As you can see in this chart, the 200 day moving average of the S&P 500 index has risen 1% above the lowest level it reached during the 2007-09 bear market. In my book on pages 129-130 I explained the contrarian rebalancing strategy for stock market investment, a method that I think is well suited for the conservative contrarian trader. This advance of 1% in the S&P's 200 day moving average has special significance for the conservative contrarian who is following this strategy. Since a huge bear market crowd had developed during the bear market the rally in the 200 day moving average means that the conservative contrarian should now adopt an aggressively bullish stance toward the U.S. stock market. He does this by moving money from bonds and cash into stock market index funds or ETF's until he has an above-normal portion of his portfolio invested in the stock market.When will the conservative contrarian move back to just a normal stock market position instead of an agressively bullish one? In my book I said that the wisest course is to wait for the bull market to develop until prices have risen for at least 20 months after the start of the bull market and have risen at least 65% from the preceding bear market low. So the conservative contrarian would now be expecting to stick with his above-normal long position until November of 2010 and until the S&P has risen as least as far as 1100.
Now that you have missed 60% upside. Dive in with both fists and buy every stock not nailed down
ReplyDeleteCarl, you surely chose the right day, i.e. DOW down 180, for declaring confirmation of a bull market.
ReplyDeleteYou are a confirmed Contrarian!!
Don't be a jerk, Jarrod.
ReplyDeleteKishore,
ReplyDeleteIn a confirmed bullish move you want to buy low.
why not just stay long 2 units until next October?
ReplyDeleteCarl, I think you might be using the wrong criteria for a bull market.
ReplyDeleteGiven the abysmal employment, rotten NAHB sentiment and astronomical p/e's, I can't see how this qualifies for anything else than an exceptionally strong counter-trend rally in a really bad bear market.
Dave,
ReplyDeleteCheck out economic conditions in 1932 when the stock market made its low and then rose 100% in 3-4 months under Hoover.
I hope you are not investing based on the criteria you mentioned being favorable before you dip a toe in the water.
I think one can make a strong argument for either case, that this is a prolonged bear market rally, or that this is a bull market. There is a lot of evidence to support either. That makes investing based on the overall market right now particularly dangerous in my opinion. I would prefer to invest in gold related assets, because I feel that the gold price should continue to rise due to the expansionary monetary policy of the Fed. There are some serious long term consequences of all the money printing, as further discussed in articles at this gold price site.
ReplyDeleteKeep up the good work Carl! Your analysis is spot on. However, if the contrarian investor had used the 24 to 50-day moving averages, he would not have missed so much of the upside move.
ReplyDeleteI prefer to watch the 24 and 50-day moving averages of individual stocks. As long as the price is above the 50-day ma AND the 50-day is in an uptrend, I remain invested or else I move to CASH.
carl:
ReplyDeletei visit often but comment little. thanks for sharing your excellent and helpful work. your book is next on my "must buy" list.
regards,
humble1
this bloomberg article helps explain why unemployment at these levels is so stock bullish. pay close attention to the HSBC forecast of up to 6% growth THIS quarter and the surging productivity increases:
ReplyDeletehttp://www.bloomberg.com/apps/news?pid=20601103&sid=aN8Zh1qEkeSw
We all know that FEAR and GREED are the CORE Emotions that move the Market.
ReplyDeleteCharts, Technicals and Fundamentals play an important part in "CREATING" the Fear and Greed.
Employment is a Huge Lag Indicator.
After people have Jumped into the Market and Everyone is all GIDDY and Laughing, at some point they will look around and say,
"Why are we so Happy?"
The Consumer is NOT Buying.
The Dollar is Losing Value, (Things cost MORE).
Gas prices are rising.
Companies are STILL NOT HIRING.
The Government is Getting BIGGER and DOING LESS.
Companies have CUT COST as much as possible...
Price to Earnings is now 50+ on most companies.
Let's Get Out of Here, Where's the Door.
Just read a US Equity Strategy Flash from JPM were they express that they expect SP500 to reach 1100 by YE09. They base this on that
ReplyDeletea) contrary to consensus, consumer spending is often weak in the first few quarters of an expansion;
b)75% of recoveries see consumer spending lower than overall GDP groth during the firs 9 months of expansion;
c) despite 2Q09 earnings beat consensus by $2 per share, Bottom-up consensus is unchanged for 3Q/4Q09;
d) They anticipate equity inflows will accelerate towars $5-$6b/week from $3.4b/week now.
One d) they write "One reason we are confident this is not a bear trap a la october 2002 or november 2008 ($8b and $51b of outflows, respectively) is the magnitude of positive equity inflows this cycle. In the past 15 weeks equity funds have seen inflows of $51.1b outpacing by 26% the inflows in the first 15 weeks after the march 2003 trough. The flows in the 2003 steepened as the bull market strengthened, ultimately leading to additional inflows of $200b between weeks 16 to week 5, or an average inflow of $5.5b per week.This implies that the pace of inflows in 09 which have been running at $3.5b week should accelerate towards $5-$6b per week."
Have been reading your blogs for a few months now I have a question about your book. I'm not trying to be a wise-ass at all, but why should we buy it?
ReplyDeleteOn your trading blog under "Should You Speculate" you advise us not to speculate. Here is a quote I've pasted from it:
[i]"Successful speculation requires that you outguess other speculators who are probably at least as smart and experienced as you are. Why do you think you can do this? What special knowledge do you have that few other people have? What's your edge?
If you think about this question honestly you will probably conclude that you don't have an edge. And if you don't have an edge you must not speculate."[/i]
I am relatively new to trading so I am probably a target customer of your book. I just wonder why encourage us to buy a book about speculation if you think we shouldn't speculate? Your "Should You Speculate" article suggests that it will be impossible for most of us to make any money at all in the market. So should I buy the book and learn to be a contrarian, or just stay out of the markets altogether? Many thanks.
David:
ReplyDeleteA fair question, and one which I address in the first chapter of my book.
The book costs $37.50 on Amazon. For that price you get a clear explanation of what you have to do to "beat the market". Most people do not have the right stuff, and I think it is well worth the book's nominal price to find out if you do or not. In any case, if you are interested in markets the book is a fun read.
I find waiting for moving averages to be a tough way to make money. You can get whipsawed and as others have commented, you lose out on a lot of potential gains. Since so many people follow these moving averages, your buy/sell price may be disadvantageous to you as well. I think asset allocation may work better, despite the 2008 experience. Even then, some asset classes went down more than others and not all asset classes did go down, e.g. gold and US Tresuries. Just my two cents.
ReplyDelete