Wednesday, December 29, 2010

Upcoming Media Appearances

Bloomberg radio, "Taking Stock with Pimm Fox", today, Wednesday, December 29, @ 4:05 pm (eastern)

BNN TV, "Business Day", tomorrow, Thursday, December 30, @ 3:05 pm (eastern)

Wednesday, December 22, 2010

Beyond the Sound Bite: An Interview with Meir Statman

Do investors really know what they want?

Well known among those in the CFA Institute and CFA society circles, the highly regarded behavioral scientist shares his thoughts and insights from his most recent book, "What Investors Really Want". Benefits (utilitarian, expressive, and emotional), cognitive errors, human nature, and rational investing are touched on in this most interesting and informative interview. Who knows, by exploring the mind of the market you may find yourself looking in the mirror.

Beyond the Sound Bite podcast interviews can be found at the Blue Marble Research media blog. To listen to this interview, click here.

Wednesday, December 15, 2010

Beyond the Sound Bite: An Interview with Bethany McLean

In The Tempest the Bard wrote, "Hell is empty, and all the devils are here." He could have easily been describing the financial crisis, its causes, and its aftermath.

My interview with the coauthor of "All The Devils Are Here: The Hidden History of the Financial Crisis" takes us deep into the details of what went wrong and why. The depth of the investigative work is truly remarkable and, when understood in conjunction with my September 16th podcast interview with Simon Johnson, helps complete the picture of what happened, why it happened, and how to anticipate future such crisis.

Beyond the Sound Bite podcast interviews can be found at the Blue Marble Research media blog. To listen to this interview, click here.

Thursday, December 9, 2010

Beyond the Sound Bite: An Interview with Michael Phillips

My interview with the former CEO and Chairman of Russell Investments, current Chairman of the Russell 20-20 Association, and Chairman of Altaira Wealth Management, enabled me to tap into his decades of investment experience and insights to explore important economic and market issues including: a global macro economic overview, the recently adopted financial regulations, and the structure of today's financial markets with its prospective impact of producing a lost generation of investors.

Beyond the Sound Bite podcast interviews can be found at the Blue Marble Research media blog. To listen to this interview, click here.

Friday, December 3, 2010

Six Degrees of Kevin Bacon

With Mitch McConnell wielding the paddle and John Boehner looking on, who knew Kevin Bacon would serve as the model for Barack Obama's management style.

Wednesday, December 1, 2010

Beyond the Sound Bite: An Interview with Ralph Acampora, CMT

Now affiliated with the investment and wealth management firm, Altaira Wealth Management, the legendary market strategist shares his optimistic market views, the tools he uses to analyze the markets, and the importance and impact that a changed market structure has on the investing.

Beyond the Sound Bite podcast interviews can be found at the Blue Marble Research media blog. To listen to this interview, click here.

Tuesday, November 23, 2010

Time To Digest

Those who heeded my Thursday last blog posting warning not to take the bait have been rewarded with +167 basis points thus far and are likely to benefit further in the coming days and weeks as the near term indicators tracked – momentum and MACD – are now even more solidly entrenched in pullback mode as the accompanying chart clearly illustrates.

Poised to close below last Tuesday’s closing price of 1175, the S&P 500 would join its major global markets brethren (EAFE (EFA) and emerging markets (EEM)) with downside price confirmation of the negative momentum and MACD trends warned of last Thursday. With the short term indicator (slow stochastics) well above its oversold territory (below 20), a pullback target to the average of 5 to 10% is more than achievable and would drop the S&P 500 to the most interesting price of 1133, or just above its head and shoulders neckline and 200 day simple moving average right around the 1125 price level before then signaling an end to the pullback.

Why Not More (Or Less) Of A Decline?

Since the market action that preceded this pullback lacked any external divergences and considering the fact that 100% of the 30 indices tracked are in bullish Mega Trends, the market only had the less serious internal divergences to work off. Accordingly, the magnitude of the current decline should be muted.

As for the decline stopping right here, that is not likely as the internal divergences are so solidly tilted to the downside plus the fact that the other major indices are also performing in like fashion. Such action rarely stops dead in its tracks and reverses itself without first producing signs of trend change.

Why Do Divergences Work?

It is important to remember that this divergence stuff I keep emphasizing works because of the nature/structure of the market. With so many market players operating in the short term space dominated by the need to match performance and with a philosophy of momentum investing, trends that get established tend to stay that way until they are exhausted thereby producing divergences. It is for we investors and traders who can correctly exploit this momentum lemming-like behavior by either joining or going against (contrarian) the crowd that can reap the absolute and relative performance rewards.

When Will It Stop?

The key bullish signs to watch for are the same ones that warned of the market decline we are now experiencing: divergences both internal and external. Specifically, the point at which momentum and MACD do not confirm lower lows will be time to consider increasing the equity exposure. Whether external divergences develop will factor into the decision process at that time.

Like a Thanksgiving meal, it is always good to digest some of what you ate before gorging yourself again on the simplistic “don’t fight the Fed” tune.

Note: My appearance yesterday on with Tracy Byrnes is available on my media blog Beyond The Sound Bite.

click image to enlarge

Thursday, November 18, 2010

Don't Take The Bait

US Stocks are poised to produce a nice upside opening today. Investors might therefore be tempted to conclude that the staple of this bull rally - buy the dips - is back in action and short term profits are in the offing. However, as the accompanying chart shows, when certain market conditions exist any upside move tends to be little more than a bounce followed by a resumption of the pullback. Here are the facts:

Thus far this year, the chart shows that whenever the two primary near term indicators tracked - momentum and MACD - both turn negative - mid January, mid April, mid August, and now - the stock market experiences a bounce that turns out to be a failing rally with a lower low in stocks shortly thereafter. This is made all the more likely this time as an internal divergence (between price and momentum) has occurred twice this year - mid April and now. It is only when MACD then turns negative that price then declines in a sustained manner.

In the April to early July pullback, US large cap stocks dropped more than 10%. The current pullback, however, is unlikely to repeat that magnitude decline (due to the absence of any external divergences). More likely in the 5 to 10% range, with a mid point of 1133, which interestingly sits right above the reverse head and shoulders neckline and 200 day simple moving average of 1125.

Of course, nothing is flawless and works perfectly all the time. But the odds of a healthy market pullback are highest when the above conditions exist.

click image to enlarge

Friday, November 12, 2010

The Fed, Sir Isaac Newton, and QE

In today's FT, Mohammed El-Erian discusses the PIGS’ (Portugal, Ireland, Greece, and Spain) resurgent credit spread problems*. Toward the end of his commentary, he references a phrase that all non economists should know as it helps in understanding the mind of the dismal scientists and the comments posted the other day re the US Fed’s thinking on the risks of a Japan style deflation taking hold in the US**. The phrase is "path dependency".

