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I am retired and live off my portfolio income and real estate rental income. I follow a simple investment strategy: (1) spend less than I earn; (2) use the savings to add more dividend paying stocks and rental properties to my portfolio. By doing this for many years, I've been able to grow my... More
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  • No Time To Be Greedy

    For those who follow technical analysis, the dark shadows have finally converged and investors now know all they need to know about the marketplace we have now entered. Long term, multiple international equities indexes have seen short term momentum slice through long term price momentum with conviction, indicating the gravitational pull downwards has gripped equities markets abroad. How long before the US markets follow? We may have found out today.

    Conversely, the US Dollar and the VIX have seen the inverse - a huge upswing in short term price momentum above long term price momentum.  Volatility is likelier to rise, driving stocks lower over the next few months or longer. In short, when measuring long term momentum, very little indicates that this market correction is just a "blip".

    It will not be a straight trip down. Multiple stock indexes are very oversold, and breadth has reached bearish extremes. The worry, though, is that extremes can become... more extreme. Momentum oscillators, like the RSI, can be helpful tools to time entry or exit points, when used in conjunction with other tools. But the fact that something is overbought doesn't mean it cannot become moreso, and does not guarantee a snap back rally, either. Oscillators, like the RSI, can revert to normal territory as a function of time, not just price.

    This is not a dip to buy, in my view. In fact, my view is that it would be better to sell risky assets - even at current levels. Holding about 20% of a portfolio in risky assets could be a reasonable target, and if we do see a well-deserved bounce, maybe taking the opportunity to reduce that risk exposure to 15%, or maybe just 10%. Bear in mind, zero exposure to equities or alternative investments has it's own share of risks, and would likely not be the most prudent allocation.


     

    May 20 5:02 PM | Link | Comment!
  • No Time for Risk
    For better or for worse, global markets are all interconnected. A quick review of some of the largest ETFs that track international equities indexes spells out the point. From a technical perspective, IEV, and FXI share one commonality: the 50 day simple moving average has  dropped below the 200 day simple moving average for both securities. What's the upshot? Well, when short term price momentum drops below long term price momentum for a security, often, it presages a dangerous spike in negative price momentum. Momentum some traders will exploit, and momentum some investors do not care to stand in the way of. Each of these securities measures certain shares in top European and top Chinese companies, respectively. Their dangerous technical posture suggests the potential for severe bear markets in European and Chinese equities. How would the rest of the world's equities markets fare, were that prognosis to pan out? 
    Not well, I am sure. And some of the broader equities ETFs bear out the point. EFA, GWL, each measuring developed market equities and global equities, respectively, are stuck substantially below their long term price averages, with short term price momentum rapidly approaching and threatening, similarly, to form up a "black cross". 
    Curiously, though, the US markets are in relatively good shape, technically speaking. The question is, for how much longer? True, our fundamentals are sound and improving, but capital markets are more about momentum and emotion in the short term than fundamentals. My concern is that if we start to see one international equities index after another droop into technically bearish territory, the US will ultimately have to follow. 
    In short, it is not time to dump all equities you own. Not yet, at least. By the same token, it is no time to start arguing with the market either, by loading up on equities during this current reversal. It may, instead, be prudent to leave some gains on the table, and wait to see whether the equities markets in Europe and China can reverse the technical damage they've already incurred. And if those markets cannot do so, and fall further into bear territory, then owning risky assets is perhaps not something you'd want to do at all. 
    May 14 10:53 AM | Link | Comment!
  • How to Identify a Bubble?
    Technical analysis is widely followed as a tool that traders can use in making bets that worked in the past, and thus, might work again in the future. I suggest a second use for technical analysis, which is how to identify a bubble in advance, prior to its inevitable "pop".

    Start with the fact that many traders will recognize certain shapes on charts, or pricing relative to moving price averages, as a technical signal to either buy or sell a security. Why should it matter that a 50-day simple moving average has crossed above a 200-day simple moving average? It matters because other traders think it does, because the last time such moving averages crossed over, the price of the asset went up. 

    The basic maxim of effective trading in a security is to keep doing something as long as doing so earns you money, and when you start to take losses, to do the opposite thing. You note this maxim says nothing of whether an asset is cheap or expensive. Thanks to price momentum, assets always can and do get cheaper or more expensive - buying cheap and selling expensive is not what guides a trading decision at all. Riding the trend is what it's all about.

    Which brings me back to spotting bubbles.  I'd identify a bubble in advance with the following three metrics:

    (1) the current valuation of asset (such as the 10 year average P/E ratio of a stock index) is at least 20% higher than 50 year average valuation  (and substitute other numbers if you like - a 5 year average P/E ratio being 10% higher than a 20 year average P/E ratio, for instance. The point is that a current valuation metric is significantly higher than a long term valuation metric);

    (2) the price of asset is at least 20% above its' mean (again, use other numbers if you like - 30% or 15% perhaps); and

    (3) the 65 day exponential moving average of asset price is higher than the 200 day exponential moving average of asset price (or any other moving average widely followed by traders).
     
    Why does this approach work? It works because even though the valuation of an asset is relatively high in historic terms, there is tradable price momentum in this asset over the short to intermediate term, and traders will act on that until doing so starts to cost them money. Thanks to momentum, and a consensus among traders regarding the tradability of that momentum, prices can, and thus should, go higher. By the same token, the law of averages eventually must kick in. The price of any asset will tend to revert to the mean, and so when the momentum in the asset price inverts, money will rush out of the asset category at a frantic rate. This will look a lot like a "pop" in the price of the asset, causing everyone, in retrospect, to conclude that there must have been a bubble in the first place.

    (No securities are mentioned in this article, and the author has no positions to disclose)


    Disclosure: No positions in stocks mentioned.
    Apr 27 2:21 PM | Link | Comment!
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