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Logical Thought
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My name is Mark B. Spiegel and I'm the Managing Member of Stanphyl Capital Management LLC. I can be reached at: mark (at) stanphylcap (dot) com. My Twitter feed is @markbspiegel
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I don't have a blog, but here's a link to a WSJ article regarding my thoughts on the "flash crash"
  • Where I'll next try to get short... 10 comments
    Apr 4, 2010 11:03 PM

    I just looked at every major market top (defined as the S&P 500's intra-day high preceding at least a 20% subsequent correction) since 1968, in order to see how extended (percentage-wise) the market got at that intra-day high vs. its 50-day EMA. Here's the data:

    12/2/68: 109.37 vs. 103.99 = 5.2%
    1/11/73: 121.74 vs. 116.42 = 4.6%
    9/22/76: 108.72 vs. 104.88 = 3.7%
    2/13/80: 120.22 vs. 111.55 = 7.8%
    11/26/80: 141.96 vs. 131.83 = 7.7%
    8/25/87: 337.89 vs. 317.34 = 6.5%
    7/16/90: 369.78 vs. 356.35 = 3.8%
    7/20/98: 1190.58 vs. 1130.93 = 5.3%
    3/24/00: 1552.87 vs. 1416.23 = 9.6%
    10/11/07: 1576.09 vs. 1509.05 = 4.4%

    What's interesting is that in only very few of these situations had the market gotten more overextended (vs. its 50-day EMA) at any point earlier in the rally than it was on its final day. Most frequently, the ultimate peak was also the most overextended day of the rally vs. the 50-day EMA, or at least the peak-day overextension approximately matched the most overextended days earlier in the rally).

    By way of comparison, in the current rally, we've had several days of "major overextension" vs. the 50-day EMA:

    5/7/09: 929.58 vs. 841.55 = 10.5%
    8/7/09: 1018 vs. 940.49 = 8.2%
    9/23/09: 1080.15 vs. 1008.39 = 7.1%

    Meanwhile, last week's high was 1181.43 vs. 1135.36, which was only 4.1% over the 50-day EMA.

    Interestingly, I didn't notice ANY days since 1968 other than 5/7/09 in which the market had gotten as much as 10% over its 50-day, but this was primarily a function of how much BELOW the 50-day the market had gotten in March of '09, thus sinking the average very steeply.

    Conclusion: I would tend to throw out the "10.5% day" as a fluke, and guess that this rally ends on a day that the market gets somewhere between 7% and 9% over its 50-day EMA. So, seeing as Monday the 50-day should be around 1137, I'll probably look to get short at 7% over that (1216), and raise that point in lockstep with the 50-day EMA, which is going up around 1.5 points per day.

    The only issue is that although the market will inevitably correct back to the 50-day the next time it gets from 7% to 10% over it, that peak may not be the ultimate peak, and it could rally again from there. I'll cross that bridge (in accordance with the data) when I come to it.

    Fundamentally, I believe that the recently impressive economic stats have been due to the filling of pent-up demand from the 85% or so of folks who aren't unemployed/underemployed, but that demand won't be enough to sustain this economy, especially in light of rising interest rates and the still-flatlined housing market.

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Comments (10)
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  • Old Trader
    , contributor
    Comments (5732) | Send Message
    So, if I'm understanding you correctly, you're suggesting the market may (not will, necessarily) rise by another 30 points...or perhaps a bit more.
    5 Apr 2010, 11:36 AM Reply Like
  • Logical Thought
    , contributor
    Comments (5493) | Send Message
    Author’s reply » If the next top is "the" top, then based upon how this rally has acted until now, the data I studied would imply that such a top occurs 7% to 10% above the previous top of 1181 or so. The caveats are:


    1) I could simply be "data-mining" a relatively small amount of data.
    2) The next top may not be the "final top" of the rally, and thus could occur at a "lesser overextension" than some of the previous overextended points of the rally.
    3) This could be one of those rare cases (among a small number of cases to begin with) in which the rally's final top occurs in a manner that's "less overextended" than some of its earlier "overextensions"