"The history of emerging economy crises also tells us that these worrisome dynamics are self-reinforcing, resulting in what economists call “path dependency”. Rather than snapping back to a better outcome, bad developments increase the probability that the next set will be even worse."

Newton To The Rescue

A path dependency that leads to a steady state equilibrium for inflation and interest rates (which is the central point of the chart posted on Wednesday**) is the great fear of the Fed. And in the mind of the Fed the only way out of that condition is to exert an external force on it, with that external force being QE. Or as Sir Isaac Newton advised: "Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it."

Push, Ben, push.

*"Irish crisis demands new EU response"
**scroll down to Wednesday's posting, "Why The Fed Believes QE2 Is Necessary"

Thursday, November 11, 2010

QE2 Sets Sail

Here is the calendar for the first round of the Fed's $600B in purchases as QE2 sets sail. Anchors aweigh!

Wednesday, November 10, 2010

Here’s Why The Fed Believes QE2 Is Necessary

Monday’s NYSSA luncheon with St. Louis Fed President (and voting member of the FOMC) James Bullard was most illuminating (wish you were there). In addition to the somewhat heated give and take with attendees, Mr. Bullard provided a chart that captures the principal fear the Fed has re deflation. It is what is known as the steady state (equilibrium) of inflation and interest rates.

The accompanying chart is the one he presented (which was also provided in his recent commentary and presentation “Seven Faces of “The Peril’”). In it I have pointed (larger arrows) to the steady state for the US (boxes to the right), steady state for Japan (circles to the left), and in the middle the May 2010 current level for the US. You will note that the May 2010 point is the closest to the Japan outcomes.

The concern at the Fed is that the slide toward the steady state for inflation and interest rates (in a zero bound interest rate environment) renders interest rate driven monetary policy impotent (as it has in the case of Japan). Moreover, a steady state tends to become entrenched (that’s why it’s called a steady state). And economists will tell you that when it comes to deflation/inflation it is the entrenched, longer term levels (and not the shorter term, more volatile factors such as commodities) that matter most.

As the May 2010 point illustrates quite clearly, the US trend is not where the Fed wants it to be.

Here’s Why The Fed Believes QE2 Will Work

In a nutshell – because it worked the first time.

Time and again in the aforementioned heated discussions, Mr. Bullard consistently pointed to the financial markets rebound during QE1 and in anticipation of QE2 as evidence of the positive effects of QE. Moreover, since the economy has recovered and avoided further economic deterioration (Great Recession not Great Depression 2), QE was and will be (in his opinion) effective.


No doubt the debate over the Fed's QE policy will continue. But at least now you know some of thinking behind the actions.

Caveat: Mr. Bullard was speaking for himself and his opinions do not necessarily reflect those of the Fed.
Click image to enlarge

Thursday, November 4, 2010

The Gambler

Who knew Ben Bernanke was actually Bret Maverick?

Using its dual mandate – price stability and full employment – as a rationale (excuse!?) for unilateral action, the Bernanke Fed has embarked on a grand experiment hoping that the wealth effect on financial assets will somehow stimulate the deleveraging US consumer to suddenly reverse course, revert to form, and shop ‘til he/she drops. The Bernanke Fed also hopes that the US consumers’ primary asset –his/her home – will somehow overcome the foreclosure fiasco and miraculously increase in value thereby adding spending fuel to the wealth effect fire.

Finally, the Fed is hoping that its actions will encourage the banks and corporations to disgorge themselves from the mountain of cash they have been hording and start lending and hiring again.

The cumulative effect of this grand adventure is to hopefully enable the US economy to reach an economic escape velocity and enter into the self-reinforcing, sustainable virtuous circle thereby enabling the Fed to enter into its exit strategy.

In today’s Washington Post, Mr. Bernanke provided his audacity of hope with arguments that had so many holes in them as to resemble Swiss cheese. Here’s a few morsels with his comments in italics and mine beneath:

Easier financial conditions will promote economic growth.
By how much? And when?

For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance.
What about the large supply of unsold homes? What about the impact of the foreclosure fiasco?

Lower corporate bond rates will encourage investment.
Possibly, but where will that investment occur – in high cost/low growth markets like the US or in low cost/high growth markets like emerging markets?

And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.
Unlikely without the support of the US consumers’ most important asset – the home. (see above noted point) Moreover, deleveraging to save for an uncertain future is a strong force for soon-to-retire baby boomers, who know that entitlement reform is in the offing.

Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
Not if companies decide to invest elsewhere, as noted above. Also, small businesses, the driver of jobs growth, will wait to see demand before committing to new hires and higher wages.

The Federal Reserve cannot solve all the economy's problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector.
Correct, but unlikely given the looming political gridlock environment ahead.

But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability.
And this provides the justification to act unilaterally – without the aforementioned other parties involved as well as the cooperation and coordination of other central banks and countries around the world?

Steps taken this week should help us fulfill that obligation.
How's that hopey, changey stuff goin' for ya?

Investment Strategy Implications

The music is playing and the actors are dancing, driven in large part by the underperforming and desperate momentum lemmings from hedge fund land. Valuation levels are now moving well above average (>15 times) anchored in solid corporate profits, low interest rates, very ample liquidity, and belief that the cyclical forces at work will overwhelm the unresolved secular structural issues.

It is imperative that investors remember this one point – just because a company was founded in the US, is domiciled in the US, and derives some of its profits and growth from the US doesn’t mean it has to rely on the US for its future growth and profitability. And therein lies the rub with Bernanke’s argument: will QE2 (then QE3, then QE4) provide strong economic growth and prosperity for the US? Or will it produce yet another bubble in assets and other markets (notably emerging economies) leaving the US economy in worse shape than when it started?

Ultimately, the all important asset allocation question is: To what extent should an investor participate in this monetary Mephisto Waltz? The answer I've come to is listed to your left.

Thursday, October 21, 2010

Bloomberg radio appearance

In case you missed the Tuesday, October 19 appearance on "Taking Stock with Pimm Fox", click here

Friday, October 8, 2010

Seeing Is Not Believing

Confused over this morning’s initial US stock market reaction to the poor employment data? Don’t be. Here’s why:

In the eyes of the cyclical bulls (who currently rule today’s market thinking, with the underperforming momentum lemming hedge funds in tow), the poor employment numbers are a twin win for the following two reasons:

1 – The Fed’s dual mandate includes the goal of full employment. Accordingly, QE2 is headed the economy’s way. This ensures another flood of money thrown at the problem, much (most?) of which will bleed its way into the financial assets.

