THREE STEPS AND A STUMBLE (Financial Dictionary)
“A rule of thumb stating that the prices of stocks fall significantly after the Federal Reserve raises interest rates three times in a row. In a
booming economy, minor adjustments in key interest
rates, both up and down, are fairly normal. However, if the Fed raises interest
rates three times in a row, this is taken as an indicator that it intends for
interest rates to remain at a comparatively high level for the foreseeable
future. This leads investors to sell stock, because the businesses
underlying the stock now have the added cost of high interest rates, which
reduces profits. The selling of stock causes stock
prices to drop.” Definition from…http://financial-dictionary.thefreedictionary.com/Three+Steps+and+Stumble+Rule
The 3-steps and a stumble rule was developed by Edson Gould who was a
true stock market Guru in his day and an expert in market timing. In a November1976 interview with Louis
Rukeyser on “Wall Street Week” Gould described his market timing system as
follows: “[T]here are three factors that determine…the level of the stock
market and the trend thereof. You can list them as economic, monetary [Fed
action] and what I call psychological [valuation/sentiment]. Now, the monetary
factors are always early, but they’re very important. They give you the early
warning of a change. The economic factors are always late….And the so-called
psychological factors that I use, they’re concurrent.” His biography and description of his timing
model can be found at…
http://knowledgebase.mta.org/?fuseaction=kb.resource&kbResourceID=13F1448F-AD6A-93F9-09E38B20030C01B4
VALUATION & THE Q-RATIO
Zerohedge had a commentary regarding Q-Ratio titled, “Are
Stocks Cheap?” Quoting ZeroHedge:
“Absent the "obvious" bubble in the late 90s, the US equity market is at its most expensive valuation
since right before the '30s crash… Still want to BTFATH
[buy-the-f’g-all-time-high]? Afraid of missing out?” For the
article see Zerohedge at…http://www.zerohedge.com/news/2013-12-11/are-stocks-cheap
The best analysis of the Q-ratio
that I have seen is by Doug Short. Doug
posted recently: “Based on the latest Z.1 data, the Q Ratio at the end of the
second quarter was 0.93…My latest estimate would put the ratio about 53% above
its arithmetic mean and 59% above its geometric mean. Of course periods of
over- and under-valuation can last for many years at a time, so the Q Ratio is not a useful indicator for short-term
investment timelines. This metric is more appropriate for formulating expectations
for long-term market performance.… the current level is close to the vicinity
of market tops, with Tech Bubble peak as an extreme outlier.” For a full discussion of Q-Ratio with
historical analysis and charts, see…
Speaking of sentiment…
“The ratio of bulls to bears has never (that is ever) been higher according to…Investor's Intelligence.” Chart brief story at…
http://www.zerohedge.com/news/2013-12-11/peak-greater-fools
CORRECTION
There have been several technical indicators that suggest a limited
correction:
1.
%-above the 200-dMA peaked at 9.8% 3-weeks ago and
was 9% 2-days ago.
2.
Sentiment
and %-above the 200-day moving average taken together indicates a
correction as of 2-weeks ago
3.
Statistical analysis of price volume action shows a
typical “calm-before-the-storm price/volume action for the last 3-days.
4.
The market is at the top trend line as of 2-days
ago.
5.
Sentiment is extreme high.
6.
VIX was at a level where corrections have started
about 3-weeks ago.
7.
There has been late-day selling over 1-week, 2-week,
and 1-month periods.
VIX will need to continue rising to confirm a correction. There is no panic either that would suggest a
“real” correction. With the Holiday
coming, any correction that might occur would probably be put on hold until
January.
“Over the past 10 years, the
S&P 500 (SPY) has closed higher than it opened in the month of December 78%
of the time.” (from The Traders Journal
at
http://blogs.stockcharts.com/journal/2013/12/some-seasonal-goodies-for-you-to-unwrap.html)
DO BULL MARKETS DIE IN DECEMBER? (MarketWatch)
Here’s today’s cheerful factoid: No bull market of the last five decades
has come to an end in December.
Unfortunately, a longer term perspective paints a less happy picture:
The number of bull markets that die in December actually is not statistically
different than average.
http://www.marketwatch.com/story/do-bull-markets-ever-die-in-december-2013-12-11
MARKET REPORT
Wednesday, the S&P was down 1.1% to 1782 (rounded).
VIX rose 11% to
15.49. Wednesday, the S&P was down 1.1% to 1782 (rounded).
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of stocks advancing fell to 44%
at the close Wednesday. (A number below 50%
for the 10-day average is generally bad news for the market.)
New-lows outpaced new-highs Wednesday, leaving the spread
(new-hi minus new-low) at minus 117 (it was plus 26 Tuesday). The 10-day moving average of change in the
spread fell to minus 30. In other words,
over the last 10-days, on average, the spread has decreased by 30 each day.
Market internals remain negative on the market.
Market Internals are a decent trend-following analysis of
current market action, but in 2013 (so far), if I had been buying the positive
ratings and selling negative ratings I would have under-performed a
buy-and-hold strategy.
I need a pullback to get back in. Otherwise I will continue to sit out the
party.
MY INVESTED POSITION (NO CHANGE)
I remain about 20% invested in stocks as of 5 March
(S&P 500 -1540). The NTSM system
sold at 1575 on 16 April. (This is just
another reminder that I should follow the NTSM analysis and not act emotionally
– I am now under-performing my own system by about 6%!) I have no problems leaving 20% or 30% invested. If the market is cut in half (worst case) I’d
only lose 10%-15% of my investments. It
also hedges the bet if I am wrong since I will have some invested if the market
goes up. No system is perfect.
I still lean toward getting back in, after a pullback, to
speculate on a final ride to the top.
NTSM did give several buy signals over the weeks of 14 and 21 Oct, but
the market has looked too frothy to rush back in…we’ll see if the market will
pullback so I can join the insanity. If
not, cash is (grit my teeth and put on a false smile) fine.
