One Year To Nowhere

[OriZ 3,157]

It has taken time. This has been coming since mid 2014.

Since that time? We were flat for a year, hit the cross, we passed the doji, the credit market is drying up, it looks like an S&P star by the end of this month, and I'm thinking no more magic beyond EOY + 1 more earning season after which we can probably get back to business.

Dude, I've been working with technical analysis for 10 years and I have no clue what you said lol. Did you look some things up and decided to toss em at me?

"passed the doji"...umm there's been several dojis, daily, weekly and monthly...they don't always mean anything, depends on the context. Credit markets yes, spreads are widening. S&P star? Well, there's some patterns in play right now, but I think what speaks volumes the most is the simplest of indicators - just take a look at the weekly RSI and weekly MACD. Those have been diverging since mid 2013.

That alone does not always mean anything. Technical divergences can last for a very long time without affecting price. Once they do the reaction tends to be very violent - akin to a ribbon snapping, or a spring that was too tight, but until then it's only a warning without particular timing. However, once market internals joined in a year later it makes it all that much more acute. Also we now have a monthly MACD cross as well. There's dozens of other technical tools as well but those are the two simplest ones for anyone to understand that are flashing bright red.

[Expat1 971]

Dude, I've been working with technical analysis for 10 years and I have no clue what you said lol. Did you look some things up and decided to toss em at me?

"passed the doji"...umm there's been several dojis, daily, weekly and monthly...they don't always mean anything, depends on the context. Credit markets yes, spreads are widening. S&P star? Well, there's some patterns in play right now, but I think what speaks volumes the most is the simplest of indicators - just take a look at the weekly RSI and weekly MACD. Those have been diverging since mid 2013.

That alone does not always mean anything. Technical divergences can last for a very long time without affecting price. Once they do the reaction tends to be very violent - akin to a ribbon snapping, or a spring that was too tight, but until then it's only a warning without particular timing. However, once market internals joined in a year later it makes it all that much more acute. Also we now have a monthly MACD cross as well. There's dozens of other technical tools as well but those are the two simplest ones for anyone to understand that are flashing bright red.

I am unfortunately carrying a discussion from somewhere else but cannot come close to interpreting a day-to-day trend but have extensively and bit by bit looked at the trends that accompany and lead up to major corrections and certainly would not toss terms at an analyst.

Let's see what you would probably call it:

The referenced "doji" would be that period of hesitation that signals a market reversal, at a short term or long term top or bottom, depending on the shape. In this case our market looks very much like 1987.

"The cross" would be when all (4) markets formed the moving average death cross

"The star" would be what you would call an evening star pattern accompanied by a death cross, jokingly referred to as a "death star"

The other indicators, the valuation indicators, are already screaming. At this time, the market is and will depend on psychology and you are in a better position to spot it. There were (3) days to spot the 1987 correction after the turn not counting the two at the top.

Edited December 12, 2015 by Expat1

[OriZ 3,157]

I don't think this market is at all like 1987....like I said before I think it's more like the two tops in the last 1.5 decades,

I don't want to turn this thread into a technical chart lesson thread but I do want to show two charts to explain my above points; Again this is not the entirety of the extensive technical research that goes into this, but rather just the surface that is easy enough for even non professionals to see and comprehend.

They say a picture is worth a thousand words well I think in this case it will be worth trillions of dollars(lost).

The first is the weekly S&P500 chart:

Second one is the monthly:

I think it's pretty self explanatory but let me know if you need any clarifications...

[Expat1 971]

No and thank you.

Other indicators:

Margin debt higher than both 2000 and 2008

Price to book higher than 1929, 2008

Double top on the NASDAQ, triple on FTSE and EU 600, all at the same time

Where we differ I believe: Length of the cycle. I think that this is a particularly spectacular bubble and the correction will happen very fast and very painfully, it sounds like you are thinking this is a typical 12, 18 month bear market cycle. I believe that the average joe bob is very, very skittish, the liquidity will be quickly sucked out, leaving the fall rate limited by the trading curbs. But we shall see. There IS a lot of liquidity out there, which can extend the cycle, but I'm not sure and in fact I doubt that the risk appetite is there. We came close in Sept.

