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Erik McCurdy  

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  • QE2 Appears Fully Priced Into Stocks [View article]
    Diva, that's what makes the market interesting, right? :) You have your own set of data (and interpretation of it), and I have mine. Yes, my macro view indicates to me that now is one of the worst times in history to invest in stocks. But keep in mind when I use the word "invest" I am using a fairly strict interpretation that requires a minimum time frame of 10 years. Anything shorter than that I would characterize as trading. So I am looking at expected returns during the next decade, and a sampling of the data that I use to forecast such things is provided in this article from last year:

    However, just because I have a negative view on the investment potential of stocks, that doesn't mean I can't be bullish on shorter time frames. It's all a matter of perspective. For example, when the market was crashing in early 2009 and economic data and sentiment were both extremely negative, I was quite bullish as the charts suggested that a massive rally was imminent:

    There is no question that the cyclical uptrend from March 2009 is in control at the moment, and it can certainly extend this year. But I will need to evaluate the character of the next downtrend before my methodology provides me with a clear read on long-term direction.

    We may have different macro views, but that is actually a very good thing for the purposes of these discussions, as they are the most productive when they include conflicting outlooks. It is only when we thoughtfully consider opinions that differ materially from our own that we truly test the validity and strength of our analysis and convictions.
    Jan 10, 2011. 02:25 PM | 2 Likes Like |Link to Comment
  • QE2 Appears Fully Priced Into Stocks [View article]
    That's exactly why we provide a (nearly) free trial subscription. Our newsletter isn't for everyone and we want to make sure you know what you are getting before you buy. Welcome aboard!
    Jan 10, 2011. 02:09 PM | Likes Like |Link to Comment
  • QE2 Appears Fully Priced Into Stocks [View article]
    Well said, basehitz. I am in relatively close agreement with your overall assessment.

    "In Rogoff and Reinhart’s book “This Time it’s Different” they compiled centuries of data from many countries developing a statistical analysis of the effects of debt levels. They found that once 90% debt/GDP threshold was reached, it was inherently limiting on future growth. That should be intuitive as debt service is an ever increasing drain on resources. We are already beyond that and growing at an alarming rate."

    That is an excellent book and I have been recommending it to others since I first read it more than a year ago.
    Jan 9, 2011. 03:09 PM | 4 Likes Like |Link to Comment
  • QE2 Appears Fully Priced Into Stocks [View article]
    Hi diva,

    "QE2 was announced just about the time it was becoming clear the US economy wouldn't double dip (the ism's and other reports were telling us this). So was it QE2 or the economy? I say it was the latter - especially since money can flow anywhere and it's obviously moving into US stocks and not gold or foreign stocks."

    It wasn't necessarily just one or the other; it could have certainly been a combination of both, right? The point is that whatever impact QE2 specifically had on stock valuations has very likely been completely priced in at this point. In order for the cyclical bull from early 2009 to continue, the economy will need to accelerate strongly during the next two quarters. And gold moved from $1,160 to $1,425--a gain of nearly 23%--following the low in late July, so it experienced a move comparable to stocks. That is not a sign of underlying economic health. The secular bull market in gold from 2001 is near all-time highs and the uptrend remains strong:

    "And please, before you start talking about 1120, the market has to get below the 1200-1220 level; an area which will have formidable support unless both the economic news and that out of Washington take a turn for the worse."

    I am a chartist and the two scenarios that I outlined at the end of the article are based upon my analysis of the long-term view of the S&P 500 index monthly chart. If the index does hold above the 1,200 level during the next correction (or period of consolidation) before returning to previous long-term highs, the bullish scenario will assert itself. I certainly didn't imply that a return to 1,120 was likely. However, it is a critical long-term support level from my perspective and a break below it would be a major bearish signal. The price action during the next two to three months should tell us a great deal.
    Jan 9, 2011. 03:01 PM | 4 Likes Like |Link to Comment
  • Housing: A Drag on the Economy in 2011 (Part 2) [View article]
    Very thoughtful and thorough analysis, John, as usual. Another chart that really puts the bubble into its proper perspective is the 120-year inflation-adjusted Case Shiller data:
    Jan 8, 2011. 03:26 PM | 4 Likes Like |Link to Comment
  • Stock Market Valuations Remain Near Historic Highs [View instapost]
    Actually, that is a popular myth. In fact, Livermore had a great deal of money when he died. It is true, however, that he made and lost more than one fortune during his lifetime. I think he would have been the first to admit that applying the keys to success is much harder than understanding them. Human nature tends to fight you every step of the way.
    Jan 6, 2011. 12:44 PM | Likes Like |Link to Comment
  • Stock Market Valuations Remain Near Historic Highs [View instapost]
    It's human nature to become caught-up in the day-to-day machinations of the markets, which is why so few are extremely successful over the long run. People tend to equate taking action with being in control, so they feel the need to trade more often than they should. As a result, the hardest action to take is none at all, even though that is how fortunes are made. As Jesse Livermore once observed, the big money isn't made in the buying or the selling, but in the sitting.
    Dec 31, 2010. 03:09 PM | 2 Likes Like |Link to Comment
  • The First Stage of Inflation Has Already Hit, Next Up Is the Currency Collapse [View article]
    Yes, greenzulu, if you track the value of gold as an international currency itself, you can see how the secular bull market from 2001 accelerated in 2005. The Gold Currency Index has been rallying for nearly 10 years now and the uptrend shows no signs of weakening:
    Dec 17, 2010. 01:29 PM | 4 Likes Like |Link to Comment
  • Stock Market Warning Signs Become More Pronounced [View article]
    Hi frosty, as I noted in an earlier comment, the CTS searches for highly likely cyclical trend inflection points. It is not a short-term timing tool. The negative divergence mentioned in the article is a warning sign, as are most negative divergences between data that should normally agree. The CTS essentially moved sideways from August to the end of November before breaking down as stocks moved higher in December. It is that breakdown that is a cause for concern.
    Dec 16, 2010. 10:37 AM | 4 Likes Like |Link to Comment
  • Stock Market Warning Signs Become More Pronounced [View article]
    Thanks, razorthin. A long-term perspective is critical to successfully navigating the wild cyclical swings that characterize secular bears. This one (secular bear) still has many years to go before it is over, and the longer we ignore the structural problems weighing down our economy (e.g. historically high debt levels), the longer it will take to create the foundation for the next secular growth cycle.
    Dec 16, 2010. 10:33 AM | 2 Likes Like |Link to Comment
  • Stock Market Warning Signs Become More Pronounced [View article]
    Thanks, bbro. I'm glad that you continue to comment on our work as a healthy debate is key, especially when it comes to the financial markets. $12 earnings per share is certainly an extreme, but so were the record-high profit margins of last decade:

    Secular bear markets are characterized by wild swings, and the one that began in equities in 2000 has produced prototypical market action during the past ten years.
    Dec 16, 2010. 10:29 AM | 2 Likes Like |Link to Comment
  • Stock Market Warning Signs Become More Pronounced [View article]
    Thanks, John, we do our best. I'm also a regular reader of your articles here at SA and you do an excellent job of covering... well, just about everything. :)

    Dec 16, 2010. 10:22 AM | 2 Likes Like |Link to Comment
  • Stock Market Warning Signs Become More Pronounced [View article]
    You should be skeptical, especially when it comes to financial market analysis and forecasting. The complete buy and sell history of the cyclical trend trading system that is based on the CTS was posted here at SA in a July article:

    Also, here is a graph of the CTS versus the S&P 500 since 2000:

    At its core, our trading system is based upon statistical analysis. Our computer models identify market conditions that suggest a cyclical trend change is highly probable, and when an opportunity is found that exceeds a particular statistical threshold, a confirmed buy or sell signal is generated. In order to efficiently manage the identification of these likely inflection points, we have implemented a rule-based software program that generates the CTS by analyzing a large basket of fundamental, technical and psychological market data and then calculating a score that provides a quantitative measure of overall cyclical bullishness or bearish, searching for turning points in the stock market cyclical trends that typically last from 2 to 5 years.

    CTS values range from -100 (most bearish) to +100 (most bullish). Potential buy signals are generated when the score moves above +65 and potential sell signals are generated when it falls below -65. An individual CTS buy or sell signal does not necessarily constitute a confirmed buy or sell signal. When the CTS enters signal territory, a window is created that eventually closes when the CTS leaves signal territory. Once the signal window begins to form, a confirmed buy or sell signal is defined by both the type of trade and the type of secular trend environment. There are many additional requirements that must be met. Since 1940, a total of 44 signals have been generated, but only 29 confirmed trades have been executed.

    The reason the system is able to correctly identify 90% of the cyclical trend inflection points is because it searches for a very specific confluence of market characteristics, and the additional requirements have been designed to eliminate potential whipsaws. For example, one of the rules associated with sell signals is that the current cyclical bull market must be at least 1.5 years old or the signal is judged to be invalid as young cyclical bulls tend to be characterized by volatility that makes the identification of optimal entry points exceedingly difficult. (As an aside, we used to have an exception to that 1.5 year bull rule wherein a confirmed sell signal would be generated if a preponderance of reliable data suggested that a return to economic contraction was likely during the next 6 to 9 months. We thought we could capture cyclical inflection points like the 1937 top and improve on that 90% success rate by maybe another 2 percentage points or so. That exception caused a confirmed sell signal to be generated this past June, but it was quickly stopped out in September, reinforcing the validity of the original 1.5 year bull rule. Hubris caused us to overreach, believing that we could improve on a 90% success rate, and the lesson learned is that there is always a point of diminishing returns after which performance will invariably be negatively affected.)

    I'm happy to discuss it further if you have additional questions.

    Dec 16, 2010. 10:18 AM | 10 Likes Like |Link to Comment
  • Daily Charts for November 16, 2010 [View instapost]
    Hi AR!

    My apologies for the delayed response. I have been engrossed in a research project during the past few months and have had very little time to spend on SA (or anywhere else), but I hope to become a regular contributor again in early 2011. I will start another market analysis blog thread for posting your dollar discussion:

    Hope all is well with you!

    Dec 15, 2010. 05:47 PM | 1 Like Like |Link to Comment
  • Is Buy and Hold Dead? [View article]
    I did a study earlier this year suggesting the cyclical market timing would have outperformed buy-and-hold and secular market timing by a relatively wide margin during the past 70 years:

    The key, of course, is developing the required depth of understanding to recognize highly probable cyclical trend inflection points, but that is readily accomplished through careful study of historical market data.
    Nov 14, 2010. 04:58 PM | 2 Likes Like |Link to Comment