Friday, September 18, 2015

As expected

No surprise this week except the market behavior after the announcement that rates won't be increased. I expected a big rally after 2:30pm yesterday. However, market rallied indeed but closed on red by the end of the day. Not only that but it continued to plunge today. Anyway, I've got rid of my long positions and now I'm mostly in cash and a little bit in bonds.

As I said last week, in my opinion, the reason market plunged in the last 30 days was not due to rumors that Feds may hike the interest rate, it was due mainly the weaknesses seen in the emerging markets, China in particular. 

Here is the paradox, a rate increase, despite the fact that the Wall Street was going to hate it on short term, it would have been signaling that the economy was doing fine. During the 2007-2009 bear market, Wall Street pushed the market up after each rate cut. However, one month later we could see market bellow the level was seen at the time of the rate cut announcement. Exactly the opposite was seen during the 2003-2007 bull market, every rate hike was met by a small plunge but after a few weeks market was eventually above the levels seen at the moment of the announcement.

Today we are in a very weird situation, the Feds are keeping the interest rates close to zero despite the huge stock market gains in the last 6 years. This is actually a very bearish signal, it says that the economy is actually very fragile and can't deal with even a small increase in the interest rates.

These are uncharted territories and one should be very careful at this point. A rate increase today after 6 years into the bull market and SPX gaining 200% since 2009 bottom is not the same as hiking rates 1-2 years into the rally. 

Anyway, let's have a look at the long and intermediate time frames.

On long term what is noticeable is that SPX did not made a lower low this week. Actually it went up a little bit. Not very surprising keeping in mind that SPX did approach a serious support level according to my timing method (SMA 120 on weekly) and it was the week when the Feds decided not to increase the rates. 

Long term bearishness is still in play! We are still in the bull market but we need to be very cautious at this moment. 

On intermediate time frame it's easy to notice that SPX went briefly outside the trading range. However, by the end of the day SPX was still in the 1915-1990 range. 

In conclusion, market remains volatile on short/intermediate time frames but bearish on longer time frames. We are still technically in a bull market but  keep in mind that this kind of bearishness was not seen in 4 years. Remember that you don't need to be invested in the stock market all the time.
Your first worry should not be how to make more money but what should you do to NOT to lose money. One way is diversification (including cash and bonds), other option is having STOPS in place. There are pros and cons in favor or against using Stop-Loss or Stop-Limit orders. I am going to touch this subject next week. My favorite way to protect my longs or my shorts is to buy options. This is a pretty complicated subject for those with little experience in the market but I'll do my best to simplify the issue. 

See you next week!
Once again, don't be a hero, be conservative with your investment at times like these ones!

Safe trading!


Friday, September 11, 2015

Very little change

A week with a bit of gains but this doesn't affect the long term at all. More exactly, after making a lower low last week we saw another lower high this week. It is possible to see a fresh lower low next week that is going to put bulls in an even worse situation that they are already in.

However, the decision to not raise the rates this month is more likely to lift the market pretty dramatically, at least for one day. If the gains are going to hold or not... this is a separate issue. Market is not down at the moment due to rumors that the Feds may increase the rates, is down because China and the emerging markets are in trouble and because some European economies are struggling as well. A rate increase will give bulls one more reason to trim their shares so I don't think this is going to happen.

Technically, market is looking pretty bad at the moment. If SPX it's going to plunge bellow the bull market uptrend line (around 1,800) the panic will set in and more likely we'll going see the beginning of a new bear market. 

This week is going to be decisive for the long term. A close bellow SMA 120 would be a very serious warning in my view and one bellow 1,800, not necessarily this week but at any time in the future will be THE sell signal. But let's not anticipate. Once indexes are touching very important technical levels they tend to bounce first even for a short period of time. 

To get rid of this long term bearishness bulls need to stop SPX making lower highs and lower lows on weekly chart. A close above 2,000 will do the trick according to the weekly chart.

On shorter time frames, hourly chart, it looks like SPX is not going anywhere. Despite these crazy intra-day or day to day swings, SPX has traded for more than two weeks in the 1,915-1,990 range. Any close above or bellow this trading range would be significative on intermediate time frame. 

In conclusion, market most likely will remain volatile until Feds meeting. Once the decision is going to be in, 99% chance they won't raise the rates, market will make a decision and most likely is going to go out of the trading range one way or the other. 

Even if the market is going to rally on intermediate time frame, without a clear higher high, meaning above 2,200 on SPX, the long term bearishness will be there. I repeat, I haven't see so much long term bearishness in 4 years. Personally, I am mostly in cash and bonds and only 10-13% in stocks. I may very well sell everything into a potential rally.  

Take care! Be safe! Don't be a hero, this is not the right time!


Friday, September 4, 2015

Lower low on weekly chart

Bulls and bears are exchanging insults on every financial board at a rate I haven't seen for a while. This is due to the huge volatility we have these days that makes market swinging strongly in both directions so everyone is right for one day and wrong the next day. What makes me laugh is they are bragging about huge gains one day then, if next day they are losing everything plus change they are arguing they are in the market for the long term.

I hope you are not joining the chorus no matter if you are a bull or a bear at the moment since arguing with other people is making your blood boiling and you are very likely to make wrong moves.

Market is doing about the same as last week, it made a lower low on weekly chart on all indexes (or indices if you prefer this version, both are correct by the way) except Nasdaq where the lower low is present but is not as convincing as one on Dow or SPX. So technically this week is more bearish than the last week despite the fact that today market is above the low seen on Monday, September 24th.

The bull market uptrend line is around 1,800 at the moment, so if you see a big move bellow this level next week that will be a very bad sign. Keep in mind that the uptrend line is moving up at a rate of 15 points per month more or less, so if SPX is going to move up on short term or trade sideways for say another 3-4 months from now and only then move bellow the uptrend line, that line is going to be in the 1,845-1,860 area.

On a shorter time, like on an hourly chart, things are neutral at best if not bearish. SPX managed to make a higher low but failed making a higher high. For this market to turn bullish on this time frame SPX needs to climb to 2,020, which is 100 points above today's close. Not an easy task and even it is going to happen next week it won't affect the long term bearish momentum.

Another point I would like to make is that you should use a logarithmic chart if you want to understand the magnitude of move up or down compared with similar situations in the past. A 200 points move down from 2100 to 1,900 is not the same percentage wise with a 200 points move from 1,200 to 1,000 on SPX. On an arithmetic chart they will look exactly the same.

The recent drop is worse than the one seen on October last year, about the same with one in 2,010 but less that the drop in 2,011. However, don't forget the recent wave down may not be over.

To give a clearer picture of a difference between logarithmic and arithmetic charts look at this 1975-2015 chart. In 1975 SPX was around 50, in 1995 was around 450, a (9 times increase). In 2000, at the top SPX was around 1,500, about 3 times higher than it was in 1995. However, from the arithmetic chart you may believe that the 1995-2,000 period has the most gains.

 Look now at the logarithmic chart.

In conclusion, market remains vulnerable on long term and neutral to bearish on shorter time frames. A good idea at this point is to trim the stocks and move into bonds. If market is going to move a little bit up from here you are still going to make money with bonds but if the market turns ugly the loss will be substantially less with bonds. Personally, I have some money in a very good bond mutual fund, FGMNX, one of the few bond funds that actually increased in value even during 2007-2009 bear market.

All the best and safe trading!