    The one thing I can say with 90%+ confidence is that if this rally gets as much as 10% over its 50-day EMA, it's headed for an immediate correction back down to that EMA. However, my target point for this market (assuming I have a chance to get short again) is more like somewhere in the 950 range, which would be 14 x $68 earnings for 2010 (which, incidentally, is also David Rosenberg's new target). I wouldn't be a broad buyer at 950 because I think it could still go a lot lower; however, that's where I'm currently thinking that I would cover my short.
    5 Apr 2010, 12:01 PM Reply Like
  • Logical Thought
    , contributor
    Comments (5493) | Send Message
    Author’s reply » Sorry, I miswrote there... What I meant to say is NOT "the data I studied would imply that such a top occurs 7% to 10% above the previous top of 1181". What I meant to say was "the data I studied would imply that such a top occurs 7% to 10% above the 50-day EMA".
    5 Apr 2010, 12:25 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (6284) | Send Message
    I charted the S&P with 50 and 200 EMAs, that got me thinking about an article last wekk by Mark Gerstein, he said you could save a lot of money getting out of the market whenthe 50 day SMA would cross over the 200 day SMA going down.


    I guess the thought would be that until the 50 day average crosses from above the 200 that any of these moves are short-term and do not signal any kind of a big correction. Right now the 50 day average is below the 200 so this rally may have a way to go, with short-term corrections but nothing like the 20% you are looking for.
    5 Apr 2010, 12:37 PM Reply Like
  • Logical Thought
    , contributor
    Comments (5493) | Send Message
    Author’s reply » >> Right now the 50 day average is below the 200...<<


    I assume you meant that right now it's ABOVE the 200, and yes, it definitely is. Waiting for that cross is a good technique. For instance, the 2007 "downcross" occurred pretty early, in January 2008 in the 1400s. It also would've worked well when the last bubble burst, getting you out in October of 2000, which would've saved anyone still long a ton of money, so yes, it's definitely a worthwhile technique... Thanks.
    5 Apr 2010, 01:03 PM Reply Like
  • Logical Thought
    , contributor
    Comments (5493) | Send Message
    Author’s reply » I just used this intra-day bounce to take another big shot at SDS @ $30.12 (S&P around 1185.85) , with a VERY tight stop if the market takes out yesterday's higher of 1189.60.
    8 Apr 2010, 01:25 PM Reply Like
  • Logical Thought
    , contributor
    Comments (5493) | Send Message
    Author’s reply » Just stopped myself out pre-market with a small loss. (That's actually a bit of a novelty; I was starting to get used to bigger losses on these shorts.) I'll try again when the market's more overextended.
    9 Apr 2010, 08:51 AM Reply Like
  • Brady J.
    , contributor
    Comments (5) | Send Message
    Good insight! Using your methodology, on 4/15, S&P 500 got 5.22% above its EMA50 (which indeed was the highest level in this 2 month rally) and on 4/16, it dropped to 4.76% above EMA, is this the start of a correction? If so, I see two mid-term scenarios, leading S&P and NASDAQ to correct 5 - 10% and DOW to correct 4 - 7% in near term before next rally higher. Check out more details here:


    18 Apr 2010, 03:12 PM Reply Like
  • Logical Thought
    , contributor
    Comments (5493) | Send Message
    Author’s reply » Hi Brady,


    Sorry for the delayed response, but I just saw your comment. Based upon today's action following Friday's dive, speaking purely technically I think that this market wants to go back up. My present plan is to get very heavily short again if we get 8% or more over the 50-day EMA, or if we have a high-volume reversal day before then.
    19 Apr 2010, 09:02 PM Reply Like
  • Brady J.
    , contributor
    Comments (5) | Send Message
    The market appears to be indecisive right now, it's in fact accumulating strength before the next huge move which will take place next week. Fasten the seat belt...
    22 Apr 2010, 06:34 PM Reply Like
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