September To Be "Nasty"?

If you are familiar with my blog, you probably know I advocate using the 200-day moving average as a buy/sell signal.  Bad things tend to happen when the market is below its 200-day moving average.  David Mcalvany compares today's markets to 1987 - low volume and high volatility.  The big drop in 1987 came just after the market had sunk below its 200-day moving average (in October).  Currently the markets are above their 200-day moving average, but I do not expect that to continue during September/October.  When that happens, it could be a good sign to take some money off the table, if you haven't done so, by that time.

What would it take for you to reduce your equity portfolio?

Odds Are?

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The closer we get to the U.S. election date this fall, the less likely it is we will see any intervention in the markets by the Federal Reserve.  Recent economic data has been just good enough to forestall any immediate intervention.  In order to not appear as they are meddling in the elections, there is a period of time just prior to that when they have their hands tied.  Few seem to agree, but to me, there is little that the Fed has left to do.  Perhaps many more would agree with the fact that much of what the Fed can do is already baked into the markets.  Regardless of what the Fed might do, the fact is, we are only a couple of weeks away from what, historically, has been the worst month of the year in the stock markets.

Bearishness

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Risk On; Risk Off
My desire in writing this blog is to share my years of experience in the stock market in the hope of helping others to be successful.  My approach has evolved over the years, and continues to, as the opportunities arise.  Currently, I am trading Exchange Traded Funds (ETF's), rather than individual stocks.  Lately, the market has all but ceased trading on fundamentals, and is following some irrational "risk on", "risk off" approach.  ETF's add diversification and more predictability during these highly volatile times.

Nothing To Show
Because of the market volatility I am trying to develop more of a trading methodology, with mixed success.  Since I am not at the point where I feel this would be helpful to others, I decided earlier in the year to share my investing club trades in this blog.  The problem is there hasn't been any trades.  Prior to the end of last year we purchased two inverse ETF's.  One makes money as the Nasdaq goes down, and the other as the TSX goes lower.  We are also holding some silver coins.

Moving Averages
None of those positions in our investing club has proven profitable, year-to-date.  With the exception of the Nasdaq, neither has there been any longer term signals which would justify reversing these positions.  You might know from other posts on this blog that I recommend using the 200-day moving average to manage risk.  The TSX has been below its 200-day moving average most of the year except for a brief high it made at the end of February.

Invest Responsibly
I have three reasons for remaining bearish.  In order to take a responsible and more conservative approach, I am not going to recommend bullish trades to my readers or to members of my investing club while the TSX remains below its 200-day moving average.  While I might take a more aggressive approach with my own personal money by making very short-term tactical trades, sharing those would not be helpful to people who aren't sitting in front of their online investment account all day.

Long Term Trends
Secondly, long term trends are negative.  The deleveraging required to restore government budgets and remove most of the unnecessary  risk in financial markets is going to take years to come.  Demographics will not substantially improve before the end of the decade.  If we look at the U.S. markets they have already reached a peak according to the Elliott Wave theory.  Trust in government intervention is almost all that is currently propping the markets up.  Wait until everyone wakes up to the fact it isn't going to make any real difference!

Head & Shoulders
The third reason is the technical pattern called a Head and Shoulders which the TSX is making.  This is a very bearish pattern which, if we break the horizontal neckline just beneath the recent lows, it could mean a possible return to our 2008/2009 lows.

Cash Is King
I know there is a segment of investors who would scoff at my lack of returns this year.  They would say four or five percent dividend returns is good in this environment.  Those are likely the same people who lost half, or more, of their life savings during the last great recession.  Let's see - four percent upside and 30 percent downside, that is not a bet I am willing to make.  As for not knowing when to get back into the market, I know where that point is, and it is NOT here, except for very short-term tactical trades.  In the mean time, my funds are mostly in cash, thank you very much.

That is my outlook.  Does your outlook differ?

July 2012 Returns

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Seasonality at this time of year favours Energy, Gold, Agriculture and Natural Gas.  The heat wave has done it's part in driving up the price of Natural Gas.  Energy companies and Agriculture have also shown some signs of improvement.  I continue to watch gold closely for signs of a turn-around.  Despite the political rhetoric, I remain unconvinced we have seen the worst in this year's markets. I see opportunities for profitable trades, but am still monitoring the 200-day moving averages closely.  The TSX index remains below it's 200-day moving average while, currently, the U.S. markets seem to have their 200-day moving average as the bottom of a trading range.

19 month return for TSX @ July 31, 2012 = -13.32 percent
Return for Basic Timing Model Using XIU =     8.41 percent
Return for Advanced Timing Model =             -4.36 percent
Money for charity =                                        $0.00