2 – Today's employment data is the last report before next month's mid term election. Anything that damages the reviled party in power, the Democrats, enhances the chances of a Republican win next month. Gridlock will ensue, something the cyclical bulls believe is good for the economy and markets.

From a corporate profits perspective, third quarter results will be just fine – at to slightly above consensus expectations. This will provide the expectational foundation for future earnings results at consensus expectations at a minimum, which puts the 12 month forward operating earnings outlook for the S&P 500 at or above $84.

With an above average P/E of 17, the future fair value of the S&P 500 is 1428, or 1286 in today’s market.

Seeing Is Not Believing

Other than 3Q10 earnings results, I do not subscribe to any of the above views as presented but offer them as the rationale for this morning’s initial stock market action. That said, the technical analysis deterioration noted over the past weeks (see blog postings below) is unchanged. Unless reversed, a 3 to 5% stock market pullback is likely.

Wednesday, October 6, 2010

Dreams of a Cyclical White Knight

And now for some more first order thinking.

At the heart of yesterday’s commentary is the issue of cyclical recoveries morphing into sustainable economic expansions. The argument by the bulls subscribing to this view is that this is precisely what will occur this time as it has every other time before. The virtuous cycle saves the day. This is about as straightforward as it gets. The argument against this thinking is equally straightforward.

When the global macro economic system is hit by an extraordinary event, the post crisis environment is anything but normal and the odds of a cyclical recovery resolving a structural crisis are very long. What is then needed is a structural solution to a structural problem. Examples of this thinking abound (not that the cyclical bulls are listening), with today’s commentary in the FT by Martin Wolf among the most cogent.

The topic of Martin’s commentary may be the emerging currency war with a particular focus on China. The essence of Martin’s commentary is, however, the more important point – structural problems require structural solutions, which in a global economy can only be solved via cooperation between the major global players. Yet, cooperation between the major global players requires leadership. Since the logical country in a position to exhibit that leadership, the US, has as its head a political manager and not a leader, the odds of someone taking the lead toward the necessary cooperative environment for structural change are very long indeed.

The Post Crisis Environment

Crises occur mainly due to structural (systemic) problems. The post crisis environment that ensues is one that rarely resolves itself via the cyclical solution. Yes, cyclical rebounds do improve things for a while but they do not get to the heart of the matter. The structural problems remain and will overwhelm the relatively meager energy of a cyclical bounce. It’s like trying to treat a patient with a life threatening disease with antibiotics. It just doesn’t work.

To use the stock market analogy in the current environment: cyclical bull markets within secular bear markets do not change the reality that the equities are in a secular bear market. Accordingly, cyclical recoveries within a structural (secular) change environment will not resolve the systemic issues at hand.

The bullish rejoinder to this is the muddle-through solution: Things are never so neat and tidy. Stuff happens, things are messy. But, fear not, we will find a way out of this mess. We always have and will do so again. This time is not different.

However, as I argued yesterday, such thinking concludes that this time IS different, for the norm in a post crisis environment is for extraordinary measures to be exerted, which includes fundamental changes in the rules of the game. Therefore, this time is not different as crises do occur and the subsequent environment requiring fundamental change is the norm.

Who will be right? The cyclical-recovery-saves-the-day crowd or the we-need-to-address-the-structural-problems club? Time will tell, which I suspect will be sooner than most think. One thing is for sure, however, someone is going to be real right and the other will be real wrong.

Investment Strategy Implications

My money is with the structural problem club. However, the cyclical dreamers are in control right now. Therefore, as an investor and investment strategist, I cannot act aggressively until the technical analysis signs that the market is ready to embrace the more worrisome view of my club. (Think, the recent vintage tech and real estate bubbles.)

Accordingly, before shifting from the currently cautiously bullish (60 to 90% in equities) posture to neutral (40 to 60% in equities) to outright bearish (<40%) clear technical analysis signs, most notably external and internal divergences, must be evident. At present, as noted last week only the internal divergences are. Therefore, cautiously bullish (the equivalent of driving with one foot on the brake) remains the advisable strategy.

As history teaches us all too well: delusional thinking rooted in old school dogmas can maintain its grip for a very long time.

Tuesday, October 5, 2010

This Time IS Different

The bulls (not the bears) would have you believe that this time is different.

The root of this view in anchored in the dogma that the cyclical recovery cures all ills as follows:

The cyclical recovery evolves as increased corporate spending on wages and new hires which, along with an increase in emerging economies’ consumer spending, result in a consumer led demand driven sustainable cyclical expansion. Corporate profits rise further enabling the virtuous circle to become engaged.

The sustainable cyclical expansion then helps to alleviate the structural risks to the global economy – e.g. current account imbalances – thereby enabling the financial sector to recover further and move the global economy off government life support.

The financial markets respond with a move more toward normality as rates rise, the dollar stabilizes, gold loses its luster, and equity valuation levels return to above average (>15 times). The combination of higher corporate profits and above average P/E levels drives stock prices back to record highs, which for the S&P 500 means 1548 (18 x $86).

An era of growth and prosperity returns thereby proving that this time is not different; that there will be no new normal (i.e. below average growth and profitability).

Sounds good, doesn’t it? Even plausible, provided one thing – conventional thinking in unconventional times requires a belief that this time IS different.

The Burden of Proof

The bulls would have everyone believe that the burden of proof that this time is different falls on those who say what was no longer works (the old normal) and that the future is a place of great uncertainty (the new normal) with the road ahead a most bumpy one. There’s one problem with this thinking – evolutionary processes to new normals are normal. A purging of the old always occurs and it always leads to a new normal, whatever that new normal may be.

Extrapolating the recent past into the future often becomes a substitute for first order thinking. Be it fighting the last war or blindly accepting corporate earnings guidance, embedded interests conspire to preserve the status quo, which facilitates a blindness to change. And it is change that is normal, not what-worked-before-will-work-again-indefinitely thinking, made all the more illogical given the highly dynamic complex global macro environment the world finds itself in.

In evolution, those that are about to become extinct are the last to notice. The same is true in the social sciences of economics and the markets, where old rules in changed times demand the view that this time is different.

Thursday, September 30, 2010

MACD Crossover Imminent

Thus far this year there have been three occasions when MACD crossed over and Momentum turned negative. In each case, the equity markets experienced a meaningful decline (see chart for examples*). We are presently poised for a fourth occasion. Interestingly, October will likely produce lots of conflicting data for both bulls and bears.

