Surprises, Surpises

Riddle me this: What is more painful than the tape we've seen this month? Another month.

I think a lot of people would be very surprised to see another month of equities rallying but the forecast I have been publishing clearly suggests this. Tonight I'd like to back off a bit and look at the longer term trend to give readers (both experienced and non) a general sense of what may lie ahead.

1.- LONG TERM FORECAST

I've provided a chart below that best describes what I feel is going to occur over the coming 12 months. Incidentally, the dates on the chart are based entirely on the position trading forecast I use.



Upon inspection you'll note I've divided the chart into 4 main components which I describe below.

Section 1 - Present to August 7, 2009

This phase of the projection is the last ditch effort to keep this market up before the gale wind forces of the current bear market finally resume. In all honesty, however, this is the part of the forecast I am least comfortable with, particularly when one considers the predominant complacency in the market at the moment. So I wouldn't be taking any long positions at this point, but the forecast is what it is.

Section 2 - August 7, 2009 to October 29, 2009

I expect this period to be a complete bearfest especially in comparison to what we've seen over the past 3 months. The majority of a trader's 2009 profits will likely occur during this very tight window of opportunity so I encourage you all to prepare yourself mentally if/when we get a rally into the first week of August. This will be THE opportune time to finally 'load up' on the short side.

Section 3 - October 29, 2009 to January 13, 2010

This will be the final corrective phase of the bear market before the mother of all plunges. I hesitate to say this but if you've ever wanted to refinance the house and go all in...this would be THE time to do it. I say this quite facetiously but you get the idea.

Section 4 - January 13, 2010 to XXXX XX, 2010

Four words: A bear's ultimate dream. If you have ever wanted to trade a market that was even better than 2008 then this is it. The sell off in 2010 will be of absolute epic and generational proportions. 2008 will pale in comparison to the 2010 sell off but will be much shorter in duration. Many, many, many downward cycles converge starting in mid to late 2009 and accelerate into 2010. It is literally the perfect financial storm - but it will occur in a blink of an eye.

In nominal terms, I expect the bottom of the bear market to occur in mid-to-late 2010 and provide smart investors the buying opportunity of a lifetime. Things like high inflation (the US government is going to print money like you've never seen) and a recovery are likely at that point but not sooner. You'll want to invest in assets like commodities.

2.- ES FORECAST

Today was a very good day for my forecast. I hardly ever take credit for nailing a turning point in the market when all I did is follow my system but today it acted well. It foresees some choppy trading with 900 as support...let's see if it holds.

Intraday ES Forecast

Think we hit the low of day at ES 911 as per following forecast:



I wouldn't be going long though.

What Do You Say?

EDIT: In order to improve the content of the blog, I'll be taking several polls over the coming weeks to gauge the demography of my readers. Please take the time to complete it if you get a chance.

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How on earth can one possibly come up with something intelligent to say after a day like today? The reality is you can't so I'm not going invent something to talk about when there is simply nothing of substance in the market.

However, I will say that despite my bearish tilt I think we conceivably have another month and a bit left of rally ahead of us which would take us into the first week of August. No one in their right mind should be plowing back into the stock market but the momentum is unequivocally with the bulls and as a trader I respect that 100%.

Over the past few weeks I've provided what I think is objective evidence that the market is in a topping process including cycles (Nenner) and ratios (gold/silver, VIX/VXV) that tend to be leading indicators. Despite the overwhelming bearish evidence the market keeps moving up and at the end the day price action is king. Until the market physically starts to go down it's very risky trying to short the market aggressively. I would rather wait and be right, then guess and be wrong.

1.- ES TRADING - THE TALE OF SAVING MY BEHIND

Today was one of those days when things seem to go 100% the way I expected. I managed to book a good chunk of ES profits that more than offset my losses on the puts I entered last week (which I'm currently out of). I think a correction is coming but I don't think it's going to be as deep as people hope.

Incidentally, today I used a phenomenon that most of you have read about on this blog - The Power of 9. My trades are shown in the chart below:




2.- PUBLIC ES SYSTEM

A few days ago I mentioned I was halting the publication of my public ES system results. I wanted to reiterate this in case some of you may have missed the comment. I will continue to trade the system and post results if trades occur on a consistent basis. Since the 2nd of week of June the system has been quite flat (so has the market - go figure). I'll let you know when I'm posting them again.

3.- HOYE...YET AGAIN

An update from Mr. Hoye can be found HERE.

4.- COMMENTARY

Lastly, I have seen many bloggers (including myself) putting up fancy charts, indicators, etc that support the bearish case only to have the market smack their hypothesis down the next day. At the end of the day trading is about making money. It is a business of consistently extracting profits out of the market using a definable and statistically significant edge. When you find yourself looking at the same things everyone else is looking at, you really don't have an edge do you?

One of the goals - among many - I had when starting this blog was to provide my readers a unique take on the markets. Nevertheless, over the past 2 weeks I've fallen into one of the typical mistakes even experienced traders make from time to time - listening to others.

