?

We have next weeks anticipated range shown on the chart.

The reversal Friday was pretty amazing, but someone had to hit the big green button since we were sitting right near the support going all the way back to the flash crash and several prior intra-day and intra-week lows. On the daily chart below the top red horizontal line shows the major support right around 1040 on the S&P. The “danger zone” lies in between the red lines and though we expect to revisit that area down the road, next week might actually be setting up for a rally.

So we just tested the lower end of the range and with the sentiment overwhelmingly bearish the past few weeks, it would not surprise us to see the market drift back up to the 20 and 50-day moving averages.

Honestly, until we decisively break out of the range between the middle red and green lines, we are not in a trending market.

We will probably have to wait until after Labor Day for some better sense of direction, but it might not turn out to be the direction most traders would like to see.

Below on the seasonal chart you will notice that September is typically the worst month of the year, followed by October, famous for crashes.

Based on the fact that the market rarely does what everyone expects, we might just have a huge rally that takes us right up to the top end of the range. But I wouldn’t bet the farm on it…

The one bright and shiny spot seems to be gold and silver. While it seems so obvious that these are probably still the best investments of all, sometimes the truth is right there for all to see.

Long-time members know that we have been suggesting physical silver as the best investment anywhere for quite some time. We still believe that it’s the one thing you can buy and hold, average down and sock away for the long-term. Anything made of paper or electrons we can’t say the same for.

By the way, keep your eye on the gold and silver mining stocks as well as the ETF’s GDX and GDXJ. This could easily be one of the leading sectors between now and the end of the year.

Have a great weekend and join us this week in the Research Lab as we mark up the charts and take it as we see it.

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Aug

21

Investing Systems Research Lab Blog for Week of august 23rd, 2010

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We are smack-dab in the middle of the “summer doldrums”. Several days last week the market was a complete yawn and the volume on opex Friday was like watching the grass grow.

Between the Back to School, Vacations, Dog Days of Summer and the current “mood” of the economy, the action has been very slow and choppy.

We think there might be a 2-3 more weeks of this, then it will start to pick up considerably, probably within a week or two after Labor Day.

The bad news is that the S&P 500 is below the 200-day moving average, the 30-week moving average and the 10-month moving average.

Combine that with a dull market and a sense of pessimism in the financial media and we don’t think there is an incredible rally on the horizon…just yet.

As we have saying, the bias is to the downside since the long-term indicators above are all Bearish.

This does not mean we can’t make money trading despite the current environment. Every day we have our finger on the pulse of the biggest moving stocks in the real-time scans and we have the weekly Focus List and 9090 scan, which always contain serious movers.

A trading account should frequently be in cash right now, taking in and out trades and protecting capital. We suggest trading a lot less frequently, taking smaller positions and waiting for only the best set-ups. It is a great time to not “overtrade”. The opportunity to make big bucks is down the road when the trend becomes more apparent.

Here is last weeks SPY with the “anticipated range” from last weeks blog. Notice last weeks trading range was captured entirely in our forecast.

So I moved the boxes over a week and placed them at what I consider to be this weeks probable range.

I would honestly like to see one more down week to set us up for some great potential trades the following week. Perhaps a short-range week with the low at the 61.8 retracement would be perfect, but the market is unlikely to do what one hopes.

We will have to see how it unfolds. Of course we will keep you posted of all developments on the upcoming shows this week.

A good friend sent me a long list of interesting quotes pertaining to stocks and the economy, so I thought I would share some of them with you.

Something different for a change….enjoy.

“Contrarian” thinking holds that the majority opinion is usually the
   wrong outlook. Why? Simply, because when everyone is bullish, their
   recent enthusiasm has probably caused them to invest most of
   their cash, leaving very little to drive the market higher,
   and setting up the opportunity for a profit-taking pullback,
   or an outright decline. Conversely, if everyone is bearish,
   they have probably experienced recent losses and have sold
   much of their holdings, leaving plenty of cash “on the sidelines”
   to kindle a rally, perhaps started by a positive external event,
   or just some simple “bargain hunting”.