So a question: Why in the world would investors, traders, spike their margin baked holdings at these valuations? Shouldnt it be the opposite and wouldnt it be much more profitable to margin at lower valuations and reduce at higher? There's a huge spike over the last few months. Why?

[OriZ 3,157]

No and thank you.

Other indicators:

Margin debt higher than both 2000 and 2008

Price to book higher than 1929, 2008

Double top on the NASDAQ, triple on FTSE and EU 600, all at the same time

Where we differ I believe: Length of the cycle. I think that this is a particularly spectacular bubble and the correction will happen very fast and very painfully, it sounds like you are thinking this is a typical 12, 18 month bear market cycle. I believe that the average joe bob is very, very skittish, the liquidity will be quickly sucked out, leaving the fall rate limited by the trading curbs. But we shall see. There IS a lot of liquidity out there, which can extend the cycle, but I'm not sure and in fact I doubt that the risk appetite is there. We came close in Sept.

So a question: Why in the world would investors, traders, spike their margin baked holdings at these valuations? Shouldnt it be the opposite and wouldnt it be much more profitable to margin at lower valuations and reduce at higher? There's a huge spike over the last few months. Why?

FTSE looks like words that cannot be said here. Just terrible with an S instead of a T. As far as length of cycle yes this is a particularly spectacular bubble, which is why it's taking so long for it to roll over. But if it's taking this long - the correction needs to be proportional(elliott waves) so I don't see just a vertical drop, 50% in 6 months and that's it. There's going to be corrections along the way. People will keep thinking it is over and become bullish right in time for the next rollover. I'm a believer that things like this take time. We are in a supercycle top whereas the 1987 top was of lesser degree.

No the risk appetite isn't there as made clear by market internals. Since mid-2014, there has been increasing deterioration in market internals and credit spreads. This deterioration has historically been a reliable signal of a shift from risk-seeking to risk-aversion. This risk-aversion is now accelerating. What we saw last week is a good example when a number of high-yield bond funds placed delays on redemptions in order to give them time to liquidate holdings into a collapsing market. When a problem is specific to a particular fund, orderly liquidation can protect investors. But in this case, the need for liquidation isn’t specific to those particular funds - it’s driven by selling pressure and illiquidity in the junk debt market as a whole, so these “redemption holds” risk contributing to general panic across the entire high-yield market.

Given the valuation extremes, I think that spiking yields in the junk debt market are a precursor of significant losses in stocks, as was the case in other market cycles across history. As I've repeated before, the valuation measures most closely correlated (~92%) with actual subsequent 10-12 year S&P 500 total returns are consistent with negative nominal total returns over a 10 year horizon, and roughly 1% annual returns over a 12-year horizon. Razor thin risk premiums are already baked into equity valuations, even assuming historically normal economic growth over these horizons.

At current valuations, the notion that “There Is No Alternative” to zero-interest cash is incorrect. The only thing that equities offer here is to promise wider extremes of panic, despair, excitement, and hope over the coming 10-12 years, on the way to overall returns no better than safe, liquid cash equivalents are likely to achieve. That's the unfortunate consequence of the obscene valuations Fed policy has encouraged. Market conditions pair the second most extreme valuations on record and a really ugly technical picture, with deteriorating internals and accelerating risk aversion among investors. This is a wicked combination.

The Federal Reserve is also in a rather difficult situation. Based on a broad range of economic factors, I currently have a guarded expectation of recession. Now, if there was historical evidence to demonstrate that activist Fed policy had a significant and reliable impact on the real economy, and didn’t result in ultimately violent side-effects, I would argue that a Fed hike here and now might be a “policy error.” In reality, however, decades of economic evidence demonstrate that activist monetary interventions (e.g. deviations from straightforward rules of thumb like the Taylor Rule) have unreliable, weak, and lagging effects on the real economy.

Nothing was learned from the global financial crisis, when the Fed holds interest rates down for so long that investors begin reaching for yield by speculating in the financial markets and making low-quality loans, the entire financial system becomes dangerously prone to future crises. If the Fed's mandate is really to support long-run employment and price stability, the first priority of Congress should be to rein in this cycle of activist Fed intervention; to end the Fed's ability to promote yield-seeking speculation and malinvestment that only produces inevitable crises and weakens long-run U.S. economic prospects.

