LunaticTrader

Investing with the Moon

Stocks and bitcoin

Posted by Danny on November 20, 2017

Stocks have basically gone sideways so far this month. Since the November 9 drop the S&P 500 is trying to climb back, but it looks like a tired effort. Meanwhile bullish participation continues to weaken, as reported in my weekly reversal levels outlook.

The lunar green period is about to end, so it will be interesting to see what comes next. Here is the current S&P 500 chart:

^SP500 (Daily) 2_11_2016 - 11_17_2017

This index keeps pushing into an important trendline. But my Earl indicator is showing a multi-month bearish divergence. And the slower Earl2 (orange line) keeps moving lower with no signs of a bottom. The MoM has cooled off since peaking into the +8 zone in mid October.
While all those warning signs have not resulted in any significant downside action so far, it doesn’t mean the market is becoming safe. Sometimes the real drop comes at the very end of a longer sideways period.

A few readers have asked about my bitcoin targets. Since my August post, the next target of $6430 was reached quickly. And I had one higher target, posted on Twitter a few months ago:

I would not be surprised to see stock markets and bitcoin reach important peaks together, before entering “cooling off” phases. With bitcoin now well above $8000 a move to my higher target at $9374 looks realistic here, and yes an overshoot to just below $10 is possible too. I would expect some serious profit taking if $10k is approached. Here is an updated chart:

bitcoin

Bitcoin is bumping into an overhead resistance line and a jump above $9k would look like a breakout. But false breakouts are a fairly common way of ending major bull markets. A one or two day jump to $10k that is quickly reversed would be a textbook blow-off peak. The ELC indicator has peaked out already and such a move would paint a clear bearish divergence. I will keep you posted on Twitter.

Posted in Market Commentary | Tagged: , | 4 Comments »

Outlook for week of November 20

Posted by Danny on November 19, 2017

Outlook for world markets with brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. Comes as a daily html file covering over 2700 stocks and ETF. To see what you get you can pick up recent free samples on this page. Instructions for use are included. Give it a try.

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Outlook for week of November 13

Posted by Danny on November 12, 2017

Outlook for world markets with brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. Comes as a daily html file covering over 2700 stocks and ETF. To see what you get you can pick up recent free samples on this page. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

Outlook for week of November 6

Posted by Danny on November 5, 2017

Outlook for world markets with brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. Comes as a daily html file covering over 2700 stocks and ETF. To see what you get you can pick up recent free samples on this page. Instructions for use are included. Give it a try.

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LT wave for November

Posted by Danny on October 30, 2017

Stocks have reached new record highs. But bullish participation has started to weaken again ( see Outlook for week of October 30). A shrinking number of stocks is carrying indexes higher and that’s always something to keep an eye on. Let’s have a look at the Nasdaq chart before sharing the LT wave for November:

^COMP (Daily) 2_16_2016 - 10_27_2017

The Nasdaq keeps moving within a nice channel it has been occupying for most of the year. Friday’s jump has taken the Nasdaq to the upper bound, but this is not a breakout that suggests upward acceleration.
My indicators are showing red flags as well. The Earl (blue line) shows a bearish divergence, while the slower Earl2 (orange line) has peaked and turned lower. The MoM is also on a downward trajectory after peaking out near the 8-euphoric zone. While none of this presents obstacles that cannot be overcome, it is not the kind of setup that prompts me to do fresh short term buying.

Sometimes the best strategy is wait and see. This is an aging rally and there has been no pullback worth talking about for more than year. If investing was always this safe and easy then nobody would be working.

October was not a good month for our LT wave. Expected weakness early in the month did not pan out, but projected strength in the 3rd week came right on target. Markets pulled back from record highs in the final week, when the wave suggested new weakness. But that didn’t carry on and the index bounced right back in the final days. Here is the wave for November:

ltwaveNov2017

Weakness is expected until the 7th, with lowest LT wave values of the month coming on the 6th and 7th. If that brings a market low then a rebound should follow until the 17th or 20th. The final 10 days of November look weak.
Remember the LT wave is experimental, so do not bet the bank on it.

Posted in Financial Astrology, Market Commentary | Tagged: | Leave a Comment »

Outlook for week of October 30

Posted by Danny on October 29, 2017

Outlook for world markets with brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. Comes as a daily html file covering over 2700 stocks and ETF. To see what you get you can pick up recent free samples on this page. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

About buying new all time highs

Posted by Danny on October 25, 2017

The mood on US stock markets is as bullish as I have seen it in a long time. That doesn’t mean this is about to change anytime soon. Just like a very bearish mood can continue for years, optimism can also go on longer than most investors expect.
Today I spotted an interesting question on Stocktwits:

“Psychological question for the top callers/hardcore bears: What if this is the lowest price you will ever be able to buy?”

The question suggests that some market participants are becoming worried about missing the next great bull run. But that’s not the reason I am picking up this question. I actually became curious about the odds that stocks will never become this “cheap” again? What happens if you buy new all time highs in major indexes like S&P 500 or Dow Industrials?

