A Realistic Perspective of the Market

Mike Turner |

Let's put this market in some kind of realistic perspective. Do you really believe this bull market is based on fundamentals? Seriously... Do you think that a market that has not seen a decent sell-off since March 9, 2009, is actually predicated on the price of earnings being too cheap. After all, paying up for better EPS in the future has always (well... almost always) been the true driver of bull markets.

Quote worth Quoting Again

"A people that values its privileges above its principles soon loses both." ...Dwight Eisenhower

And although it is true that EPS for 'some' companies have been better and the forecasts for a tiny few companies have, indeed, been better... have you actually seen fundamentals that can justify a gain of 16% in the first 5+ months of this year? I haven't.

Ok... Let's look at the technicals then... maybe the technicals are telling us there is some reason why the market is moving a lot higher. I suppose you could make a case that the market has broken out, above the top of the most recent consolidation period (see DJIA chart below) that started in January of 2002 and, just like it has done (virtually) every time that has happened in the past 112 years, the market has moved into a 10-year+ raging bull market. Maybe that is what is happening? I like this idea, but I'm not so sure that's the reason.

I think the primary reason the market has been on a rocket ship moving higher for the past 4+ years is almost directly due to the Fed keeping rates at or near zero. Our Government has racked up a national debt that is expected to top $20 trillion by the end of the current Administration. In 'normal' times with 'normal' interest rates, a debt of this magnitude would be a huge drag on the economy and, by extension, the market. But for one reason, it is not.

At this moment, the national debt is not a big deal and to my way of thinking, there is only one primary reason why... the debt is virtually interest free. As long as the US Government can continue to monetize our own debt to the tune of $80+ billion per month via the Fed, and borrowing money at no interest to pay for that debt, this massive issue is not a crises.

As long as the US Federal Reserve is allowed to keep interest rates artificially low and liquidity artificially high in the market, the market will likely move higher and the day of reckoning pushed out into the future. Basically, the Fed is engaged in a multi-trillion Dollar price-fixing policy of interest rates, where it gives the Government the ability to borrow money at zero interest (or nearly so). The problem is, price fixing never works out in a free market society... especially when it is so massive. One day, in the not-too-distant future, the Fed will not be able to print faux money and artificially depress interest rates. When that day occurs, it will be a massive day of reckoning. Interest rates will soar and the ability for the US to pay off its debts will become problematic.

It has been estimated that the interest alone on the national debt will rise to over $700 billion per year, if interest rates move to just 3%. That's more money, in interest payments, than it costs to run the entirety of the Department of Defense for a! And... 3% is certainly not an unusually high rate of interest in 'normal' times. Once interest rates start to rise, things could get very ugly.

How long can this artificial rate structure (and, by extension, the stock market bubble) continue? My guess is it will continue through the end of the current Administration and maybe even for a few years beyond. The next President will have an incredible hill of potential financial crises to climb. But, for now... even if it is a terrible thing for our country... the runaway Federal Reserve is actually a good thing for the stock market. As long as interest rate stay at or near zero and as long as the Fed keeps buying our debt with our own money, the liquidity in the market will likely continue to flourish and the market has little reason, for now... to pull back.

But... beware the end of free money. We are in an incredible, never-before-experienced, artificial equity bubble. This is great for stocks and it could continue for quite some time... perhaps many more months, if not years.

Unfortunately, most folk have missed out on the big run-up in the market. And, I am not about to suggest you run out and start buying stocks. However, you might not want to sit on the sidelines either. You need to ride the upside of this tsunami wave and also be ready to ride the downside. This is why I continue to have a long-term investment strategy in the market... one-week-at-a-time.

My Take...

For the next week to two weeks, I am 60% bullish and plan to trade accordingly. The time-cycle trend probabilities for the major indexes are evenly split for the next couple of weeks with 50% showing a small move lower and 50% showing a small move higher. But, with the Fed clearly indicating it will continue to pump $80 billion of liquidity into the market each month for the rest of the summer, I'd say the odds favor the upside case a little more than the downside case.

