Halloween Came Early This Year
Two posts ago I said this was the last post for the week. That was a trick. And since Wall Street has likely been giving you a trick, I thought I'd attempt to counterbalance in some small way with a treat.
Gross Domestic Product was not very pretty. In fact is was really ugly and so was the breakout data. But, hey, retail sales weren't that bad and the Fed will save us or so the thinking goes. In other words, I guess buying that new purse made in China is going to offset the substantial capex cuts being announced in an already comatose capex cycle. Or how about the CEO confidence surveys which are cratering. I bet that means said CEOs will start hiring more people and spending more on infrastructure given their sentiment which, by the way, is likely backed up by order rates, business activity and corporate economists telling them the business climate is deteriorating. Or the mortgage derivatives market which is pointing to a much uglier housing picture than we are experiencing. It's all good. Or, as the greatest value investor of all time, Ben Graham said, "Wall Street learns nothing and forgets everything.".
You can be quite assured we are not going to get any meaningful sell off before funds close their books at the end of October. Their paychecks matter most. So would yours if you were in their shoes. Plus, in a moment of paranoia, I suspect a little of this rally is a gift to politicians. A Democratic sweep in the U.S. elections would likely mean more Wall Street regulations, more oversight for hedge funds, potential business meddling, possible repeal of tax cuts or tax increases on the top income earners, a slow down in earnings from fat contracts for defense contractors, etc, etc, etc. So, why not do your part to help your fellow Republicans win the election by putting a little icing on the stock market? Enough conspiratorial thinking. I don't want to become too fringe. But, given the unusual underlying dynamics of this market, something unusual is happening.
I think I've only had two posts on here sharing any data from my short term models. Those were my October 3rd and 4th posts. I don't want to turn this into a trader's blog because I believe investors should not attempt to be traders and I don't subscribe to most people hopping in and out of stocks. But since this is a treat I thought I'd share a few graphics. Most of my work is pretty arcane because I don't want my work eroding over time.
The first set of three graphics include one of a suite of data points I use to anticipate a negative change in trend. It is extremely accurate. Does that mean it will always work? I'd hope so given human nature never changes but if everything were a certainty, we'd have our lives mapped out perfectly. If you want 100% certainty, you shouldn't be investing in equities. This is also confirming what my prior post on October 4th showed. That is an environment which does not appear to be a conducive to a continuation of this move up. I've smoothed it with a moving average shown in red since it can be extremely volatile. If it's not intuitively obvious, the graphic should be rising along with the market in a bullish environment. Graphic#1 is the 2000 bubble top. Graphic#2 is the May of 2006 top and Graphic#3 is today. All three are displaying the same algorithm.
Graphic#4 is a current chart. This is obviously a different algorithm. It started falling off of a cliff a week ago. Not that it was exactly bullish before last week. It is not smoothed but you can easily visualize there are no higher highs and higher lows. The direction is down. That it accelerated last week is not a good sign for the intermediate term.
Pricing action on all four charts is the NDX or Naz 100 which is my favorite proxy for the short to intermediate term trend. Remember, there is no magic bullet in life but with my long term models on sell and with some of my short term work falling off of a cliff, it would take an act of God to have me allocating capital to equities over the last few weeks. In addition, some of my other short term work shows some really reckless action started two weeks ago. The last thing I ever want to do is be one of the reckless crew. It's all about capital preservation, safety based investing and risk management. Now is a time to be defensive.
Gross Domestic Product was not very pretty. In fact is was really ugly and so was the breakout data. But, hey, retail sales weren't that bad and the Fed will save us or so the thinking goes. In other words, I guess buying that new purse made in China is going to offset the substantial capex cuts being announced in an already comatose capex cycle. Or how about the CEO confidence surveys which are cratering. I bet that means said CEOs will start hiring more people and spending more on infrastructure given their sentiment which, by the way, is likely backed up by order rates, business activity and corporate economists telling them the business climate is deteriorating. Or the mortgage derivatives market which is pointing to a much uglier housing picture than we are experiencing. It's all good. Or, as the greatest value investor of all time, Ben Graham said, "Wall Street learns nothing and forgets everything.".
You can be quite assured we are not going to get any meaningful sell off before funds close their books at the end of October. Their paychecks matter most. So would yours if you were in their shoes. Plus, in a moment of paranoia, I suspect a little of this rally is a gift to politicians. A Democratic sweep in the U.S. elections would likely mean more Wall Street regulations, more oversight for hedge funds, potential business meddling, possible repeal of tax cuts or tax increases on the top income earners, a slow down in earnings from fat contracts for defense contractors, etc, etc, etc. So, why not do your part to help your fellow Republicans win the election by putting a little icing on the stock market? Enough conspiratorial thinking. I don't want to become too fringe. But, given the unusual underlying dynamics of this market, something unusual is happening.
I think I've only had two posts on here sharing any data from my short term models. Those were my October 3rd and 4th posts. I don't want to turn this into a trader's blog because I believe investors should not attempt to be traders and I don't subscribe to most people hopping in and out of stocks. But since this is a treat I thought I'd share a few graphics. Most of my work is pretty arcane because I don't want my work eroding over time.
The first set of three graphics include one of a suite of data points I use to anticipate a negative change in trend. It is extremely accurate. Does that mean it will always work? I'd hope so given human nature never changes but if everything were a certainty, we'd have our lives mapped out perfectly. If you want 100% certainty, you shouldn't be investing in equities. This is also confirming what my prior post on October 4th showed. That is an environment which does not appear to be a conducive to a continuation of this move up. I've smoothed it with a moving average shown in red since it can be extremely volatile. If it's not intuitively obvious, the graphic should be rising along with the market in a bullish environment. Graphic#1 is the 2000 bubble top. Graphic#2 is the May of 2006 top and Graphic#3 is today. All three are displaying the same algorithm.
Graphic#4 is a current chart. This is obviously a different algorithm. It started falling off of a cliff a week ago. Not that it was exactly bullish before last week. It is not smoothed but you can easily visualize there are no higher highs and higher lows. The direction is down. That it accelerated last week is not a good sign for the intermediate term.
Pricing action on all four charts is the NDX or Naz 100 which is my favorite proxy for the short to intermediate term trend. Remember, there is no magic bullet in life but with my long term models on sell and with some of my short term work falling off of a cliff, it would take an act of God to have me allocating capital to equities over the last few weeks. In addition, some of my other short term work shows some really reckless action started two weeks ago. The last thing I ever want to do is be one of the reckless crew. It's all about capital preservation, safety based investing and risk management. Now is a time to be defensive.
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