To find an answer I took the daily Dow Industrials average starting from year 1900 and checked out how many new all time highs were never revisited again later on. To do this in a fair way I decided to give any new ATH at least 5 days breathing space. If the market ever traded below the ATH after that 5 day window then it would have been better to wait and buy cheaper later on.

The results are quite interesting. As of yesterday October 24, 2017 the Dow has made a new ATH 1382 times. Only 66 of those new ATH have never been revisited so far outside the 5 day space I give them. So basically, if you buy Dow at new ATH levels then you have a little less than 5% chance that you will “never” be able to buy that cheap again. The chance that you will be able to buy cheaper at some point in the future is thus more then 95%. But, some of the more recent ATH that have been set since late 2016 could easily be revisited in a next correction or bear market. We just don’t know yet. So, the real figure could be closer to 3% “NR ATH” (Never revisited all time high). Here is a long term Dow chart where I have marked those NR ATH:

dow_ath

The first thing I found is that all new ATH prior to 1985 have been revisited later on. Between October 1985 and February 1986 there were 16 ATH that still stand as NR (never revisited). It would take a huge crash to the 1386-1639 area to take them out. Between March 1995 and November 1996 there were another 24 ATH that still stand as NR. It would take a drop to 4048 to remove them from the list. In March 2013 we had another 3 NR ATH. A market drop to 14286 would remove them. And since November 2016 we have another batch of new ATH that are still waiting for a revisit, bringing our current total to 66.

This creates the impression that buying on a new ATH is a bad idea but that’s not really the case. Assuming random buying and a fixed 1 year holding period an investor would have enjoyed an average 7.15% annual return in Dow since year 1900. But buying a random new ATH has seen an average 8.45% gain after 1 year. Most new ATH have come in the midst of ongoing long term bull markets, so buying ATH has often shown tidy profits one year later.

If the market almost always revisits previous ATH, then isn’t it better to wait for a bit of a correction to do our buying? Well, the problem is that most of those NR ATH came in the middle of very powerful moves, remember 1985 and 1995? By waiting for a pullback some large 1 year moves would have been missed. I did the test to see what happens if you bought as soon as the market was down 10% from a previous new ATH. Doing that and holding for a year produced only an average 3% gain. Waiting for a larger 20% correction from new ATH did even worse: only 0.1% gain after a year.

There is a way to do better than the average 8.45% annual gain from buying any new ATH. If you had waited for the first new ATH after there had been no ATH for at least a year then you would have enjoyed an average 13.3% gain over the ensuing year. The last such occasion was in July 2016 and it produced a nice 16.5% annual gain.

Bottom line: new ATH levels are almost always revisited later on, often giving investors a chance to buy cheaper in the next weeks/months. But the few times a new ATH was never revisited has led to some of the biggest annual gains, so hoping for a pullback can make you miss out on the best moves. Stock markets have a long history of frustrating investors who are waiting to get in on a pullback. It has happened before and it will happen again.

And what about buying lows? In most markets we cannot study new all time lows. But I took a quick look what to expect if you buy the first 1 year low that comes after an ATH in the Dow. This happens to have a negative expectation. Buying that new 1 year low produced an average 3.5% loss over the next year. So, new one year lows on the heels of ATH have historically been shorting opportunities. If you are not into shorting then just stay out and go fishing for a year. Chances are you will buy much cheaper stocks after that 1 year sabbatical. You would have avoided some of the worst bear markets of the recent century (1907, 1920, 1930, 2000, 2008) by simply resisting the temptation to buy “cheap stocks” on that first 1 year low after an ATH.

With the market still setting new records regularly we are nowhere near new one year lows in the Dow. But that day will come and then you better be very careful. True, the “law of small numbers” applies to this study. The next time may be different. But a lot of trading algos have been trained on the past and some of them will have picked up on this historic tendency. And that may have the effect of repeating the past when those algos start to sell. Be ready for it.

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Outlook for week of October 23

Posted by Danny on October 22, 2017

Outlook for world markets with brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. Comes as a daily html file covering over 2700 stocks and ETF. To see what you get you can pick up recent free samples on this page. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

Quantitative squeezing – what you need to know

Posted by Danny on October 16, 2017

Stock markets keep inching higher and people probably start thinking that nothing can bring them down. Real volatility has also dropped to new all time lows. That’s strange because there is unusual uncertainty on the horizon already. The US Fed has announced that it will start unwinding its decade old QE programs and that’s something that has never been tried before. They present it as a non-event that will be like watching paint dry and maybe enough investors are believing them… Anyway, I will give my observations on how this “quantitative squeezing” is likely to unfold, but first a look at the current S&P 500 chart:

^SP500 (Daily) 1_26_2016 - 10_13_2017

This market keeps advancing within the narrow channel (red) it has been occupying for most of the year (with the exception of a brief breakout attempt in February). The S&P is at new record highs and bumping into the ceiling of this trend channel. This advance has lifted the MoM index into the +8 euphoric zone, which usually marks peaks. The Earl (blue line) has turned down already with a bearish divergence in place. The Earl2 (orange line) is still climbing and has reached its highest level since early January. When the Earl2 turns down we will probably have an important peak in place. This not the kind of setup to do new buying. The risk/reward is too poor. Our LT wave for October shows a peak on the 19th, so that’s something I would also keep an eye on this week.

