Seeking Alpha

Joseph Stuber's  Instablog

Joseph Stuber
Send Message
Joseph has been an analyst, investor, and student of economic theory; money and banking; and statistical methods for evaluating and implementing risk/reward trading algorithms since 1972. Joseph is also an occasional contributor to financial publications and his essays are frequently cited by... More
  • Making A Call On A Market Top 11 comments
    Apr 11, 2013 12:03 AM

    As the market moved to new highs today it occurred to me that we were moving very close to the upper limit of my call for the years high. The following is an excerpt from my 2013 forecast 3 part series:

    In part 1 of this series I made mention of the risk/reward in holding stocks for the all time highs. My best case scenario for 2013 is a range basis the S&P of 1600 on the high side and 1260 - the 2012 lows - as the low side.

    We have made a pretty good run to the upside and we have reached a point where we can now say the market is truly overbought. A look at the S&P (NYSEARCA:SPY) chart below with Bollinger Bands included shows that today's move pushed well above the upper band at 156.97.

    (click to enlarge)

    Another tool that I have great faith in is my trade structure chart. I create the chart by plotting the close against a grid work that sets pivot points at the mean and 1 and 2 standard deviations above and below the mean. The chart below is the 90 day mean version:

    (click to enlarge)

    The +2 standard deviation consistently contains the closing price. The current value for the +2 standard deviation is 159.62. The +3 standard deviation value --not reflected on the chart -- is 164.73.

    As you can see from looking at the chart the markets tend to move back and forth from the +2 standard deviation to the -2 standard deviation levels. The chart dates back to January 20, 2012 and the market moved from top to bottom 2 ½ times in the last 15 months.

    The next chart is the 30 day mean version reflected below. You will notice that the bands are much closer and the mean value has a steeper slope. The +2 SD band on the 30 day is 158.48 and the +3 SD band is 160.30.

    (click to enlarge)

    The -2 SD is 139.17 and 151.13 respectively for the 90 day and the 30 day mean. The fact that the +2 SD on both charts is within a few points of each other is significant and usually provides confirmation that we are at a top.

    As you can see from the charts above the close is consistently contained within the +/- 2 SD bands. There is nothing that precludes the close hugging the upper band as the mean value -- a moving average - moves steadily higher as it has done for most of the year but the fact that we have moved substantially above the upper Bollinger Band and the fact that the market is beginning to have a broader range than earlier in the year suggests that we are in fact not going much higher.

    The charts above suggest that we are very close to putting in a high. What would confirm the high in my mind would be a gap higher on the open tomorrow morning that begins to sell off in the first hour on heavy volume. Even more compelling would be a sell off that takes out today's low of 157.13.

    I generally argue that it is almost impossible to call a high in a bull market but the probability of doing so is greatly enhanced with the tools I am using here. The point I am making is that at these levels the odds of being right are much greater than trying to call a high when the market is trading at the mean value.

    The probability of the market moving much higher than 2 standard deviations is about 95% against that occurring. It does happen on occasion but it is very rare. Additionally, for the market to move further above the upper Bollinger Band than today's close is also not likely. One thing for sure - we won't have more than a day or two to see if this call is a good one.

    Disclosure: I am long FAZ, TZA, TECS, UVXY.

Back To Joseph Stuber's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (11)
Track new comments
  • rphaider
    , contributor
    Comments (17) | Send Message
     
    Wow, No comment here. everyone is holding their breath, sitting and watching! Thank you for another educational article and thanks again for sharing your thoughts.
    11 Apr 2013, 08:33 PM Reply Like
  • Alpha Man
    , contributor
    Comments (207) | Send Message
     
    JS, to be clear, are you calling for THE top(start of a cyclical bear market) or a top (correction here)?
    12 Apr 2013, 09:13 PM Reply Like
  • Joseph Stuber
    , contributor
    Comments (1700) | Send Message
     
    Author’s reply » My call is for a 2013 top with a test of the 2009 lows to follow as we enter recession. The call is outlined in a number of articles including the one I referenced here. The timing of a top is extremely difficult -- the call on a recession and a test of the 2009 lows seems easier to me.

     

    The difficulty of calling a top is compounded by the Fed's manipulation of the markets as we saw on Friday with the late ramp up in an effort to keep this bull alive. I have written at some length on the point that the Dow is where the Fed is focused and where the manipulation is occuring with the broader market following once the late day, high volume push comes into play.

     

    Friday was just another example of that but the broader market didn't follow to the degree it has been with the S&P and the other indices only partially participating and still closing lower on the day.

     

    My guess is that once the market really does correct the sell side volume will accelerate much as gold has. Apple -- another short side call of mine back in September is another example. The Fed and their money flowing into the hands of the major banks is being used to prop this market -- not retail investors, hdege funds, etc.

     

    At some point that money won't be enough to offset significant sell side volume. So far the call is still in play as we did peak on Thursday. Next week should tell the tale. If we push through Thursdays highs the call is probably wrong.

