SPX Elliott Wave Interpretation

Obviously this interpretation is somewhat subjective but it's not based on looking at this chart alone. If this is right we should see some upside in the next few days followed by more downside. The ultimate bottom would be still 3-4 weeks off. I don't think it will be a lot lower than the wave 3 lows. E-Wave suggests the lowest it will go is about 1225-1230. If that is exceeded we need a whole new wave count.

There is a risk of missing the bottom here. I've posted a lot of bullish stuff recently. But I think I will wait till the next bottom on the weekly chart before taking on a lot more risk.

Retest Underway

A new downtrend has started in the stockmarket that will test the low established in the week of 21st January. It is likely that at this coming low I will go massively long, unless indicators are telling me otherwise. My moves, up till now, have been very small in comparison. Take a look at the chart of GOOG - there are a nice 5 waves down since the beginning of 2008. The NDX now appears to be catching up in a 5th wave down. From an Elliott-Wave perspective, it's likely that the move from July to August 2007 is a three-wave wave A. We then have wave B from August to early November and since then wave C; with us now in the final wave 5 of C. We can apply the same interpretation to the SPX, except that wave C already got underway in October. The entire formation is an expanded flat. I long suspected that something like this was occurring since July, but didn't know how big each wave would be. Of course I could still be wrong, I don't use E-Wave as a primary method of predicting the market but just one way of putting what is happening into a framework.

My bigger picture is that this move is just wave 4 since the 2002 low and not a major bear market. Expect a bigger correction heading into the four year cycle low in 2010. But expect a bull market before that. Expect most people to be wrong.

The only move I made was buying some XHB puts yesterday. I'm not in a daring mood.

Short Term Trends: Asia vs. America

Though my US (NDX and SPX) models switched to short at Friday's close, the Australian and Japanese models are still long with no possibility of a short for several days in all likelihood. My guess is that this divergence means global markets will go sideways this week. In fact it is easy to see that if the indices remain unchanged for the next week, Australia will shoot up into the overbought zone as defined by the daily stochastics, while in the US the stochastics will decline. This isn't based though on any historically similar period - I probably should look into finding examples. I'd still expect plenty of volatility this week. But if this happens it will be another strong point in favor of the bottom being in.

The Australian market is closed today for Australia Day (which commemorates the arrival of the first British settlers in Sydney in 1788). But I'll be following Japan and the US futures to see what happens.

Ten Year Low in Bullishness

Ten year low in bullishness. As you'll see these low levels of bullishness tend to be at market bottoms not tops. The contrarian approach fades the crowd and the crowd is bearish now. Investment newsletter writers are too.

Investment Returns in the Millennial Decade

The source of this table is this week's edition of Barron's, which I subscribe to. US stocks have not been a good investment so far this decade. Of course if you dollar cost average in you would have bought quite a lot at lower prices in 2001-2004. even better if you'd tried to time the market any time in 2002. Dollar cost averaging the SPX over this period returned 3.81% by my calculation. The MSCI World Index (All Country Gross) returned 4.18% p.a. So foreign stocks weren't that spectacular either. Moom's return over this period BTW was 7.2% per year. As "The Fly" would say: "Odd, no?" :)

Cramer Revisionism

Cramer's revisionism. Cool video pastiche.

U.S. Restaurant Stocks

Take a look at the charts of these U.S. restaurant stocks:

Starbucks
Cheesecake Factory
Darden
Ruth's Chris
Ruby Tuesday
Buffalo Wild Wings
Jack in the Box
IHOP
Brinker
Wendy's
Morton's
Benihanna
P. F. Chang
Texas Roadhouse
Peet's
Domino's Pizza
California Pizza Kitchen
Papa John's
CKE
J. Alexander
Cosi
Cracker Barrel
Krispy Kreme Donuts
Rubio's
Bob Evans
Denny's
Grill Concepts
Steak n Shake
Chuck E. Cheese
Panera Bread
Jamba Juice

This one was doing well till recently:

Einstein/Noah Bagels

There are plenty more once you start digging...

Mostly they look as bad as homebuilders or financials. I got the idea of checking this out after reading in some article about what a bad stock Ruby Tuesday is. There are some exceptions:

Yum Brands
McDonald's
Burger King
Chipotle

The first three are all low price fast food chains. These are doing well, but mid- and high-range restaurant stocks are doing terribly. Sign of recession?

Any Australian restaurant stocks?

P.S.

I found an Australian one - Domino's Pizza:



Not too hot either.

Trading in the Zone: Review

I've now read Trading in the Zone by Mark Douglas. There are lots of reviews that give the book high praise. My review sounds very critical, but probably this is because I am already aware of a lot of a lot of the issues covered in the book through reading trading blogs such as Brett Steenbarger's.