“The market is a never-ending battle between short-term wants and
   long-term needs.”
                 … Barry Ritholtz, Chief Investment Officer,
                     Ritholtz Capital Partners.

“It is an observed phenomenon that certain tendencies in the stock
   market occur earlier than they have in the past as more investors,
   aware of these events, try to climb on board before everyone else.”
                 … Michael Kahn, Marketwatch, December 4, 2006

“One of the great evils of trading is false exactness…Trading is a
   fuzzy process and I mean fuzzy in the best sense of the word. That is,
   as in fuzzy logic, as in the willingness to accept the idea that
   things aren’t exactly quantifiable and to forge ahead anyway.”
                 … John Bollinger (creator of the Bollinger Bands)

“You have to remember the American market is not dominated by conservative,
   long-term investors. It is dominated by short-term traders who are
   compensated on a performance basis.”
                 … Michael Metz, chief investment strategist,
                     Oppenheimer & Co.

“The more people all come to believe the same thing…the more they
   must all be surprised. Because as they become more and more sure of
   themselves, they so tilt the odds that the person on the other side
   is almost guaranteed to win.”

… Bill Bonner, “The Daily Reckoning”

“When a rare thing hasn’t happened for a while, people begin to think it
never will. But after it has happened, they expect it to happen everyday.”
… Bill Bonner, “The Daily Reckoning”, September 13, 2005

“The main point is that after periods of strong returns, trailing average
   returns are higher, and since these periods almost always come with
   increases in valuation, future expected returns are actually lower.
   Next consider the hallowed property of equity returns; that stocks never
   lose if held for the long term. Well, if a decade is your idea of the long
   term, then this is only true when prices start out at or below average.
   When they start out expensive, there are decades where stocks not only
   lose to inflation but lose big.” (So there goes “hold for the long term
   and you’ll be okay”, out the window along with “buying last year’s
   winners”.)
                 … Clifford Asness, AQR Capital Management

“The historic pattern is for manias to retrace the entirety of their
advance.”
… Pete Kendall, co-editor, Elliott Wave Financial Forecast

“I can tell you right now that there is going to be a crash of
   unprecedented proportions – a crash like we have never seen before in this
   country. The greatest shock of this decade is that more people are about
   to lose more money than at any time before in history, but the second
   greatest shock will be the incredible amount of money a relatively
   small group of people will make at the same time. You see, in periods of
   economic upheaval, in periods of economic crisis, wealth is not destroyed -
   it is merely transferred.”

                 … Larry Bates, author of “The New Economic Disorder”
“The only thing more frustrating than buying the high of a breakout,
   or selling at the low of a correction, is to keep doing it over and over.”
                 … Tomi Kilgore, Marketwatch

“You should never worry about what everyone else is worried about
   because it is either in the market or already wrong. What you need to
   worry about is something that people take for granted as good.”
                 … James Cramer, thestreet.com

“Buy at the time of maximum pessimism and sell at the time of maximum
optimism.”
… Sir John Templeton

“Investors have a strong tendency to overreact, becoming too exuberant
   when things are going well and too despairing when the news is bad. This
   overreaction sets up the preconditions for the market to reverse its
   previous trend – in the process often sabotaging those who bet on
   the trend’s persistence.”
                 … Mark Hulbert, Dow Jones Marketwatch

“If somebody had told me my method would not work I nevertheless would
   have tried it out to make sure for myself, for when I am wrong only
   one thing convinces me of it, and that is, to lose money. And I am
   only right when I make money. That is speculating.”
                 … ‘Reminiscences of a Stock Operator’ by Edwin Lefevre

“Markets can remain irrational longer than you can remain solvent.”
… famed British economist John Maynard Keynes

“There is no subtler, no surer means of overturning the existing basis
   of society than to debauch the currency. The process engages all the
   hidden forces of economic law on the side of destruction, and does
   it in a manner which not one man in a million is able to diagnose.”
                 … John Maynard Keynes, 1920

