Head For The Hills

To say the market is behaving badly would be an understatement. I have moved all of my money out of mutual funds. Take a look at the chart below (click on image). As you can see the price bars are red, the moving average is red and the momentum indicator is red. If you don't understand the significance of this please read through last Saturday's post. The long term direction is now down. Unfortunately I can't elaborate much more at this time due to a family emergency. Keep watching on a daily basis for any potential changes.

Jinkies!

I could have used a stronger word to describe what happened in the market last week but this one is more family friendly:} You may recall that last week I stated that I was back in mutual funds. This was primarily due to the fact that the S&P Index closed above 1110 last week, a very important price level. The expectation was that for the next several weeks there was a high probability of a sustained move up. Well, price action this past week may have thrown a wrench into that. The index closed lower at 1076.76 this Friday. It is still possible that we may eventually see a rally due to the fact that the long term trend is still up. But after last week it is conceivable that we may see further short term weakness before that happens.

IMPORTANT ENHANCEMENT...From now on I would highly recommend you check the blog after 7 PM EST Monday - Friday. There will not always be a post but when there is it will be an important one, informing you of an important trend change. No longer will you have to wait until the weekend to find out if you need to make an adjustment in your portfolio. I will still continue with the Saturday and end of month updates as usual.

FOR YOUR EDUCATION...Up until now I've hesitated to show any of my proprietary charts. After all, the knowledge I've gained over the last 20+ years is too valuable. I don't want to just give away my secrets. However, I also understand that some of you may be thinking "Is this guy just flying by the seat of his pants"? Just to help convince you that I'm not I'm going to share with you today one of my most important charts. As I shared with you in one of my April articles I look mainly at four elements to determine the long term direction of the market; price, volume, momentum and market breadth. Of these four I place the most weighting on price action. The chart I'm going to share with you today (click on image) focuses on price action and momentum. The most important things you need to know about this chart:



1) Notice there is an upper pane with what appear to be blue and red bricks. This is actually a method of charting price I discovered which Japanese traders use. In simple terms this technique plots price movement and does not take into consideration the time element. When price moves a predetermined distance up a blue bar forms. When price moves the same predetermined distance down a red bar forms. In my view the advantages of using such a chart over traditional time based charts are many but the most important is that it is much easier to analyze price movement.

2) In the upper pane there is also a moving average which is blue when rising and red when declining.

3) In the lower pane is a momentum indicator. Notice this also turns blue when rising and red when declining.

4) There are two simple rule I use with this chart. A) If the trend has been down then the trend will change to up ONLY if a blue price bar forms, the moving average turns blue and the momentum indicator turns blue. B) If the trend has been up then the trend will change to down ONLY if a red price bar forms, the moving average turns red and the momentum indicator turns red.

IMPORTANT NOTES: Notice I've highlighted the last four major trend changes on the chart with a vertical cursor and arrow. Also note that the long term trend remains up (green arrow) even though the last bar on the chart is red. This is due to the fact that the moving average and momentum indicator remain blue. Have a great weekend everyone. If you have any questions or feedback, please comment.

Back In

Greetings everyone. I stated last week the indicators that I look at pointed to indecision so I moved my money to the sidelines. I also stated that there was a 50/50 chance the market may rally. Well, it did. The S&P Index closed at 1117.51 on Friday. In hindsight it would have been great to get back in last week. But as I stated last week, when all factors do not align, the market could just as easily have dropped last week. It's all about probabilities. The good news is that this week everything is pointing up which indicates a high probability of a sustained up move during the next several weeks . Since the monthly arrow is still up (green) I'm moving back into mutual funds. I will continue to monitor the markets on a weekly basis because things are rather volatile right now.

FOR YOUR EDUCATION...Originally I had planned on unveiling the results of my weekly timing system in this week's article but life got in the way. I spent a lot of time at the hospital visiting my ailing father. Next week will hopefully be a little less hectic so I'll look to share more with you next Saturday. Have a great weekend and for all you Fathers out there...God's richest blessings.

What Now?

If you recall in last week's article I indicated that I moved all my 401-k out of mutual funds. This even though the monthly arrow remains green. If you missed that, please go back and read it to be enlightened as to the reasons why before continuing. This week the market did show some strength but my analysis indicates indecision right now. Half of what I look at suggests there could be a rally over the next week or two and the other half indicates weakness. My experience has taught me that when there's indecision, it's best to stand aside and wait for the market to prove itself. Each week I'll monitor the market and look for all factors to line up. That will be the best time to get back in, when the probabilities favor an extended rally.