Now, let’s have a look at quantitative easing (QE) and what will happen when it reverses into quantitative squeezing (QS). Will it be a non-event, as they want us to believe? If so, then why are they starting it with a paltry $10B in the first month(s)? The reality is they are shaking in their boots. This is not mere tightening like when rates are being raised. This is about squeezing a few trillion $ out of an economy over the course of a few years. If putting those $trillions in supposedly saved the economy then it makes no sense to think that taking them back out will have no effects. That’s like putting the engine off in a helicopter and tell the passengers that it will keep flying all the same.

There are a few charts that you will want to watch as this QS gets underway. All can be found on the Fed’s own websites. The first one is the so-called balance sheet of the Fed (https://fred.stlouisfed.org/series/WALCL):

CB_assets

It is easy to see how their holdings have jumped up with the asset purchases done for the QE programs since 2008. I have extrapolated the original growth rate of their total assets prior to the QE experiment (orange line) and that shows us the Fed has to unload about $3.3T worth of paper if it wants to get back to “normal”. They say they will do that gradually by not rolling over some of the bonds at maturity, thereby suggesting they will not do any direct selling. But that’s just smoke and mirrors. When the Fed doesn’t roll over some Treasuries when they are being refinanced then new buyers need to be found for that portion the Fed is unwinding. When bonds mature it is not like a lottery ticket that expires worthless. The principal needs to be payed back (+ interests) and that money will have to be found elsewhere if the Fed doesn’t roll over its assets. So, where will those new buyers come from? Well, not everyone has $ billions lying around, but the first candidate buyers can be seen here (https://fred.stlouisfed.org/series/EXCSRESNS#):

Excess_Res

Most of the QE money went into excess reserves at commercial banks. They still have a little over $2 trillion in excess reserves and that money will inevitably become a buyer of the assets the Fed is unwinding because primary dealers are required to pick up the unsold portion on treasury auctions. You will want to watch this chart during QS to see how quickly their excess reserves dwindle. Once that money starts running out it will become problematic for the Fed to continue unwinding because then buyers with deep pockets will have to be found elsewhere. Problems may start well before that point because commercial banks could balk at picking up more treasuries unless a more attractive long term interest rate is offered. Historically commercial banks have held a portion of their assets in government paper and this is the third chart you will want to watch as QS unfolds (https://fred.stlouisfed.org/series/USGSEC#0):

bank_own

Banks have typically held about 10% of their total assets in government paper. That was also the case in 2008. Since the start of QE banks have been net buyers of $1.2T worth of treasury and agency securities, doubling their stake and now more than 15% of total assets. We can easily see where all the QE money has gone: two thirds went into excess reserves and the rest was used to buy government paper. Are those banks now going to be eager to use all their excess reserves to buy another $2T worth of bonds for their own accounts? They would be well on their way to become a bond ETF rather than a bank if they do so. Those bankers will try to unload some bonds on the public and this chart will tell us how successful they are in doing so. If their treasury holdings go up just as quickly as the Fed unwinds theirs (chart 1) then we will know that the broader public has little or no appetite for this paper and then QS will be in trouble.

Of course they could use a few tricks to boost public appetite for treasuries. E.g. Fed could announce that long term inflation target has been lowered to 1%, saying that low inflation has become a permanent feature of the economy. In a 1% inflation world a long term bond yielding 3% would look OK, especially compared to richly priced stocks. And a stock market crash could also beef up the demand for bonds. But for how long? NYSE tells us that stock investors currently have some $291 billion cash in their accounts and $550 billion in margin debt (http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=tables&key=50&category=8). Good luck in trying to peddle them a portion of the assets the Fed will be unwinding.

Will foreign investors pick up the tab? Not likely. Official foreign holdings of US treasuries is around $6T. Latest data suggest they are trying to reduce their holdings: http://ticdata.treasury.gov/Publish/mfh.txt.

Investors understood that QE was like having a persistently large buyer in the bond markets and that money spread into other markets. They will soon realize that QS is like having a persistently large seller in the market and that transition will feel like a kind of squeeze because money is taken out. My guess is that QS will seem to go smooth in the beginning, especially when other central banks like ECB are still in ongoing QE programs. But as excess reserves dwindle at commercial banks it could turn ugly without any warning. So, I think they will be forced to stop QS well before their balance sheet gets anywhere near the old “normal”. Trying to unwind all the way to “normal” would cause a financial crisis that is worse than the one they happily believe to have solved with QE. Once that is understood they will settle for freezing their balance sheet at a high level for an indeterminate period of time. And they will still want us to believe that their actions have saved the economy. But in reality the economy will have saved their actions.

Posted in Market Commentary | Tagged: , , , | 4 Comments »

Outlook for week of October 16

Posted by Danny on October 15, 2017

Outlook for world markets with brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. Comes as a daily html file covering over 2700 stocks and ETF. To see what you get you can pick up recent free samples on this page. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

 
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