munKNEE.com Your Key to Making Money
In the 7 years that the Greedometer has been used there have been zero missed calls,
and zero false alarms. The 7th warning began in January and in late February,the Greedometer gauge reached an epic 7900rpm which is marginally higher than the 7700rpm maximum reading seen 3 months prior to the S&P500 peak in October 2007. [This article outlines the development and successes of the Greedometer and the new Mini Greedometer and what they are predicting for the stock market in 2013.] Words: 1420
So says Jeff Seymour (www.triwealth.com) in edited excerpts from an article* he has written entitled A history of the development and real-world application of the Greedometer.
This post is presented compliments of Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and the Intelligence Report newsletter. You can also “Follow the munKNEE” daily posts on Twitter or Facebook. The article may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Seymour goes on to say in further edited excerpts:
A number of people have asked whether the Greedometer gauge is merely an indicator generated from back testing. Good question! I’m happy to write the answer is no.
It is one thing to create a stock market warning device that works with historical data but it is entirely another to create a device that works in the real world. Let me provide this short history of the development and real-world application (in my advisory practice) of the Greedometer.
The Development of the Greedometer
2006: The Beginning
I began working on the gauge in early 2006, and had an early version working – and deployed in my practice – towards the end of that year. The early version was based on a combination of the S&P500 Profit Margin, S&P500 adjusted P/E, VIX, and ECRI’s WLI which are the 4 adjustable input parameters on the interactive Greedometer gauge tool.
2007 – 2010: Some refinements
More inputs were added over the course of 2007 through its completion in April 2011. I’m not sure completion is the correct term because the gauge has been tweaked and had another input added since then. I suspect I’ll keep searching for more parameters, and continue using new data as a feedback loop to refine the algorithm. This may upset the purists out there and risk labeling the algorithm as back-tested. To this I say: that’s stupid. I’m an applied scientist, not a pure scientist. I’m going to continue to try to find ways to improve the Greedometer algorithm –both algorithms. Why not?
Be that as it may, the early version of the algorithm provided enough insight to assist me in limiting client losses during the 57% S&P 500 collapse (October 2007 to March 2009) — to around 6.5%.
I had sufficient confidence in the early version of the gauge that I ran TV advertisements in January 2009 indicating the Dow would drop to the 6000s that year. As we now know, it did. (Those were 60 second ads that ran on the 6pm news at the local TV station with the largest market share – expensive.)
What came next was the massive QE1 rally from the March 2009 trough to the April 2010 peak. It ran me over (I lost 3%) because the gauge was – and remains – a very slow moving gauge. I was anticipating another drop in mid 2009 that never materialized. It’s too bad I was not further along in development of the Greedometer gauge at the time.
2010: More Parameters Added
More input parameters were added. The early 2010 version of the algorithm provided a warning shortly before and during the S&P500 peak in late April 2010. You may recall 2010. The S&P500 dropped nearly 20% from late April to early July. The collapse was halted by QE2‘s announcement in August. Another bear market rally ensued.
2011: “Final” Product & a Book
In early 2011 there were 8 inputs to the Greedometer gauge, and development was largely done. At the time, the gauge was warning of another collapse (8000rpm- the highest reading ever registered, and as high as the gauge goes). What transpired was another nearly 20% drop in the S&P500 from late April to early October (a far faster drop than the opening salvo of the 2007-09 collapse). That 6 month period was probably my best 6-month period from the point of view of beating the market (relative basis), and on an absolute return basis.
Anticipating an interim rally in July to roughly the same stock market peak as was seen in April, with a crash to follow,…[I sent] dozens of emails to financial news writers in June and July. No one would touch the story. The combination of my being an unknown and the extent of the dire forecast made for a tall obstacle to overcome. It proved insurmountable….[so] I ran an ad in the Wall St Journal. (I don’t mind telling you that ad was pricey!) Here it is.
In the interest of full disclosure, once the Fed’s Operation Twist and the ECB’s LTRO were announced, I got kicked in the shins again and gave up a chunk of the previous period’s gain so be warned: anyone that is attempting to do any short term trading based solely on the Greedometer — don’t do it! The gauge is too slow. The mini Greedometer was designed to help overcome this problem (and even it can only “see” to about 2-3 weeks — a lot can happen in 2-3 weeks).
In autumn 2011 I began researching and writing my first book (Greedometer: Dow 5000 – Why nobody sees it coming) It was self-published in early July 2012. The objective was to provide a thorough explanation for previous recent stock market collapses, to connect them, and to warn of another imminent crash. Sadly – for my book sales – a few weeks after the book was published Dr Mario Draghi (ECB President) pounded the table and threatened “to do whatever it takes” to defend the euro currency experiment. This stopped another stock market collapse in its tracks (that was again warned in advance by the Greedometer a few months earlier). I didn’t see the point in leaving a book for sale that forecast a stock market collapse that would not begin to happen for another 6 months or more. So I took the book off the market.
