Bearishness

Click To Enlarge

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?

June 2012 Returns

Click To Enlarge

The behaviour of the banksters continues to be nothing short of appalling.  All of the largest economies are struggling.  Even so, June was positive for the markets.  Seasonally, the latter part of July is good for the gold and the energy markets.  I expect both to improve.  As for the broad markets, overall, I expect some good shorter term trading opportunities, but fail to see any real catalyst which could propel them to new heights.  The Elliott wave pattern of three waves followed by two in the opposite direction would suggest we will see a lower low than the May/June correction we just saw.

18 month return for TSX @ June 30, 2012 = -13.89 percent
Return for Basic Timing Model  using XIU = 9.03 percent
Return for Advanced Timing Model = -4.36  percent
Money for charity = $0.00

March 2012 Portfolio Update

Typically, seasonality favours the TSX during March.  Not so this year.  While the TSX was down each week in March, the major U.S. markets were up and down.  Despite the long rally since the third quarter last year, I have been reluctant to chase it.  My own Elliott Wave analysis would suggest a high of 1425.  The S&P 500 Index hit 1419 during the last week of March.


The media talks about the U.S. markets decoupling from the rest of the world markets.  I have my doubts, although the huge government stimulus is having an affect.  Normally the markets should continue higher until the first week of May, but if 1419 is, in fact, the high, then I would not expect any major rally until the last quarter of the year.  According to the Elliott Wave theory, we could see the lows of last fall, again.


My investing horizon remains very short.    


15 month return for TSX @ March 30, 2012 = -7.23
Return for Basic Timing Model using XIU = 5.84
Return for Advanced Timing Model (my returns) = -4.36 percent
Money for charity = $0.00


What are your expectations between now and the end of the year?

My Recent Trade



Click To Enlarge

Context
This post attempts to answer the question, can the technical indicators be used to time the market?  The Elliott Wave Theory tells us what the overall fractal patterns followed by the markets look like.  The fact that it is some sort of fractal means we can verify where in the pattern we are, by looking at it in the context of the shorter time frame and the longer time frame.  We can view the indicators in that context. One dip, or one rise in the market does not a trend make.  When we see a series of higher highs and higher lows, we have an uptrend.  When we see a series of lower highs and lower lows, we have a downtrend.  That means we can't know the top until, at least, we see another lower high, and we can't know the bottom until we see another higher low.  Rather than try to explain what I mean, let's look at the trade I made at the end of July.

Going Down
First, the RSI indicator at the top of the chart peaked out at the beginning of July as evidenced by the lower high two weeks later.  So did the price candles, the MACD in the section below that and the stochastics in the section below that.  I should have bought (the inverse fund) when the price crossed the green dotted line which represents the midpoint of the Keltner Channel from above.  Instead, I waited for the price to drop below the blue line which represents the 40-day moving average (circled in orange).  By this time any conceivable uptrend had been clearly broken.  Even without any knowledge of the Elliott waves, it would be clear to most people the market was headed lower.

How Far?
At that point in time I had no target price.  I knew fair value based on the historical average annual earnings was  850.  The Point and Figure chart (also found on StockCharts.com) indicated a bottom at 1140.  The Fibonacci ratios associated with the Elliott Wave would suggest a bottom around 1190.  There is nothing in the indicators, initially,  that suggest how much down-side to expect.  On August 9 we had a big bounce, then another drop  on August 10.  I was happy with my gains at that point and exited my position.

Too Early
Had I played the downturn at the beginning of July, I would have been on the right track, but the lower high near the end of July would likely have been sufficient to cause me to start to lose money, even though the longer trend was still down.  I make it a policy to exit such a position when I start losing money.  If the trend resumes in my favour, there is nothing to say I can't take the position again, perhaps even at a better price!

Momentum
The reason I believe we can rely on these indicators is because this "toing" and "froing" in the market is caused by momentum.  The momentum is caused, not by events that happen, but by people's perception of the events that happen.  These optimistic and pessimistic moods take a while to develop and then, to run their course.  Generally, it is not the value of the indicators themselves which I rely on, but the trend in the indicators.  The indicators have since taken a positive shorter trend, but I don't trust it as long as the moving averages are inverted with the 40-day beneath the 200-day and prices lower still.

Comments?

Are We Due For A Market Correction?

1 Year TSX Index - daily prices (Click to Enlarge)

The chart shown is a daily price chart of the Toronto Stock Exchange for the past year.  We have been following along a nicely defined channel during that time.  It presents an almost classic Elliott Wave 5-wave pattern.  The convergence of the upper channel line, the price candles, and last trend line all suggest we should be very close to a top.  Looking at a chart of the S&P500 Index, I get a very similar result.

It is too early, yet, to tell if 20 year U.S. Treasury bonds are making a bottom (if only for the time being).  We are seeing a second week of gains for them after closing in on an almost three year trend line.  Earlier I blogged about the bounce in the commodities index.  It has now been going sideways for a couple of weeks.

It is impossible to call the exact top.  If anyone could do that, they would be more famous than Warren Buffet.  The point is, the likelihood of a correction in the market at this point, is greater than that of the market duplicating last year's performance without, first, correcting (despite any and all quantitative easing).  We never know what event will trigger a sell-off, but something will come along, people will perceive it as negative, and down goes the market.  Buy-and-holders won't care - they won't be happy, but they'll wait it out.  Me, I have already taken my profits.  I don't trust the markets to go much higher, so I am preparing for the correction.

As for the cause of market tops, I don't want to imply they are caused by certain events.  The real cause is the lack of new money being put into the markets.  A top comes when everybody who wants to get in has done so.  Buying dries up.  It is rather like trying to inflate a balloon with a hole in it.  As long as the amount of air going in exceeds the amount of air leaking out, the balloon will grow larger.  Stop putting in air, and the leak will cause the balloon to deflate.  Of course, if the leak grows larger, then the balloon deflates even faster. 

I am not a professional, and I can not give you advice, but as I said, I feel this is a good time for me to protect some of my gains.  I'm just saying!

Do you feel we are due for a correction?  Have you taken any profits?

P.S. The basic timing model I blogged about earlier wouldn't currently give us a sell signal until the market has corrected by almost 10 percent.  Where it would make us money is in the large corrections we see every 4 or 5 years, or so.