tradersystemguru

Overbought Breadth Levels

The obvious takeaway from a chart perspective is whenever these sectors hit past highs, its not a bad time to sell - kind of like a market overbought indicator....

What Goes Around Comes Around in the Equity Market

Interesting take Bill. You may be right and we may be in a bear market or bull trap rally (take your pick of terminologies). The sad truth is that even though the asset bubbles are breaking and the market is in dire need of a correction to clean out the excesses, that probably won't happen for a few months until after the U.S. election based on historic performance. If the market crashes before November, it will mean the wheels have come off the government election priming bus.

Any study of markets will tell you that governments shamelessly manipulate economies and markets leading into elections and that governments and their minions are getting better at it. A simple system of buying the mid-term election year low 25 months before each election and selling at the end of November each election year would have captured 93% of all Dow gains between 1902 and 2006. In other words, the investor or trader would have made 13 times more money by being invested in the two years leading up to each election compared to the two years after.

In the Canadian TSX, where you got your training, the ratio is an astounding 97:3 - 97% of all TSX gains from 1950 to 2006 were made in the two years (26 months actually) leading up to each US election. Why? Because the US government and associated agencies do their level best to inflation the heck out of the economy leading into each election (see tradesystemguru.com/co... ).

The moral of the story is that since WWII, not one major recession has occurred in the two years leading up to an election. With the exception of 1987, bear markets and recessions have all occurred in the two years post election. A system that bought the Dow at the mid-term election low in September 25 months before each election and sold at the end of November each election year would have had 17 winning trades and not one losing trade.

Given the excesses that are in dire need of correction, I expect things to get a whole lot tougher in 2009 if history is any guide.

Matt Blackman
TradeSystemGuru.com

The Danger of Low Trading Volume

Barak - Good article. I am a huge volume fan and have been watching it closely. You are right in your comments, but might I add on of my own. Stock prices need volume to propel prices higher but can 'fall of their own weight' as you chart shows. As the fuel that drives prices higher, when it runs out stocks fall.

I have been doing some research on price and volume and have been working on some interesting volume indicators. Care to share notes?

Cheers,
Matt Blackman
www.TradeSystemGuru.co...

Those Who Know and Those Who Don't

See seekingalpha.com/artic...

According to the latest data, builders are building 947,000 homes per year into a market that is buying 526,000 homes and their is an 11-month supply... Can't see how we could logically expect an upward lift on profits in that environment...

We've seen homebuilder rallies before but until there is solid evidence that the environment for housing has changed, any long position should be considered a short-term play....

Are Homebuilders a Buy?

Darcydance - Gartman is a trader and traders trade trends. The trend in builders is currently up and this may continue for a while...

I'll never forget a quote that was attributed to George Soros that could describe successful traders. He said,

“Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited.”

Traders do not question the reason for a trend, their goal is to catch it as early as possible then beat a hasty retreat before the crowd figures it out...

Matt Blackman
TradeSystemGuru.com

Are Homebuilders a Buy?

Bakerloo Bill - I began writing about the building housing bubble in mid-2004 and my first article was published in a mainstream magazine in the October issue of SFO magazine (Stocks, Futures & Options). You can read the article free at www.sfomag.com/article... (or check the site yourself at www.sfomag.com

Upside to Falling Prices: Housing Affordabilty Index Reaches 4-Year High

Your argument is nearly identical to one that tells us its time to buy stocks based on stock market valuations. Such an approach encourages people to double down on a bad investment and will cost you your shirt in a true bear market. And I think it is safe to assume based on the data, that the real estate market is in its biggest bear market since the 1930s...

Like Cramer advising his listeners to hold on to Bear Stearns on March 11 when the stock was trading at $63, telling people that now is the time to buy property without concrete proof that prices have stopped falling is just plain bad advice!

The way prices and the property market is going, prices could be back to late 1990's levels of affordability or earlier before that time will come.

S&P 500 A/D Line in Neutral Territory

The only positive on that chart I see is the last higher low that would indicate positive divergence with the S&P (which has lower lows). But that only means we may get a bear market rally from here...

They Call This a Bear Market?

Interesting comments. You are certainly not the first to proclaim an end to the bear market. But each one of the indicators with the exception of the last are very short-term and also indicate the beginning of a bear market rally... Would love to see your research showing that valuations show a bottom. All my research indicates that valuation metrics like 3-month trailing and forecasted PEs have a poor record in helping anticipate turnarounds...

