My Bull Market / Bear Market Chart

It is the beginning of a new quarter and time to review the market in relation to its past trading history.

My Bull Market / Bear Market Chart
This chart is easy to understand –
It is in a Bull Market if price is above the Red and Blue Lines. Pullbacks into the lines are to be bought.

It is in a Bear Market if price is below the Red and Blue Lines. Rallies into the lines are to be sold and shorted.

So the markets are still in a Bear and I am still on defense. When things change, I will change.

Bottoming is a Process
The lows for the Bear Market of 2008 may be in. But bottoming will be a process.
I want to show you the process of how the markets bottomed in the 2000-2003 Bear Market. I also want to show you the indicators I use to judge how the stocks which make up the markets are doing.

2002-2003 Bottom
Here is a chart of the 2002-2003 bottoming process. There were three bottoms over an 8-month period. I do not want to focus on price. Instead, I want to focus on the two indicators below price –

$NYA200R – Percent of NYSE Stocks above their 200-day Moving Average
$NYHGH – Number of NYSE Stocks hitting New 52-Week Highs in Price

See how few companies were breaking above moving averages and hitting new highs, while the market was violently trading between 775 and 950? That was 8 months of violent trends straight up and straight down!
That trading range is 22.5%. You could make a lot of money if you timed the bottoms and sold the tops…
You can trade it. I am not interested in speculating.
The trend is still down, until proven otherwise, so I am still looking to short rallies.

In March 2003, the market hit its final lows and then broke out of the trading range as New Highs and stocks trading above their 200-day exploded! Thus confirming the new Bull Market. The big boys showed up and started to commit real money and the 4-year Bull Market was off to the races.

Current Market Conditions
The market may have already set its low and tested it once. But it is only now in Month 3 of the bottoming process. Stocks hitting New Highs and Stocks above their 200-day averages are still nowhere to be found. So I don’t think Big Money has shown up yet.

Modified Bull Market / Bear Market Chart
I want to show you a couple key points on how the markets are trading in relation to the 2000-2003 Bear Market. I have included $NYA200R and $NYHGH on this chart.

The low monthly close of the 1998 Financial Panic (Green Line) also capped the rallies of the 2002-2003 bottoming process. That level (950) is not much above current price.
See how the 2002-2003 lows stopped the current selloff dead in its tracks? The Green Line may cap this rally.

I think the key to markets that crash is that they need time to repair the damage of the crash. The best way to graphically illustrate this is to use moving averages like the Blue Line.

The 2000-2003 Bear Market hit is low in July 2002, at 775. In July 2002, the Blue Line (12-Month EMA) was at 1078. It took 8 months for the Blue Line to catch up to price. The key signal for the end of the Bear was the explosion in the number of New Highs and Stocks crossing above their 200-day, while price was breaking above the Blue Line (Black Arrows). 8 months of healing was enough and Big Money showed up and bought!

Do you see where the Blue Line is right now, in relation to price? The low in November 2008 was 741, while the Blue Line was at 1216! The Blue Line is falling at a rate of 46 points per month, so here is a chart of where it should be in future months. I put in the yellow box at 940 in May 2009, because the market closed today at 934. So we may have another 4 months until price crosses and Big Money starts buying in earnest.

I have no clue when the Bear Market ends (nobody does).
I know that history tells me that at best, price should retest the lows of November 2008. I also know that I have not yet seen any new leadership being bought on big volume. Finally, I know that I have methods for evaluating the internals of the market to determine when it is time to reallocate money back into stocks.

When big money shows up, I will buy too. For now, I wait. And look to short a rally that has a high probability of failing.

You MUST read These 2 Op Eds in the NY Times

It is not often that I recommend that you read and Op Ed piece, but there were two in the New York Times this weekend that must be read.

http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?em

http://www.nytimes.com/2009/01/04/opinion/04lewiseinhornb.html?ref=opinion

Both pieces are written by Michael Lewis, who wrote “Liar’s Poker” (one of my all time favorite books) and David Einhorn.

The pieces go over all the issues I have been griping about for the better part of a year. Read them.

The fact that these issues are now being raised in the Sunday Edition of the New York Times means that the public is not pleased with Washington and change is coming to the status quo – the one which now robs the tax payer to enrich the bank executive.

