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The Right Course of Action in This Market

By  +Follow June 17, 2013 11:52AM
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When the government has more to do with the vagaries of the stock market than economic issues, it makes the process of stock picking and timing the buying and selling events more than somewhat difficult. I guess that is why so many of the real, hardcore traders (both large and small) among us have missed out on this runaway market. More on this in a bit...

Quote worth Quoting Again

"I believe there are more instances of the abridgement of freedom of the people by gradual and silent encroachments by those in power than by violent and sudden usurpations."... James Madison

Obviously, if you completely discount risk of loss, the right course of action would have been to put all your money into an index fund 4 years ago and just gone fishing. I think I hear Jack Bogle saying, "Amen!", somewhere out there. But, there is that little, worrisome pocket of knowledge tucked way back in your brain that keeps saying, "pssst.... don't forget what happened in 2008!"

I guess that is one reason why we have such a nicely growing group of clients joining my Sabinal One portfolio...[Editor's Note: Unabashed self-promotion] At this writing, the portfolio is about 40% invested with about 17% short the market (in various market segments) and 83% long the market (also in various market segments). On a day like today, most of my short-biased (via inverse ETFs) holdings were hurt a bit; but the long positions did great for the most part. I really like the long/short strategy of this portfolio and strongly suggest you look into doing something similar. CycleProphet's Equity Analyzer is a great tool for helping you accomplish this task. I realize that it 'looks' like this market is just going to do nothing but move higher; but, one of these days we will not have the government backstopping the stock market. When that day finally arrives... and after the level-setting that will come with it... perhaps (hopefully) we can return to where we can make trading decisions based on fundamentals, technicals and time-cycle forecasts, instead of wondering if the US Federal Reserve is going to continue its government-backed policy of zero interest rates and trillions of dollars of artificial market liquidity.

This week (starting tomorrowTuesday), the Federal Reserve meets for two days. The market is, basically, being held hostage waiting for some clarity from the Fed Chairman, Ben Bernanke, regarding the $85 billion-a-month bond-buying program (aka, debt monetization program) and, as a consequence, allow interest rates to begin rising to non-artificially maintained levels.

Here's my guess... I suspect the zero interest rate strategy will continue until such time the Federal Government can sustain a reasonably comfortable capability of paying back its nearly $20 trillion in debt. I certainly could be wrong, but I doubt that day has arrived. As such, I suspect the 'Bernanke Bubble' will continue; he will indicate as much on Wednesday; and, the markets will soar higher. Should the markets move higher? Yes, as long as massive amounts of liquidity and zero interest rates are the norm. But, you must, must beware that this market could be in huge bubble and that equities could plummet lower when the Government gets out of the business of producing an artificial market. For this week, my confidence is very high that the end of the bond-buying program will not be announced and interest rates will continue to stay historically low; and, as a consequence, the market will, most likely, move higher.

I realize that my Turner Oscillator is Bearish (see below) and yes, I realize that 4-out-of-4 of my major index probability forecasts indicate a 'slightly' down-trending market is more likely than an up-trending market. But, you must understand that my forecasting algorithms do not forecast exogenous events. What the Fed is doing has never been done before and therefore, by definition, the Fed's actions are a multi-trillion dollar exogenous event. Forecasts be damned... the Fed is in control of this market and it is unlikely (again, in my opinion) to drop the hammer of reality on the market right now. My guess is the current Fed policy will stay more-or-less intact until after the 2014 election. And... yes... I know... the Fed is not supposed to be partisan. I'm just guessing on the timing and the timing of the election coincidence is just all too obvious to ignore.


My Take...

Since we have to bet one way or the other on Bernanke... my bet is Bernanke does not do anything to spook the market into a massive sell-off. No massive sell-off means the Bull market is still in play. As such, I like the following:

  • 2-to-1 long the market versus short themarket<.li>
  • I like oil, gold and silver to move a little higher... buying on dips. Of the three, oil is the riskiest play and could see a pretty steep sell-off in the not-too-distant future.
  • I am long Basic Materials, Financials, Healthcare, Industrials and Technology, but short (inverse ETFs) Energy and Telecom.
  • I am long the Euro and short the US Dollar.

Really (I mean REALLY) Understanding Time-Cycle Trend Probability Forecasts...

One of the more frustrating things about providing my customers with the most advanced trend probability forecasting tools in the world, is the difficulty in getting new subscribers to understand that a pricing forecast chart is NOT a forecast of future prices. I know... you're lost already... as much as you want to... DO NOT SKIP TO THE NEXT SECTION!

This concept that I am going to explain via an analogy is extremely simple to understand once you get past the fact that when you look at a chart of the next 90 days, you are NOT looking at what the prices will be over the next 90 days even though that exactly what the chart depicts. I know you are shaking your head right now, but stay with me and you will thank me for this later... I promise.

