Trying to predict markets more than a couple of days into the future is nothing more than a “wild ass guess” at best but, that being said, we can make some reasonable assumptions about potential outcomes based on our extensive analysis of these 6 specific price trend and momentum indicators.
The above introductory comments are edited excerpts from an article* by Lance Roberts (streettalklive.com) entitled Sell Signal Triggered.
The following article is presented courtesy of Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) has 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. This paragraph must be included in any article re-posting to avoid copyright infringement.
Roberts goes on to say in further edited excerpts:
I rely heavily on price trend and momentum because it tells you what investors are doing versus what you “hope” will happen [and] it is from this basis that I developed…[the following] 4 signals to drive portfolio allocation models…based on weekly data to smooth out portfolio volatility and position turnover.
Alert Signal – Pay attention
Sell Signal 1– Reduce equity allocation by 25%
Sell Signal 2– Reduce equity allocation by 25%
Sell Signal 3– Reduce equity allocation by 25%
- Ride the Market Waves With These 6 Momentum Indicators
- Yes, You Can Time the Market – Use These Trend Indicators
If all of the sell signals were in place it would only reduce the allocation to equities in portfolios by 75% in total [and, truth be known,] I would most likely never recommend going below that level of exposure. [Why? Because] fully exiting the markets leads to emotional biases that make it extremely difficult to re-enter markets near bottoms. By always maintaining a small piece of exposure to equities in portfolios, it is easier to add to existing positions when the sell signals above begin to reverse back to buy signals.
A history of the S&P 500 & relevant “initial sell signals”
The chart below shows the history of the market and the relevant “initial sell signals.”
(The selloff in the market over the last couple of weeks was sharp enough to trigger both sell signal #1 and #2.)
Our portfolio allocation model
The portfolio allocation model, the same as we use for the 401k plan manager below, shows how the migration works to reduce overall portfolio risk and conserve investment capital.
The current “sell” signal does not mean “panic sell” everything you own in your portfolio and run to cash. As shown in the chart above, these initial sell signals can be short lived particularly when the Federal Reserve is still intervening in the markets.
Furthermore, by the time a WEEKLY sell signal is issued the markets are generally OVERSOLD on a short term basis. It is very likely, that a rally will ensue in the markets over the next week back to resistance which could be used to re-balance portfolios and reduce risk more prudently.
The chart below is a daily chart of the S&P 500 going back to the beginning of year.
There are several very important things to note.
- ALL indicators are currently “oversold” on a short term basis. This oversold condition provides the “fuel” necessary for a stock rebound such as was seen at the end of last week.
- The short term moving average (red dotted line) has now crossed below the longer duration moving average which now creates strong resistance at 1940. Any rally back towards 1960 next week should be used to re-balance portfolios. (I will provide guidelines below for this exercise.)
- The current correction is very similar in nature to what was seen in February of this year. The main difference between that correction and now is the continued extraction of the Federal Reserve from the markets. Less liquidity suggests that the easiest direction for prices in the near term is likely lower.
- It will likely require a move in the markets back to “new highs” in order to reverse the current sell signal. While this could happen, it is likely that with the Federal Reserve extracting liquidity from the markets – the highs for the markets this year have already been seen.
It is very likely that the recent sell-off has reached a short term bottom. A rally back to the moving averages is very likely. A failure at those levels will be very important.
How Big Could a Longer Term Correction Be?[To arrive at an answer to that question below are a number of analyses of the market:]
1. A simple trend-line analysis
The first chart is a simple trend-line analysis of the weekly S&P 500 index.
As shown, the bull market trend that began in 2009 remains currently intact (dashed blue line).
- A correction from current levels back to the bull market uptrend line, which occurred in both 2011 and 2012, would entail a decline to 1700. That would be a 14.6% decline from the recent intra-week market peak. While not technically a “bear” market, for many investors it will certainly “feel” like one.
- However, in December of 2012, Ben Bernanke launched the latest round of monetary stimulus at a whopping $85 billion dollars a month. At that point, the markets elevated away from the previous bullish trend to establish a new trend (black dashed line). At the current time the intersection of that elevated bullish trend, which has repeatedly acted as support for the markets since the end of 2012, is at 1900. There is also some more minor support just below at 1850.
2. A Volatility (VIX) Index Analysis
Currently, there seems to be nothing on the horizon to intensify the current “pullback” into a selling “panic.” Geopolitical events, weak underlying economic data, and extremely stretched market valuations have posed no immediate threat to the markets. This is clearly shown in the 6-month average of the Volatility (VIX) Index (a 6-month average is used to smooth the volatility of the volatility index.)