I hope that these pieces finally stir up the public and start to put an end to all the games going on right now in the markets!

+2.82% for 2008

I did the math on the accounts I actively manage and the total return on all the money was +2.82%, net of fees. Normally I would say that that number stinks, but considering the following, I am okay with it –

The Fed did everything it could to trump Short Sellers, even making the practice illegal for several weeks

The 3-month US Treasury Yield spend most of 2008 below 2% and the last 4 months below 1%

Accounts were in 40% Short Term Treasuries almost all of the year

Accounts were at least 30% cash most of the year

I don’t remember a time where accounts were more than 40% invested

2008 was all about preservation of capital. The goal was to make sure that clients had the assets to allow them to continue to live their 2007 lifestyle in 2008. I lived through the Tech Wreck in 2000-2003 and promised to NEVER life through that again. I achieved my goal.

The S&P 500 was down -37.5% in 2008. That is its worst year since 1937, when it was down -37.6% (do you think it is a coincidence that the market rallied just enough in the last 2 days of trading to beat the returns of 1937? That would have been a marketing nightmare for the mutual fund industry).

So I beat the market by over 40% in 2008! I can stay in cash for years and the market will have to rally 80.6% to get back to even with me…

2009
I expect to have to take 2009 day-by-day. I expect it to be another grind. My most optimistic case for 2009 is a successful retest of the November 2008 lows. My most pessimistic case for 2009 is that the Treasury markets refuse to finance the $2 Trillion the US will need to borrow in the first half of 2009 and the markets have another large crash.

My crystal ball is cloudy and I have no clue how the year ends. I don’t even have a clue how next week ends. I will continue to study and try and be on the side of Big Money.

Right now, Big Money has been buying defensive shares – Healthcare/Biotech, Utilities and Consumer Staples
If and when Big Money starts to bet on an economic recovery, then they will start to buy the more cyclical shares, which they have been spurning – Financials, Technology, Industrials and Transports

Until Big Money starts to accumulate risky assets, with big flows of money, I will continue to take things one day at a time.

I Have Stop Orders in to Go Short

I figured that they could take the markets up to the top of the recent trading range. I actually figured that we would overshoot the tops of the range to suck in a bunch of Stop Buy Orders. That has occurred.

Most people are home on vacation, so the volume is light and the last few days of each month/first few days of each month have a positive bias, because retirement plans invest payroll deposits.

A recent phenomena is that Pension Funds do significant reallocation of assets in the last few days of each month. That has meant they have sold US Treasuries and bought Stocks and Commodities.

So I am taking this rally with a grain of salt and actually have but in Stop Buy Orders to buy the Inverse (Short) ETFs above current prices. I like DUG (-2x Energy Stocks) and SKF (-2x Financials). I sold SKF in the mid $120’s last week and now have orders in at $106.

Sold

This morning, the markets got down to the hourly support levels for the recent trading ranges, so I sold the remainder of my SKF (-2x Short Financials) and all of my PSQ (Short NASDAQ).

I figure that they won't let things crack this week.

NASDAQ
The NASDAQ (QQQQ) has been stuck in a trading range since early December. Here is the hourly chart of the QQQQ with volatility bands. The +/- 0.5 band (Black Lines) has defined this trading range.
I covered my shorts on the NASDAQ this morning, by selling my PSQ (Short NASDAQ).
The NASDAQ will break out of this trading range soon. I’m just don’t think it will occur this week.

Financials (XLF)
The Financial Index is now testing the low of its recent trading range at $11.50 (Orange Line). $11.50 is support, until proven otherwise. So I sold my SKF (2x Short Financials).

These trading ranges may break down tonight, or support may hold. I have no clue.
But I know that if support holds, yet again, then I would be really ticked at myself for not booking small profits.

I am now operating under the assumption that they do not want prices to fall hard in the last week of the year.

I will scan charts tonight to see if anything is setting up. From what I have seen so far, there may be a short set up in Gold and US Treasuries. We’ll see if big money shows up and the trades trigger.