Luckily, I have in-laws-to-be that live in a quiet town just north of Gibsons, BC. This weekend I was able to relax in a quiet environment and objectively think about the markets on my own terms. I suggest if you ever enter a bad trading streak or simply find yourself clouded with other people's opinions, that you take a day or two to step completely away from the computer. You'd be surprised how different your take on the markets is when you return.

Post Before The Weekend

I'm headed out the door for the weekend after a pretty mild week. I'd love to sit here and tell you I am printing money but unfortunately that is not the case. Making money, yes, printing money like the Fed (lol), no.

I still remain in the bearish camp despite yesterday's powerful rally, but am taking the weekend to seriously ponder my bearish tilt. I believe the ultimate contrarian call here would be to say the bear market is over but we all know how fine a line there is between contrarian and outright asinine. It's simply something I am considering as a measure of precaution.

In the meantime, however, I will continue to add longer term short positions (very lightly) and trade ES (which is saving my behind big time) until we see some conviction selling below 900.

Updated ES forecast:



Have a good weekend.

Pick Your Poison and More Hoye

My aim in this blog is to provide a balanced analysis of the markets and while it's possible I'm giving the bearish case too much credence, I still feel we are in the topping process. God knows how long this process is going to take, but in the meantime I have to respect the buoyancy of this market.

My action plan is to have smaller positions for my more long term position trading (usually with a short bias), while trading the ES contract intraday. I am not a day trader by any means but this market has absolutely no follow through in either direction, so I've been forced to limit my time horizon to a certain extent.

Now, let me frustrate you a bit more with both bullish and bearish charts.

BULLISH





BEARISH





MORE HOYE!

Some of you have asked me to let you know when Bob Hoye posts new comments/audio/video so I have a treat for you this afternoon.

His latest commentary is with respect to the Gold/Silver ratio and how it is pointing to a significant turn in the equity markets.

I've gone through the liberty of delineating the moments when the gold/silver ratio increased/decreased while the SPX decreased/increased, respectively.



Witness the remarkable inverse correlation between the ratio and the overall equity markets. He argues (in the pdf file provided above) that a close above 66 would 'seal the deal', so to speak, in the change in direction of the ratio. The ratio currently sits at 67.03 at the time of this writing.

OPINION

There is a great saying my father uses:

"A fool and his money are easily parted."

This statement could not be more true, particularly at this juncture.

As a trader I have the utmost respect for the market. If the market goes up I will buy, and if it goes down I will sell - no questions asked. But I am also human.

To put to it bluntly this market rally is fabricated upon synthetic and debt-based wealth. There is absolutely and unequivocally NO substance whatsoever behind the rally. At some point this madness WILL end (I bet my trading career on this fact!). Until then it is insane trying to fight this tape until we've broken SPX 900 with conviction, so please don't short the market with everything you have until we see further weakness.

My suggestion is to roll with the punches until a clear trend has developed. I promise you the bears WILL regain control at some point but it seems like the bulls are putting up a good fight, particularly when the SPX sports an '8' handle (the fact that we have some serious tape painting at the end of Q2 also helps).

ES FORECAST

For those of you interested in my ES forecast here you go:



And a quick note before I sign off...

There haven't been many public ES system entries since the 2nd week of June, so I've decided to temporarily halt the publication of those results until see we some significant conviction either way.

It's been frustrating to say the least considering the system was averaging about 20 points/week and seems to have completely tapered off (perhaps, due to the summer doldrums?). I'll keep you updated.

Perspective

Powerful rally indeed today...keep this in mind though. When we hovered around ES 940 area a few weeks ago we had about a 10 point move up/below that level, yet still maintaining that range bound market.

A true break above 925-930 would get me damn nervous.

Here's the chart of the forecast from a few weeks ago:

What I'm Looking At

EDIT: See below...

Patterns, patterns, patterns...

If you read my post from last night - We are VERY Close - you'll know by now that I expect a romantic dance around SPX/ES 900, followed by a continuing to the downside.

This is the chart I'm looking at to enter my shorts.



For full disclosure purposes, I'm scaling into shorts at the moment but position size is being reduced. I can't tell you where the top of the range bound channel will be so my risk tolerance on my small position size has been increased.

If we get a powerful rally past SPX 930, at that point I would have to second guess my analysis.

EDIT: The one thing that does worry me is the oversold McClellan oscillator - something I am keeping a close eye on. Very oversold McClellan oscillators have coincided with market bottoms.

We Are VERY Close

Call me crazy, I think I'm going crazy.

Not sure how the rest of you feel but this market is frustrating the hell out of me - and I'm happy about it to tell you the truth. The reason you ask? My frustration only occurs at significant inflection points. We are close guys.

To put it bluntly, this market is screwing with as many people as possible and I suspect we're going to see similar action to that experienced near SPX 950 two weeks ago (i.e. a whole whack load of dojis, followed by a precipitous drop). Today marks doji #1.