FOR YOUR EDUCATION...This week I thought I would address the question of whether or not it's possible to make better returns than what money market funds have to offer during protracted bear markets, the likes of which we witnessed from October 2001 - March 2003 and November 2007 - March 2009. For those who have all their money 401-k plans unfortunately there is not a lot of flexibility. I would suggest checking with your plan administrator to find out which type of funds perform best during those times. In a future article I will post the results of testing the types of funds which are available in most 401-k plans to see if any offer superior returns.

For those of you with IRA's who are not familiar with exchange traded funds (ETF) I have good news for you. As you may know IRA plans allow much more flexibility in investment choices which includes the ability to invest in ETF's. I would suggest you "google" ETF for a more detailed explanation of what an ETF is but for our purposes I'll give a basic definition and the most important advantages that an ETF has over mutual funds. An ETF is designed to be similar to a mutual fund in the sense that it diversifies risk into many different stocks. The two most important advantages over a traditional mutual fund are: 1) An ETF is traded on a stock exchange just like a stock. So you can exit a position intraday. Mutual funds don't offer this flexibility. 2) Fees are lower with ETF's. But here's the most exciting part. There are a class of funds called "inverse" or "bearish" funds. Simply put these are funds which are designed to move in the opposite direction of a typical ETF or mutual fund, which is designed to profit only if the market moves up. One such fund is the Proshares Short S&P 500, ticker symbol "SH" which trades on the NYSE. Remember my long term model gave a red arrow in November 2007? Those of you with IRA plans could have moved all of your money into this fund (SH) at a price of 60.56 in November 2007 and exited at a price of 78.25 in March 2009 when the arrow turned green again (click on image below). This would have earned you a return of 29% over a 16 month period. Much better than the puny returns a money market would have paid, wouldn't you agree?



That's all I have for this week. If you have any questions or feedback regarding this or any other subject, please comment. Have a great weekend.

That's All I Can Stands, I Can't Stands No More!

Remember that familiar refrain? For those of us who are old enough you''ll certainly recognize that as Popeye's lament just before grabbing a can of Spinach which will empower him to dispose of his nemesis Bluto. Well, my response to what's been happening on the stock market is similar. I have moved all of my money out of mutual funds into money market funds. I have done this even though officially we won't know if the green arrow changes to red until the June 30 close. Please click on the image and I'll explain. Notice all the red down arrows from monthly peaks to monthly valley lows between April 2003 and November 2007. During this long term "green arrow" period the maximum monthly decline was only 5%. In November 2007 the long term arrow changed to red and correctly anticipated a bear market. Notice the maximum monthly declines between November 2007 and March 2009 were 15%, 10%, 30% and 19% respectively. Imagine the devastating effect on your account had you stayed in! Ok, now shift your focus to the far right. The S&P Index closed at 1064.88 on Friday, down 10% from the April 30 close. The last time the market declined this much from a peak was in January 2008. This came two months after the long term arrow changed red in November 2007.












So what does all this mean? Until now the long term methodology would have had us out of the market before the "larger than normal" corrections started occurring. As I mentioned last week all the elements of a long term trend change are still not present so the long term green arrow remains in effect. HOWEVER, our primary concern is ALWAYS capital preservation. There is a LOT of time remaining until the June 30 close. It is conceivable the market could decline much further between now and then. Remember the April 23 article in which I presented a table showing the percentage return needed in order to recover given percentage losses? Right now the S&P Index is down 10% from the April 30 high. This means that a return of 11% is all that is needed to recover that loss. The last thing I would like to see is a decline of 15% or more which would require much larger gains just to get back what was lost. It only makes sense to me to sit on the sidelines for now. In each Saturday post between now and the Wednesday, June 30 post I will make a determination as to whether or not it's safe to get back in mutual funds.

FOR YOUR EDUCATION...As I mentioned in last week's article I am nearing completion on research based on weekly and daily charts which may allow us to optimize the returns achieve using only the monthly charts. Also, some have asked whether there's a way for those who have IRA's to make returns superior to a money market fund during bear markets. As you may know 401-k plans don't offer such flexibility. But most IRA plans allow you to invest in ETF's (Exchange Traded Funds). There are bullish ETF's that will allow you to profit during market rallies and bearish ETF's that will allow you to profit during market declines. More on this in the weeks to come. Stay tuned and have a great weekend!