The 6-month average of the VIX is currently at the lowest levels of this century. Understand that it is NOT the decline in the VIX that is important, but rather the point at which the 6-month average turns higher. If you look at the chart you will see that 6-month average of the VIX turned, and begin to trend higher, just prior to the peaks of the market in 2000 and 2007. The same occurred in 2011 and 2012.
Currently, the 6-month average of the VIX is still trending lower which suggests that the current correction, at this point, is just a pullback within the current uptrend. However, as you can see above, that can change very rapidly.
Should volatility begin to accelerate, this would be coincident with a much larger correction that would bring into focus the 2009 bullish trend line, as shown in the chart above.
3. A “Fibonacci Retracement” analysis
Another way to look at potential corrections is to use a “Fibonacci Retracement” analysis as shown in the chart below. As defined by Investopedia:
“The Fibonacci retracement is the potential retracement of a financial asset’s original move in price. Fibonacci retracements use horizontal lines to indicate areas of support or resistance at the key Fibonacci levels before it continues in the original direction. These levels are created by drawing a trendline between two extreme points and then dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.”
As identified in the chart, the 23.6% retracement level basically confirms the 2009 bullish uptrend line around 1700 currently. If the market begins a more serious correction, this level should provide support for a short-term bounce that should be used to “sell” into to decrease equity risk in portfolios. The bounce from this support will most likely fail in short order. The markets will then either:
- retest support at the bullish uptrend/23.6 retracement level and turn higher allowing equity risk to be increased, or
- support will be violated, and the market will likely seek out the 38.2% retracement level at 1490.50. Such a decline would increase the magnitude of the correction to 25.14%. This would officially push the markets into “official” bear market territory.
While it is entirely possible, it is unlikely that (2) will happen outside of the onset of a recession. When the eventual “recession” does return to the economy, it is very likely that the markets could test the lower Fibonacci bands of 50% and 61.8% retracement levels.
4. A “2-standard deviation” analysis
The chart below, providing a “2-standard deviation” analysis of the weekly chart of the S&P 500…[shows that] it is unusual for the markets to consistently push 2-standard deviations above the 50-week moving average for a long period without a correction back to it. A correction back to the 50-week moving average at this point would entail a decline to 1829.31, a 8.12% decline from the recent peak.
Importantly, a decline to 2-standard deviations below the 50-week moving average would converge at the 1700 level, which as discussed above, is also home to the 2009 bullish trend line and the 23.6% retracement level.
5. A “relative strength” analysis
The lower part of the chart above is the “relative strength” index (RSI). This index has turned lower as of late with the recent correction and is currently posting a reading of 60. Levels of 80 represent “overbought” markets and levels below 40 represent periods of being “oversold.”
I have notated (vertical red lines) points at which the RSI had peaked and turned lower. Historically, the RSI tends to oscillate between 80 and 40 on the index. However, since the beginning of the latest round of Quantitative Easing (QE) by the Federal Reserve, the range has remained between 80 and 60.
6. An analysis of the market relative to the Williams %R indicator
The same anomaly is shown in the next chart which is an analysis of the market relative to the Williams %R indicator.
The Williams %R indicator, like RSI, is a representative of “overbought/oversold” conditions in the market by measuring changes in the momentum of prices over a specific period of time. From the beginning of 2009 to the end of 2012 (highlighted in gold), the index oscillated between levels of -20 or less, “overbought,” to -80 or greater,” oversold.” However, beginning in 2013 the oscillation has remained tightly constrained between ZERO and -30. This is unsustainable longer term and a break below the -30 level on the Williams %R will likely indicate a more severe deterioration in the markets.
Some reasonable assumptions about potential outcomes of a market correction
There is no exact answer to the potential magnitude of a correction in the markets. “This” depends on “that” to occur which is why trying to predict markets more than a couple of days into the future is nothing more than a “wild ass guess” at best.
However, from this analysis, as shown in the table below, we can make some reasonable assumptions about potential outcomes.
Currently, there is a convergence of points between 1650 and 1700 on the index that will present rather important levels of support for the market currently. Not only would a correction to such levels be a “healthy” event in order for the current “bull market” cycle to continue, it would also likely present a fairly decent opportunity to increase equity exposure in portfolios.
As I noted above, a correction of 14-16% is far outside of the expectations of the market currently. Such an event will likely “feel” much worse to individuals that have inadvertently taken on excessive risk in their portfolios by “chasing” markets and “yield.”
However, while I show that the greater levels of a potential correction will likely be coincident with a recession, as they have historically been, it does NOT mean that a recession is required. A sharp rise in interest rates or inflation, a downturn in economic growth, deflationary pressures from the Eurozone, or a credit related issue in the “junk bond” market could all do the trick.