For the bulls, earnings season will be more than satisfactory. The aggregate macro economic data produced in the third quarter plus the fact that the confession season has passed with little bad news suggests that earnings will meet or slightly exceed consensus expectations buttressing the bulls' case. On the bear side of the ledger is the emerging traditionally-thinking investor angst that the Republicans won't win either house of Congress, thereby knocking out the gridlock-is-good beam from the bullish structure.

Investment Strategy Implications

Because there are no external divergences, any market pullback in October will likely be minimized with many country/sector/industry/company specific cross currents occurring. Internal divergences on their own are a sufficient reason to lower one's equity exposure somewhat but insufficient to ring the bearish bell too loudly. That time will likely come after the pullback followed by a failed rally followed by the OMG-the-Republicans-didn't-win-either-house introduction to the bear of 2011.

*click image to enlarge

Wednesday, September 29, 2010 media appearance

Last Friday's interview has been published and posted today.

To view the interview, click here

Tuesday, September 28, 2010

Internal Divergences Emerge. Market Pullback Probable.

As noted in yesterday’s Bloomberg radio segment (see below), internal divergences are beginning to emerge for the first time since early August. The accompanying 3 charts* representing 3 key indices (US, EAFE, and emerging markets) illustrate identical action seen in virtually all indices with price moving up while the key near term internal indicators Momentum declining (a clear divergence) and MACD poised to rollover. Moreover, today’s bounce has lifted the short-term indicator (Slow Stochastic) back into overbought territory.

The net effect of the early August internal divergence was a negative 8% for the S&P 500. With so much enthusiasm behind the current market rally (see yesterday’s blog posting illustrating the record low cash levels of mutual funds and the valuation math supporting the current market, as examples), stocks are now in a much higher risk zone than is generally appreciated.

The saving technical analysis grace is the absence of any external (index to index) divergences. That said, a pullback now followed by a further run to higher highs (courtesy earnings season) may produce the external divergence condition necessary to signal an end to this rally followed by a far more meaningful decline. If no external divergences occur in an ensuing rally, however, then the bulls will rule the roost for a while longer.

*click images to enlarge

Monday, September 27, 2010

Bloomberg radio appearance

In case you missed the Monday appearance on "Taking Stock with Pimm Fox", click here

Media appearance on Bloomberg radio "Taking Stock with Pimm Fox"

Media appearance today on Bloomberg radio program "Taking Stock with Pimm Fox" at 4 PM (eastern).

Prospective talking points:

* There may be an enthusiasm gap in politics but there is certainly not one in the equity markets.
* The September relief rally has morphed into a more confidently bullish mode lifting valuation models well into overvalued territory.
* At to above average P/Es are now embedded in the data.
* Is the current environment average, which therefore justifies an average P/E of 15?
* Do the valuation math:
o current S&P 500 price: 1147
o required return: 11%
o future price (12 months ahead): 1273
o optimistic expected earnings (next 12 months): $86
o future price (1273) divided by exp. earnings ($86) = 15 P/E

Also, re enthusiasm - Cash levels at stock mutual funds are now at their lowest levels in decades. (see accompanying chart - click image to enlarge)

Plus market technicals - internal divergences have begun, no external divergences thus far.
Last time internal divergences occurred (early August), stocks dropped 8%.

Thursday, September 16, 2010

Beyond the Sound Bite: An Interview with Simon Johnson

"A fiscal agenda that is sensible and a fiscal message that makes sense has to make banking front and center."
Simon Johnson

The consequences of public policy decisions are front and center in my very informative interview with the coauthor of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown and highly regarded commentator. In the interview we explore many vital issues - too big to fail, shadow banking system, securitization, Basel III, US fiscal debt, Elizabeth Warren.

Beyond the Sound Bite podcast interviews can be found at the Blue Marble Research media blog. To listen to this interview, click here.

Thursday, September 9, 2010

Doing The Valuation Math

As the thank-goodness-we-aren't-headed-into-a-double-dip-recession-or-deflation relief rally continues, perhaps a quick look at the valuation math for the US equity markets might be helpful.

As the accompanying table illustrates, the three likely near term scenarios with expected earnings and prospective P/E ratios provide a useful valuation guide. I have bracketed the most likely P/E ratio for each prospective forward 12 month earnings scenario (mid 2011). (Obviously, an above average P/E for the doomsville scenario makes little sense.)

As I describe in the equity analysis classes that I teach every fall, the math is fairly easy. Getting the inputs correct is the hard part.

Note: even more difficult is getting the inputs correct for the right reasons!

Wednesday, September 8, 2010

Beyond the Sound Bite: An Interview with Dr. Rob Atkinson

Will President Obama's economic proposals help produce a sustainable economic expansion? For this and other timely topics, we once again turn to the CEO and innovation expert with the Information Technology and Innovation Foundation to help identify the key elements of public policy that can most effectively enable the US to achieve sustainable economic growth.

Beyond the Sound Bite podcast interviews can be found at the Blue Marble Research media blog. To listen to this interview, click here.

Friday, September 3, 2010 appearance

Yours truly pontificating again on politics, the economy, and the markets on

The interview is posted and can be found on the Beyond The Sound Bite media blog.

Thursday, September 2, 2010

Yahoo Finance "Tech Ticker" appearance

Yours truly pontificating on politics and the markets on Yahoo Finance's "Tech Ticker' media service.

Both interview segments are posted and can be found on the Beyond The Sound Bite media blog.

Wednesday, September 1, 2010

Here We Go Again

Another big up day! Yippee! Hooray! Mazel Tov! Burb.

The manic/depressive nature of the trading range market continues as we start the new month. Unfortunately, from a technical analysis perspective, the significance of today's latest bout of stock market euphoria is...nothing. To understand why there's no there there (at least, not yet), take a moment and step away from today's hoopla and look at the accompanying chart.

Since the fall of last year, stocks have been locked in a trading range - one that remains unresolved as to its future major direction. Is it a consolidation range of the bull market to be resolved with an upside break? Or is it a distributional range to be resolved to the downside and, thereby, signaling one of the shortest bull markets in history?

Right now, only the very clairvoyant or foolish know the answer to this question. For the rest of us mere mortals, it does seem advisable to exploit the trading range in a prudent manner (expand and contract equity exposure at each end of the trading range with an 80 to 90% equity exposure at the bottom end and a 40 to 50% exposure at the upper end) and wait for a resolution to then shift the equity exposure to bullish (>90%) or bearish (<40%).

Bottom Line:

1 - Big moves within trading ranges rarely have sustainable meaning for the major trend in stocks.
2 - Eventually a resolution will emerge. Nothing is forever, especially not trading ranges.