2012: Introduction of the Mini Greedometer
Tired of not being able to get out of the way of these repeated monetary policy driven bear market rallies, in late 2011 – early 2012 I created a second algorithm – the mini Greedometer – that would output to a faster moving (tactical or semi-tactical) gauge. It was deployed in April 2012. The gauges together warned prior to two collapses that initiated and were stopped by more monetary policy intrusions in 2012.
2012: Another Addition to the Greedometer
There were further minor refinements to the algorithms. A 9th input was added to the Greedometer in late 2012 (and was also the 4th input parameter to the mini Greedometer): the ratio of insider shares sold / bought. I call this the rats jumping ship parameter because a few months prior to previous collapses, I observed extraordinarily high ratios of insiders dumping their shares across the realm of publicly traded companies. In other words an endemic phenomenon — not just a few CEOs selling shares to buy a third home.
2013: A New Book
The rats jumping ship parameter was also the inspiration for [the] name of my second book (Greedometer 2.0. The rats are jumping ship) which comes out in April 2013. Note: I plan on giving away as many copies of the e-book as possible in 1 day. This will be announced in the free section of the Greedometer Newsletter.
In January 2013, the Greedometer rose through 7000rpm. The countdown to initiation of another stock market crash had begun. In late February, the Greedometer gauge reached an epic 7900rpm — marginally higher than the 7700rpm maximum reading seen 3 months prior to the S&P500 peak in October 2007.
(This leaves the 2000-2003 crash. While I have data for most of the 9 inputs on the Greedometer reaching back to January 1999, I was not in the investment business back then. (I had a great career as an engineer in the hi-tech telecoms bubble. Those were the days.) So, yes, the Greedometer sequence for the 2000-2003 crash is entirely based on back-tested data, and not real world experience.)
Conclusion
Let’s take stock. There have been 6 previous Greedometer warnings –5 of them real world, 1 from back testing alone. In the 7 years that the Greedometer – or parts that formed its predecessor – have been used in the real world, there have been zero missed calls, and zero false alarms. The 7th warning began in January. Will this collapse be stopped by more monetary intrusions? Could be. Will they be large enough? Who knows? Those questions are not knowable….yet the risk measures that feed the Greedometer are not relaxing because the Fed’s QE3 & QE4 are in place. Instead they’re showing extreme risk.
There you have it. A history of the development and real-world (not just back tested) application of the Greedometers. It may not look like it, but I just glossed over several thousand hours of my time developing the Greedometers over the past seven years.
Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://www.triwealth.com/a-history-of-the-development-and-real-world-application-of-the-greedometer/
Related Articles:
The Dow has surpassed its all-time record high – set in October 2007 – and the S&P 500 is not far behind? Is this the early stage of another great bull market? Let’s look back at the two previous times when the S&P 500 set new all-time highs and see if we can learn something. Wait…first put your “this time it’s different” glasses on. OK, let’s go. Words: 430; Charts: 1
2. Don’t Ignore This Fact: “Greedometer Gauge” Signals S&P 500 Drop to the 500s by July-August, 2013!
The S&P500 is likely to achieve a secular (long term) peak this month, then drop to the 500s by July-August 2013. This article explains why. Words: 180
3. This Metric Strongly Suggests a Major Correction in the S&P 500 Could Be Coming
History shows that when investors experience a rapid decline in the amount of available cash in their brokerage account to spend/invest quickly such “negative net worth” leads to major corrections in the stock market. Currently such is the case so can we expect another such decline or will it be different this time?
4. Dr. Nu Yu: Formation of S&P 500′s “Three Peaks & a Domed House” Pattern On Course
The S&P 500 is on its way to building a “Domed House” and to challenge multi-year highs, or even all-time highs, in the process. Based on the forecast of my proprietary Long Wave Index, the broad market should be in a short-term bullish time-window until March 21st/13 by which time the “roof” phase of the formation should be complete with the S&P 500 having reached a projected peak of 1570. Words: 634; Charts: 4
