The Wisdom of Seven Charts, When Emotion Is Detached

Emotions, preconceived ideas, opinion, ideas, knowledge, beliefs ... mention a name of a stock, index, market, sector etc. and all these things will flood our grey matter. Hopefully from that will come a decision (of course many individuals are unable to come to any decision, but that is another story). Yet this decision will likely be highly biased to one's previous experiences and the previous experiences of others. Perhaps this is why the vast majority of fund managers consistently fail to outperform major market indices such as the S&P 500 or even the “old fashioned” Dow Jones Industrial.

Have you ever looked at a chart of a market going back over time and said to yourself, man, that was so obvious, even a 5 year old could have told you that this market was going up (or down as the case may be)? How about we walk through a real life case in point.

Below are six charts, representing major asset classes. In order to avoid any preconceived ideas, we have removed the names on the charts. We have placed a few trend and support lines on each graph so that you get an appreciation of what we are seeing, but that is it.

For each chart, try and give it a “bullish” or “bearish” ranking based on what pattern you see:

The first five charts we ranked as bullish. They all are well above their support levels and momentum is positive on at least a rolling 3 month (quarterly) basis. The last two charts look bearish, particularly the last. In fact the last chart has got some way to go before it would remotely qualify as being bullish.

Now to identify the charts. They are:

1. The Old CRB Index know known as the “CCI” ( an equally weighted index of 17 commodities)

2. The ETF “EWX” – a small cap emerging market tracking fund

3. The Fidelity High Yield Bond Fund –“SPHIX”

4. The “carry trade” ETF “DBV”

5. The Fidelity Emerging Market Bond fund – “FNMIX”

6. The US long bond ETF “TLT” [oops, gave that one away, sorry]

7. Our old favourite the USD Index.

We chose these charts because they are the most sensitive to any impending change to the asset class and because the trends have relatively little random noise.

We hope that your bullish/bearish perspectives don’t change now that you have discovered what each graph is. Of course if your perspectives have changed, then we rest our case.

It seems rather daunting going into Friday with futures markets on their knees, but it takes more than one day to change a trend, and as of the close on Wednesday, at least, each of the 7 charts above had reasonably clear upward or downward trends (perhaps with the exception of DBV and TLT). We don’t think that a storm in the desert will change anything.

Disclosure: Long EWX, DJP, TBT, UDN, PCY, JNK, DBV.

Comments

[mbkelly75]

Trends do tend to keep right on going and currency trends can go on for years - regardless of what else is going on. I like these charts - thank you for the update and your work here.

2009 Nov 27 01:43 PM

[User 492911]

My conclusion on seeing these charts is hardly 'Onward and Upward' as the author concludes with childish extrapolation. I have never seen such 'ripe' conditions for a major reversal. Dubai's 60B$ postponement is not significant in and of itself. Dubai's predicament has been known for a year. This could even have been a self-engineered mini correction in which they and their wealthy adjacent cousins made back much of that easily surmountable deficit. What it does show however, is how very fragile and over reactive this world speculative bubble is. There are many other extend & pretend shams that could be outed in the coming months, not to speak of mounting foreclosures, rising unemployment, lackluster holiday retail sales, and a forthcoming Tsunami of CRE resets, any one of which would reverse this bear market rally, and, in combination, bust all illusions of a recovery.

2009 Nov 27 07:34 PM

[Thomas MacLeod]

Childish...........you miss the point baba!


On Nov 27 07:34 PM User 492911 wrote:

> My conclusion on seeing these charts is hardly 'Onward and Upward'
> as the author concludes with childish extrapolation. I have never
> seen such 'ripe' conditions for a major reversal. Dubai's 60B$ postponement
> is not significant in and of itself. Dubai's predicament has been
> known for a year. This could even have been a self-engineered mini
> correction in which they and their wealthy adjacent cousins made
> back much of that easily surmountable deficit. What it does show
> however, is how very fragile and over reactive this world speculative
> bubble is. There are many other extend & pretend shams that could
> be outed in the coming months, not to speak of mounting foreclosures,
> rising unemployment, lackluster holiday retail sales, and a forthcoming
> Tsunami of CRE resets, any one of which would reverse this bear market
> rally, and, in combination, bust all illusions of a recovery.

2009 Nov 28 03:38 AM

[TheFounder]

Very interesting article. Indeed primary trends do not change over night. But this moment in time presents a rather unique dillema. Many believe that the current market action is technical, temporary and government driven. And joining the herd now seems too late to the party. On the other hand, going counter trend now means timing the market. Seems like a lose lose situation.

2009 Nov 28 04:15 AM

[Bud Wood]

Seems to relate to that old adage:

"The trend is your friend".

2009 Nov 28 10:21 AM

[Lucas199]

On Nov 28 10:21 AM Bud Wood wrote:

> Seems to relate to that old adage:
>
> "The trend is your friend".

. . .his name is 'Brutus'.

2009 Nov 29 07:21 AM