Short term, given the weak momentum and MACD starting points, the risk that the Mega Trend is about to turn bearish, and all that lies ahead on the fundamental and geo political realm, today's rally looks like yet another mid range big bounce. Longer term (which is far more important), my bias is toward the distributional range scenario and its eventual downside break. That said and knowing how much this will frustrate many (who insist on certitude in just about everything), stocks can defy logic and gravity for long periods of time. Therefore, staying flexible and not forcing the issue seems the most prudent path to follow.

I may believe in something but when it comes to the social sciences insisting that it must be so is the sure path to poor absolute and relative performance, which is, after all, the name of the game.

Friday, August 27, 2010

A Head and Shoulders BOTTOM!?!?

There has been a certain amount of chatter lately re the prospects of a head and shoulders topping pattern. To the best of my knowledge, however, I am unaware of anyone who has put forth the prospects of a head and shoulders BOTTOM. So, here goes.

The accompanying chart illustrates the prospective bullish pattern with the obvious necessary future price action to make it happen. While not fitting the textbook version of the pattern, considering the heavy bearish sentiment in the air such an outcome would have to rank fairly high as a contrarian call. The measured move of the pattern is not a biggie – 100 points above the neckline, which is around 1120. That means the upside potential is limited to the approximately the previous high, which is around 1220. And that gets us into a whole other set of potential patterns. (Double tops, anyone?)

A Word of Caution

As someone who has conducted numerous events and interviews with some of the very best in technical analysis, when it comes to head and shoulders patterns there is one piece of advice each of these veterans of technical analysis cite: NEVER anticipate a head and shoulders pattern. Like a good boy scout, being prepared is always a good thing to do. Whether to act or not before the fact is risky business.

That said, acting on what others might act on can be a profitable exercise. Which brings me to the main point of this blog commentary.

If you have read my blog for any length of time you know I am not a chart pattern guy. Like investor sentiment and volume measures, I find chart patterns necessary to be aware of as so many others reference and sometimes act upon them. However, as a highly predictive tool in and of themselves, not so reliable. Therefore, as a student of the market, it is essential that I understand the market structure and the behavioral aspects of how the game is played. In other words, knowing the nature of the beast (structure and participants) should be an essential part of every investor’s investment decision-making toolkit.

Accordingly, the structure of the market (e.g. high frequency trading, the role of ETFs, dark pools and structured products and how they disguise the true nature of investor interest) and the players, their motives and behavior (e.g. hedge funds, traditional institutional investors, the virtual disappearance of individual investors) has become an essential part of the investment decision-making process. Put differently, if you are sitting at a card table and don't know who the sucker is, it's you. In all this, pattern recognition and other use such tools (that others tend to use) are most helpful when it comes to playing the game, hopefully tilting the odds more in your favor.

What About The Bounce?

By the way, the bounce potential for stocks is intact. The bottom parts of the accompanying chart show near term weakness (momentum and MACD) and a short term oversold (slow stochastics). The conclusion reached the other day is unchanged – a bounce and little more.

Whether the bounce is like a ball going down a flight of stairs, bouncing up after each progressive lower step (the reverse of most of last year’s market action) or the start of some stabilization culminating in the head and shoulders bottom remains to be seen.

Wednesday, August 25, 2010

What About Small Caps?

There are two primary reasons to watch the performance of small cap versus their large cap brethren. First, being a generally higher risk category, small caps provide an insight into the degree of risk appetite investors have for equities. Second, because they tend to be more US centric in their businesses, the performance can provide some insight into investors' expectations on the US economy, in general, and US centric companies, specifically. So, what does the accompanying chart and related data reveal?

The underperformance since the April 23rd high is apparent, but not so dramatic as to warrant ringing the bearish bell on the sector and market overall. In fact, since the bull market got started in March 2009, the group has underperformed the broad market more dramatically last fall only to rebound quite nicely shortly thereafter. Moreover, last fall's relative performance slide was accompanied by a meaningful divergence breaking to a lower low while the S&P 500 not only held above its correction low but was actually trending upward. Contrast that with the present, where it has yet to break below its previous pullback low. And even if it does, it does not appear to divergence in the dramatic fashion serious market tops typically indicate.

When looking at the index itself, there is nothing that stands out vis a vis the action of the S&P 500. Both have deteriorating long term Mega Trends, solidly down near term trends (momentum and MACD), and are into strong short term oversold territory.

From a fundamental point of view, the higher P/E for the group and higher projected growth in earnings for the next 12 months compared to the large cap S&P 500 is something of a concern but does not fall into grossly overvalued territory.

Investment Strategy Implications

Small caps are not helpful for the bull case. Neither are they overly hurtful. At least, not yet.

The bounce is still the most likely next move for stocks. What follows will help clarify the picture and should lead to a resolution of the multi month trading range that stocks have been locked into since last fall.

Tuesday, August 24, 2010

A Bounce and Little More

The following is primarily for those who are very short term oriented.

I have some bad news for the bulls: the hoped for bullish non confirmation is not occurring. Here's why:

The first chart shows the internal divergence dynamics of the market. What you see are lower lows being made in momentum and MACD. Contrast that with the July 2 low when momentum was going sideways and MACD headed upward. In both cases, the short term indicator, slow stochastics, is oversold and lends itself toward helping a sold out market bounce.

It is also worth pointing out that on July 2 the Mega Trend* was in modestly better bullish shape. This time, it is right on the cusp of a bearish call.

The second chart illustrates the external divergence dynamics and compares the S&P 500 to the EAFE (EFA), Asia Pacific ex Japan (EPP), Europe 350 (IEV), and Emerging Markets (EEM). At present, all markets (save EEM) are making confirming lower lows. And EEM is just a hair away from joining the parade. Contrast that (through the spaghetti lines) to the price lows made by most markets in late May, which when the S&P 500 made a lower low on July 2 the other markets did not. All of them save none were at or above their May lows, including the sick man of markets - Europe.

Bottom Line: Bounce potential exists. Then we have to do it all over again and make non confirmed lower lows. One bright spot in all this - there is the real potential of a more significant bullish non confirmation call should stocks bounce then slip below the current lows. In the process of the bounce, emerging markets might take themselves sufficiently high enough that the lower low in developed markets will more clearly not be confirmed. The dark lining on this seemingly silver cloud is the fact that in the process of making that lower low in the S&P 500 the Mega Trend will likely turn bearish.

As noted many times since the end of last year, nothing has been easy for equity investors this year.

Note: There is another serious issue to consider - the recent poor relative performance in small and micro cap issues. I will describe this issue tomorrow.