1.- SIMPLE THINKING

In last night's post - High Probability Trading - I provided you with reasons why I thought a move to ES 872 was coming. Look at the following chart. At an intuitive level, doesn't it seem weird that the market would move all the way down from 950 and NOT test the base of that dome?



Markets simply don't fall short of testing important levels like this.

2.- SPX FORECAST - A FRESH START

Those of you following the blog for the past week will be familiar with the 'transposed' forecast I've been using. Instead of confusing you with more of that gibberish let's bring things down to earth and start on a fresh footing.

Below is the forecast I'm using going into July. Notice I've eliminated the scale on the left axis as I can't tell at the moment how far down we go from here, but I think it's safe to say that ES 872 is absolutely possible. In fact, I think we go much lower than that.



The forecast predicts a range bound market until next Monday followed by a drop. Isn't it ironic that it expects a range bound market AND we also happen to be exactly at the 900 level????? Hence, the reason why I expect a few dojis over the next few sessions.

3.- CHARLES NENNER

I only have a handful of market gurus I listen to but Charles Nenner ranks as one of the most accurate cycle forecasters of this bear market. According to his recent update on June 17, 2009 both his medium and long term cycles are pointing down, with only the short term cycles up into the end of June. This precisely matches my forecast TO THE TEE!

4.- THE PLAIN AND SIMPLE TRUTH

We are going down - big time and soon. This market has done a great job of confusing and frustrating me but I realize this is simply part of a normal topping process. I don't see many blogs tonight calling for a large sell off so I'm glad I'm a loner in this respect.

High Probability Trading

EDIT: Someone just informed me that Charles Nenner (famous cycle forecaster) has a very similar forecast, though he doesn't expect the rally to last much past July 1. You can find his two newest videos HERE. The BIG move is coming folks...it's right around the corner.


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Traders go through various steps in their career before they finally internalize one simple fact: trading is a business of probabilities.

Whether you use charting techniques, Elliott Wave, technical analysis, correlation analysis, value investing techniques, etc the one thing they all have in common is they give you some kind of edge over other market participants. An 'edge' is defined as a repeatable and statistically significant advantage in your trading methodology.

Tonight I'd like to present a 3-pronged 'proof' of why I believe ES 872 (or thereabouts) will be the bottom of this leg down and for a multi-week rally to ensue lasting into July.

1.- EXHIBIT A

In last night's post - Falling Behind The Tape - I provided you with a transposed forecast of the ES contract suggesting a price move into the ES 872 area by June 26, 2009. Below is an updated transposed forecast which still suggests a move to this area is imminent:

Figure 1 - Transposed Forecast


For new readers of the blog this may be a bit confusing considering the market has gone down, yet I have prices going up. I promise once this move is over, you will not see the chart ever again. The last thing I want to do is confuse people.

The point is that the transposed forecast still suggests the 'inversion' of prices that took place on Monday will produce a 50-or-so point move down from Friday's 922 high (922 - 50 = 872).

2.- EXHIBIT B

I don't consider myself in any shape or form to be a chartist, but when I see a very clean pattern developing and it supports my overall view I start to pay attention (by the way, I also pay attention to evidence that opposes my view).

At the moment, the SPX is starting to develop a very clean head and shoulders pattern as depicted in the figure below:

Figure 2 - Possible SPX Head and Shoulders Pattern


Its neckline would be located around SPX 880 (or equivalently ES 875) which jives with my ES forecast from above. The ensuing rally would be on the order of 30-40 points (which also happens to jive with my position trading forecast - I'll show you that some other time).

3.- EXHIBIT C

I don't put too much emphasis on things I don't fully understand but considering the Bradley Siderograph has been been very accurate predicting inflection points in this bear market, I am using it as a confirmation tool for my market timing.

It also suggests a rally beginning 6/26 and lasting into mid-July. This rally , in my opinion, should form the right shoulder of the H&S pattern shown above.



4.- SUMMARY

So there you have it. Three completely independent and objective (with the exception of my forecast) forms of analysis that all suggest the same thing:

1. A bottom around 6/26/09 or ES 875
2. A rally into mid-July

CAUTION: You must always accept the possibility that this could completely fall apart. While probabilities suggest this is highly likely to occur, one should always ponder "What if I'm wrong".

Falling Behind The Tape

1.- FALLING BEHIND THE TAPE

I want to focus on what happened to me this morning with the hope that other traders learn from my experience.

Those of you following the blog for the past week are aware I was positioned slightly bullish (w/ hedge) going into the weekend, as per the forecast I posted on Friday - Monthly Bars. I also noted on Friday that despite the forecast showing strength into today, my bullish conviction was significantly reduced due to Friday's incredibly low VIX reading.

This morning upon seeing pre-market futures in the red, my inclination was that we would see further weakness past the open and immediate action would be required. About 5 minutes into regular trading (when the DOW was down -60), I quickly exited my losing positions and added to my existing short positions.

The net-net effect today was an increase to my account, albeit not nearly as much as it would have been had I completely been short from Friday.

