Market Timing

See the Annual Returns from the MIPS4/MF+ Model for 2003-2013 YTD below:

Our Beloved Ben did it again !!!
- when he stood up and said "No Tapering," the markets went wild immediately.
- the SPY easily broke its all-time upside resistance at $171.1 and closed at $173.05 (see the 1st graph below).

With liquidity coming from (a) Brother Ben, (b) mom-and-pop coming back in the market, (c) a mass exodus from bonds to stocks, etc., how could the markets go anywhere but up?  [Bonds are such a bad investment now, we have read that even bond funds are buying stocks!]

We see more upside (and maybe even much more upside) in this bull run, but the market does not always follow my direction.  Because of this, when the time comes to hold-or-fold, we rely on MIPS to tell us what to do.

More on this later...

MIPS Members:

In our previous blog from 9/9/2013, we showed the SPY's breakout from a several week, tight trading pattern.  For the last several weeks, the SPY has been very volatile.

In the graph below, we can see that since 8/8/13:
   1) the SPY broke its long-term trendline (top green line)
   2) the SPY gapped down twice (orange circles),
   3) it bounced off of the 100-day EMA and turned up (inflection point) on 8/28/13,
   4) the SPY then broke above its 50-day EMA and closed both gaps,
   5) it has held above both gaps (above 168.6) for 4 days now (purple rectangle).
From here, of course, the SPY could challenge (and hopefully surpass) its all-time high at 171.1 or it could fall back significantly.  I'm glad that we have MIPS to detect and tell us what we should do (see the MIPS Market Strength Indicator below).




The MIPS Market Strength Indicator (MSI) has improved significantly in September.  See graph below:

In our previous blog from last Thursday, we showed that the SPY was ready for a breakout from its tight sideways trading range between its 50-day and 100-day EMAs. On Friday, the bulls pushed the SPY up above its 50-day EMA (and above the trading range), but the bears sold it back down to close just slightly above its 50-day EMA.

Today, however, the SPY make a nice, solid break out of the range and well above its 50-day EMA (orange ellipse). This would normally mean a run up, but we never know for sure.  That's MIPS' job.

The SPY is stuck between its 50-day EMA and 100-day EMA, but not for long (see graph below):
   Green Line = 50-day EMA
   Red Line = 100-day EMA
   Straight Black Lines = Trend Lines
   Blue Box = Trading Range

In 2013, we have lived through meager gains in the economy, small setbacks, the Fed's QE3 and hints at "tapering" its purchasing of Treasury bonds, and the crisis in Syria, with the recent U.S. markets going nowhere.  Sometime soon, we believe that the market will establish a new trend (up or down). It is difficult to digest all of this activity, but a technical analysis of the SPY's performance offers some insight.

The SPY broke its 6-month "primary" trend to the downside on 8/12/13.
- Then, on 8/15/13, it broke its 50-day EMA.
- In the last 3 weeks (15 trading days), the SPY has formed a trading range between the bottom of its
  50-day EMA ($165.8) and the top of its 100-day EMA ($163.4).
- This is a "tight" trading range, with the top and bottom being only 0.7 of 1% around the mid-line of the trading range.

We believe that the SPY will break this range soon (up or down) and MIPS will instruct us to go long or short in due time to make money on this new trend.

Crazy markets these days...

But, we all know at least two things:
1) Economic conditions are bad enough to send the US stock market through the floor, and
2) It is foolish to bet against the Fed, and if the Feb keeps printing money at a record pace, it
    will be hard for the markets to fall.
It's not worth going over this again, but you can get the general idea from our previous blogs.

So, what do the tea leaves say now (see graph below) ???
1) In early July, the SPY recovered from a fast (but rather small) correction and then bounced off
    of the bottom of its 50-day EMA for 5 days (purple box) before heading up (orange circle) and then reaching new
    all-time highs.
2) After falling below its 50-day EMA for the second time a week ago, the SPY has again bounced off
    its 50-day EMA for 5 days (2nd purple box); and again, it appears to have stuck its nose above the
    50-day EMA (orange circle).
3) Of course, if the bulls can get a strong break-out to the upside at this point, we could see more new 
    highs; but if not, things could get ugly fast.

Instead of guessing, it is best for us to depend on MIPS to tell us what to do, and when.
   

 

The following is the opinion of the author and is not a part of the MIPS models or programs.

We do not believe that this bull market is over, for the 3 simple reasons below.

1. The chart below is indicative of every bull market where the Individual Investors
    (the "little guys") buy at the top.  This is just starting but can go on for a long time.

2. The little guys have not yet re-entered the market en masse, BUT THEY ARE 
     STARTING TO SELL BONDS AND BUY EQUITIES NOW !!!
     - From CNBC - http://www.cnbc.com/id/100938142

3. Ben Bernanke is still printing money at a rapid, crazy rate (see email below)

We will depend up MIPS to tell us what to do, and when.

Our previous entry discussed Ben Bernanke's influence on the market.  This entry summarizes the results.