*Use the search function in the top left area of this blog to read comments and definitions on the Mega Trend.

Thursday, August 19, 2010

Parked At the Gate

The following is primarily for those who are very short term oriented.

We are parked at the gate for a decent bullish non confirmation signal - provided the following: Should the S&P 500 break below its intra day and closing lows of August 16 (1069 and 1079, respectively), which given the deterioration in momentum and MACD and the failing rally (see first chart* and prior blog posts) seems likely, the key to watch for is whether that low is matched (i.e., confirmed) by other important indices - such as the EAFE (EFA) and emerging markets (EEM).

As the second chart shows, EFA may break to a new low as its momentum and MACD are showing most of the same signs that the S&P 500 is. However, as the third chart shows, EEM is in better shape but it, too, has deteriorating momentum and MACD readings.

Investment Strategy Implications

It looks like my "failing rally" blog posting warning two days ago has occurred. Now, watch for the downside break with a non confirmation in the above noted and other indices to see if the S&P 500 has company (making new lower lows). If it does, then the second scenario noted last Thursday will apply. If it doesn't, then the first one applies.

The bears prefer the former while the bulls the latter. Stay tuned.

Note: This is primarily all short term stuff. For investors, it is important to note that none of the above resolves the longer term trading range, which will determine the next major trend move for the market.

* click images to enlarge

Tuesday, August 17, 2010

A Failing Rally?

As the accompanying chart shows, a crossover in the near term indicators tracked (momentum and MACD) occurred last week. That crossover suggests several weeks (or more) of work to undo the damage. However, today's bounce (while certainly justifiable on economic terms for a number of reasons) is taking place very early in the undo-the-damage process.

Given the short term oversold (third indicator - slow stochastics), the bounce is not entirely unexpected. However, in light of the aforementioned crossover, the bounce today has all the characteristics of a failing rally.

Therefore, out of the four probable market sequence outcomes noted last Thursday, the first two referencing a failing rally now appear to be the most likely.

Whichever market sequence ultimately plays out, however, it is toward a resolution of the multi month trading range that the market sequencing outcomes have the greatest value.

Thursday, August 12, 2010

Market Sequencing

The following four charts depict the four most probable sequences for stocks over the near term. They are representative of my Investment Theory of Relativity, which I have described in previous blog postings and reports to subscribers but will do so more formally in future blog postings.

Wednesday, August 11, 2010

Vinny on Bloomberg radio

In case you missed the Monday appearance on "Taking Stock with Pimm Fox", you can listen to it on the Blue Marble Research media blog, Beyond the Sound Bite.

Tuesday, August 10, 2010

Could Be Wrong, But...

To all investors in the bold category (>90% in equities):

* Not sure how anyone can read today's Fed minutes as anything but bearish. The Fed is impotent when it comes to the primary issue in the US - employment. Taking the baby step of QE2 lite will do virtually nothing to help the situation.

* What's the next bullish catalyst for stocks? We are passed earnings season, now what?

* Analyst reports today re Intel not good re 3Q10 orders.

* Technicals are poised for downside breaks - first pullback, then rally, then ????

Now that investors are getting comfortable with deceleration but no recession, the greater risk appears to be on bullish disappointment side of the equation.

That said, it is always advisable to remember the Keynesian beauty contest: It's not who you think will win, but who you think everyone else thinks will win.

The Fed's Kobayashi Maru

For the equity markets, the Fed faces a no win scenario today.

If it eases, it sends both a contradictory signal re Obama and Geithner and a message that things are worse than the US economic deceleration data suggest (see prior post below).

If it doesn't, then the fast money crowd (they are the market) will likely react rather dourly, throwing their usual temper tantrum when not getting their short term way*.

The accompanying chart** shows the key internal market indicators at their tipping points. Should the decline broaden out, it will most likely NOT lead to anything more than a pullback of modest proportions as there are virtually NO divergences (either internal or external) at this time (not to mention the fact that the Mega Trend is bullish).

A decline, however, will set the stage for such divergences to develop. The likely timeframe for clarity on this is 2 to 4 weeks.

P.S. With President Barack Tuvok Spock in the White House, is Captain Kirk at the Fed?

*Given their generally abysmal performance this year, many hedgies are on edge and will act rather dramatically to preserve what little gains they have.

**click image to enlarge

Why Would The Fed Act Today?

In light of the poor productivity report issued this morning, an even greater amount of focus is on today's FOMC meeting. The politically propitious time for the Fed to act would be today, but it likely won't. Here's why:

With rates zero bound, some are hoping that the Fed will take further quantitative easing steps (a so called QE2) to help prevent a clearly decelerating US economy from decelerating right into a recession. Yet, one data point does not a trend make. Clearly, the US economy is decelerating. Macro economic data issued since mid May have been consistently coming in BELOW consensus expectations. Yet, not all the data is pointing south (see ISM reports issued last week), and most that do tend to disappoint modestly. Therefore, it is more than a stretch to conclude at this time that deceleration will inevitably lead to recession. Certainly, global growth data does not support such a negatively certain outcome. Moreover, this morning Economic Cycle Research Institute managing director (and recent Beyond the Sound Bite guest), Laksman Achuthan, stated that their data does not conclude a recessionary outcome.

Then you have the feedback from the financial markets, which have sent a fairly sanguine signal this summer re the current and future economic climate. Lastly, we have the political dimension in all this.

If the Fed were going to act, now would be the politically appropriate time as the next meeting will be much too close to the mid term elections and would be almost certainly perceived as politically motivated. Yet, in light of the Treasury Secretary Geithner's recent NY Times "Welcome to the Recovery" op-ed piece along with the Obama administration's self-described "summer of recovery" road show, an act of further monetary accommodation by the Fed today would send a signal of confusion and lack of coordination between the key branches of government. Obama and company say yippee, while Bernanke says uh oh?

Given these factors the question becomes, "Why would the Fed act today?"

Monday, August 9, 2010

Upcoming Media Appearances

Bloomberg radio, "Taking Stock with Pimm Fox", today, Monday, August 9, @ 4 pm (eastern)

Thursday, August 5, 2010

Vinny on Yahoo Finance "Tech Ticker"

My Yahoo Finance Tech Ticker appearance with Savita Subramanian, Chief US Quant Strategist, Bank of America/Merrill Lynch is posted and can be found at

Wednesday, August 4, 2010

I Would Love To Sell But...

I feel like a cat on a very hot tin roof. And it isn't the heat wave that's causing my furry investment pads to cook. It's this damn summer bounce within a cyclical bull within a secular bear that's making me so jittery.