Figure 1 - SPY



The point of this story is for traders to learn that THEY MUST NOT COMMIT TO AN OPINION, NO MATTER HOW CONVINCING. When the market proves you wrong, you are wrong - period. If you ever want to last more than a year in this business you must develop the habit of leaving your ego at the door and accepting losses like a professional trader - not some amateur wanna be "I wanna be a trader" trader.

By letting losses get ahead of you, you put yourself in a position where you are - what I call - 'behind the tape'. In other words, you are always one step behind price action. Your losses accumulate only for you to capitulate - yes, you got it - right at the top/bottom of a trend. And the cycle repeats itself over and over again.

If you learn to cut losses as soon as possible, I promise you trading becomes something completely different - and it even feels different.

2.- TRANSPOSED FORECAST

Many of you are familiar with my post dated June 4, 2009 regarding The Power of 9 (i.e. the preponderance of intraday impulse moves to be approximately 9 points). You are also aware I have no idea why they occur LOL. They simply do. It's an empirical observation I've made over the past year or so.

Similarly, I have come across something very interesting (that I can't explain) that occurs in my position trading forecasts that I'd like to share with you this evening, as it might help you exit your current short positions.

Over the course of trading these forecasts I've become aware of a 'inversion' phenomenon. That is, the forcasted direction is wrong, but the forcasted magnitude of the move is correct.

Based on Friday's post - Monthly Bars - we had the following forecast which suggested a 33 point move up to 955 from Friday's high of 922:

Figure 2 - FRIDAY'S FORECAST



Instead, what we got today was a 33 point move down to 889 (922 - 889 = 33). As a numbers geek, I get pretty excited when I see these relationships.

Next, what I did was transpose the former forecast as if the market had rallied and this is what I came up with:

Figure 3 - TRANSPOSED FORECAST



Interesting isn't it?

If the extent of this move matches that of this inversion, I would expect the markets to bottom out around ES 872...and get this, look where ES 872 is located:

Figure 4 - ES Contract (Line Chart)



Three words: A-ma-zing!

3.- THANK YOU

Lastly, I wanted to thank all of you for supporting this blog. Since the blog's inception on June 1, 2009 I've had about 13,000 hits to the site which is beyond my expectations to be honest. I know there are many a blogs that receive far more than this on a daily basis but I'm glad I have a consistent readership. It means I'm doing something right. Thank you.

Take care everyone and we'll see you tomorrow.

More Hoye

A good Sunday evening to you.

Just got back from a relaxing camping trip with friends and ready to begin the week on a solid foot.



As per two of my previous posts - Ah Hoye, Looks At Those Bonds! and Ah Hoye, Part Deux - you guys know I am a huge believer in Bob Hoye's analysis of the markets. I provide you this evening with his latest commentary HERE.

Note his comments regarding gold - somewhat neutral/bearish for 2009 and an absolute rocket ship to the upside in 2010, particularly small cap gold stocks. He says the popularity surrounding small cap gold stocks will be equivalent to the tech-company mania during the dot-com bubble, so be on guard - he really knows his stuff.

Monthly Bars

Alright, quick post before I take off for the weekend.

Needless to say today's tape was confusing at best. Markets reversed from highs (quite sharply I might add), but COMPQ/RUT led all day with VIX ending significantly down (27.99).

1.- MONTHLY CHARTS

Check out these monthly charts on all 4 major indexes (INDU, SPX, RUT, COMPQ). Two words: VERY BEARISH (I know the month of June is not over).

INDU



SPX



RUT



COMPQ




2.- UPDATED FORECAST

Not much to say. Still cautiously bullish but hedged as per previous post - Intraday Update. If we crack 900 to the downside I'll get about 80-90% bearish. Crack 880 and Bearfest is on. Let's see what happens next week.

To be honest, my unbiased opinion is we head down since the VIX is at an absurdly low level, but I always obey my trading system so staying slightly long.



Have a good weekend.

Intraday Update

So far the forecast is still intact but the rational part of me is arguing for a correction here. A zoom up past 950 by Tuesday to me seems very improbable, though it could happen.

Thus, I've added some short hedges to my long positions. I'm really on the fence at the moment which way we go...until we crack 900 I'm moving like a wild jungle cat between bullish and bearish.

The Three Stages Of Truth

I've received a number of e-mails from people questioning the forecast which motivated me to write this follow-up post (previous posts can be found HERE and HERE.)



This post is not to suggest that my forecast is the end-all and be-all of all market truths - it is simply an interpretation of it. This interpretation CAN BE WRONG!

However, it seems to me that people are steadfastly convinced that THE top is in (and they might be right!). But that dogmatic form of trading is very detrimental to one's financial success.

Anyways, to the post....
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I consider myself a pretty active reader, particularly in the world of self-development. I'm currently reading a book called "Don't Read This - Your Ego Won't Like It" by Dov Baron. In it, is a prescient quote (as it relates to markets) by a famous German philosopher named Arthur Schopenhauer. He is quoted as saying the following:

"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."