     

    JS
    13 Apr 2013, 09:07 AM Reply Like
  • Alpha Man
    , contributor
    Comments (207) | Send Message
     
    JS

     

    I think we could pull back here, I don't believe this is THE Top as strength of new highs was too solid on Thursday. I see a pull back as a buying opportunity.

     

    I don't understand your premise that the Fed is manipulating the market. What indication do you have of that?
    13 Apr 2013, 03:53 PM Reply Like
  • Joseph Stuber
    , contributor
    Comments (1700) | Send Message
     
    Author’s reply » Alpha Man

     

    You may not agree with my premise but surely you understand my argument or maybe not. I have written a few pieces on this subject but maybe you haven't read them.

     

    There's more to the story than this but the ramp up in the last 1/2 hour day after day is very manipulative and always led by the Dow with the broader market following. Believe what you want but I believe the Fed's surrogates - primary dealer banks - are carrying out Bernanke's wealth effect agenda by pushing the market on high volume in the last 1/2 hour.

     

    This is very contrived and not even close to normal market action and not something hedge funds, institutional investors or retail investors are doing - it just isn't.

     

    JS
    13 Apr 2013, 07:17 PM Reply Like
  • Thomas Lott
    , contributor
    Comments (588) | Send Message
     
    What is the probability that continued worldwide central bank easing creates an equity bubble do you think? Is it that likely that massive doses of liquidity injections can coexist with a correction or bear market?
    12 Apr 2013, 11:43 PM Reply Like
  • Joseph Stuber
    , contributor
    Comments (1700) | Send Message
     
    Author’s reply » I think it is not on possible but likely that a bear market can co-exist with the Fed's money printing.

     

    I sure don't see the Fed backing off that much and I do see present price levels as the high. What surprises me is the extraordinarily high degree of faith that the Fed can move the market well beyond what is reasonable even if the economy were firing on all cylinders and it is certainly not doing that.

     

    Retail sales numbers in the tank again, housing faltering as indicated by Wells Fargos numbers and JPM's numbers on loans - loan to deposit ratio at extreme lows and mortgage lending not showing up is a little disconcerting to the real estate recovery theory.

     

    Consumer sentiment not to good either. Where do we get the fuel for more upside when the economy is clearly faltering? If your answer is that stocks will go up in spite of really horrible data on the economy I would suggest that stocks already have gone up. The only question is when do invetors start believing the economy and stop believing the Fed can push the stock market to higher and higher highs without support from the economy?

     

    JS
    13 Apr 2013, 09:16 AM Reply Like
  • Alpha Man
    , contributor
    Comments (207) | Send Message
     
    I think you may be jumping the gun on the economy. Yes we have some indications of weakness. However the economy has not gone straight up since 2009. As an example, ECR's WLI had a big drop in 2010, yet we did not fall into recession. I won't say that we absolutely won't fall into recession but I'd like to see more evidence before I assert that we are going into one.

     

    I also disagree that we will test the 2009 lows this year. We may fall into another bear market but there's also the possibility of additional government intervention if we do.
    13 Apr 2013, 04:00 PM Reply Like
  • Joseph Stuber
    , contributor
    Comments (1700) | Send Message
     
    Author’s reply » Alpha Man

     

    I obvisouly don't agree with you on the timing of recession or the magnitude of the sell off. The truth is only a very small number of people see it as I do so you are clearly in the majority.

     

    I don't know how to explain my view any better than I have in several articles over the last few months. I will say this - the numbers are starting to reflect what I expected. Retail sales are slipping, mortgage lending based on WF earning report aren't indicative of a housing recovery, bank loans as a % of deposits are continuing to slide, sentiment is falling, inflation is falling, the dollar is climbing, gold is falling (a lot) and bonds are moving higher as yields fall.

     

    If the Fed's QE was effective none of these things would be occuring with the exception of bonds but bonds are not moving based on QE - they are moving as buyers bid the price up based on what I see as a fear induced rally.

     

    If you want to wait until the recession is announced you will find that the market has already priced it in. That is the nature of the markets.

     

    Anyway, appreciate your views. My call here will be proven right or wrong in the next few weeks. We will see.

     

    Thanks.

     

    JS
    13 Apr 2013, 07:29 PM Reply Like
  • Stanley J G Crouch
    , contributor
    Comments (2080) | Send Message
     
    J S,

     

    You know what I think..!!
    13 Apr 2013, 08:31 PM Reply Like
  • Maverick Trader
    , contributor
    Comments (149) | Send Message
     
    Wonder what Alpha Man did today?? Did he "buy the dip" Or was he part of the $600,000,000 trying to get out of this magic market at the end of the day.

     

    Cash is king right now.
    15 Apr 2013, 04:29 PM Reply Like
Full index of posts »
Latest Followers

StockTalks

More »
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.