2009 The Year of the Pork Barrel

I want to start off with my 2009 prediction...
My best guess is that 2009 is the Year of the Hog on the Chinese calendar, because that $1 trillion “Stimulus Package” will be the biggest pork barrel transfer of wealth from taxpayer to political cronies in the history of mankind.

Madoff
I have been telling clients all year that Hedge Funds have a history of inflating their performance numbers and then fessing up by taking an artificially large loss early in the following year. The fact that any entity in the investment community has the capability to fudge performance numbers is a really by indication of how lax regulations are and how bad oversight is.

The implosion of the Madoff Hedge Fund is the canary in the coal mine for the Hedge Fund/Fund of Funds/Alternate Investment/Managed Futures industry. Either regulators will have to start taking the auditing of Hedge Fund performance numbers seriously, or investors will pull their money from that investment product.

The big question for me right now is – how much of the performance numbers for Hedge Fund and Managed Futures Indexes were the result of Madoff’s bogus numbers? The big argument for owning this asset class is that it performs well during times where stocks are down. This improves the overall performance of the portfolio during bad years.

But what if a significant amount of the outperformance for Hedge Funds during down years was actually generated by the bogus numbers of Madoff’s Fund? I am going to email some people about this topic and will relay their thoughts to you.

On to the Markets
I hear a lot of people on TV telling me that the markets have found their “bottom”, that stocks are “cheap” values” “bargains” and that their targets for 2009 are someplace well above where we are now. My crystal ball is cloudy… I have no clue where we end 2009, and neither do the guys on TV.

I just want to look at the charts of the sectors to gauge the health of the markets, as we enter 2009. I see two patterns right now. Indexes have either made narrow rallies into declining moving averages (wedges) or they are stuck in narrow trading ranges. Now, things can change very quickly, but neither pattern is very promising.

Wedges
Here is the chart of the S&P 500 Index (SPY). I see a bounce up into the declining 50-day moving average (Black Line) after a crash, on declining volume (Red Line and Arrow). That is very bearish.


Basic Materials (XLB), Financials (XLF), Industrials (XLI), Technology (XLK), Retail (XRT), Housing (XHB) and Semiconductors (SMH) each have patterns similar to the S&P 500.








Healthcare (XLV) and Consumer Discretionary (XLY), have similar patterns, but have held up better, in relation to the October lows.

Couldn’t Even Bounce
These sectors could not bounce, while the markets were able to make sharp bounces from recent lows. That is not a good sign for these sectors – Energy (XLE), Consumer Products (XLP) and Utilities (XLU).





Individual Stocks
Here are some stocks that scare me as we enter into the new year.

Microsoft (MSFT) is still well below key resistance ($20.68). It can’t get even get to the 50-day and has appeared to have broken its recent uptrend. I just saw some guy on CNBC tell viewers that Microsoft is now a “utility” and is his low risk pick for 2009. Who are these clowns who run these TV shows…

American Express (AXP)
Here is another stock that can’t get anywhere near its 50-day. I consider AmEx to be an important company. I don’t think its performance is a good thing for the markets.

Apple (AAPL)
This former darling looks like it is setting up for another leg down.

Leaders
Now, onto the leading names, with strong growth, breaking out of trading ranges on heavy volume.

There aren’t any…

Keep Your Losses Small

I wanted to follow up on my last post.

Small losses are a part of the business. Not all setup that trigger become profitable. I always assume that I will have more losing trades than winners (I am not sure if that is the case), so my losses per trade have to be smaller than my gains per trade.

Crude Oil
I got stopped into Oil (USO) and then got stopped out at $31.80 yesterday. USO has been as low at 29.13 this morning. I still expect a real strong bounce on Oil at some point. To give you example of the power of the potential bounce, Natural Gas (UNG) has rallied 9.5% intraday. So I will be looking for other setups in the future.

Financials
A few days ago, I added to my short positions on Financials via SKF at $109 or so. I took half of my SKF out this morning. That gives me about a 3% exposure to SKF.

NASDAQ
I had stops in to buy QQQQ (Bullish NASDAQ) and PSQ (Bearish NASDAQ). PSQ triggered and I now hold it. PSQ did its annual distribution of dividends and capital gains today. The distributions were a total of $4.2547 per share. So I am up a few percent on PSQ. The distribution will hit my account on 12/30.