I would rather see the bearish signals first generated by certain global markets (Europe, most notably) spread to all markets and produce a clear downside signal. Unfortunately, when it comes to the social science of investing the best laid plans of mice and men have a nasty habit of following their own path and rhythm.

So, as much as I want to write the blog posting before summer's end fittingly titled "Everyone Out of the Pool", I cannot. Or as Orson Welles said in a commercial of years ago, "We will sell no wine before its time". For me, the same applies to the current stock market environment.

Here is why:

1 - The Mega Trend* for the S&P 500 never went negative. As I noted several weeks ago (Death Cross: Fact and Fiction), the false signal produced by the so-called death cross using the simple moving average was not generated using the exponential moving average. Therefore, the bullish Mega Trend is intact. Until the market generates a Mega Trend reversal, the existing trend (which is bullish) must be presumed to be in force. This is quite clear in the first chart.

2 - There are still no important divergences - not internally (Momentum and MACD, first chart) nor externally (inter market, see chart #2). None. Zero. Zippo.**

Re internally generated divergences: as I noted last week it is only when both momentum and MACD generate a divergent signal from price that the odds of a near term trend reversal increase to a sufficient degree to take action. The past week has proved that view. And here we stand one week later with momentum now rejoining MACD in bullish near term confirmation of price (first chart).

Investment Strategy Implications

Cautiously bullish (equity exposure between 60 and 90%), generate absolute returns, lose alpha. Could be worse.

*Use the search function in the top left section of this blog to find prior postings (there are many) re the Mega Trend.

**It is true that there are times when fully synchronized and confirmed markets do reverse themselves. But they are the exception and not the rule. Therefore, it seems advisable to go with the higher probabilities that divergences produce.

Thursday, July 29, 2010

We Shall See

"A string of Europe's largest firms issued surprisingly upbeat profit reports on Thursday, bolstering an abrupt renewal of investor confidence in the region after months of debt turmoil and fears for the euro."
Reuters, July 28, 2010

The two charts to your left illustrate the 350 largest companies in Europe (IEV). The first chart shows the long-term Mega Trend over the past 5 years, while the second chart shows the past twelve months.

The first chart shows that once the Mega Trend (the interplay between price, 50 day, and 200 day moving averages) is set it tends to remain intact for as long as several years and as short as many months. You can see in the second chart more clearly how the Mega Trend went bearish in mid May. However, the recent summer bounce has lifted the price above both its moving averages and, in the process, turned the 50 day upward toward the 200 day while also enabling the 200 day to stop its descent and go flat.

It is possible (but I would argue unlikely) that the good news noted by the Reuters quote will result in a whipsaw of the mid May bearish signal. Possible is just probable with a very low percentage of occurring. We shall see.

Investment Strategy Implications

Much of the technical analysis reasons for the cautiously bullish view that I have expressed these past few months (between 60% and 90% in equities) is rooted in a deterioration of the longer-term trends, specifically the confirmed bearish Mega Trend calls of the past few months (e.g. IEV) and the standing at the precipice to join the bearish parade by nearly every other index tracked.

Should the fundamental picture improve and the economic deceleration in developed economies turn out to NOT dissolve into a recession and economic conditions in the Eurozone turn out to be not all that bad, we should see continually improving technical analysis readings that reverse the bearish signals generated since mid May. Until that occurs, the advisable investment posture of cautiously bullish will produce stock market gains but lose alpha.

Some may disagree but there are times (this being one of them) when making money on the upside courtesy a perceived counter trend rally but losing relative performance (alpha) due to a less than 100% equity exposure is an acceptable price to pay pending the resolution of the multi month unresolved trading range of stocks.

Wednesday, July 28, 2010

Short-term Indicator Crossover. Mini Pullback in Stocks Likely.

The short-term indicator tracked (Slow Stochastics) has crossed over in overbought territory signaling a high probability of a pullback in stocks. Since the near-term indicators (Momentum and MACD) are flashing only a half warning sign at this time (see yesterday's blog posting), the odds are that the likely pullback will be modest (see accompanying chart for examples of the four prior pullbacks over the past 3 months).

Should this occur, the pullback will almost certainly be followed by another run to higher current rally highs (above Tuesday's 1115 closing high in the S&P 500). It is during this run that two factors should be watched closely:

1 - Will the near-term indicators (Momentum and MACD) BOTH fail to confirm the higher highs with higher highs of their own (thereby signifying a deceleration in the strength of the move)?
2 - Will other indices (such as EAFA (EFA) or emerging markets (EEM)) fail to confirm and not make higher highs?

If both the internal metrics of an index tracked (in this case, the Momentum and MACD of the S&P 500) AND the external metrics tracked (index to index, e.g. SPX versus EFA and/or EEM) produce divergence signals from the S&P 500, then the odds increase significantly that (a) a decline will occur subsequently and (b) it will be more substantial than the mini pullback the current rally is at risk for.

Tuesday, July 27, 2010

2 Down, 1 To Go

2 down:

Momentum diverging from price
Slow Stochastics (short term indicator) overbought

1 to go:

MACD still bullish, confirming price

If the first two hold when MACD rolls over, the summer bounce is likely over.*

*For a full bearish call, external divergences (inter market) must be in place as well. At present, unlike the internal divergences noted above there are no meaningful inter market (index to index) divergences. This has been a source of market strength for the summer bounce, surprising many (present company excluded). It is when both internal and external divergences develop that trend reversals have the highest probability of occurring.

Note: click image to enlarge.

Wednesday, July 21, 2010

Beyond the Sound Bite: An Interview with Diane Swonk

My interview with the Chief Economist with Mesirow Financial and author of "The Passionate Economist: Finding the Power and Humanity Behind the Numbers" includes the austerity versus stimulus debate, the multi-speed global economy, deflation, advisable government policy, and the risks of developed economies deceleration.

The length of the interview is 15 minutes 32 seconds.

Beyond the Sound Bite podcast interviews can be found at the Blue Marble Research media blog. To listen to this interview, click here.

Friday, July 16, 2010

Who Knows?

“Doubt is not a pleasant condition, but certainty is an absurd one”

You got to love those who state with certainty that stocks have made their lows and a resumption of the bull rally is underway. God may favor the bold, but fools do rush in where angels fear to tread.

Who knows if various stock market indices, which have produced a wonderful bounce from the lower end of their trading ranges, will broaden out and help numerous other indices reverse their bearish Mega Trend (“death cross”) signals? Who knows if the US economy has evolved into a private sector driven sustainable path of growth and, thereby, avoid an economic backward slide into hell?