While most of us agree this is true as it relates to markets, many times we unconsciously find ourselves in the first or second group of people. I say 'unconsciously' because we, in some form or another, all try to be contrarians in our investing/trading only to find ourselves - after the fact - part of the herd.

The reason I'm mentioning this tonight, is simply to keep everyone on their toes and consider ALL POSSIBILITIES going forward. A dogmatic form of trading is a guaranteed road to financial failure.

I'm NOT trying to suggest the 6/11 highs were not the high of this run up. I'm simply saying that the possiblity of it being surpassed is absolutely real and it seems to me a lot of people are completely discounting this from occurring.

If we turn around tomorrow and head south, then so be it. But at least you will have pondered one of the most important questions - "What if I'm wrong?". It took me a longggg time to develop this habit.

Just some food for thought...

EDIT: Also, check out the Bradley Siderograph (Page 23). It also suggests we could go to new highs into July.

Forecast Update

Just a quick update on the forecast I showed in last night's post - Transitioning To Flatline Status.

Until the forecast is invalidated I am cautiously bullish over the next day or two.

Transitioning To Flatline Status

1.- TRANSITION (BACK TO BEAR MARKET - HOPEFULLY)

Part of the gig of being a trader involves coping with and managing personal issues while keeping one's trading psychology in check.

The past couple of weeks have been one of those periods where things seem to deviate from what is normal.

Not only has my public ES system flat lined over the past week but my stress levels seems to have gone up, I feel a lot more tired than usual and today I had the mother of all weird occurrences - I got really cold all of a sudden and started convulsing 3 hours before the close. I'm fine now but, man, strange indeed wouldn't you say?



What is interesting, however, is that these strange things have usually occurred near major inflection points - I kid you not, I can't make this up. What's even more peculiar is that at market bottoms, I usually have a week or so of bad trading and at tops my trading results flat line. I can't explain it but it's the honest truth.

2.- SPX EXPECTATIONS

Well, we managed to touch 900 before 960 on the ES contract as per my comments a week ago - Lines In Sandboxes. The $64,000 question at the moment is how high will the correction to this week's sell off go?

Today's small change in the McClellan Oscillator (seen below) suggests a large price move over the coming days. My strong suspicion is we will see a significant rally into next week and possibly test ES 970 - yes, that's not a typo.



A rally is likely in the works based on a simple 60-day/120-min chart I use to complement my position trading. As you can see a rally is likely going to occur any time the RSI(9) reaches the 30 area. Disregard all the trend lines, etc...just focus on the green rectangles.



Also, a forecasting technique I have used for several years supports this as well as seen by the chart below. Incidentally, I will not disclose the rationale behind the forecast so please don't ask. I may post these forecasts from time to time.



Please note, however, this forecast CAN BE WRONG! So, don't go and load the boat up on calls expecting the market to blast up, but probabilities (even not using the aforementioned forecast) still suggest a rally.

The Need For Change

1.- CHANGE

No, I'm not talking about Obama.

I'm having to post this just before the close. I'm off into the city to attend my girlfriend's boss' BBQ so it shall be short.

Needless to say, it has been a long time since we've had a tape like today. What started off as a low volume/volatility day turned into a broad sell off trend day.

Anyone who has a developed a good 'feel for the market' as of late needs to be quick to change their pattern recognition skills. What has worked over the past 3 months has the real potential of utterly failing as the bear market resumes, so one must be completely vigilant of this fact.

This past week my public ES system results have been significantly muted which is expected considering volatility had completely vanished - a major signal of a top. This week is turning out to be exactly the same, so exercising extra discipline is warranted.

Below is the month-to-date equity curve based on a 1-lot trading size which I expect to, at a minimum, maintain by exercising real caution when it comes to long entries.


2.- SPX FORECAST

My original forecast - Lines in Sandboxes - that we would hit 900 before 960 (on ES) seems to be unfolding at the moment. I, however, exited my shorts around the 920 area as a measure of precaution. Personally, I needed to be sure that the bears have regained control of the tape before shorting aggressively.

The current impulse move should end around ES 897. At some point I expect a bounce (approximately to the 930 area) at which time I will begin to re enter shorts more aggressively.

Sorry for the not-so-detailed posts. I promise to get back to my regular scheduled program shortly. Lots going on this summer.

3.- DISCLOSURE

As a matter of full disclosure, I will mention that I am completely flat in my trading account but heavily short from the beginning of June in my active RSP account (which is more long term). In it, I am invested in double inverse ETF's which I plan on holding for a longgg while and a single small gold stock.

Ah Hoye, Part Deux!

OK, so first off let me apologize for not posting the follow-up a little earlier. I put in a lot of time and commitment in front of the computer as a trader but when the bell rings Friday afternoon that's when I like to take advantage of the fact that I do trade for a living.

Anyways...