No one will know, until in hindsight, what the catalyst will be that ignites a “panic” in the market. This is why we do analysis to understand the potential risks in the market as compared to expected reward. What is abundantly clear is that the potential “upside” in the market is currently outweighed by the “downside” risk. It is important to remember that our job as investors is to “sell high” and “buy low.” Unfortunately, for most, it is exactly the opposite.
There is one important truth that is indisputable, irrefutable, and absolutely undeniable: “mean reversions” are the only constant in the financial markets over time. The problem is that the next “mean reverting” event will remove most, if not all, of the gains investors have made over the last five years. Hopefully, this won’t be you.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
Follow the munKNEE!
Market Cap to GDP is a long-term valuation indicator that has become popular in recent years, thanks to Warren Buffett and it is now at the second highest level in the past 60 years – even surpassing the levels reached in 2007. Read More »
Is this stock market decline the “real deal” (that is, the start of a serious correction of 10% or more) or is it just another garden-variety dip in the long-running Bull market? Read More »
The 10-year yield’s Death Cross has proven to be a pretty significant risk-off shot across the bow over the last decade and this matters today because the 10-year yield put in a Death Cross back in early April of this year. So what does the 10-Year’s Death Cross mean for stocks this time? Read More »
The financial markets are drastically over-capitalizing earnings and over-valuing all asset classes so, as the Fed and its central bank confederates around the world increasingly run out of excuses for extending the radical monetary experiments of the present era, even the gamblers will come to recognize who is really the Wile E Coyote in the piece. Then they will panic. Read More »
To ignore all the compelling charts and data below would be irresponsible and, as such, will NOT go unnoticed by institutional investors. Such bearish barometers for stocks worldwide will, unfortunately, be ignored by the ignorant and gullible hoi pollo causing them severe financial loss as investor complacency in the past has nearly always led to a stock market crash. Read More »
In their infinite wisdom the Fed thinks they have rescued the economy by inflating asset prices and creating a so called “wealth affect”. In reality they have created the conditions for the next Great Depression and now it’s just a matter of time…[until] the forces of regression collapse this parabolic structure. When they do it will drag the global economy into the next depression. Let me explain further. Read More »
Brace yourself! The stock market is ripe for a nasty selloff according to a number of politicians and even more market pundits – but not so fast. Two very reliable long-term recession indicators strongly suggest that a correction – or worse, the end of the bull market – is highly unlikely given the current state of the economy. Let me explain. Read More »
Despite a long list of major risks to the global economy, the trend for the stock market is still UP until proven otherwise. At this stage it is absolutely critical to be cautious and watch for signs of a market correction or peak, but it is our view that a recession won’t take hold until the following 6 key indicators are triggered. Read More »
We look at this market and we see “too much.” Too much divergence, too much complacency, too much embedded downside risk…the list goes on and covers many things. Let’s make the rounds and see what we find [and what it means for the immediate well-being of the various stock markets.] Read More »Read More »
There are a number of potential pitfalls out there for the market but, right now, the behavior of the main catalysts for a major correction suggest that there continues to be more right than wrong with the market. Let me explain. Read More »
Some investors are sure we’re heading for a crash because we’ve had such an uninterrupted rise in stocks but these things can last much longer than most people realize. While a crash is never out of the realm of possibilities, just because stocks are up doesn’t mean they have to immediately crash. Eventually they will be right. It’s the timing that gets you on these type of calls. Read More »
This is not going to end well, I tell you. The stock market is significantly overvalued at 123%. The question is: “When will it happen?” I think it happens soon. Read More »
If you follow the mainstream financial print media, you may have seen that many prominent publications have recently called this stock market a ‘bubble’ and many are waiting for the elusive stock market crash! In our view, however, such bearish ‘bubble’ sentiment is precisely the reason why, in our opinion, the party is likely to continue for at least another 2-3 years. Here’s why & what sectors to take full advantage of. Read More »
Back in the 1940s Donald Bradley developed a means to forecast the stock market using the movement of the planets which, according to the noted technical analyst William Eng in his book Technical Analysis of Stocks, Options, and Futures, is the only ‘excellent’ Timing Indicator. Below are current Bradley timing model charts indicating a major turning point in the stock markets is imminent. Read More »
While the majority is looking at the Megaphone Pattern correction since the 2000 high and is expecting the market to go back to the lower trend line of this pattern and to make new lows, I think that it will not happen. The opinion of the majority can be used as a contrarian indicator. I think that a healthy correction in this new Secular Bull Market could push the Dow Jones to 12500-13500 (end of 2015 – half 2016) followed by a second leg up of this new Secular Bull Market. Read More »
