Warning Shot Fired Across Bow

Market in Correction

Warning  Shot Fired Across Bow

We know that the worldwide economy has been slowing down.  Verification of that fact came today with negative earnings reports from Google and other companies. Negative earnings reports are now coming from all the S&P sectors, but in particular, the high tech and commodity sectors.

The uncertainty created by the Euro Zone problems, the upcoming Presidential Election and the perceived dire consequences of the looming Fiscal Cliff, especially when coupled with the bad earnings reports, are proving to be too much for the markets to bear. So, we got a big sell-off today.

Our  impulse indicators flashed a strong warning signal that the market is very vulnerable; the downside risk is very high in the days ahead.  Heavy institutional selling causes our impulse indicators to turn dark red. In other words, the large players are leaving the market in a big way.

Bucketology

What a strong sell signal looks like.

Ian Woodward, HGSI Group Mentor, is the creator of our market direction model. He developed this methodology over the last 30 years and it is very effective at keeping us on the right side of the market. It is based on an enhancement of John Bollinger's Bollinger-Band theory.

The chart below represents the daily price movement of the S&P 1500 Composite Index. Roughly 90% of the time the price movement of the index stays within the confines of the upper and lower bands (Bollinger Bands). A certain amount of volatility is normal and should not be of concern. A large move in price in a single day, on the other hand, gets our attention. These large moves reveal themselves when a longer than normal daily price bars shows up. A solid colored daily price bar tells us that the index price began the day trading at the top of the bar and closed at the low end of the bar, in other words the price declined.

Ian divides the distance between the upper and lower Bollinger Bands by 10. He calls these  subdivisions %B Buckets. He also adds an additional bucket above and below the Bollinger Bands.

The distance between the Bollinger Bands is divided into subdivisions that Ian calls %B Buckets. A price skips down 4 buckets or more in a single day is a rare event and provides a strong warning of trouble ahead. Today we had a 5+ bucket skip down. This kind of big price movement tells us that the Large Player Institutions are unloading stocks and stocks will be driven down.

The following chart paints a long red line through the index price chart when we have a 4+ bucket skip down day. Notice how, in most instances, it proved to be a very timely sell signal.  This is the chart that helped us sidestep the 20% decline that occurred in July 2011.

This blog post does not constitute an offer of investment advice. This blog is only provided for educational purposes. Please read the Important Blog Disclosure posted in the right channel bar. 

Weekend Market Review 10 12 2012

Market Snapshot

Market in Correction

Market Direction Model

The Red Cells show that the market has been declining all week.

Chart View

Big moves up and now down

The market has retraced much of the Quantitative Easing Announcement inspired rally. The market rapidly shot up when both Draghi and Bernanke announced planned QE programs. The market quickly became overbought and a correction followed and continues.

The longer term uptrend remains intact, but near term stocks are falling. I think the decline will be limited to less than 8 %. I have reduced our risk exposure in a big way. Hopefully I can successfully buy back at lower prices and catch the year end rally that is still expected.

After a consolidation, the Flexible Income Sectors are beginning to strengthen. The Flex Income Folio is now fully invested in positions that are gaining.

The investment community is referring to this year's rally as the most hated rally in history. No one has been able to effectively capture the index returns this year for a number of reasons. It is difficult to invest with any degree of confidence when the real worldwide economy seems to be in decline. The markets are being driven primarily by the hope that quantitative easing efforts will continue to be effective in keeping the markets afloat.

Weekly Market Review

Market Snapshot

Market in Correction

Chart View

Yesterday's bounce was faded today,
giving us a weak close to a good month

Market Comment 09/25/2012

Market Snapshot

The market could break either way from here.

Chart View

S&P 1500 Composite Index

The market closed in the middle of the Bollinger Bands, right at the 20 Day Moving Average.
The Market Snapshot pie chart paints the percentage of stocks  above the
20 DMA green and the percentage of stocks below the 20 DMA red.
Remember Green is good and red is bad.

Market Direction Model

The market has been drifting lower for more than a week now.
The market rose earlier in the day only to sell off strongly in the last hour of the trading  day.

Today's pullback was partly due to comments by Philadelphia Federal Reserve President Charles Plosser. He said that the Fed’s recently announced third round of quantitative easing is not likely to do much to benefit growth or employment.

Basically, the market had become very overbought and a pullback is to be expected. This is all part of the normal ebb and flow of the market. Intermediate term I remain bullish, but short term the market is bearish.