The author is a trading coach but not a psychologist. He is right on the mark in describing the emotions and thoughts traders have which damage their performance but one of the weak points of the book is any of his discussion of how the brain works or any other science for that matter. We read of beliefs being conscious of themselves, the law of conservation of energy applying to such beliefs etc. Other weak points is that the first ten or so chapters could be much condensed. He only really gets to the point in the final chapter: "Thinking Like a Trader". It would also be helpful to have far more examples of actual traders that Douglas has encountered who illustrate his points. There are very few such examples. I can only think of two off the top of my head. Instead there are pages and pages of the single example discussion about a hypothetical boy who is afraid of dogs.

One of the key parts of Douglas' prescriptions for successful trading is to have total confidence in your ability as a consistent trader. What he doesn't address is the real possibility that your trading system stops working in terms of giving you an edge due to temporary or permanent changes in market conditions. What do you do then? How do you know that the edge is gone?

On the plus side he is right about the nature of the markets and the problems traders face and what is necessary to trade in a consistently profitable fashion. There is really only one exercise in the final chapter aimed at changing the trader's thinking. This is of course a very important exercise. One insight I did get was into the nature of "self-sabotage". Douglas says that our belief that other activities are more important or valuable than trading causes us to get distracted and not pay attention to the market and then make mistakes and lose money. This might be especially true once you had made some money - you might think - "OK now I can get back to more important stuff that society values more highly" - and then your profits are lost.

Though my comments here are mostly critical, I'd still give this book 4 stars if I was doing an Amazon.com review. It would be especially valuable for people who have gotten started trading and are experiencing their first round of frustration with not being able to hold onto profits.

Phoenix Market Neutral Fund Changes Managers

A follow up to the story I reported earlier this year about TFS Capital's approach to the directors of the Phoenix Market Neutral Fund, offering to take over management of the fund. It turns out that though Phoenix did not respond to TFS they did decide to change the manager of the fund. I can't find any more information on this event even on Phoenix's website.

Is that the Bottom?

Howard Lindzon is calling a bottom in the stock market here. Is this the bottom? My model appears to be exiting the noisy conditions that made using it almost impossible and is now giving a much clearer signal. Expect some downside starting most likely on Monday. It is also signalling that we remain oversold not overbought. Conditions look very similar to early August where a consolidation in the market was followed by a plummet to the final lows on August 16th. This could happen and looks like the likeliest scenario to me and is supported by a lot of other stuff I am seeing. But this could be the bottom. We'll only really know when the next low occurs next week - will it be a higher low or a lower low? In the meantime enjoy the rally :) The fundamentals behind this rally are supposed to be the investment by Abu Dhabi in Citigroup and the possibility of rate cuts. Both facts show that things are very bad but help is on the way to stop them getting even worse. The fact that Citigroup needs this capital injection on such bad terms is very bad news. But I guess the market thought that things could be worse and noone might come to Citigroup's rescue.

Australian Election

I voted yesterday in the Australian Federal Election. Snork Maiden came along, even though she can't vote here, and I was surprised to find we had to stand in line to vote, like (now former) prime minister John Howard in the picture. I didn't encounter that in previous years here (or in England). I voted Labor for the first time here in Australia. Labor seem to have finally moved much closer to the centre than in any time in their eleven years out of power. The Hawke-Keating Labor government before 1996 was a very reformist administration, but after they lost power the party swung left and stayed out of power till now. The Liberal Party didn't seem to have much of an election pitch except to warn of the dangers of electing Labor claiming them to be inexperienced and extremist. Many people seemed to have also decided to give the other guys a chance. Labor's main difference with the Liberals was on their plan to roll back some of the Liberals labour market reforms - this would have put me off voting Labor. What swung me to Labor was their more convincing approach to climate policy. In fact I voted Green with my second preferences to Labor. In Australia we get to order candidates according to how much we prefer them rather than just choosing one candidate. If your first choice candidate doesn't get enough votes to win a seat your votes are transferred to your second choice candidate and so forth. Another unusual feature of Australian elections is that voting is compulsory.

Here in the ACT it is pretty much guaranteed that Labor will win both lower house seats and that the Senate will split one Liberal and one Labor senator. So voting for a minor party can indicate a policy preference while your vote in the end goes to one of the major parties. I've long thought it would be nice if we could de-bundle political parties - choosing different parties to represent us in different policy areas.

Petrol Consumption

Amazing that Australia uses more petrol than France that has three times the number of people. Price of filling up a Honda Ciivc here is currently $US60. It would have been lower last November probably when this table was created.

Weak Economy, Low Inflation, Record Low Bond Yields?