1.- REVISION

Again, this is a follow-up post to my previous one entitled Ah Hoye, Look At Those Bonds!. If you have not read it, I encourage you to review it before reading tonight's post.

In summary, however, I wrote about my belief that we should see US interest rates come down into 2010 as the bear market resumes its course and investors flee to 'safer' assets (I probably don't have to explain why I say 'safer' in between quotation marks.) When the markets finally bottom and the economy begins to recover, I expect rates to go substantially higher.

2.- INTEREST RATE CYCLE

I'm posting the interest rate chart from my previous post for ease of use.



As you can see, the model Bob Hoye happens to be using is the 1930's style depression. To date, his calls on everything from oil prices, equities, etc have been absolutely dead on...I mean DEAD on, and I only expect his projections with respect to interest rates to be equally right.

To further support his conjecture, I'd like to present an interesting cycle in the 2-year US treasury yield as seen in the chart below.



As you can see, over the last 15 years we've seen a 5 - 6 year cycle in interest rates. Projecting out, one would expect a peak around mid-2011 at the earliest and mid-2012 at the latest. Now, some of you may be saying to yourself - "Well, 15 years or two cycles is not a really long time to base, or even support, this hypothesis". Way ahead of you...

I went back and looked up historical data on the 2-year yield and came up with the following chart:



Pretty much the same periodicity isn't it? Again, what we see is a recurring 5 - 6 year cycle in interest rates going as far back as the 1980's.

3.- THE EGO AND CRASH FORECASTS

Don't worry I'm not making any crash forecasts here. I'll leave that to other websites...ahem.

All bear markets have been accompanied by crash forecasts. In fact, coming into ANY calendar year I'm sure you will find a plethora of websites calling for crashes if you Google "Stock Market Crash 20XX".



There is a particular blogger who is now calling for a crash in a few months and I want to comment on it. Incidentally, the only reason I am commenting on it is because this is my personal blog - I have no intention of discussing it outside this medium.

My beef with people who love to forecast crashes (and ultimately take credit for it) is that it is simply done out of personal ego - to be right in other words. I get irritated by it because in this day in age where there is such a need to help others, all this person can think about is being right.

Now, this being said, I strongly believe that a crash is absolutely possible given the current environment. And by 'crash' I don't mean a market that drops precipitously month after month (though this IS going to happen in my opinion). I mean a one-day '87 or 9/11 stock market crash.

I have a forecasting technique that has been remarkably dead on when it comes to market direction over the past 2 years and this particular model is calling for a large sell off beginning now and lasting into September. If there ever was a chance for a one-day crash event to occur it would be around mid-August. I can't explain why but that's what the information I have tells me.

So if you are going to listen to these egocentrics and their market crash calls please be vigilant around this time frame and don't lever in thinking you are going to trade well through it. That is a recipe for financial disaster.

Ah Hoye, Look At Those Bonds!

1.- BOB HOYE

I probably have more toes on my feet than people on my list of 'market gurus' that I listen to. Bob Hoye happens to be one of them.

For those of you not familiar with his work, he is not only a trader/investor, but also a market historian of epic proportions in my opinion. He runs a publication service over at Institutional Advisors covering everything under the sun - stock market, yield curve, credit spreads and energy prices.

When I worked at Haywood Securities I had the privilege of reading his market commentaries on a regular basis (for free of course) and he always had a very unique approach to the markets. What I like about his style is he looks at things from a historical perspective by finding interesting cycles and/or correlations and tonight I came across a video of his:



Things are not looking so rosy according to him - and I agree.

HERE you'll find a recent update of his, expanding on what he mentions in the video with respect to interest rates. I have taken the liberty of cutting and pasting the 2nd chart in the pdf file below.



As you can see we're currently experiencing rising interest as a result of the belief that the US economy is in recovery mode - hence the inflation worries. I strongly suspect these beliefs are not only ill-founded but downright asinine, but unfortunately that is the way markets work. That's not to say that I'm right - but logic would suggest we are FAR from recovering.

What I have suspected - in private at least - is there will be a reversion of those rising interest rates when equities start to sell off hard, persuading buyers into the bond market. When markets finally bottom (in nominal terms) late-2010 through mid-2011, I expect interest rates to creep up again.

EDIT: There was a lot more I wanted to add to this post but my girlfriend's parents came over and we we're drinking wine, so I wasn't able to complete this in its entirety. I'll finish it tomorrow...I have some very interesting stuff for you guys.

Twitter My Fibs! I Have Tons To Look At!

I'm almost getting as good as Tim Knight at naming my posts!

1.- TWITTER

For those of you who interested in following my intraday ES trades via Twitter here is the address: http://twitter.com/amgrant78

2.- FIBONACCI

Sometimes simple is better. As the saying goes, "Keep It Simple Stupid".

Below are two charts I am closely following that clearly show my line in the sand when it comes to fading the market short or continuing with my longs.

The first is a picture of the Dow Jones Industrial Average (INDU) and its Fibonacci retracement levels that extend from its all-time lows on July 8, 1932 (40.60) to its all-time highs on October 11, 2007 (14,198.10). As you can see, we are currently sitting at the 38.2% retracement level.