When our algorithms go back in time to 'discover' cycles, we use a Bartels formula to find those cycles that have a 90% or better "probability" of consistency. The assumption is that cycles with this high Bartels rating will be more likely to exist in the future. However… and this is extremely important… it takes, literally, hundreds of thousands of cycles to explicitly duplicate the historical movement of prices for a ticker. The Bartels analysis finds, on average, only a handful of cycles that are "persistent". Even if 100% of the found cycles actually do exist in the next 90 days, the forecast will NOT be a perfect representation of what is going to happen. If it took hundreds of thousands of cycles to replicate the past, it will take hundreds of thousands of cycles to replicate the future, but we only find a few cycles (generally less than a dozen) to paint a probability view of the future pricing trends of a ticker.

As such, the forecasts CANNOT be exact representations of what is going to happen. This is so very important for everyone to understand.

So, the question is, what are we forecasting???

The 'found' cycles are extremely important and can (67% of the time) provide us with a much increased level of "probability" of trend...not price! Take a look at the chart on the right. When I make a trade for GLD, which I did today, I care much more about the upcoming trend that has an elevated probability that GLD will trend higher over the next several weeks than trending lower. I care very little what the exact price will be (although I do care). I care mostly about the trend, how long it will last and how strong it is as a significant basis for my trade and trading strategy.

Think of it this way... Let's say it is the Fall and leaves are falling. It is a windy day with the wind blowing from left to right as you sit on your front porch. You are watching a leaf as it falls from a tree and lands on the ground. You ask yourself, "I wonder if the wind will blow that leave out of my yard and into the next yard? It may be very difficult to know exactly where that leaf will be blown. It may stay put. It may move a few inches. It may cross your yard and the neighbor's yard before it stops. The probability of you guessing exactly where that leaf will end up is extremely low. A lot depends on the weight of the leaf, the speed of the wind, the barriers that the leaf will have to cross, etc.

But, you have one piece of information that you can use to help you predict (raise your probability of being correct) 'what direction the leaf will move'. You know the wind is blowing from left to right and the odds are very high that the wind will not suddenly reverse direction. Therefore, you can, with a higher degree of probability, accurately guess the "direction" of where the leaf will move. You can increase your odds of knowing the trend of the leaf because you know the direction of the wind. You may not know exactly how far it will move (price), but you will have a good idea of what direction it will move if it moves at all (trend).

This is, metaphorically, exactly what our time-cycle forecasts do. They tell you what direction the wind is blowing and they will be right nearly 70% of the time.

So many new subscribers and even some long-time subscribers entirely miss how to use the forecast probability charts. Even if you use the probability forecast charts every day, it is entirely possible that you have never looked at the probability forecast charts in the manner in which I just described.

By the way... the probability forecasts also provide a some limited price forecasts. But the probability of exactly forecasting price is far less than the probability accuracy of forecasting future trends. Still... price probability forecasting is worth considering, but not to the degree that you consider the probability forecasts of trends.

It is important to understand what our probability forecasts are and almost more importantly, what they are not.


The Turner CrossOver and Bull/Bear Report...

Each week, our computer programs compile the total number of tickers in our database (over 6,000) that are issuing new "Alerts" for this coming week. The Alerts can be any one of the following:

A running total of these new conditions (BULLISH, NEUTRAL, BEARISH) is kept on a weekly and monthly basis. We have found that an analysis of these data provide a reasonably consistent view of short term (upcoming week) and longer-term (next few weeks) of the market, as follows:

  1. First of all, the ratio of new BEARISH Signals (red line in the Turner CrossOver Oscillator, below) is an excellent indicator of overbought or oversold conditions. Oversold means the market will have a tendency to move from a downward trend to an upward trend.
  2. We have also found that the total number of BEARISH Signals compared to the total number of BULLISH Signals is a reasonably good indicator of investor sentiment. The more BEARISH Signals, the more bearish the sentiment. The more BULLISH Signals, the more bullish the sentiment. This investor sentiment analysis is generally more valid for the upcoming week.
  3. The Composite (black) line is produced by subtracting the total number of BULLISH Signals from the total number of BEARISH Signals. Charting this total over time and observing how the red line crosses the black line, often provides an excellent early warning of a market correction.

These data elements, along with charting the trend of the S&P 500 provide the basis for the forecast provided in these weekly Reports. It is important to understand that this analysis is based solely on a technical analysis and anecdotally-derived historical observations of these data. I write the weekly forecast based on my observation of the data and the Oscillator chart. Time-cycle data are NOT explicitly included in this analysis.