The fact is that a quarter-point hike comes too late to avert the consequences of years of speculation, and while the hike itself will have little economic effect, the timing is ironic because a recession is already likely. The main effect of a rate hike will be to add volatility to an already speculative and now increasingly risk-averse market. The Fed’s real policy error, as it was during the housing bubble, was to hold interest rates so low for so long in the first place, encouraging years of yield-seeking speculation and malinvestment by doing so.

Some would argue that the Federal Reserve “saved” us from the global financial crisis. I couldn’t disagree more. My view is that the financial crisis was caused because the Fed overly depressed interest rates in the early 2000’s, encouraging investors to reach for yield in mortgage securities. In response, poorly regulated financial institutions, with banks free from the constraints of Glass Steagall, and other institutions having inadequate capital requirements, created a huge mountain of new, low-grade mortgages in the frenzy to create more “product.” The easy lending created a housing bubble, but someone had to hold the mortgages when they went belly-up, and those holders were banks, insurance companies, hedge funds, and individuals. As the mortgages went into foreclosure, banks had to mark the value of those mortgages to market value on their books, to the point where the value of their assets was less than the value of their liabilities: insolvency.

The crisis actually ended - precisely - in March 2009. How? The Financial Accounting Standards Board changed rule FAS 157 and overturned the mark-to-market requirement, instead allowing financial institutions "significant judgement" in the way they valued their assets: often called mark-to-model (or as some of us call it, mark-to-unicorn). That has given financial institutions time to build up their capital and clean up their balance sheets, for the time being. However, another sign of trouble is that unlike the headline indexes, the indexes comprised of only financial institutions have not gone up to new highs since then, but have been in a rather weak upwards correction ovr the past 6 years. The Fed’s policy of buying up government backed mortgage securities (Fannie Mae, Freddie Mac) can certainly be credited for stabilizing the housing market in the depths of the crisis, but don’t think for a second that years of zero-interest rate policy is what produced the recent recovery.

The Fed is in a rather unpleasant situation of its own making. A U.S. economic recession is already likely, regardless of what the Fed does. A quarter-point rate hike isn’t likely to have any material effect on the real economy, but given the already elevated level of risk-aversion, most clearly observed in the junk debt market, a rate hike could be viewed as aggravating that risk. Undoubtedly, any further market deterioration would easily be blamed on the Fed’s “policy error.” Alternatively, a failure to raise rates next week would be seen as a sudden vote of no-confidence in the U.S. economy. A shift to easier Fed policy is actually the most negative possible outcome for the stock market when it occurs in an environment of rising risk-aversion. Such shifts (as we saw in 2007 and early 2001, followed by two of the worst market collapses in history) are generally a response to sudden economic and financial deterioration.

All of the above is vastly different than 1987.

Throughout history, a constructive market outlook has always been best supported by some combination of favorable valuations and/or favorable market action (ideally the presence of uniformly favorable market internals, and the absence of overvalued, overbought, overbullish features). Now is not one of those times. Historically, when trend uniformity has been positive, stocks have generally ignored overvaluation, no matter how extreme. When the market loses that uniformity, valuations often matter suddenly and with a vengeance. As repeatedly noted before, Valuations, trend uniformity, and yield pressures are now uniformly unfavorable, and the market faces extreme risk in this environment. There are also other risks. Historically, consensus economic forecasts have never correctly warned of an oncoming recession. Market action is profoundly more informative, particularly interest rate and credit spreads. Based on the most reliable set of leading indicators, a recession is increasingly likely.

Once technicals, valuations, and market internals start showing a shift towards more positive and risk-seeking willingness, I will be the first to turn bullish, and warn that a bottom is near. Right now we have a long way to go.

Edited December 13, 2015 by OriZ

[Rob L 3,811]

No idea what that means-lol.

Dude if you want to understand hi finance Texas Holdem style, thou must watch Rounders

The interest on the money the house is putting out is Juice, the good for nothing Ed Norton character borrows on the Matt Damon characters account

"Otherwise, the juice starts five points a week on Mike"

You got my hopes up this morning-however I can now see I am dealing with a bunch of tight wads here-sigh.

