Crash!

Where's the market been? Where's it going? Should I focus my search on recent time periods, or should I include the boom and bust years of 1996 through 2001? Here we discuss the markets, and how they can best be exploited.

Re: Crash!

Postby Dacamic » Tue Aug 24, 2010 2:25 pm

This thread has been dormant for several months while I worked to reset my bearings.

With only a touch of exaggeration, I can rightfully claim the S&P 500 was about where I expected it to be at July month-end. The path it took to get there, though, was not per my plan. In fact, the pattern in 2010 is inverted compared to its historical counterpart in 1939. Thankfully my equity curve remained intact, mostly because my arguably reckless stubbornness helped me avoid whipsaw swings; an eventual -- albeit late -- adjustment to reality helped, too.

Quite frankly, my macro-level indicators gave mixed signals during the first half of this year. I chose to trade anyway, even though the better approach would have been to sit on the sidelines until the fog cleared from my macro vision. Lesson learned (again ... and I have high hopes it will be remembered).

With bearings set, signals unmixed and fog gone, it now appears U.S. equities will be in a downtrend until early 2013. It is my belief the resulting decline in the S&P 500 will be at least 40%, i.e., that index will fall well below 700 on a monthly-close basis.

The chart below shows what the predicted decline will look like if present-day price patterns match those from October 1939 to October 1942.
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Re: Crash!

Postby Dacamic » Tue Feb 08, 2011 9:41 pm

Dacamic wrote:With bearings set, signals unmixed and fog gone, it now appears U.S. equities will be in a downtrend until early 2013. It is my belief the resulting decline in the S&P 500 will be at least 40%, i.e., that index will fall well below 700 on a monthly-close basis.

I'd like to take this opportunity to publicly express my gratitude for the humility lesson that Mr. Market gave to me in 2010.

My prediction in August 2010 -- quoted above -- was posted a few days before the S&P 500 began a five-month move that vaulted it 23% higher. Loosely translated: I was impressively wrong. At the risk of stating the obvious, the tools I use to evaluate macro-level market environments have not worked well for me during the past several months. So, I figured it was time to create some new tools.

I have embedded below a chart that gives a new perspective to an old theme. We have previously discussed in this thread the similarities between prices patterns of the S&P 500 in the 1930's and the 2000's. To my eyes (arguably nearsighted) there remains a resemblance between now (Q1 2011) and then (Q1 1940). Of course, that is the old view. The new view is created by adding another "then" (Nikkei 225, 1990 - 2010) and changing to a different "now" (NASDAQ 100, 1996 - 2010).

I also switched from monthly prices to a ten-month simple moving average (SMA) of monthly prices. This change was prompted by discussions we've recently had in another thread about evaluating macro trends using a ten-month SMA. This higher-level view, although it further obscures EOD price action, helps combat the natural tendency to find patterns where patterns don't exist.

The resulting chart shows three equity bubbles bursting (dare we say deflating?) and the price action during the years following. In regard to present day activity, "then" and "now" are on paths that appear to be diverging. My view of the long- and intermediate-term pictures shows the divergence will not continue, meaning the prevailing cyclical bull market will end this year (hmmmm, where have we heard that tune before?). The daily charts, however, aren't clearly calling for the downtrend to emerge within the next few months. So, I'm staying away from long positions, but I am not ready to dive into short positions, either.
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Re: Crash!

Postby Dacamic » Mon Jun 13, 2011 2:45 pm

Peter Eliades publicly proclaimed in March 2011that the NYSE Advance Decline line would reach a major peak on April 27th. The chart embedded below shows that Eliades might be on to something, because a topping pattern began within a couple days of the date he predicted it would.

Eliades based his prediction upon an AD-Line chart pattern that began in September 1957. The underlying premise -- which Eliades borrowed with acknowledgement from Terry Laundry -- is there are cyclical ebbs (down trends) and flows (up trends) in markets, and the flows last as long as the preceding ebbs. In this particular case, a 27-year ebb from 1957 to 1984 in the NYSE AD Line created an equal-length flow lasting from 1984 to 2011.

Naturally, prices can move in different directions and degrees compared to their AD line, as was true from 1998 to 2000. Nonetheless, toppiness of price patterns – beginning February 18th -- along with emerging divergences between the S&P 500 and broad market indexes – tend to confirm Eliades’ prediction, both in terms of the AD line and price.

A tenet underlying the ideas of Eliades and Laundry is that each “flow” requires a preceding “ebb”. With the recent expiration of the subject 54-year-old pattern, we’re fresh outta long-term ebbs ... in other words, there isn't any fuel left to propel prices higher. Accordingly, the significant market decline that I have been expecting has probably begun (admittedly, it is beginning nine months later than I originally thought ... how I envy Eliades' apparent accuracy).
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Re: Crash!

