Stock Market Winter?

Ulli Uncategorized Contact

The markets greeted the first trading day of the New Year with a sharp sell off, which picked up even more steam towards the end of the week caused by yesterday’s chilling jobs report. With all major indexes (Dow Industrials, S&P; 500, Nasdaq, Wilshire 5000, Dow Transportation), including our own international Trend Tracking Index (TTI), now positioned below their long term trend lines, the question is whether the tide has turned on the markets.

While it’s still too early to tell, many signs are pointing in that direction. Before I jump on the bear band wagon, we need to get confirmation from our domestic TTI, which so far has remained in positive territory, but is showing signs of weakness.

To look at the big picture, I found this article, written last month titled “Stock market ‘winter’ is moving in.”

Here’s an excerpt with an opinion from Paul Desmond, who heads the demand-analysis firm Lowry’s Reports, based in Florida.

Desmond observes that bear markets have occurred over the past two centuries every 52 months or so, roughly every four and a half years. Although they seem like rare events, they’re actually as regular a part of the market cycle as winter is part of the seasonal cycle. Past market lows in just the past half-century include 1957, 1962, 1970, 1974, 1978, 1982, 1987, 1990, 1994, 1998 and 2002. Surely you recall at least a couple of those.

Desmond notes that just as winter corrects the excesses of a summertime abundance of plants and animals to ensure a sustainable natural balance come spring, bear markets and recessions clear out excesses in business inventories, consumer accumulations and human emotions to make way for the next bull market.

The first 12 to 15 months of the market life cycle are the equivalent of springtime: a time for planting (or buying fresh stocks). The next 12 to 15 months are a time for watering, weeding and nurturing. The third phase, which can last around 30 months, is the time, like autumn, for harvesting. And the fourth phase, which is where we are headed now, is a time for protecting seeds to make sure you can replant the next spring.

Desmond says one sign indicating stocks have peaked was a gauge showing the supply of stocks for sale surpassed demand in midsummer. Because such behavior took 10 months longer than usual to emerge, he says, it will likely lead to a longer-than-normal bear phase. If precedence is meaningful, then he believes we can look for a decline that persists at least through 2008.

Desmond generally recommends moving portfolios to cash and selected shorts at the start of a bear phase, since virtually all groups of stocks tend to move down together at first, and waiting to see which groups of stocks emerge as countertrend heroes. In the early 1970s, the heroes were energy stocks, while in 2000-02 they were value and small-cap financial stocks. He guesses that energy, health care and utilities may buck the trend this time, but it’s too early to say with certainty.
I have to agree with Paul’s assessment, but I will let my Trend Tracking Indexes and momentum tables guide me as to the timing of either getting into or out of certain investments. I also believe that energy, health care and utilities have good upside potential and the momentum figures in our weekly StatSheet confirm this fact. This is why we own selected positions in all three of these areas.

As usual, I will implement our sell stop discipline should it turn out that we were too early, or simply wrong, with our investment decisions.

Contact Ulli

Comments 4

  1. Dear Ulli:
    Desmond and Roger mentioned energy and agriculture may be the good sectors to invest in the coming bear market (the 4th phase in the current market life cycle), what about the precious metals such as gold and silver and their ETF funds: GLD, SLV and GDX? I want to listen to your opinion.
    Thanks.
    A new reader of your excellent investment site
    GY Zhao from Rochester, New York

  3. Dear Ulli:
    Thanks for the reply. In fact I have bought GDX and SLV two weeks ago.
    However, for the energy ETF fund and agriculture Fund I am stuck here. From your fund list currently UCR and DBA have the best M-index 12. My feeling is I am little bit afraid of investing in both of them and actually I have been waited for two weeks because I felt both of them were in overbought region thus I wanted to wait for a pullback. However, it looks like the more I wait the more hesitation I now have because UCR did have a pullback and it may pullback more, and DBA did not pullback and it even enter a much more overbought region. This is a very common question to use you models, please let me know how I can solve this problem.
    Thanks.
    Sincerely
    GY Zhao

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Stock Market Winter?

Ulli Uncategorized Contact

The markets greeted the first trading day of the New Year with a sharp sell off, which picked up even more steam towards the end of the week caused by yesterday’s chilling jobs report. With all major indexes (Dow Industrials, S&P; 500, Nasdaq, Wilshire 5000, Dow Transportation), including our own international Trend Tracking Index (TTI), now positioned below their long term trend lines, the question is whether the tide has turned on the markets.

While it’s still too early to tell, many signs are pointing in that direction. Before I jump on the bear band wagon, we need to get confirmation from our domestic TTI, which so far has remained in positive territory, but is showing signs of weakness.

To look at the big picture, I found this article, written last month titled “Stock market ‘winter’ is moving in.”

Here’s an excerpt with an opinion from Paul Desmond, who heads the demand-analysis firm Lowry’s Reports, based in Florida.

Desmond observes that bear markets have occurred over the past two centuries every 52 months or so, roughly every four and a half years. Although they seem like rare events, they’re actually as regular a part of the market cycle as winter is part of the seasonal cycle. Past market lows in just the past half-century include 1957, 1962, 1970, 1974, 1978, 1982, 1987, 1990, 1994, 1998 and 2002. Surely you recall at least a couple of those.

Desmond notes that just as winter corrects the excesses of a summertime abundance of plants and animals to ensure a sustainable natural balance come spring, bear markets and recessions clear out excesses in business inventories, consumer accumulations and human emotions to make way for the next bull market.

The first 12 to 15 months of the market life cycle are the equivalent of springtime: a time for planting (or buying fresh stocks). The next 12 to 15 months are a time for watering, weeding and nurturing. The third phase, which can last around 30 months, is the time, like autumn, for harvesting. And the fourth phase, which is where we are headed now, is a time for protecting seeds to make sure you can replant the next spring.

Desmond says one sign indicating stocks have peaked was a gauge showing the supply of stocks for sale surpassed demand in midsummer. Because such behavior took 10 months longer than usual to emerge, he says, it will likely lead to a longer-than-normal bear phase. If precedence is meaningful, then he believes we can look for a decline that persists at least through 2008.

Desmond generally recommends moving portfolios to cash and selected shorts at the start of a bear phase, since virtually all groups of stocks tend to move down together at first, and waiting to see which groups of stocks emerge as countertrend heroes. In the early 1970s, the heroes were energy stocks, while in 2000-02 they were value and small-cap financial stocks. He guesses that energy, health care and utilities may buck the trend this time, but it’s too early to say with certainty.
I have to agree with Paul’s assessment, but I will let my Trend Tracking Indexes and momentum tables guide me as to the timing of either getting into or out of certain investments. I also believe that energy, health care and utilities have good upside potential and the momentum figures in our weekly StatSheet confirm this fact. This is why we own selected positions in all three of these areas.

As usual, I will implement our sell stop discipline should it turn out that we were too early, or simply wrong, with our investment decisions.

Contact Ulli

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