In the graph below, we can see:
1) MIPS followed a 6-month uptrend in the SPY
2) MIPS, along with other timing models, got caught in a short "Bear Trap" (pink rectangle)
3) This included a sharp drop followed by a one-day key reversal on 6/24/13 and a 6-day sideways
     consolidation pattern before breaking up on 7/5/13.

So, what does this new uptrend have to do with Helicopter Ben?  Read on...

Then, the following week, reports showed that whatever economic growth that we may have (if any) was slowing or reversing. In other words, Ben's Quantitative Easing is NOT working!!!  On this news, the market dropped, right?  Wrong again. The fat cats and big traders, who couldn't care any less about our economy, drove the market way up and started a new up-trend because extended QE looked more feasible. It seems to me that something is wrong when the economy slows and the market goes up. It’s not surprising that no one even claims to know how to invest in this environment.
.
The moral of this is that our markets most likely will not suffer a large drop as long as the Fed is printing and giving away your money, but it will be a pretty dismal outcome if they do stop in the near term. 
 
Let's not forget that the main things moving the stock market are the plans and actions of the Fed. In my lifetime of investing, the only long-term indicator that has never failed is the one between the money supply and stock market movements. Over the years, the market has had substantial gains when the money supply was growing and big contractions when money was tight. That is when I learned to "never fight the Fed".

These days, however, with this Fed's actions, the markets are convoluted.  Our only chance is to use a good timing model like MIPS that follows the trends of the big guys, because they are always right (by definition).  I would also always be right if I had enough buy/selling power to take the market with me as I trade, like they do.

Our previous entry [Three Possible Market Moves (And Why)] showed 3 likely market moves from July 1st.  Well, for now, it looks like #1 (moving up from here) won the several weeks battle between the bulls and the bears.

In the graph immediately below, you can see that after 5 days in a tight trading range (pink box) around the 50-day EMA (black dashed line), the SPY broke up with a gap (orange ellipse).  This is enough for most market "technical traders" to say this is a huge win for the bulls.  From my perspective, the only thing that I did not like about this is that this break-out happened on very low volume (little guys?). As to where this takes us in the next few weeks, we will depend upon MIPS.



 

Let's not forget that the main things (and maybe the only things) moving the stock market are the plans and actions of the Fed.  In my lifetime of investing, the only long-term indicator that has never failed is the one between the money supply and stock market movements.  Over the years, the market has had substantial gains when the money supply was growing and big contractions when money was tight.  That is when I learned to "never fight the Fed".

These days however, with this Fed's actions, the markets are convoluted.  A couple of weeks ago, the market took a big hit when Bernanke (Ben) set some guidelines for when the Fed might start throttling back on printing money (so-called "tapering").  Printing more money, of course, means diluting our actual money, with hypothetically "more for everyone". Problem is, however, the "everyone" does not include us.  Ben was emphatic that when the economy improves, the Fed will cut back on printing money (as should be).  And, this drives the market down?  Great.

Then, the following week, reports showed that whatever economic growth that we may have had (if any) was slowing or reversing.  In other words, Ben's Quantitative Easing is NOT working!!!  On this news, the market dropped, right?  Wrong again. The fat cats and big traders, who couldn't care any less about our economy, drove the market way up and started a new up-trend. It seems to me that something is wrong when the economy slows and the market goes up.  No wonder no one even claims to know how to invest in this environment (and by "how to invest", I am including stocks, bonds, gold, etc.)

So, here are the possibilities that we see from here:
(Note: this is not part of the MIPS program, but only my opinions of how I think the big guys and traders see the market.)

I.) Graph #1
In the graph below, we can see that (a) the market took a dive 9-10 days ago when Bernanke opened his mouth, (b) it had a "key reversal day" four days later when reports showed a slowing economy, and (c) it has made a sharp rebound since then.  Now, we are at a critical juncture.  The SPY has hit and failed to break its 50-day EMA (black dashed line) to the upside in the last three days and, hence, has failed to recapture lost territory above $161.7 on the SPY (orange ellipse).  If the SPY does break this resistance level to the upside in the next few days, the bull should continue to run.  If not, we will continue to scenarios II or III below.


II.) Graph #2
If the SPY fails to break above its 50-day EMA and its 161.7 resistance, it will turn around and head back down. If this happens, there is a good chance that the market will trade in a sideways trading pattern as shown in black below.  This is a dangerous pattern because of the high possibility of getting whipsawed.

III.) Graph #2
The other possibility if the market retracts from this 161.7 resistance level is that it will not go into a sideways trading pattern, but rather head down into a much larger correction (red arrow).



Like everyone else, we really have no bias one way or another on these possibliities.  I keep saying "don't fight the Fed", but so much damage has already been done that anything is possible.

Like it or not, the fat cats will have to make a move sooner or later.  MIPS will be closely watching their volume and will closely track (and duplicate) their movements.  Right or wrong, the big guys move the market one way or another, and I want to be in their camp when they do.

And, we must rely on the math in MIPS' models to figure this out for us.