Postby Dacamic » Thu Aug 04, 2011 11:15 am

As shown in the chart below, the S&P 500 is once again following the pattern it made seventy years ago. Present-day market participants haven't let equity prices trend sideways to the same extent that they did in the 1930's. As a result, the current down cycle is starting later and at a higher level than I had expected. It nonetheless appears to be well underway.

If equity prices follow the historical pattern, the end of this down cycle is about two years away.
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Re: Crash!

Postby Overload » Fri Aug 05, 2011 12:18 pm

Assuming this is more than a correction, and instead the beginning of a significant decline in the markets due to fundamental problems in the economy, there is a big question that needs to be asked: how do traders know when to get back in?

With the crash in 2008, we would have all liked to get back in during those few days in March 2009 when the S&P dropped below 700. But there were plenty of false-buttoms out there. Mar-May 2008, Jul-Aug 2008, and Dec 2008 all showed signs of a rebound, only to be followed by significant, continued drops.

Apart from waiting until the monthly S&P rises above its monthly 10-month average, any thoughts on identifying when the true bottom has actually been hit? Perhaps something with less lag?

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Re: Crash!

Postby Dacamic » Fri Aug 05, 2011 4:03 pm

Overload wrote: ... any thoughts on identifying when the true bottom has actually been hit?

I have not yet been able to find an automated method that correctly identifies prevailing market conditions, whether they be up trending, down trending or not trending. (This isn't to say such methods don't exist, rather only that I haven't found them.) Furthermore, as evidenced in this thread, my "non-automated" methods still have plenty of room for improvement.

In my opinion, secular bear markets -- such as the one that U.S equities have been in since 2000 -- are difficult to trade. The S&P 500 has, roughly speaking, dropped 50%, climbed 100%, dropped 50% and climbed 100% during the past eleven years (not to mention dropping 10% during the past nine trading days), and the longest trend has lasted only four years. These conditions have often not left much margin for error.

A simple solution might be to focus only on those markets that are in long-term trends, e.g., gold. Although a search for such markets probably makes sense, I'll also continue honing the "non-automated" tools I have for navigating the secular bear market of U.S. equities. (I expect the chart included in my previous post to continue playing a role).
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Re: Crash!

Postby Dacamic » Wed Jan 30, 2013 9:32 pm

Has trading been more difficult than usual during the past two years? Maybe I am the only person afflicted by pattern-recognition vertigo.

Beginning in November 2010 a video appeared on YouTube titled "Buy The Dip", which shows a dialogue about the stock market between two animated superheroes. One character presents fundamental reasons for her concern about stock prices; the other counters by repeatedly saying "buy the [expletive deleted] dip." As the video progresses we learn his straightforward advice is based on another oft-mentioned trading belief: don't fight the Fed.

Ever the contrarian, I fought the Fed, and -- to paraphrase a popular 1960's song by the Bobby Fuller Four -- the Fed won. U.S. equities zigged (went up) when I zagged (went short) in November 2010. My perspective on the equity market has been mostly upside down ever since. For two years I have searched for bears in fields teeming with bulls. As one example of my struggle, I suggested about eighteen months ago in this thread that stocks prices would be trending lower until mid-2013; instead, the S&P 500 index is up about 16% ... so far.

Scraps of anecdotal evidence show the performance of hedge funds, university foundations and pension managers have fallen short of their benchmarks during the past couple years. So, in answer to an earlier question, I am not the only person to have been flummoxed by the market's movements. I have found little solace, though, being in the misery of this company.

People who trade using mechanical systems fight two sides of the same battle:

-- Fixing it when it ain't broke; and,
-- Not fixing it when it is broke.

I made both of those mistakes by abandoning systems that were working while deploying those that weren't. An underlying theme in this thread is trading systems need to be used in the right place at the right time. The trading community is fond of referring to the Holy Grail, which -- in my opinion -- would be a system with universal application. Lacking that, we are left to determine the When and Where portions of the Holy Grail solution. As already implied, my solution has been inside out, upside down and/or backwards in relation to reality since November 2010.

Okay, enough confessions by the confused. Now what?

I went neutral several weeks ago to help clear visions of bears from my mind. Even with the benefit of a less biased outlook, I still see storm clouds on the horizon. In my opinion, the macro environment is not yet suitable to support a secular bull market. It's too early to know whether Apple's 35% decline during the past four months is the canary in the coal mine foretelling the end of the cyclical bull market that began almost four years ago. I don't think it is, because my refreshed view shows the next major top won't be until 2014. Equities might fall back from their present position for a couple months before moving toward that top, giving us a dip to buy. If true, it'll be interesting to see how well I've learned my lessons about fighting the Fed. Maybe I should take a page from Chief Joseph who said in surrender, "From where the sun now stands, I will fight no more forever."
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Re: Crash!