A similar pattern is displayed on the CBOE Volatility Index (VIX) using its all-time low on December 15, 2006 (9.39%) and its all-time high on October 24, 2008 (89.53%) as its reference points. Here, the 78.6% retracement level is acting as support.



Any significant close above/below these levels is my indication that we have finally picked a direction.

My belief is that the longer we stay in this holding pattern the more bearish I get. The onus at the moment is not on the bears to push prices down, but on the bulls to push prices up and prove the 3-month old rally will continue.

My expectation over the next two trading sessions is a continuation of this oscillation around the 940-945 area on the ES contract, with a significant pullback occurring next week down to the 900 level.

I remain with the conviction that we will see 900 before 960, as per my post on June 9, 2009 - Lines In Sandboxes.

3.- TONS TO LOOK AT

The dynamics in all markets - equities, commodities, bonds/interest rates, real estate and foreign exchange - at the moment are absolutely incredible and from a historical perspective, it's quite interesting to study the relationships between them.

Money tends to flow to areas where it is best used and its efficiency maximized, but right now it's having a hard time finding a home.

On one hand we have equity and commodity markets that have run their course (or are close to running their course), a bond market that is in complete disarray, a US dollar that is on the verge of collapse and a plummeting real estate sector (no the bottom is NOT in). So the question is where will capital flow next?



This particular question is so vital which why I think we are at such a perilous moment. If capital has no where to run, the markets' price discovery mechanism will adjust prices to the downside until it finds some kind of floor where buyers are more willing to step in.

Which brings me to my final point tonight.

4.- THE MASSES ARE USUALLY WRONG

There has been many a discussion regarding deflation vs. inflation as of late. Now, I am not claiming to be an economist nor an expert in deflationary/inflationary recessions but a good rule of thumb I have used for god knows how long (even outside of my investing/trading) is one to bear in mind:

"The masses are usually wrong"

Intuitively we all know this, but we also often find ourselves alongside, and agreeing with, the very same people we think we are so different from. To be a true contrarian requires the discipline to step outside of oneself and imagine and rationalize, the absolute opposite of what the crowd is saying.

I'll tell you what the crowd is saying now:

• Put your money in commodities
• The reflation trade is back
• Deflation is history
• Yields are going through the roof - "I remember the days of 15% or higher"

Now, I'm not trying to say that inflation is not a concern - it definitely is. But was it not just a few months ago we are were all scared of deflation?

This is something to keep in the back of your mind.

Beautiful Symmetry!

See my post on The Power of 9.

Lines In Sandboxes

1.- IMPORTANT JUNCTURE

We are at one of the most important junctures of this bear market.

Gary over at The Smart Money Tracker has an interesting article relating to the 950 level on the S&P 500. Some of the salient features of his article with respect to this level are:

• It acted as support during the September 11, 2001 terrorist attacks
• It acted as support during the 1998 LTCM crisis
  
• It acted as resistance during the counter trend rally in January 2009
• It formed the breakout line that initiated the bull market 2003 - 2007

From a long term perspective this has huge implications. Effectively, it has served as an inflection point of sorts between changes in trend for the past decade.



The only way this market is going to penetrate this incredibly important level with lasting results is by finding genuine buyers to push it through, but it simply can't occur (again, on a lasting basis) without a pullback. The caveat, however, is any pullback - and the bulls likely know this - is going to be a massive wave of selling and its going to require a lot of conviction on behalf of new buyers to buy that 'dip', particularly after the 40% run-up we've seen since the March lows.

The market at this juncture resembles a roller coaster at the top of its peak. Both volatility and volume have come in tremendously and my now infamous divergent A/D ratio chart is even more divergent. There is always calm before the storm and right now things are more quiet than at any other time in the past several weeks.

There are no surprises, for the most part, to the upside anymore. The end-of-day buy programs are simply not as shocking as they were even a few weeks ago. Both bulls and bears have reached a level of, not only acceptance, but agreement that buying dips is the way to go and a breach of the SPX high at 951.69 is a CLEAR indication that we are off to the races.

This to me absolutely screams a top.

This being said, I'm going to make a prediction that we hit 900 before we hit 960. I typically don't like predictions since it can have unwanted unconscious effects on your trading but I also like to stick my neck out from time to time.

I expect the rest of the week to be lackluster and gyrate around the 940-945 area.

EDIT: Today's small change in the McClellan oscillator suggests a large price move tomorrow. Looking at current futures, seems big move will be to upside - time will tell however. A break of 950 on good volume will be a welcomed sight...we're all tired of the price action as of late.

2.- TODAY'S ES TRADING

I wanted point out another great example of today's ES trading and the rationale behind one of our long trades.

I blogged about the The Power of 9 - that is, the preponderance of intraday impulse waves to be approximately 9 points in range. Today was such a great example of this.