5. I’m “making the call” for a market correction of 50% – or more!!
I don’t relish the job of constantly pointing out the risks to the equity markets but since few on Wall Street seem willing (or able) to do this, I’m “making the call” for a market correction, as enough variables have aligned to indicate a high likelihood of stocks heading downwards from here. Words: 1203; Charts: 6
6. Watch Out For Falling Stocks! Here’s Why
The stock markets make no sense. They have literally lost touch with reality. Divergences between fundamentals, confidence and the valuation of markets are large [and, as such,] cannot last for long….The only question is how…and how quickly….this correction occurs. Words: 261
7. You Need to Stay in the Stock Market Despite an Impending Economic Collapse – Here’s Why
You need to stay in markets despite an impending economic collapse. [Really?! Yes, really.] Normally such an expectation would be addressed by getting out of the way of the oncoming disaster and taking ones chips off the table [but,] in this situation, there is no place to hide. Low-risk assets, like bonds and near-cash, produce little to no return…and the threat of rising interest rates and inflation make them dangerous. Higher risk assets are unavoidable, given current conditions. [Let me explain further.] Words: 830
8. You Can Insure Your Portfolio From Potential Capital Loss – Here’s How
Most everything you’ve heard about investing from the mainstream media, your mutual fund advisor and your tax accountant is a lie. You’ve been told…that the entire point of portfolio diversification is to mitigate downside risk yet when the market experiences the inevitable decline, every sector pushes significantly lower – and your “diversified” portfolio suffers as a result, [right? Well, there IS a better way.] Hear me out. Words: 895
9. The U.S. Stock Market Is Overvalued By More Than 50%! Here’s Why
Key stock indices are becoming significantly overpriced. The value of the U.S. stock market stands at about 133% of GDP. The average for the past 60 years has been around 82%. By this measure, the U.S. stock market is overvalued by more than 50%! Words: 398
10. Stop! Don’t Forget Market Risk – Remember What Happened in 2000 & 2007/8.
Investors are more bullish now than at any time since 2002 but the current rally has not been fueled by improved prospects of actual growth and wealth creation. Instead, it’s mostly due to:
- investors desperate for income denied them elsewhere by central bank policies;
- printed stimulus cash seeking a home and
- sheer technical momentum
but nowhere do they seem to be considering market risk – the risk that your investment will lose value because it gets dragged down in a falling market. Words: 615
11. Insider Trading Suggests That a Market Crash Is Coming
What you are about to read below is startling. •Every time that the market has fallen in recent years, insiders have been able to get out ahead of time… •[What] is so alarming [this time round is] that corporate insiders are selling nine times as many shares as they are buying right now. •In addition, some extraordinarily large bets have just been made that will only pay off if the financial markets in the U.S. crash by the end of April. •So what does all of this mean? [Could it be that they] have insider knowledge that a market crash is coming? Evaluate the evidence below and decide for yourself. Words: 570
At some point we are going to see another wave of panic hit the financial markets like we saw back in 2008. The false stock market bubble will burst, major banks will fail and the financial system will implode. It could unfold something like this: Words: 660
13. Ignore Wall Street Cheerleaders: Market Technicals, Fundamentals & Other Info Says Otherwise!
[In spite of what] the typical Wall Street cheerleaders, I mean strategists, are predicting, we see the equity market ever more closer to its cyclical top, miners about to retest a major bottom and hard assets with a new catalyst. [This article analyzes 9 pieces of information, complete with charts, that show what is actually going on in the marketplace at this point in time and what the short-term future holds.] Words: 930; Charts: 814. 5 Sound Reasons Investors Would Be Better Off On the Sidelines Than In the Market
New year festivities have continued on the stock market even as the Christmas trees have been put away. The “death of the fiscal cliff,” not horrible job numbers and supportive comments from Mario Draghi on the other side of the pond have led to bold and bullish behaviors over the last three weeks. While no one can predict the exact peak, here are five reasons you’re better off on the sidelines than in the market.
15. These Charts Suggest a Possible +/-60% Decline in the S&P 500 by 2014
J.P. Morgan Asset Management has developed a chart showing the past two cycles in the S&P 500 highlighting peak and trough valuations. At face value it is very alarming as it suggests a potential decline of somewhere in the vicinity of 60% over the next year or two and concurs with previous innovative trend analyses included in this article. Charts: 4
Based on the latest S&P 500 monthly data, [my analyses indicate that] the market is overvalued somewhere in the range of 33% to 51%, depending on which of 4 indicators I used. This is an increase over the previous month’s 31% to 48% range. [Let me explain the details.] Words: 475
17. Goldman Sachs’ Leading Indicators Signal Steep Market Crash Ahead
Goldman Sachs reports their Global Economic Indicators (GLI) show the world has re-entered a contraction and…is predicting a market crash worse than that of the early 90′s recession and one slightly less than the sell-off at the turn of the millennium. [Below are graphs to support their contentions.] Words: 250
18. Will a Black Swan Event Cause the S&P 500 to Drop by 40%?
Mark Spitznagel…warned the other day that the S&P 500 could lose 40% of its value in the next couple of years. So what black swan event could cause the S&P 500 to drop down to 760? [Let’s take a closer look.] Words: 856