The Turner CrossOver Oscillator has given a somewhat weak Bearish indication. You should note that the overbought trend of the red line (total number of new Bearish indicators) has reversed and is now trending higher. The volume of Bearish indicators is still relatively low, indicating the market is not oversold. The black line (combination of Bearish and Bullish signals) is trending strongly lower, but is far from indicating the market is oversold. Conclusion: A mildly Bearish trend is indicated for the broader market. A very similar pattern developed back in May of 2011 when the market was 40% lower than it is today. The aforementioned "mild" Bearish trend 'could' be the start of a bigger move to the downside, but it is too early to be sure. The investor sentiment Bull-to-Bear ratio jumped into Bearish territory with both feet this week with a 4-to-1 ration favoring the Bears. The market awaits some indication from the Federal Reserve this week as to whether the 'Quantitative Easing' policy of high liquidity and low interest rates will continue for the foreseeable future. The time-cycle trend probability forecasts are a bit more Bearish this week than last week. The forecasts of the Sectors are, for the most part, also indicating a higher probability that the market trends slightly lower this coming week. No major capitulation is indicated as highly likely, but the short-biased trades may have a bit more success this week, for the most part. 

Turner Bull/Bear Forecast
For the Upcoming Week

Investor Sentiment Weekly Forecast

The Turner Bull/Bear Forecast™ provides a one-week directional forecast on the market, with [-5] being the most Bearish and a [+5] being the most Bullish. This is predicated on the ratio of number of new Buy Signals to the number of new Short Sell Signals for the previous week. The assumption is investors are becoming more Bullish the more lopsided the ratio becomes in favor of new Buy Signals; and, the converse is true; the more lopsided the ratio becomes in favor of new Short Sell Signals, the more Bearish investor sentiment.


Turner CrossOver Oscillator

The Turner CrossOver Oscillator™ provides an indication of the over-bought or over-sold condition of the market. The red line (New Short Sell Signals) shows a technical direction and strength (or lack thereof) of investors to push stock prices lower, triggering new Short Sell Signals. The higher the Short Sell Signals line, the more Bearish the market. The black line (Composite of both Short Sell and Long Buy Signals) is the combined impact of both the new Short Sell Signals and the new Buy Signals and is an indication of the degree of oversold or overbought condition of the market. Buying opportunities exist when the Composite of Signals line is moving higher. The higher this line moves, the more Bullish the market. Market bottoms are represented by a change in direction of the Composite of Signals line from moving lower to moving higher. Market corrections become much more likely when the Composite of Signals line crosses the Short Sell Signals line from below the Short Sell Signals line to above the Short Sell Signals line. The market is represented by the green shaded area.


Closing Thoughts... a LOT of them...

I was hopeful that I could announce a new feature on the website today, but I can't... although if you look hard enough, you just might find it and if you do, you can help us debug it and have some educational fun at the same time. You'll have to work a bit, but you can find it.

~~~~~o~~~~~

Starting this coming Thursday, we will be conducting a series of weekly LIVE training webinars to help you get a LOT more out of the CycleProphet tools. This week, we will be discussing how to properly read the Equity Forecaster charts. The webinar will take place at 3:30 PM CT. After the training portion, we will have a Q/A session that can encompass anything on the CycleProphet system. You'll be able to type in your question and we'll respond on-air with the answer for as many as we can. If you have a question in advance, please send it to  This email address is being protected from spambots. You need JavaScript enabled to view it. . For more information and to register for the webinar, please click on this link: CycleProphet LIVE Training Webinar.

Even if you are unable to attend the webinar, if you register for the event, we will send you a link to the recorded session so you can watch and learn it at your convenience.

~~~~~o~~~~~
  1. June 27, I will be in Chicago as the featured subject-matter expert for the day-long CBOE training seminar. I don't have a link for registration at this writing, but I promise to get it out to you as soon as the CBOE gets it to me. I feel very honored to have been selected by the CBOE for this very exclusive session. It is an all-day affair that you can watch, listen and post questions to throughout the day. It will be a lot of fun and you should get a ton of great information. If you ever wanted to know how to get the most out of CycleProphet by trading options, you do not want to miss this event. CBOE is charging $99 for the event but it is worth many times that amount.

We'll email you the details as soon as we get them!

~~~~~o~~~~~

In closing, I hope all you Fathers out there had a great Father's Day. I certainly did. Thank you for giving me the day off with my kids and grand kids. It was a lot of fun and even though my guy didn't win the US Open, it was a blast watching the ebbs/flows of the US Open, talking with the kids, burning the dogs/burgers and enjoying life with my family. Life is so very short and the older I get the faster time seems to travel. Try to enjoy every minute of every day with those you love. All else pales to insignificance.

Have a great week in the market!

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.


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By  +Follow June 17, 2013 11:52AM
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