Postby Dacamic » Fri Mar 22, 2013 2:04 pm

In January 1987, nine months before Black Monday, John Kenneth Galbraith published an article advising caution about U.S. stocks. By some measures, stocks were indeed in "bubble" territory when Galbraith wrote his article, and we know an even bigger bubble inflated during the following thirteen years. Ron Insana offered two observations on CNBC this week that -- in combination with the Dow's recent reach into record territory -- prompted me to re-read Galbraith's article:

    1. The U.S. is almost becoming immune to external shocks; and,
    2. [There is] a net shortage of equities in the United States.
Those comments have ominous overtones when considered alongside an excerpt from Galbraith's article (the emphasis added is mine):

    "... as a stock-market boom continues, there is increasing participation by institutions and people who are attracted by the thought that they can take an upward ride with the prices and get out before the eventual fall. This participation, needless to say, drives up prices. And the prices so achieved no longer have any relation to underlying circumstance. Justifying causes for the increases will, also needless to say, be cited by the sadly vulnerable financial analysts and commentators and, alas, the often vulnerable business press. This will persuade yet other innocents to come in for the loss that awaits all so persuaded."
Those of us active in the markets during the late 1990's remember broad participation in U.S. equities and euphoria about the future of prices. The resulting positive feedback loop propelled prices to extraordinary levels, but also sowed seeds of instability that eventually caused prices to collapse. I don't sense the same extreme favorable sentiment today as overcame us during the late stages of the 20th Century. Insana's comments, though, did raise a red flag.

With all the above being said, it's still important to remember the S&P 500 rose almost six-fold after Galbraith wrote his article, a fact that brings to mind John Maynard Keynes' advice about entering positions contrary to a prevailing trend:

    "Markets can remain irrational a lot longer than you and I can remain solvent."
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Re: Crash!

Postby Dacamic » Mon Jan 27, 2014 3:37 pm

Pete started this thread seven years ago, when the S&P 500 dropped 3% one day in February 2007, At that time, four years had passed since a decline of similar magnitude had happened, so the reappearance of volatility was startling to people who had watched the S&P 500 sail 90% higher in calm conditions.

As was true in 2007, Friday's sag occurred in a low-volatility environment and in a market that has been moving higher for several years. It was only a 2% dip, yet I couldn't resist the temptation to compare then to now. The following quote from my post in March 2007 captures my thoughts about where stocks are headed in 2014:

Dacamic wrote: I believe that -- at a macro level -- the more things change, the more they stay the same. This paradoxical premise suggests nothing more than markets will trend up, down or nowhere over varying lengths of time and occasionally experience sudden noticeably large moves … just like markets have shown for centuries. In other words, the bull market move U.S. equities began in October 2002 will eventually end, and – as traders – we need to accept and anticipate that unavoidable outcome. If someone hasn’t considered what their systems will do in up, down and sideways conditions, they should do so.

A lone 3% single-day move by a broad U.S. equity market index isn’t sufficient reason to sound Red Alert. Moves of that nature can be infrequent, yet aren’t unfailing signals of transition from one secular or cyclical trend to another. Furthermore, volatility begets volatility; hence, we shouldn’t be surprised when global equity markets continue bouncing around during the next week or two. The S&P 500 is up 90% since October 2002, and only 4% off its cyclical peak (which it recently reached). Exodus from trend-based, long-only systems isn’t warranted just because of one burp. If we zoom out, though, we’ll see symptoms telling us the cyclical bull market that began over four years ago is coming to an end; I don’t think it will continue past this year.

The bear will pull down the bull sooner or later; my crystal tea leaves show odds that favor “sooner”. Regardless of my prognostication abilities – or lack thereof – prudence suggests traders should commit time to evaluating their systems’ performance in less favorable market conditions. If nothing more, a 3% down day is an inexpensive hint that we should leave our cocoon of complacency.
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Re: Crash!

Postby Dacamic » Sat Jul 19, 2014 3:58 pm

It's been awhile since I've made a top call …

To my regret I ignored a macro indicator that showed “go long” for the past several years. That indicator -- a monthly momentum oscillator developed by the late Terry Laundry -- is now telling me stocks have almost run out of gas. True to form, I am again trying to talk myself out of believing it because valuations aren't stretched super high, interest rates are stable and volatility is low. Other than a catastrophic event (knock on wood), I can’t imagine what would pull equity prices lower … which might be the surest sign the prevailing cyclical bull market is coming to a close.