In the macro economic realm, certitude is shared by those who declare that the global economy is fine, that the US economy is fine, that GDP and other key US economic indicators (e.g. unemployment) will be fine (see the accompanying table* from the Fed). Yet, for all the certitude that may be uttered, just about every reliable measure of the stock market and the economy shouts, “Who knows?

What Is Known

Thus far, the macro economic reports and forward earnings guidance from company’s reporting their 2Q10 results paint a fairly clear picture of a US economy that is decelerating**. Since mid May, the majority of US macro economic indicators have been coming in steadily below consensus expectations. Thus far, the magnitude of the shortfalls have been, for the most part, moderate. Whether this remains the case remains to be seen. However, if there is one thing that is a characteristic of our globalized networked economy and markets it's that seemingly small things can become very large in a very short period of time. In bad times, correlations tend to go to 1 rather quickly.

Importantly, an economic deceleration does not necessarily mean a recession will follow. It may simply be the natural process in the transition from the early strength of an economic recovery to the more moderate growth rate in an economic expansion. At least, this is the argument heard from traditional economists, who assume away the unusual circumstances that preceded the current recovery/expansion and apply their well-educated tried and true methodologies that kind of, sort of, worked okay in the past – a past, I might note, that was quite different from the present.

As for stocks, this much is known: The global stock indices have been locked in a multi month trading range that will be resolved with either an upside or downside breakout. An upside break signals the trading range was a consolidation – the bull has been refreshed and ready to run again. Whereas, a downside break signals the trading range was a distributional top and everyone should get out of the pool. Death crosses will abound.


It isn’t often that the real economy and the financial economy mirror one another so neatly. In the US economy, the deceleration is quite evident. Both the forward guidance from corporate America and macro economic reports published since mid May point to an economy that is still expanding but at a slower pace. Most areas of the global economy are decelerating that will either become the pause that refreshes or the prelude to a recession that will almost be far more difficult to manage than the cutsey phrase “double dip” suggests. The outcome – continued expansion or recession – remains to be determined.

As for the stock market, we have a trading range whose outcome suggest a bearish outcome but cannot be stated with certainty until such time of a clear breakout signal. Hence, the appropriately cautiously bullish posture expressed previously.

Human nature may prefer those who state they know with certainty to those who say, “Who knows?” However, in highly fluid situations in the social sciences of economics and markets, certainty may be a most expensive attribute.

*click image to enlarge

**This is also the case in other developed economies – Eurozone, Japan – and, from a different perspective, the high growth rates in emerging economies that are being pressed by their respective governments to cool their overheated economies.

Wednesday, July 14, 2010

Beyond the Sound Bite: An Interview with David Rosenberg

Exactly how bearish is David Rosenberg? The answer may surprise you.

Beyond the Sound Bite podcast interviews can be found at
To listen to this interview, click here

Monday, July 12, 2010

Vinny on Yahoo Finance's "Tech Ticker"

All three Tech Ticker interview segments are posted and can be found at

Friday, July 9, 2010

Beyond the Sound Bite: An Interview Rob Nichols

Continuing our focus on the likely impacts of financial regulatory reform on the financial services industry and the overall economy, we get the perspective from the President and COO of the Financial Services Forum.

While not as well known as some other associations, the Financial Services Forum is "a non-partisan financial and economic policy organization comprising the CEOs of 19 of the largest and most diversified financial services institutions doing business in the United States". Need I say more?

Those interested in hearing the views of this important group from its leader will find this a most productive use of one's time.

Beyond the Sound Bite podcast interviews can be found at
To listen to this interview, click here

Wednesday, July 7, 2010

Beyond the Sound Bite: An Interview with Todd Groome

In this twilight period before earnings season gets into full swing and the all-important third quarter macro economic reports provide the vital insights into the strength of the US economic recovery, we arranged for a series of podcast interviews with key leaders in various segments of the financial services industry to give their initial thoughts and opinions on the financial regulatory reform bill working its way through Congress.

My first guest is Todd Groome, Chairman, Alternative Investment Management Association. In this interview, we learn how hedge funds, private equity, and other alternative investment organizations might perceive the prospective changes.

Beyond the Sound Bite podcast interviews can be found at
To listen to this interview, click here

Friday, July 2, 2010

Death Cross: Fact and Fiction

Much is being made of the "Death Cross", when an index's 50 day moving average crosses below its 200 day moving average. Those making the most noise on this topic use the simple moving average (e.g. 50 days divided evenly) as opposed to the exponential (e.g. 50 days weighted more toward the most recent days). Therefore, it is worth taking a moment to observe the two versions and how one (the simple) tends to produce false signals than the other (the exponential).

In the recent 2002 to 2008 bull market in stocks, the accompanying top two charts* illustrate how the simple version (on the right) can produce false signals (2, to be exact), whereas the exponential (on the left) did not.

In the current market decline, the simple (on the right) will almost certainly generate a "Death Cross" whereas the exponential (on the left) may or may not.

Not The Only Tool In the Toolbox

It is also important to remember that the moving averages are one of several very useful technical analysis tools that should be relied on, particularly when attempting to forecast major market turns. Since we currently have other important indicators, such as non confirmation divergences (see previous post below) from other indices, it is premature to call the end of the current bull market solely based on one indicator.

(For the record, I use the exponential. Also for the record, I do believe the odds favor a bear market will eventually emerge. However, until I get signals from all indicators followed I cannot make that call. This may cause me to be late to the bear game. However, I would rather be late to a game changer than premature and get whipsawed. Moreover, the prospect of a bounce back rally this summer and how to play it (to gain absolute and relative performance) is enhanced.)

*click images to enlarge

Tuesday, June 29, 2010

Potential Minor Bullish Non Confirmation

*Short term deep oversold becoming extreme (bottom segment of first chart).

*Momentum and MACD well above previous lows (second and third segments of first chart).

*Significant bullish non confirmation from selected global markets (including Europe 350) versus US (second chart).


Want to see S&P 500 break 1042 intra day low AND/OR new closing low below 1050. That would produce the new low and set up the conditions for a non confirmation.

Do not want to see 10 to 1 advance/decline to the downside today.

If above occurs, selective purchases are advisable.

Single biggest risk to above is the impending Mega Trend reversal (top segment of first chart). Possible but unlikely as it would also require other markets to confirm to the downside. For that to happen, an already deeply oversold market would have to get even more deeply oversold (as in at least another 50 points to the downside RIGHT NOW). As I said, possible but unlikely.

Note: This is a short term forecast. It does not alter the longer term view that stocks are in a distributional topping process. In fact, the current decline only makes such a view a greater probability. The world may appear to be going to hell in a hand basket, but not quite yet.