John Mauldin forwarded his subscribers (subscription is free) an interesting article by Hoisington and Hunt today. They point to low inflation and low growth this year rather than an outright recession but also what they describe as "record low bond yields". A continuing fall in interest rates has been one of my themes for a long time and the reason I hold so many bonds (in mutual funds). Falling interest rates mean rising bond values. Periods like this are when bonds perform well and tend to outperform stocks if the reason for falling rates is economic weakness.

Traits that Lead to Success

How many of these traits and habits do you have? I think I have several, though I'm not a very good networker. That's my weakest point.

Amusing Article about a Hedge Fund Conference

An amusing article about a hedge fund conference. One guy wants to start a hedge fund and has never traded anything! Even if my trading model works out really well, I wouldn't want to start a hedge fund. Not anytime soon anyway.

Bill Gross' Latest Commentary

More evidence that in Gross' opinion the recent bear market in bonds is over.

Hussmann and Svenlin on the Stockmarket

Here is the latest from Hussmann on the stockmarket. He seems to be one of the smarter guys around with regard to market analysis. Basically, he says hedge your stock portfolio against loss at this point. This is what I have been doing (after a rebound in the Aussie markets in the last two days my investment return for May seems to be 0% exactly :)).

Why hedge rather than just selling everything and going to cash? In taxable accounts there is the capital gains tax issue. If you sell you pay the tax with 100% certainty and you especially don't want to pay the short-term rates (as they are in the US and Aus) if you can avoid it. If you hedge and you are wrong you sell the hedging instrument (or buy back shorted shares) and take a capital gains loss. Another issue is mutual funds cannot be traded intraday. In reality there can be a day or two delay in getting the transaction done. If the market moves up suddenly you lose out. Hedging positions are normally much more liquid - I hedge with shares or options on ETFs or heavily traded stocks. For big investors, individual stocks are illiquid, they hedge in the futures market which is much more liquid.

Of course you can get more aggressive and overhedge until you are net short. I am slightly net short by standard measures. Again it is a risk if you are wrong - in the long-term stocks go up and based on the law of percentages up moves are bigger than down moves - a stock can only go to zero on the downside - but can go up infinitely in theory on the upside...

Carl Svenlin has posted an article on shorter term technical trends. I think that short term bounce is likely completed for now, but a larger rebound will happen in the first half of June.

Stockmarket Slide Continues - Is Slowing Growth or Rising Inflation Responsible?

The slide in global stockmarkets continued today (and tonight in Asia). Not getting a lot of attention yet in the mainstream media (in the US at least) and in the financial media commentators are mostly remaining bullish. Bill Gross has posted his annual economic outlook. The bottom line is he still expects inflation to be low and bond yields in the US to remain in their recent range. He expects global growth to remain relatively strong. Others also think that the inflation outlook is benign but that global growth is likely to slow. This is on the whole my take, but I think the US stands a strong risk of outright recession in the coming year. Barclay's Bank warn that current conditions are very similar to those in 1987. I already made the same analogy with the big caveat that resource prices have been rising now, which wasn't the case in 1987. Others are similarly bearish but are looking for the main decline in the markets to occur in the Fall. There is no reason why we have to wait for the Fall for a crash to occur. On the other hand a slow slide across the midle of the year is entirely possible as are strong countertrend rallies on the way.

Something interesting is that bonds have begun to rebound from their recent lows. The sell-off in gold and other commodities may also have exhausted itself. I don't see us as being in a commodity price bubble. There is a genuine shortage of supply in many commodity areas. Perhaps the long-term trend of declining real resource prices (except for forest products) has begun to reverse? In the very short-term I am expecting a flight to safety to US government bonds and gold as stocks slide further. Regarding my own portfolio today, I rolled my QQQQ put options to a lower strike to free up some equity and buy gold with it. I also shorted more Google shares.

Global Markets Update

Here is Bill Gross' latest commentary. The last days and weeks have seen rapid movements in exchange rates, interest rates, stock prices, commodity prices etc. Volatility is increasing. Having some computer problems and so haven't yet produced final April numbers. Yesterday, the first day of May, though, was extremely good for me, especially in the US Markets. Stocks fell sharply, especially after Maria Bartiromo said that Ben Bernanke had told her he was misunderstood. Didn't do any good for my bonds of course (and the US Dollar reversed course and went up - though it's down again this morning). In the morning I covered 20 shares of my GOOG position and then in the afternoon started a short position in AAPL. Google went under 400 - Apple fell too - but would have been better to keep all 120 shares short of GOOG I had in the morning! Am also short (and have puts on) QQQQ. So that helped too.

Weekend Links

John Mauldin's latest weekly letter is all about the weakening US Dollar and the Federal Reserve. Included is this great video! :) We've been watching Ben Bernanke in the Introductory Economics course I teach. We use the textbook the coauthored with Robert Frank and keep uptodate on his progress. And then this crazy real estate listing! That wild insider trading case again, and, finally, an article on renting vs. buying from the Economist.