The U.S. stock market has been closing at one record high after another but, despite the seemingly unending investor optimism more than five years into the current bull market, some worrisome issues are continuing to build under the surface. Like all past bull markets, the latest episode will eventually come to an end and a new bear market will begin and it has the potential to be even worse than the two previous downturns since the start of the new millennium… Read More »
As Warren Buffett is famous for saying “…be fearful when others are greedy and greedy when others are fearful” and now is such a time. The crowd can be right for a long time, but they are rarely right at extremes and, while this time may be different, the probabilities suggest that at the very least it will be a more difficult environment for equities going forward. Read More »
The 4 fundamentals and technicals discussed in this article accurately called stock market crashes in 2000 and 2007 and these same market metrics are again TODAY warning that a possible financial tsunami is brewing on the horizon. No one knows for certain WHEN the tsunami will hit Wall Street…but, without question, today’s stocks exhibit extremely exaggerated valuations, and extremes never last, so make no mistake, a major stock sell-off looms. Read More »
The S&P 500 is now up over 180% since troughing in March 2009 and it has been almost 3 years since the stock market experienced a 10% correction. Historically, market corrections happen approximately every 2 years on average. [As such,] we think that this rally is getting very long in the tooth and we wouldn’t be surprised if we have a healthy pullback in the coming weeks or months. Read More »
For US stocks — and by implication most other equity markets — the danger signals are piling up to the point where a case can be made that the end is, at last, near. Take a look at these examples of indicators that should scare the hell out of anyone with a big stock portfolio. Read More »
You can call this current stock market a blowoff or call it a Wile E. Coyote moment or call it a divergence or call it a disconnect or call it a lapse of judgement. You can call it whatever you want but I call it the “Honey Badger” market because this is one “crazy, nastyass” stock market – and I can’t believe I’m watching it happen all over again. Read More »
Greed may have been good for Gordon Gekko. but in the investment world it rarely is. As Warren Buffett is famous for saying “…be fearful when others are greedy and greedy when others are fearful” [and now is such a time]…to start showing some level of fear here in the face of extreme greed by the crowd. The crowd can be right for a long time, but they are rarely right at extremes. While this time may be different, the probabilities suggest that at the very least it will be a more difficult environment for equities going forward. Read More »
Are we in the third phase of a bull market? Most who will read this article will immediately say “no” but isn’t that what was always believed during the “mania” phase of every previous bull market cycle? With the current bull market now stretching into its sixth year; it seems appropriate to review the three very distinct phases of historical bull market cycles. Read More »
Are we near the end of one of history’s great stock market rallies? I don’t think so. Yes, prices are in the upper half of their long-term trends, but it’s not what you might call “scary-overvalued.” There is still plenty of room on the upside before historical precedents are violated. Let me explain further. Read More »
I’d argue that the record low volume shows investors aren’t looking ahead as much as looking behind and reminiscing at how good things have been over the past five years or so. They’re expecting more of the same even though it’s mathematically impossible people. Read More »
The health of a market is best assessed along three vectors: fundamentals, technicals (price action) and sentiment and this is what each is saying about the health of the markets these days. Read More »
For today’s seriously overextended and overvalued US stock markets the best-case scenario is a full-blown correction approaching 20% emerging soon while the worst case is a new cyclical bear market that ultimately leads to catastrophic 50% losses. Read More »
In the midst of all the optimism we see towards key stock indices these days, there are two leading indicators that are flashing warning signals. They say, “Be careful, and don’t get caught up in the euphoria.” Read More »
No stock can resist gravity forever. What goes up must eventually come down. This is especially true for stock prices that become grotesquely distorted. We have been – and still are – living in another dotcom bubble, and – like the last one – it is inevitable that it is going to burst. Read More »
Is the current stock market correction simply just a dip within an ongoing uptrend OR have the “bears” finally awakened from their winter hibernation? [Below are my views on the subject plus those of several others to help you arrive at an informed conclusion]. Read More »
It’s frustrating to see key stock indices keep pushing higher when historically proven market indicators are all warning of a crash ahead. Irrationality is exuberant to say the very least, and that’s why I believe this rally is counting its last days. Read More »
There are many indicators available that provide information on stock and index movement to help you time the market and make money. Market strength and volatility are two such categories of indicators and a description of six of them are described in this “cut and save” article. Read on! Words: 974 Read More »
With both the fundamentals and the technicals saying the stock market is a risky place to be, we await its crash back to reality. Here’s why. Read More »
