Below are some investment-related articles I am reading:
Could Oil Prices Intensify a Pending S&P 500 Selloff? – JW Jones
Towards the Paranormal – Bill Gross
Bill Gross’ summary: ”For 2012, in the face of a delevering zero-bound interest rate world, investors must lower return expectations. 2–5% for stocks, bonds and commodities are expected long term returns for global financial markets that have been pushed to the zero bound, a world where substantial real price appreciation is getting close to mathematically improbable. Adjust your expectations, prepare for bimodal outcomes. It is different this time and will continue to be for a number of years. The New Normal is “Sub,” “Ab,” “Para” and then some. The financial markets and global economies are at great risk.”
2012: A Year of Choices (pdf) – John Mauldin
Momentum for Dummies – Mebane Faber
Leading Indicators and the Risk of a Blindside Recession – John Hussman
Five Global Risks to Monitor in 2012 – Bill Hester
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DJI Oscillator Rising Index Signals Trouble – Tom McClellan
The Great Leading Indicator Smackdown: New Update and ECRI Recession Call: Growth Index Shows Further Contraction – Doug Short
Using Commodity Prices to Identify Secular and Cyclical Trends in Equity Prices and Why It’s Bearish Now (pdf) - Martin J. Pring
Disclaimer: No current positions in stocks mentioned. Please note that Scott’s Investments and its author is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott’s Investments.
David Banister has released his new projections for Gold here. You’ll remember last week I posted a gold forecast projecting a short-term dip. It’s possible that “dip” could be coming to an end if Banister is correct. The smarter play, however, may be to look at GDX (Gold Miners ETF) because the Gold to XAU (Gold & Silver Miners Index) ratio is currently at 8.49, high by historical standards. For some background on how to use this ratio, please search my site for “GDX” or see my previous articles here and here.
A Second Lost Decade: an Update of the Secular Bear Market in Equities (pdf) – Pring Turner Capital Group, Pring.com
Did Tail Insurance Turn South in Recent Market Volatility? Geoff Considine
Brace for a Long Recovery From Global Credit Glut: Simon Johnson
Fed Policy – No Theory, No Evidence, No Transmission Mechanism – John Hussman
Is the US Monetary System on the Verge of Collapse? (pdf) John Mauldin
Preparing for a Credit Crisis (pdf) John Mauldin
Nursing the Patient (Part III): Unwinding the Monetary Mess (pdf) – BCA Research via Cumberland Advisors
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Disclaimer: No current positions in stocks mentioned. Please note that Scott’s Investments is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott’s Investments.
I had hoped to run some more screens and update some previous screens, but a few things have come up this week that may limit my postings. Thus, below is a list of some of the better articles I have read over the past few days:
This is a trader’s market. It is not time to buy and hold large indexes or high-beta stocks and expect to be made whole over the next ten years. Hope is not a strategy. But waiting for the “shoe to drop” is frustrating, I know. However, that is the situation we find ourselves in.
We will go into this next week, but the current environment is quite different than 1982, when the last bull market started. Rates were falling; they are now likely to rise over time. Taxes were going down. Valuations were at historical lows, not high and rising. Inflation was coming down. And on and on. The current environment is not one in which bull markets are born.
Invariably, the strongest engine of growth at the outset of economic recoveries is rapid expansion in debt-financed classes of expenditure such as housing, autos and other forms of durable investment – something that is unlikely here outside of a brief burst of inventory rebuilding. Moreover, there is a widespread tendency here to extrapolate the trend of recent improvement into 2010, without considering that the improvement is almost exclusively a reflection of government spending (see, for example, the dull performance of personal income once transfer payments are excluded), and that the strains in the employment market coupled with high loan to value ratios and heavy mortgage resets nearly ensure fresh credit deterioration….
…Most of what we are seeing now is a tendency to make marginal new highs, back off slightly, and then recover that ground enough to register another marginal new high. As I’ve noted frequently, when market conditions are characterized by unfavorable valuations, overbought conditions, overbullish sentiment, and upward yield pressures, the market’s tendency is exactly that – to make continued marginal new highs for some period of time, followed by abrupt and often steep losses virtually out of nowhere. Being defensive in that situation can make each slight new high feel excruciating, even if the market is not making much net progress.
If 2008 was the year of financial crisis and 2009 the year of healing via monetary and fiscal stimulus packages, then 2010 appears likely to be the year of “exit strategies,” during which investors should consider economic fundamentals and asset markets that will soon be priced in a world less dominated by the government sector. If, in 2009, PIMCO recommended shaking hands with the government, we now ponder “which” government, and caution that the days of carefree check writing leading to debt issuance without limit or interest rate consequences may be numbered for all countries….
…The fact is that investors, much like national citizens, need to be vigilant and there has been a decided lack of vigilance in recent years from both camps in the U.S. While we may not have much of a vote between political parties, in the investment world we do have a choice of airlines and some of those national planes may have elevated their bond and other asset markets on the wings of central bank check writing over the past 12 months. Downdrafts and discipline lie ahead for governments and investor portfolios alike. While my own Pollyannish advocacy of “check-free” elections may be quixotic, the shifting of private investment dollars to more fiscally responsible government bond markets may make for a very real outcome in 2010 and beyond.Additionally, if exit strategies proceed as planned, all U.S. and U.K. asset markets may suffer from the absence of the near $2 trillion of government checks written in 2009. It seems no coincidence that stocks, high yield bonds, and other risk assets have thrived since early March, just as this “juice” was being squeezed into financial markets. If so, then most “carry” trades in credit, duration, and currency space may be at risk in the first half of 2010 as the markets readjust to the absence of their “sugar daddy.” There’s no tellin’ where the money went? Not exactly, but it’s left a suspicious trail. Market returns may not be “so fine” in 2010.