Blame Congress for Problems in US Economy: Fed's Fisher

Click the link below to view a brief article featuring QE-3 comments by Dallas Fed President, Richard Fisher.

The Fed has done about all it can. Congress now needs to start earning their pay.



http://www.cnbc.com/id/49070290

Weekly Market Review 09 14 2012

Friday 14, 2012

Market Snapshot

The Market is now very overbought and
a pullback should be expected before too long.
This will be another buying opportunity.
.

Investor's Business Daily

Follow-Through-Day

A Follow-Through-Day
is Investor's Business Daily's
version of our Impulse Indicators.
It is confirmation of a new intermediate term
bull market phase that should have some legs.

Market Direction Model

Our Impulse Indicators fired on 09/06/2012,  a week before
IBD's FTD.  Our Impulse Indicators beat the FTD to the punch on a regular basis.

The potential impact of Ben Bernankie's quantitative easing decision was tremendous. Had he not announced the implementation of a new QE program the markets would have crumbled under the weight of the current worldwide economic slowdown. The market had been bid up in anticipation of QE-3. Out of prudence I reduced our risk exposure just prior to the announcement due to the high risk nature of the event. 

In the end, Bernankie delivered on QE-3 in a very big way. I got all GWM model portfolio fully invested very quickly after the decision. I loaded up on those asset types that showed the greatest relative strength in the initial move., i.e., energy, basic materials, home builders. etc.

The market is now even more overbought than before on a short term basis, so a pullback should be expected. Any dip should be shallow and investors will step in to buy those dips going forward. I will lighten up just a little and buy any and all dips right up until the presidential election. We are in an intermediate bull market phase.

The majority of money managers, including myself, have under-performed the market indexes in the crazy and volatile market we have had this years. This our chance to catch up. 

Addendum:

Ian Woodward, market analyst and HGSI group mentor, provided us with an updated assessment of the market late this afternoon. Ian said and I paraphrase "There have been only a couple times in the last 12 years when the market has been this over-bought, July 2011 and October 2011." Ian thinks the market could possibly begin a pull-back in eight to ten days and definitely within 15 days. Below is a chart showing how the market corrected in July/August and then October/November of 2011 after being this over-bought.

S&P 500

2011

Ian also reminds us that this is the 4th year of the presidential cycle and the market does not tank in an election year.

Based on Ian's comments, I now think it may be prudent to begin reducing our risk exposure a bit more than I originally thought. I do want to have some cash on hand if we do get a little deeper correction.

This blog post does not constitute an offer of investment advice. This blog is only provided for educational purposes. Please read the Important Blog Disclosure posted in the right channel bar. 

Weekly Market Review 09 07 2012

Market Snapshot

Nearly 35% of  S&P 1500 Index stocks
are now above the top Bollinger  band.

S&P 1500 Composite Index

Chart View

The two outer lines are the Bollinger Bands.
Historically, prices remain confined within these bands
89% of the time.

Ian Woodward, market analyst and  HGSI group mentor, was very quick in posting a timely blog about the market's valuation after the big move up late last week. I have spoken many times about this very gifted octogenarian over the last couple years; he is a real treasure to all of us in the HGS Investor group.  Ian turned 81 last week. Happy Birthday to Ian. Whenever there are important things going on in the market Ian wastes no time providing us with in-depth analysis. 

Thursday's big market move was prompted by Central Bankers telegraphing their next moves; U.S. quantitative easing is imminent and the ECB is talking about buying an unlimited amount of the bonds from troubled Euro Zone countries.  Ian says the market is now very, very overbought on a historic basis. He said there have been just a couple times in recent history that have even come close to registering such extraordinary  internal readings. That was on 11/04/10 and 03/13/2012. In both 2010 and 2012 the market stayed up for another 4 days after becoming this overbought before starting to correct. He added that, with an explosive move up like this, it takes a few days for the euphoria to burst.

In addition to U.S. and European stimulation expectations, China has hinted at a round of stimulus as well. This caused a rapid rotation into risk on style assets such as the metals and basic materials. 

We will want to rotate into these growth sectors, but only after some of this euphoria is dampened. This coming week will be a good time to take some profits and wait a little before jumping in.

The Presidential Election Year Cycle

I talked about the Presidential Election Year seasonal effect on the market in the August issue of The Gerritz Letter. So far we are tracking the Presidential Cycle Pattern road map perfectly.

So far so good!

This blog post does not constitute an offer of investment advice. This blog is only provided for educational purposes. Please read the Important Blog Disclosure posted in the right channel bar.