8 replies to this topic

[IYB]

Some of the "long timers" here at Fearless forecasters may remember our "Four Faithful Friends" posts form 2003-2005. Unfortunately the original post is no longer in the archives {as it was posted before the late-2003 server move by TT} where we explained how these four friends were at that particular time confirming the onset of a long strong Primary Bull Market ahead. I've linked a later one from 2004 that is still in the archive, above.

We've used these four as our primary long term guides to market direction for decades, and still turn continually to these faithful friends for council on prevailing context. We'll review these four briefly here. The four friends to which we refer are:

Monetary trend

Cyclical trend

Sentiment

Momentum

Our friends are now universally negative, indicating that the Perfect Storm may just be upon us right now. Below is our brief summary of each. Over the last several weeks at SS.com, we've detailed each of the four and those interested may sign up for the free trial indicated at the bottom if they wish to see the full analyses. But our brief summary of each of the four follows with each intentionally oversimplified for clarity:

--------------------

The Monetary Trend is now swinging negative as the Fed, after dropping rates to zero in 2008 and holding them there, then initiating for the first time ever a $Trillion "Quantitative Easing" program in 2009, then another $Trillion via QE2 in 2010 --- is NOW faced with not only the end of that pedal-to-the-metal monetary easing strategy, but the daunting task of draining $2 Trillion from the reserve system over coming years. While that drain may take years to reach full swing, it lies ahead of us and that coming restrictive policy is a major negative....as restrictive Fed policy eventually leads to lower equity prices. Here the new transparency of Fed activity is likely, as we see it, to lead to selling in anticipation of the restrictive action, and to continue as that activity commences.

http://stockcharts.com/c-sc/sc?s=$SPX&p=M&st=1996-01-28&en=(today)&i=p57004796817&a=181755078&r=916.png

Cyclical Trend- The Intermediate Cycle which started last summer has run for now nine months and, as we read it, has NOW swung to the down cycle and calls for a deep sustained decline as detailed here.

http://stockcharts.com/c-sc/sc?s=$SPX&p=W&yr=3&mn=0&dy=0&i=p89280653039&a=228018391&r=6.png

Sentiment- Extremes in bearish sentiment have been consistently running at unprecendented record levels, screaming "TOP" now since last fall. We have lots to say about that here at SS.com. Sentiment is calling for a long and deep decline.



Momentum- As discussed in this article, momentum has been declined now for a year, as declining internals have been setting the backdrop for a long sustained drop in prices ahead.

http://stockcharts.com/c-sc/sc?s=$SPX&p=D&yr=1&mn=7&dy=0&i=p23824210672&a=181755090&r=6847.png

Is it the "Perfect Storm"? We suspect so. But at minimum our market indicators are telling us that downtrend is solidly in progress, and we remain short. Good trading to all, Don

[arbman]

Once again, you need a triggering event for a crash and it must be a rapidly deflationary event such as the energy leading down last year with BP's woes, but very nice charts, thanks for sharing. Currently, we have all necessary ingredients for more sell off though, rising skepticism after an internal and speculative peak technically and no massive monetary stimulus left at the apex of 2012 full valuation fundamentally, people may have to exit in mass if an event triggers a sell off... Very Best.

Edited by arbman, 22 May 2011 - 06:06 PM.

[securelstmile]

Some of the "long timers" here at Fearless forecasters may remember our "Four Faithful Friends" posts form 2003-2005. Unfortunately the original post is no longer in the archives {as it was posted before the late-2003 server move by TT} where we explained how these four friends were at that particular time confirming the onset of a long strong Primary Bull Market ahead. I've linked a later one from 2004 that is still in the archive, above.

We've used these four as our primary long term guides to market direction for decades, and still turn continually to these faithful friends for council on prevailing context. We'll review these four briefly here. The four friends to which we refer are:

Monetary trend

Cyclical trend

Sentiment

Momentum

Our friends are now universally negative, indicating that the Perfect Storm may just be upon us right now. Below is our brief summary of each. Over the last several weeks at SS.com, we've detailed each of the four and those interested may sign up for the free trial indicated at the bottom if they wish to see the full analyses. But our brief summary of each of the four follows with each intentionally oversimplified for clarity:

--------------------

The Monetary Trend is now swinging negative as the Fed, after dropping rates to zero in 2008 and holding them there, then initiating for the first time ever a $Trillion "Quantitative Easing" program in 2009, then another $Trillion via QE2 in 2010 --- is NOW faced with not only the end of that pedal-to-the-metal monetary easing strategy, but the daunting task of draining $2 Trillion from the reserve system over coming years. While that drain may take years to reach full swing, it lies ahead of us and that coming restrictive policy is a major negative....as restrictive Fed policy eventually leads to lower equity prices. Here the new transparency of Fed activity is likely, as we see it, to lead to selling in anticipation of the restrictive action, and to continue as that activity commences.