A bear market is commonly believed to be one in which prices fall, sometimes precipitously as happened in 2000-2002 and 2007-2009. By definition, though, a bear market is simply one in which prices rise at a slower-than-average pace. Thus, the S&P 500 will soon slow from 20% compounded annual growth (over the past five years) to less than 7% if Terry’s macro indicator is correct.

From a trading perspective, a significant decline in equity prices does not worry me because I trade on both the long and short sides. My concern is prices will languish for awhile, and that’s the scenario striking me as most likely to happen. I have long believed (admittedly creating biased thinking) the secular bear market that began in 2000 would not end until stock prices withered from apathy. We seem to be on the brink of that phase.

I mentioned above that valuations aren't super high. They are nonetheless high. The S&P 500’s PE has been above it’s long-term average with few exceptions since 1990. Even the cyclical bear markets in 2000-2002 and 2007-2009 dropped PE’s below their average for only a few months. Are historically high PE’s the new normal? I admit to wondering about that, especially in light of low interest rates. Nonetheless, it is my expectation PE’s will eventually shrink. Unfortunately, it could be a long time before the foundation is ready for the next secular bull market if PE’s contract while prices stagnate.

This might be the calm before the even calmer.
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Re: Crash!

Postby Dacamic » Tue Sep 23, 2014 2:24 pm

Every once in a while business journalists talks about the Hindenburg Omen. As you might guess from its name, this is an indicator that signals an important market top might be near. In 2007 -- just before equities began an impressive plunge -- we talked about the Hindenburg Omen in the following thread:

http://www.stratasearch.com/forum/viewtopic.php?f=8&t=361

Since that time I have modified my version of the Hindenburg Omen to be based on stocks in the Russell 3000 rather than all securities in the NYSE sector. This allowed the indicator to be based on a larger group of stocks while also eliminating "non-stock" securities, e.g., ETFs and investment trusts.

The revised version of the Hindenburg Omen flashed a sell signal on Friday, which is the first time it has done so since mid-September 2008. The indicator is considered most reliable when its signals appear in clusters as they did in 2007 and 2008. So, it's too early to reach any conclusions from the alarm sounded last week. It is nonetheless another hint that equity prices are more likely to move down than up.
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Re: Crash!

Postby Dacamic » Sun Nov 02, 2014 2:12 pm

A few months ago I said the equity market in the U.S. might be on the brink of doing nothing. With one notable exception, the market did indeed stagnate. The S&P 500 now sits within 2% of where it sat about 100 days ago, even though it's at record highs. The corresponding annual pace of 7% matches the S&P 500's long-term average, but it's far below what we've become accustomed to since 2008.

As mentioned above, stocks did have one jittery episode during the past three months. On Friday the S&P 500 completed a 10% up-and-down round trip it started only six weeks ago. My trading reflexes are sufficiently slow that this quick journey left me unscathed, which is both good news and bad. Price moves during the past six weeks created great opportunity, but the depth and speed of the rise and fall caught me off guard. I am particularly amazed by how fast equities recovered the ground they lost. I remain convinced this is a liquidity-fueled, bubbly cyclical bull market nearing its end. Nonetheless, the underlying forces keeping prices high are impressive.

My macro and micro signals show prices will likely drift higher for a few more weeks, then chop into year end. The floor supporting prices looks like it might shift lower early next year, yet I still don't expect much of significance to happen for awhile. If the Hindenburg Omen confirms the signal it gave in September, then maybe we'll have some excitement like we had in October.
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Re: Crash!

Postby Dacamic » Mon Dec 01, 2014 12:49 pm

As a follow up to my post on September 23, the Hindenburg Omen appeared again on Friday. I already expected equities in the U.S. to see their strength fade before year end. The Omen's reappearance seems to confirm that outlook.
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Re: Crash!

Postby Dacamic » Wed Dec 10, 2014 2:30 pm

The Hindenburg Omen on Monday had its third showing in three months, so that signal is now considered confirmed. I still don't see a catalyst that will trigger a startling decline. The most likely scenario seems to be a choppy market into late January/early February, and then equity prices will drift lower until June 2015.
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Re: Crash!

Postby Dacamic » Sun Jul 12, 2015 12:53 pm

With a notable share of the financial world's attention focused on Greece today, it's seems worth mentioning the Hindenburg Omen appeared -- and was confirmed -- a couple weeks ago. Prices have already stumbled downward a bit since then, and a "No" vote on Greece would likely pull prices even lower.

My charts show prices could drop about 5% before hitting a tradeable floor; likewise, the related ceiling is 3% higher. So, either outcome for Greece isn't expected to shake things up too much. In other words, it looks like the doldrums will resume after the ripples caused by Greece fade.
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