Why does David Rosenberg (Gluskin Sheff) always try to rain on the bulls parade!? (pdf)
“The credit collapse and the accompanying deflation and overcapacity are going to drive the economy and financial markets in 2010. We have said repeatedly that this recession is really a depression because the recessions of the post-WWII experience were merely small backward steps in an inventory cycle but in the context of expanding credit. Whereas now, we are in a prolonged period of credit contraction, especially as it relates to households and small businesses (as we highlighted in our small business sentiment write-up yesterday).
In addition, we have characterized the rally in the economy and global equity markets appropriately as a bear market rally from the March lows, influenced by the heavy hand of government intervention and stimulus. But in classic Bob Farrell form, 2010 may well be seen as the year in which we witness the inevitable drawn out decline that is typical of secular bear markets. There may be some risk in industrial commodities if global growth underperforms, but the soft commodities, such as agriculture, may outperform in the same way that consumer staple equities should outperform cyclicals in an environment where economic growth disappoints the consensus view. Gold is operating on its own particular set of global supply and demand curves and should be an outperformer as well, especially when the next down-leg in the U.S. dollar occurs. We are not alone in espousing this view — have a look at Why Consumes Are Likely to Keep on Saving on page C1 of today’s WSJ.”
From Pring Turner Capital Group, Are You Prepared for Another Lost Decade? (pdf), some outstanding charts show that, in their opinion, we are only halfway through a secular bear market. However, they argue one can still profit in this type of environment:
“Buy and hold, indexing, and static allocations may work in a secular bull market but they are losing strategies in a secular bear market. In the current environment it is more important than ever to pay attention to the business cycle for financial success. Essentially, an investor needs two game plans, one for defense, to protect assets in difficult periods and one for offense, to grow wealth during favorable conditions. A prudent and profitable investment strategy should be flexible enough to actively adjust portfolio asset allocation, depending on where we are in the business cycle and the direction of the secular trend. With knowledge of business cycles, secular trends, and tactical asset allocation, it is possible to create better returns with less risk and most importantly to experience peace of mind.”
I don’t know where the market is headed. The best we can do is position ourselves to succeed. From a technical perspective, we are again at some important levels. I previously wrote in August that the gap in the S&P 500 (and SPY ETF) was going to draw us upwards at some point in time. That time came quickly, and the gap is now beginning to fill. The gap coincides with some key fibonacci levels. First, lets get some visual perspective on a monthly SPY chart from inception along with the MACD:
As you can see above, the MACD is showing positive momentum on a monthly chart. Now, we zoom in on the chart above to a weekly chart since 2007. The gap is evident. The gap also coincides with a key 50% fibonacci retracement level. If the gap is totally filled and the 50% level is filled, I think the 61.8% level is the next stop in short order. That means we could be headed to 1200 on the S&P 500 ($120 on SPY) if we move through the 50% level.
If you’re new to technical analysis, don’t do it alone. Consider John Murphy’sTechnical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications (New York Institute of Finance) or one of the many books by Martin Pring like Technical Analysis Explained : The Successful Investor’s Guide to Spotting Investment Trends and Turning Points
In addition, same yourself some time and consider using MarketClub’s Trade Triangles Technology as shown in this video example analyzing of the US Dollar Index.
Martin Pring is a prolific technical analyst and is considered by many a pioneer in technical analysis. It was with this in mind that I read a copy of his Trading Systems Explained: How to Build Reliable Technical Systems. A little bit of background about me: I am not a mechanical trader and have never developed a mechanical trading system for my own use, although I do have an interest and basic knowledge of technical analysis which was helpful in understanding the book.
Overall, this book serves as a great starting point for anyone interested in developing a mechanical trading system. What I enjoyed most about the book was that Pring was not afraid to use very specific examples of trading systems. He shows specific uses of moving averages and oscillators and shares his optimized results. The systems he uses are simple and easy to chart, which is encouraging to anyone new to trading. In addition, he gives four specific trading systems based on intermarket relationships. They are systems based on a) Equities versus short term interest rates, b) The CRB versus Gold, c) Bonds versus commodities, and d) Systems using relative strength. Again, in each example he shares his results for each trading system. Pring also uses the beginning of the book to cover the basics that every trader should be familiar with before risking his or her own capital. Mainly, the tools he emphasizes for risk management including stop losses and and the importance of testing systems prior to implementing them.
The primary drawbacks of the book would be that the results are 7-8 years old. It would be nice to see the out of sample returns on the systems Pring uses in the book. In addition, and this is not necessarily a drawback of the book itself, every trader is going to need a robust software platform to test potential systems and should not expect to rely on one book to provide the “holy grail”. The book’s emphasis in on longer term systems, which I find to be a benefit. However, short term traders should probably look elsewhere. Finally, the book’s title states its limitations: the book explains reliable technical trading systems. A beginning trader should seek out other books, especially ones that have more details on money management (especially as it relates to trade sizes) and the psychology of trading before implementing these systems.
In conclusion, I think Pring’s book could serve as a core book for anyone interested in mechanical trading. The book is specific, helping the reader get inside the head of a master technician and to understand the work involved in testing and optimizing trading systems. As with any book, don’t rely on it as the “holy grail”, but use it to help build your own master trading plan.