Challenges with the bear market is about to end hypothesis are;
1) It is heavily dependent on what happens in the real estate market and given that real estate cycles are 18.5 years long and have only been contracting (price) for little more than a year, would seem to point to the fact that we are still early in the correction phase.
2) We have just come off the top of the largest number and scope of asset bubbles in history. As Jeremy Grantham pointed out some months ago, such events have ended neither quickly or without significant pain in the past and take years not months to run their course.
3) If you buy into the valuation argument, Robert Shiller who uses trailing 10 year PEs says that current valuations around 20 are anything but cheap. Corrections in the past have seen valuations drop below 10 before the cycles turns back up.
4) Most of the major sectors (financials, auto & truck, RV, retail and banks) that turn down in advance of the S&P500 in a recession are still heading lower. This does not suggest that a sustained turnaround is in the offing anytime soon (see tradesystemguru.com/co... ).
5) Economic indicators continue to show deteriorating conditions such as consumer spending, durable goods, consumer sentiment, jobs etc. While many tend to lag, a number have just begun to turn down and once begun, these trends do not generally reverse quickly.

In other words, while I agree that we could be near to the beginning of yet another bear rally, I see little evidence of major reversal in the cards anytime soon.

Matt Blackman - TradeSystemGuru.com

Tracking Jim Cramer's Performance: January 2007 Stock Picks

Based on these picks at least, a dart board would have been a better way of picking stocks..... Takeaway, he may be entertaining but following his advice, especially in bear markets can be detrimental to your financial well-being...

Jim Cramer's Mad Money In-Depth: 3/11/08: Remember the Rallies

Why not watch the clip of that segment of the show yourself. Its
www.liveleak.com/view?...

Now tell me with a straight face that we have seen the worst of the credit crisis as many analysts have been touting.....

Buying in the Crisis

Sounds like you should go on Cramer's Mad Money show. Were you also advising people last week when Bear Stearns was trading at $60 that it was silly to sell?

Like many eternally optimistic financial pundits, you appear to advocate to buy when there is blood in the streets. The only problem is that in a true bear market, the blood begins to flow years before the market bottoms. Like those who started buying homebuilders last year when they began to bleed red ink, those who took this action added their own blood to the mix.

You said in your Oct 15 contribution seekingalpha.com/artic... that you had changed your outlook too bullish and chided calls for a recession and forecasts by folks like Marc Faber. Interesting that that was the peak in the S&P500 which has fallen 15% since. The Nasdaq is down 19% since then.

You also advised your readers "Don't fear a calamity in October. If we get a sell-off, it'll be a good time for late-comers to join the party that will see stocks higher in the medium term." Those who followed this advice and bought in January are now down 5-7%. Those who turned bearish while you were turning bullish and bought contra ETFs that go up while stocks are dropping are up anywhere from 10 to 50% for the contra double bear funds.

You also mention that the Fed dropping rates is good for stocks. You neglected to mention that during the last bear market, the Fed started dropping rates in the first week of January (2001) from 6.5% and although rates dropped more than 80% (to 1%), stocks (S&P500) fell more than 50%... The same thing is happening now in case you haven't noticed. You say above that rate cuts take a while to soak in - that time around it took two years!

You mentioned in your October piece that "The solid returns of the past five weeks have not dulled my enthusiasm for stocks. I expect 3Q earnings growth and forecasts of good 4Q earnings to keep this rally going." Have you checked earnings lately? As of March 13-08 a total of 3596 companies have now reported Q4-07 earnings on Wall Street (up from 3399 companies last week). Average improvements fell again to -56% (from -55% last week) indicating that the earnings picture is certainly not improving. This compares to a drop of 21% (4205 companies) at the end of Q3-07 reporting season and a 13% jump in Q2-07. Rapidly falling earnings is not good news for stock markets.

I couldn't disagree with you more when you say above "(1) the bad news has been more than sufficiently reported, which is why everybody gets angry when I suggest buying and, (2) cheap is cheap even in a bear market." That argument has been bandied about for months now but then events like the Bear Stearns crisis comes along shaving 90% of stocks prices. Certainly the bad news was not baked into BSC two weeks ago...

Maybe instead of dissing folks like Marc Faber who got it right in October when you were wrong and are still correct in their prognoses, you should spend some time learning how to read charts... As Faber says, we are in experiencing the aftermath of the biggest asset and credit bubbles in history. At no time in history has such a period ever NOT ended badly. It's a bear market and we are heading for recession at the very latest in 2009. That means trading a bear market strategy until the markets tell us otherwise. Telling people that it was a good time to buy in October was just plain bad advice and unless my leading indicators are wrong now, its time to short the rallies and cover on the dips.

Pulse of the U.S. Housing Market

And if we go into recession and real incomes drop, unemployment rises and an increasing number can't make mortgage payments, do you think the number of delinquencies, foreclosures and home inventories might rise? Also, as building demand drops so do costs but it's important to point out that in past recessions building costs as a floor under the market became irrelevant, especially when inventories of unsold existing homes remain high...

News That Moved Tuesday's Market

Bear market rallies can do that....

Was That a Short-Covering Rally?

That short interest performance calculator is a useful tool.... Where can I get one?