“Trying to pick a bottom in a falling market is not always the smartest
   strategy.” (Nor would be trying to pick a top in a rising market. The
   only reliable way to identify a market top or bottom is to see when you
   have just passed it, that is, when the trend has reversed convincingly.)
                 … Tomi Kilgore, CBS Marketwatch

“Whenever any one of the three rates set by the Federal Reserve Board
   (i.e. the Discount Rate, member bank reserve requirements or stock
   margin requirements) is increased three times in succession, the
   investor should beware because [almost] invariably thereafter, there has
   occurred a substantial decline in stock prices.” [after 5 - 18 months]
                 … Edson Gould’s “Three Steps and Stumble Rule”

“The precise moment at which a great belief is doomed is easily
   recognizable; it is the moment when its value begins to be called
   into question. Every general belief being little else than fiction,
   it can only survive on the condition that it is not to be subjected to
   examination…. Finally, when the belief has completely lost its force,
   all that rested upon it is soon involved in ruin.”
                 … Gustave le Bon, explaining how panics develop

“Bulls of 1929 – like their 1990s counterparts – had their eyes glued on
   improving profits and stock valuations. Not a thought was given to the
   fact that the rising tide of money deluging the stock market came from
   financial leverage and not from savings.”
                 … Dr. Kurt Richebächer

“Our exhaustive research has found that sentiment extremes will very
   often mark turning points in the broad market averages, from intraday
   to weekly. The common explanation is that when a great majority of
   investors are bullish, then they have probably already bought, so who
   is left to continue buying? Conversely, when things look terrible and
   most believe the markets are headed down, then they have theoretically
   already sold, and the selling pressure will ease, thereby lifting prices.
   It makes sense to us, and history proves it out.”
                 … sentimentrader.com

“Credit expansion is the governments’ foremost tool in their struggle
   against the market economy. In their hands, it is the magic wand designed
   to conjure away the scarcity of capital goods, to lower the rate of
   interest or to abolish it altogether, to finance lavish government
   spending, to expropriate the capitalists, to contrive everlasting booms
   and to make everybody prosperous. … There is no means of avoiding the
   final collapse of a boom brought on by credit expansion.”
                 … Ludwig Von Mises

   Barry Ritholtz, market strategist at the Maxim Group, said none of the
   reliable metrics — such as fund flows, momentum, sentiment, support
   levels, valuation measures, money supply or earnings momentum — are
   at extreme or predictive levels. “Instead, we see a frustrating ‘tweener’
   zone with little conviction in either direction,” he said. The result has
   been a range-bound and choppy market with small gains usually followed
   by small losses. “We believe sitting on your hands more and trading less
   to be a good approach until the picture clarifies,” Ritholtz said.
                 … April 17, 2004

“Too much debt, geopolitical risk and several bubbles have created a very
   unstable environment which can turn any minute. More than any point in the
   past 20 or 30 years, there’s potential for a reversal. We have become a
   levered global economy, specifically in Japan and the US. With all this
   consumer debt, business debt, government debt, smaller movements in
   interest rates have a magnified effect . . . a small movement can tip
   the boat.”
                 … Bill Gross, Pimco Funds, June 16, 2004

“The big news for me was that a shadowy suspect that is rumored to be
   behind the gravity-defying levitation of the SP500 was identified by an
   anonymous e-mail to John Mackenzie, and it is some mysterious trader known
   as 990N. The way the scheme worked was that if the market was headed down,
   990N would come barreling into the market and take the bad side of a huge
   block of trade involving SP500 futures, and the insiders would take the
   good side of the trade, which involved the insiders buying stocks to
   make money, which made the indexes all go higher.” [NOTE: it has long
   been rumored that buying to support the market is the work of a shadowy
   group called "The Plunge Protection Team", with the FED being "the bag
   man", and heaven knows who else doing the tracking and calling the shots.]
                 … Richard Daughty aka Mogambo Guru

“The market always does what it’s supposed to — but NEVER WHEN.”
… Richard Russell, Dow Theory Newsletters

“Even being right three or four times out of 10 should yield a
person a fortune if they have the sense to cut losses quickly.”
… Bernard Baruch

See you Monday morning live in the Research Lab

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