http://stockcharts.com/c-sc/sc?s=$SPX&p=M&st=1996-01-28&en=(today)&i=p57004796817&a=181755078&r=916.png

Cyclical Trend- The Intermediate Cycle which started last summer has run for now nine months and, as we read it, has NOW swung to the down cycle and calls for a deep sustained decline as detailed here.

http://stockcharts.com/c-sc/sc?s=$SPX&p=W&yr=3&mn=0&dy=0&i=p89280653039&a=228018391&r=6.png

Sentiment- Extremes in bearish sentiment have been consistently running at unprecendented record levels, screaming "TOP" now since last fall. We have lots to say about that here at SS.com. Sentiment is calling for a long and deep decline.



Momentum- As discussed in this article, momentum has been declined now for a year, as declining internals have been setting the backdrop for a long sustained drop in prices ahead.

http://stockcharts.com/c-sc/sc?s=$SPX&p=D&yr=1&mn=7&dy=0&i=p23824210672&a=181755090&r=6847.png

Is it the "Perfect Storm"? We suspect so. But at minimum our market indicators are telling us that downtrend is solidly in progress, and we remain short. Good trading to all, Don

Thanks so much for sharing your work. Always appreciated, very generous of you.

[thespookyone]

Hey D., Great work as usual-thanks for sharing it. I certainly agree with you, but with one added caveat-when? Everything on your charts rings true. Unfortunately, we were up over 100 SPX points after the MACD crossed negatve, and as momentum declined for a year-we clocked up over 250 points. Timing is everything, and being early short has meant being punished for the most part. I'm sure you are quite close, as good as you are-but I can't rule out one more tiny higher high myself. So for any big trades-if we cliff dive, I'll play whatever backtest it can muster. Other than that, my plays remain small here-to me, this is touchy ground.

[Islander]

Holding put sreads for the last month or so. This is shift in direction will take a while to unfold, the sentiment change will take a while to take hold. Frankly suspect "Don's 4 Friends" areJust the beginning:

The Financial Repression required to survive during a market sell off will likely kick-in for 2012 as the Administration struggles to avoid the loss of the elections and the Fed fights a volatile dollar (first up, then down hard as it is understood the Fed can not do much given the problems.) Congressional actions that must unfold will only make things worse. The steps are:

1. A program of Increased taxes, & Regulation. Restriction on internal and external financial holdings by US Citizens, ( eg, a manditory 20% of treasuries in all tax favored retirement programs, (higher taxes on gold> 28% current rates) and the inevitable decrease in interest rates (first a flight to safety) ,during an equities decline this is the drill, will excerbate the problems of the Treasury in rolling over about 30% of the national debt next debt year. It will be difficult for the Treasury to place new debt at relatively low yields so eventually interest rates must rise in the out years to keep the treasury nominally "solvent". A very volatile period for the dollar over next two years, maybe longer as it becomes clear the US is late (too late?) in taking action to meet its debts (dollars starts decline and gold and silver go parabolic again and controls are employed).

2, Concurrently, we must expect that Soc Security will be prospectively decreased in present value terms, and sales of the special bonds held by the SSA as colatteral (about 800 billions) will start to be sold, (2012 on to 2032) to pay retirements. This is a flood of new debt no buyers will want.
Medicare will be cut back, higher copays MDs billings rates halved, all in attempt at making the system less costly.
Mediaid will be stopped by many states due to inability to fund.

The misery index (unemployment plus rate of inflation) will soar from present to 20 to ~ 40; ( 14% U6 unemployment, and 3-7% inflation based on headline CPI.)

In the latter part of this decade things will be vastly different than they are today. There is too little time to cope with the events at hand.

Islander

Edited by Islander, 22 May 2011 - 08:06 PM.

[SixSigma]

D: Thanks for your "heads up" post and your usual unselfish sharing. I know there are many here, regardless of their current market position, who value and appreciate your continued participation. I know I certainly do. And, Aloha again from a fellow kama'aina; I miss the big island and often think about the white mountain turning purple at sunrise watching from the rainiest city in the world's bay...Best!

Edited by reddybuild, 22 May 2011 - 09:48 PM.

[Rogerdodger]

ditto!

[vitaminm]

http://stockcharts.com/h-sc/ui?s=$SPX...id=p41176550394

[Mr Dev]

nice post IYB im sure our markets will go negative on the year at some point.. like spooky said, timing is everything... im short now. thanks for sharing.