Wednesday, August 31, 2011

important update

In my last post I suggested that aggressive contrarians should wait until the cash S&P 500 closed above its 50 day moving average (red dash arrow) before reducing the current, above-average exposure to stock to below-average levels.

I had envisioned this happening around the 1220 level in the S&P. The market is currently trading there but the 50 day moving average is 30 points above the market. I think it is better to be safe than sorry, so I think aggressive contrarians should take advantage of current prices to reduce their stock market exposure to below-normal levels.

Tuesday, August 9, 2011

Panic II

This morning's editions of The New York Times and the Chicago Tribune presented the front pages you see above this post. Just as it did this past Friday the stock market has made it into the headlines. Generally speaking big rallies start a day or two after headlines like these appear in the newspapers. Today's 6% rally from yesterday's close is probably only the first stage of a bigger move which should take the S&P (daily chart above this post) back above the 1200 level.

Aggressive contrarians still have above average long positions which were increased from average levels while the S&P was in the 1250-1290 range. This latest break has dropped the average nearly 20% from its May 2 high on an intraday basis. Frankly, this is a much bigger drop than normally appears in the context of an ongoing bull market.

For this reason I think it makes sense to adopt a defensive strategy even though the 200 day moving average of the S&P 500 (red line in the chart) has yet to turn downward by 2%, the mechanical method I prefer for signalling a bear market. I think the thing to do now is to hold on to long positions for the time being, but to adopt the strategy of dealing with bear market rallies which was described on page 133 of my book. Wait for the S&P 500 to close 1% above its 50 day moving average (the black wavy line on the chart) which currently is at 1293 but falling rapidly. When this happens reduce stock market exposure to below normal levels.

The blue arrow projects this drop in the moving average linearly into the future. It looks like the market is likely to meet its 50 day moving average somewhere in the 1200-30 range.

My best guess is that the drop from the May high at 1370 is only the first wave down in a bigger decline. I estimate that the low of this decline will develop somewhere in the 950-1000 range.

Conservative contrarians are still carrying a normal stock market long position. I think this is the appropriate strategy until such time as the 200 day moving average drops 2% from its recent high.

Friday, August 5, 2011


Here is the media reaction to the latest 12% drop in stocks which I think culminated in high volume, panic selling yesterday.

My favorite image is right above this post and appeared on page one of today's Chicago Tribune business section. In big, black, block letters, the Tribune's business editor leaves no doubt about what he or she thinks you should do!

Above that are images of today's front pages of the Tribune and of the New York Times. The stock market is in the headlines, spread across the front page, in both papers. The emotional content of the headlines is subdued relative to those we saw in 2008-09 but I wouldn't expect to find hysteria in the headlines in a bull market.

The top chart is a daily bar chart of the cash S&P 500 going back to the start of 2010. The most significant thing about this chart is that the 200 day moving average is still rising. Unless and until it drops 2% or more the bull market is entitled to the benefit of the doubt. In a bull market a drop below the moving average is a buying opportunity. Compare this one with the one we saw in 2010 (green dash ovals).

I think this is a buying opportunity for the contrarian investor. The aggressive contrarian strategy I described in my book already has an above average commitment to stocks so no action is called for.

I think that this selling squall will soon pass and that the S&P will resume its bull market advance to new highs above the May top at 1370.