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BEING STREET SMART by Sy Harding Probabilities For The Market Going Forward! The Dow plunged 433 points, or 3.3%, in the two days after
the election. The timing makes it ‘obvious’ to many pundits that it’s due to
President Obama being re-elected. But he was already president prior to the election, and the
stock market has been in a strong bull market that started March 10, 2009, less
than two months after he was inaugurated. And after a 10% March to June
correction this year, the market continued to rally strongly off the June low
even as the polls showed him as likely to win re-election. So it’s doubtful the election is the catalyst for the
correction. Besides which, the correction is not something new this
week. It’s been underway since mid-September, almost two months ago. In fact,
the correction was already enough to break the trend-line support of the rally
off the June low a month ago.
The Dow gained 1,492 points from its June low to its
September high, and has now given back 800 points since that September high. So what is the
market’s problem? If the media’s sudden switch from its obsession with the
election to its new fixation on the ‘fiscal cliff’ is any indication, the
worries of corporate insiders and hedge funds all summer are finally being
recognized as being serious. Major market participants including corporate insiders and
hedge funds did not believe the rally off the June low was justified and were
already selling into it at an unusual pace, and increased their selling after
the Fed announced in September that it would provide QE3. From their public pronouncements it was clear that concerns
about the dysfunction in Washington, and the resulting ‘fiscal cliff’, were
primary factors in the bearishness of corporate insiders, and the high levels of
cash raised by hedge funds and other institutional investors. The heads of major
corporations, rating agencies like Standard & Poor’s, and even international
agencies like the IMF and World Bank, have been warning all summer that the U.S.
fiscal cliff must be resolved or the U.S. economy will drop into a recession
next year. Other worries also remain, including plunging U.S. corporate
earnings and the euro-zone debt crisis. Yet some serious concerns are subsiding. Economic reports
have been indicating for a couple of months now that the U.S. economic recovery
is back on track after its spring and summer slowdown. And recent reports from
China indicate similar improvement there, alleviating fears that its economy is
slowing into a hard landing. I’ve been saying for some time, that although my indicators
remain on sell signals, conditions seemed to be setting up for a correction but
then a typical ‘favorable season’ rally through the winter. And it has been my
contention in these articles that regardless of who wins the election, and even
though it may be at the last moment, Washington will hammer out a compromise
that at least kicks the fiscal cliff down the road into next summer.
Meanwhile, the market’s most consistent pattern, regardless
of which party is in office, and regardless of surrounding conditions, is its
seasonality. The basic ‘Sell in May and Go Away” strategy calls for
selling May 1, and re-entering on November 1. Academic studies prove that
following that simple strategy has out-performed the market by a significant
margin over the long-term, while taking only 50% of market risk. However, my firm’s Seasonal Timing Strategy (STS) improved
significantly on the basic Sell in May pattern by incorporating a simple
technical indicator, short-term MACD, and a re-entry rule that calls for
re-entering the market on October 16 each year
unless MACD is on a sell signal at
the time. In that event, the re-entry is delayed until MACD triggers its next
buy signal. And that is the case this year. When October 16 arrived,
short-term MACD was on a sell signal indicating a correction was underway. And
it remains on that sell signal.
However, at some point in the October/November time-frame
the market almost always becomes oversold in a correction and the indicator
reverses to the upside to a buy signal that is the re-entry signal for the
market’s favorable season. I expect that to happen again this year, with the catalyst
for the upside reversal likely to be a political agreement that resolves the
‘fiscal cliff’, or at least kicks it down the road. So, for now the risk is for further correction. Not only has
my seasonal strategy not yet triggered a re-entry, but my non-seasonal
Market-Timing Strategy remains on an intermediate-term sell signal, and some
significant support levels like 200-day moving averages, and trendline supports,
have been broken.
So I advise continuing to hold the downside positioning in
‘inverse’ etf’s that I have been recommending in these articles for several
months, as well as high levels of cash. But it’s not a time to fall asleep at the switch. Given the
broken support levels anything can happen. But I still believe conditions are
being set up for a typical favorable season rally to next spring once the
correction ends. In the interest of full disclosure, I and my subscribers
have 20% positions in each of the inverse etf’s; ProShares Short S&P 500, symbol
SH, and ProShares Short Russell 2000, symbol RWM.
Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com. He can also be followed on Twitter @streetsmartpost Editors: You are welcome to quote from this article, or use it in its entirety, in your publication or on your website, as long as the credit in the above paragraph is also included. Readers are also welcome to e-mail, or print and snail-mail it to friends. These reports reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance. Back to the Top Home Subscribe to RSS Feed
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