Note the oversold RSI(9) around 8am PT (11am ET) and the 9-point range of the previous impulse wave (945 to 936). When a cluster of indicators come together like that, they make for incredibly high probability trading.

Where Do We Go From Here?

I want to follow-up on one of my previous posts - Falling Balls and Markets. The $64,000 question is when, not if, will we get a correction? At some point this madness we all call a rally will be history, and I suspect the ensuing correction will inevitably cause further financial pain to the average investor.

To put it bluntly, probabilities favor a significant correction by the end of August 2009 which is not that interesting of a prediction considering we've been rallying 3 months straight, but if you were to put a gun to my head that's what I would say.

For full disclosure, I sold into the rally June 1, 2009 and am sitting in 75% cash and 25% precious metals in my 'passive' retirement account after having banked over a 40% YTD. I had 25% exposure to the general market, 50% exposure to commodities, and 25% in precious metals, the latter of which I foresee exploding through the stratosphere over the next year. I also manage a self-directed retirement account, but this is a more active investing style, where my time horizon is greatly shortened.

Anyways, back to business. Below I outline the main reasons why I believe we are on the precipice of a significant correction.

1.- A Divergent Advance/Decline Ratio

The advance/decline ratio is simply a measure of the underlying strength of a trend and is measured by computing the ratio of # advancing stocks to # declining stocks. At the moment, we are experiencing a waning A/D ratio when the market is rising. The longer this bearish divergence lasts (currently 3 months old), the more significant the trend change will be when it finally occurs.

Similar divergences can be found in the McClellan Oscillator which I came across today over at Xtrends.



2.- Cycles

I am a believer that a natural rhythm occurs in markets of all varieties (bonds, commodities, etc). That is, a level of periodicity that reflects the ever-changing psychological make up of the masses.

Many cycles, including the Bradley Siderograph, point towards a significant sell off beginning July 2009 and lasting well into 2010.







Harry Dent, a well-known forecaster whose own cycles have been fairly consistent (although his remarks about the DOW going to 30K a few years ago was asinine), also point towards a significant downturn starting mid to late 2009. In fact, two of his cycles (the 4-year political cycle and 10-year business cycle) concurrently point down into this time frame.

I noticed today he has an update which you can find here.

Further cycle-related evidence I came across can be found in this article here.

I have seen more cycle work that I can't publish due to copyright laws, but they all pretty much say the same thing.

3.- Sentiment

"After two months of significant improvements, the Consumer Confidence Index is now at its highest level in eight months (Sept. 2008, 61.4)...While confidence is still weak by historical standards, as far as consumers are concerned, the worst is now behind us."

- Lynn Franco, Director of The Conference Board Consumer Research Center (May 26, 2009)

This kind of rhetoric makes a bears' mouth salivate. You want to know where we were in September 2008?



'Nuff said, as they say.

Also, see my post here regarding the front page article in the Vancouver Sun the other day.

One thing I will point out, however. This kind of complacency can go on for quite a long time, so I would not be shorting the market too aggressively until things really show themselves. We will know pretty quickly once the bears have regained control of the market. I will post once I think they have really turned this market on its backside.

Also, the US dollar is a major factor keeping all markets propped up at the moment. Anything dollar denominated is rising, particularly commodities so if you are hesitant about exiting I would keep my exposure in that area. I suspect when we finally do reverse course, commodities on the whole will likely go down less than other asset classes. International commodity-based markets, particularly the Canadian one, will likely outperform over the next decade. Which brings me to my next point.

4.- What Do I Do Now?

This is NOT a recommendation, but personally if I was still long the market I would absolutely reduce my exposure to stocks and go to cash. If you think US or Canadian bonds are a safe haven, you might want to reconsider. There will, however, be a PHENOMENAL opportunity down the road to lock in super high yields in bonds but I suspect that is a few years away. In the meantime, bond prices are likely to go down.

The name of the game at this point is not to lose money. Forget about making money (not entirely, but you get what I'm saying!). Investing is going to be very tricky over the coming years. Whether its real estate, stocks, commodities, etc...the easy money has been made and its going to require caution on your behalf to protect your ASSets.

The next bull market in stocks will be absolutely massive - I can guarantee you that. It will be an honest to god authentic bull market, but unfortunately there is some unraveling to do before all that occurs.

OK, last point...

5.- Interesting Correlation

I happened to be meddling around with some correlation analysis stuff I do and came across an interesting relationship that shows a natural cycle in the 100-week correlation between the SPX cash index and oil (disregard all the trendlines, etc on the chart).



It's interesting when oil and the US markets positively correlate, they do so for about 3 years (see red rectangles) and these periods occur roughly every 5 years. The periods that have positively correlated well are:

• 1988 - 1990
• 1995 - 1997
• 2000 - 2002
• 2004 - 2006
• 2009 - 2011 ?????

Correlation does not imply causation (anyone familiar with the way mortgage derivatives were priced will know that ;) ), but it is interesting to say the least.

Ok, that was a long post...going to have a glass of wine now!