We are just doing you a favor by teaching you self reliance

I don't think this market is at all like 1987....like I said before I think it's more like the two tops in the last 1.5 decades,

I don't want to turn this thread into a technical chart lesson thread but....

...

to late I already fell asleep

[OriZ 3,157]

I wanna add something to tie it all together:

I'm not going to time this ahead of time at 6, or 12, or 18 months etc. As far as I am concerned internals are the hinge between a market that's prone to more losses and a market that's going to recover. Once I see improvement in internals and technicals, I will become more constructive. Absent that, I will remain bearish.

The one thing I know is - what we're about to see happen is going to become very ugly very soon. The only question is precisely how soon, and will it be soon enough to happen during enough of Obama's last year to put the last nail in Hillary's coffin.

Edited December 13, 2015 by OriZ

[Rob L 3,811]

I wanna add something to tie it all together:

I'm not going to time this ahead of time at 6, or 12, or 18 months etc. As far as I am concerned internals are the hinge between a market that's prone to more losses and a market that's going to recover. Once I see improvement in internals and technicals, I will become more constructive. Absent that, I will remain bearish.

The one thing I know is - what we're about to see happen is going to become very ugly very soon. The only question is precisely how soon, and will it be soon enough to happen during enough of Obama's last year to put the last nail into Hillary's coffin.

With all of those charts and graphs, you cannot tell me when to sell? Isn't when an essential part of of the market timing strategy? I think my best investment of December was not trying to read this entire thread and make sense of it.

[OriZ 3,157]

Which is exactly why what you just said made no sense, because if you had read this thread, you would know that what you quoted me saying, refers rather to when to buy and not when to sell.

The time to sell was in the third quarter of 2014. We've made that pretty clear. When internals and technicals join together in deterioration it is time to sell. Once they will join together in a positive shift, I will take a much more constructive stance.

Edited December 13, 2015 by OriZ

[Rob L 3,811]

Which is exactly why what you just said made no sense, because if you had read this thread, you would know that what you quoted me saying, refers rather to when to buy and not when to sell.

The time to sell was in the third quarter of 2014. We've made that pretty clear. In Hindsight

When internals and technicals join together in deterioration it is time to sell. Once they will join together in a positive shift, I will take a much more constructive stance. With statements like these you can understand why dollar cost averaging is an easier strategy to execute

[OriZ 3,157]

No, not in hindsight, in real time, and dollar cost averaging might be easier, but definitely not more profitable.

[Expat1 971]

With all of those charts and graphs, you cannot tell me when to sell? Isn't when an essential part of of the market timing strategy? I think my best investment of December was not trying to read this entire thread and make sense of it.

Nobody can tell anyone else when to sell, but I will heads up when and why I sell

[Jacque67 7,328]

No idea what that means-lol.

Dude if you want to understand hi finance Texas Holdem style, thou must watch Rounders

The interest on the money the house is putting out is Juice, the good for nothing Ed Norton character borrows on the Matt Damon characters account

"Otherwise, the juice starts five points a week on Mike"

You got my hopes up this morning-however I can now see I am dealing with a bunch of tight wads here-sigh.

We are just doing you a favor by teaching you self reliance

to late I already fell asleep

So is Oriz the Ed Norton character or Expat1?

Off Wall Street is a bore-no talk of hookers and drugs ... Will check out the film. Thanks, dude.

[OriZ 3,157]

Nobody can tell anyone else when to sell, but I will heads up when and why I sell

I gave the heads up basically when I said I was actively shorting this market. Same thing essentially.

I will definitely give the heads up when I think it's time to buy again. I'm not married to either scenario so this could happen in 18 months, 12 months, 6 months, or even 2 months or 36 months. I'm not going to decide that ahead of time - the behaviour of technicals and market internals will determine that.

Edited December 14, 2015 by OriZ

[Rob L 3,811]

I gave the heads up basically when I said I was actively shorting this market. Same thing essentially.

I will definitely give the heads up when I think it's time to buy again. I'm not married to either scenario so this could happen in 18 months, 12 months, 6 months, or even 2 months or 36 months. I'm not going to decide that ahead of time - the behaviour of technicals and market internals will determine that.

So you are recommending that folks move to a cash position for up to three years? No bonds and no equities?