So much analysis we see and hear lately is concerned with whether the stock market is in a bubble or not. The truth of the matter, however, is that bear markets do not begin due to bubble-level valuations being reached and then bursting, but in anticipation of half a dozen mitigating factors as outlined in this article. Read More »
It is hard to know what to buy or sell let alone just when to prudently do so. Thank goodness there are indicators available that provide information of stock and index movement of a more immediate nature to help you make such important decisions. This article describes the 6 most popular Momentum Indicators. If ever there was a “cut and save” investment advisory this is it! Words: 1234 Read More »
Remember the game Musical Chairs? It seems that investors on Wall Street have been playing this game recently, as more and more we are seeing signs that the current bull market may be reaching its final stages. Each new sign that appears represents just one more chair being taken away from the game. The question investors need to ask is “where will I be when the music stops”? Read More »
The benefits of being able to detect a bubble, when you are in its midst, rather than after it bursts, is that you may be able to protect yourself from its consequences. [Below are possible] mechanisms to detect bubbles, how well they work and what to do when you think a particular asset is in one. Read More »
Below is a description of what I believe to be the best stock market indicator – ever. I am referring to the percentage of S&P 100 stocks above their 200 DMA which gives traders a clear early warning signal of impending serious market downturns and later safe re-entry points. Read More »
Everyone is worrying that we are at or near a market peak and this has investors extremely hesitant to buy stocks for fear of a big decline or perhaps even a crash. Obsessing over the risk of a crash, however, could lead to analysis paralysis but there is a basic investing strategy that can save investors from losing too much hair as they make the decision to buy stocks. It’s called dollar-cost averaging. Let me explain how it works and why it’s great for investors with long-term investing horizons. Read More »
Since the U.S. stock market still appears to be trying to make up its mind which way things will go from here, this appears to be as good a time as any to expand on the idea of using the VIX to “buy the freaking dips.” Read More »
Following the 2007-09 financial crisis, many investors decided they needed insurance on their portfolio to protect against the possibility of another “black swan” event and poured money into a host of new funds that were supposed to help if there was another downturn — long/short funds, tail risk strategies, absolute return funds, option hedging strategies, tactical asset allocation funds and the like – but they missed the idea completely. They were trying to plan ahead for uncertain events that could surprise everyone. Of course this is impossible, because you can’t hedge out the risks of unknown events – they’re unknown after all. So how should an investor protect oneself from another such occurrence? The answer is below. Read More »
We fail to pay attention to the warnings signs as long as we see no immediate danger and keep our foot pressed to the accelerator believing that since it hasn’t happened yet, it won’t. This time is only “different” from the perspective of the “why” and “when” the next major event occurs. Below are analyses and exhibits to support that contention. Read More »
It’s a boom time for doomsayers according to the cover of Barron’s and such paranoia-inducing prognostications are only going to get bolder, and more frequent, thanks to the fact that billionaire George Soros’ hedge fund firm has increased its bearish bet on stocks – a put position on the S&P 500 Index – by a staggering 154% in the most recent quarter…accounting for 11.13% of his holdings…implying that the stock market is headed for a nasty fall. The efforts of the doom-and-gloom crowd to try and scare you stockless aren’t going to succeed this time, though, and here’s why. Read More »
Remember, the trend is your friend and now you have an arsenal of such indicators to make an extensive and in-depth assessment of whether you should be buying or selling. If ever there was a “cut and save” investment advisory this article is it. Words: 1579 Read More »
The markets are considerably, fantastically overbought and that whatever happens after this “Wall Street Party” is going to be a sort of catastrophe. Here’s why. Read More »
The Small Dogs of the Dow is a simple and effective strategy that has outperformed the Dow and the S&P 500 significantly over the last 20 years. Let me present this in simple terms: Read More »
The Fed has manufactured a parabolic move in the stock market…which is much more aggressive (and thus even more unsustainable) than witnessed at either the 2000 or 2007 stock market tops. Parabolas always collapse – there are never any exceptions – so when the pin finds this bubble it’s going to take down not only our stock market, but unleash a destructive force on the global economy. Read More »
Current macro conditions indicate that we are in a sweet spot for equity returns…that global growth is continuing and there is little or no tail risk in the immediate future. It’s time to get long equities…but I have this nagging feeling that these market conditions are too good to be true. If you look, there are a number of technical and fundamental clouds on the horizon. Read More »
There’s no fear anymore – anywhere – and I’m talking about the type of fear that overwhelms investors – and, in turn, the market. The surest indication of this can be found in the following chart. Read More »