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Erik McCurdy
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Erik is the senior market technician for Prometheus Market Insight and has been performing chart analysis since 1995. The software program that he developed to monitor long-term stock market trends has correctly identified 92% of the cyclical turning points in the S&P 500 index since 1940.... More
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  • The Big Picture Remains Bearish for Stocks 5 comments
    Dec 4, 2011 2:56 PM | about stocks: SPY, DIA, QQQ

    Last week, following the release of economic data that were perceived to be positive, conventional market wisdom experienced yet another violent sentiment shift, once again coming to believe that the recession scenario is no longer viable. Unfortunately, noisy data trends tend to become even more so during periods of economic transition and it remains likely that the US will enter a new recession during the next two quarters. The following charts courtesy of Prieur du Plessis display the manufacturing PMI trends for the largest economies around the world, along with the average global PMI trend.

    At the moment, the US economy is the only one that has not trended down into contraction territory. However, if the global recession continues to intensify, it is highly likely that the US will follow suit. Hoping that the US will somehow weather the storm and maintain its tepid growth rate falls into the dubious “this time is different” mode of thinking, which has an extremely poor track record from a historical perspective.

    The mainstream financial media celebrated the sharp move higher by the stock market last week, noting that the weekly gain of 7.4% was the largest since 2009. However, as always, short-term moves only have meaning when analyzed in their proper context and last week’s rally was simply another extreme move engendered by the current environment of elevated volatility that has persisted since the long-term breakdown in July.

    During periods of heightened market volatility, it is instructive to review the big picture, which requires starting with the secular trend and then moving in toward shorter time frames. The US stock market is currently in the middle stage of a secular bear market that began in 2000. The previous secular bull market from the early 1980s accelerated into a prototypical speculative blow-off phase in the late 1990s before forming the most recent secular top.

    Our Secular Trend Score (NYSEMKT:STS), which uses a large basket of fundamental, technical, internal and sentiment data to identify highly likely secular trend inflection points, issued a sell signal in December 1999, predicting the start of a 10 to 20-year secular bear market. Since then, the stock market has behaved exactly as expected, moving sideways in typical fashion for a secular downtrend.

    The STS has remained deep in negative territory for most of the 11 years since the secular bear market began, although it has moved up toward positive territory after rebounding off of the most recent low in late 2009, indicating that the bear market is maturing. However, at a current value of -16, the STS remains a long way from buy territory at the 80 level, so it is likely that we are still several years away from the start of the next secular bull market.

    Secular trends are composed of cyclical trends that have typical durations of two to five years. There have been four confirmed cyclical trends since the secular bear market began in 2000.

    When they occur during a secular bear market, cyclical bull markets have an average duration of 33 months. The cyclical uptrend from March 2009 was 30 months old when it broke down in July, signaling that the high in April was likely a long-term top.

    Additionally, our Cyclical Trend Score (NYSE:CTS), which has correctly predicted more than 90% of the cyclical turning points during the last 70 years, issued a confirmed sell signal in September, indicating that a new cyclical downtrend likely began in May. However, even if the cyclical uptrend from 2009 is still in progress, at a current duration of 33 months, it could terminate at any time, so the risk/reward ratio is very poor with respect to US equities, especially given the deepening global recession. As always, anything is possible when it comes to financial market forecasting and the best that we can do is identify possible scenarios and their associated probabilities. At the moment, the odds strongly favor the continuing development of a new cyclical bear market in US stocks accompanied by a return to economic contraction, so we will remain defensive until presented with compelling evidence to the contrary. We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers.

    Subscribe to our RSS feed to receive our free daily market update.

    Themes: Market Outlook Stocks: SPY, DIA, QQQ
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Comments (5)
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  • Conventional Wisdumb
    , contributor
    Comments (1802) | Send Message
     
    Makes a great case for not being a buy and holder during a secular bear market.

     

    You can make one hell of a lot of money if you can time it - we can dream can't we?

     

    Buy in a recession sell at the peak go to cash/treasuries - repeat. I wonder if that would work?

     

    Hopefully I will have the guts to try it out this time.
    4 Dec 2011, 03:10 PM Reply Like
  • Tack
    , contributor
    Comments (12958) | Send Message
     
    The last two charts in this series are instructive, not because they, in and of themselves are indicative of what will occur in the future, but because they illustrate --perhaps, unintentionally-- how historical data can be transmuted into a causal indicator, when no such causal link exists.

     

    For example, look at the two major dips that occurred. Did they happen just because, like a roller coaster, the market ran out of gas and rolled over? No, the 2001-2002 was occasioned by specific sequential events: 9/11, followed by the Enron-induced energy crisis and the Worldcom accounting panic. Then, the next major dip in 2008 was occasioned by specific events, the collapse of Lehman and other major banks and lenders.

     

    What this tells us, or at least should tell us, is that the charts alone mean almost nothing and have absolutely no causative power. They merely record what did happen, not why. So, from this point, we're still left with the pondering as to whether Europe's finances will occasion a new panic. This can not be predicted by historical charts or technicals. It will either occur because of a political failure, or it will not. It's an independent event with a binary outcome.

     

    So, absent an underlying major event, like the previous two dips, there's no particular reason to forecast a major dip in the chart data, as the previous two dips did not occur absent specific causative factors. Investors must choose what they believe Europe's outcome is, not think the charts show the way.
    4 Dec 2011, 05:07 PM Reply Like
  • Erik McCurdy
    , contributor
    Comments (318) | Send Message
     
    Author’s reply » Hi Tack,

     

    Yours is the typical, conventional perspective when it comes to interpreting and analyzing market data. However, if it were true that market behavior provided no statistically significant predictive data, it would be impossible to forecast cyclical market turns with a high degree of reliability and our CTS has identified more than 90% of those long-term turns since 1940. The system details are provided at the following article at Advisor Perspectives if you are interested in learning more about it.

     

    http://bit.ly/uxufRp

     

    Best, Erik
    4 Dec 2011, 05:28 PM Reply Like
  • Tack
    , contributor
    Comments (12958) | Send Message
     
    Erik:

     

    Thanks for the link.

     

    You talk about secular markets and predicting "long-term" turns. Then, you mention forecasting "cyclical" turns, which are something entirely different. Are you suggesting that your CTS method predicts the former, the latter, or both.

     

    I maintain that cyclical turns cannot be forecasted accurately or attributed to technical factors when technical data occurs in the presence of major, overriding headline events. In such cases, it's not possible to say that formula-derived retrogressive correlations indicate a causative relationship. This is especially so when examining historical data.

     

    Now, for your CTS to gain independent credibility, it will have to provide signals -- prior to events-- that prove correct, whether or not headline events intervene, even more so if no major explanatory headline events present themselves during the prediction period.
    4 Dec 2011, 06:27 PM Reply Like
  • untrusting investor
    , contributor
    Comments (9927) | Send Message
     
    Erik,
    Did check your article. Looks very good and a very reasonable basis for market timing. Nice summary of the current market environment. Would certainly agree that risk-reward to the upside is very poor at this stage of the game. Would not expect 2012 to be a good period for risk assets, but we shall see.
    4 Dec 2011, 06:38 PM Reply Like
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