Gold and silver still look to be at or near a bottom, so I may be adding some precious metals shares. Gold could meander a bit lower so I will be looking to buy gold on dips.

Crude oil continues to point higher from a trend probability perspective, but a pull-back in the next couple of weeks is being forecast. The pull-back does not look to be significant, though.

The Japan and EU market indexes are indicating the trend probability is nicely bullish for the next few weeks.

I like the fact that the trend probability forecast for the Financial sector is decently bullish for the next few weeks. The Financials tend to lead the market, so this forecast lend credence to my slightly bullish stance on the broader market indexes.

The Bull/Bear and Oscillator Report...

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

  • BUY - This means the status of the equity last week was "OUT" and this week, the weekending closing price moved high enough above my 10-week, time-shifted, moving average to trigger a "BUY". Click Here for this week's STRONG BUYS, or Click Here for this week's BUYS.
  • OUT - This means the equity stopped out by triggering a long-position stop-loss where the equity was sold, or it triggered a short-position stop-loss where the short position was covered.
  • SHORT - This means the status of the equity last week was "OUT" and this week, the weekending closing price moved low enough below my 10-week, time-shifted, moving average to trigger a "SELL SHORT". Click Here for this week's STRONG SELLS, or Click Here for this week's SELLS.

A running total of these new conditions (BUY, OUT, SHORT) 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 Short Sell 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 Short Sell Signals compared to the total number of Buy Signals is a reasonably good indicator of investor sentiment. The more Short Sell Signals, the more bearish the sentiment. The more Buy 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 Buy Signals from the total number of Short Sell 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 brief 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 Oscillator has moved into an interesting pattern. You should take note of a similar pattern back in March and May of 2011. Even as recent as March of this year, a 'somewhat' similar 'bounce-up-to-the-red-line-followed-by-a-retreat' event occurred.

The investor sentiment Bull-to-Bear ratio has edged up ever so slightly, but is still in the 1-to-1 ratio with a tiny Bullish leaning. The black line (Composite of Signals) is now showing a top was put in, which in 'normal' markets would indicate a market top. With the Fed now, seemingly, firmly entrenched into a continuation of holding interest rates near zero, the market may have little reason to sell off.

The red line (Short Sell Signals) seems to be stabilizing, which is more Bullish than Bearish.

The time-cycle trend probability forecasts are only slightly Bearish this week with far less volatility. We could see a week where the gyration of the broader market does not so massively overshadow trades on individual equities. Longer-term trades are in order with no more risk than what would be lost if stops are hit. Remember to focus on the first trend that is at least a week in duration and not more than 40 days in duration.

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...

My staff often get questions about the difference between my CP Trades portfolio and my money management services. This week, I thought I might provide a little clarity on the differences in my Closing Thoughts...

In the CycleProphet Trades portfolio, my goal is to simply pick the highest scoring stock or ETF that has more than 300,000 in average trading volume and at least a 3 to 4 week forecast trend probability that is bullish. Most of the subscribers to this service want several trades to choose from each week, so I try to keep the portfolio at or near 100% invested. Keep in mind that I do not recommend anyone buy or sell any securities via the CycleProphet Trades portfolio. I am merely offering an opinion and information that is publicly disseminated and should not be used for the buying or selling of securities. In the world of CycleProphet, I do not know your financial situation. You should always assume any trading of securities in the stock market comes with significant risk of loss of principle. And, above all else, you should seek competent, professional advice from a registered investment advisor before buying or selling any security. I am NOT your financial advisor within the constraints of CycleProphet. CycleProphet, Inc. is NOT a registered investment advisory. As such, CycleProphet can only provide its customers with opinion and information. It cannot provide buying or selling advice on any stock market security; and it does not.

My money management portfolio (Sabinal One) is exclusively a part of my registered investment advisory, Sabinal Capital Investments, LLC. Whereas in CycleProphet, I do not know the financial condition of my subscribers to that service; in Sabinal, I explicitly know the financial condition of my Sabinal clients. In Sabinal in general and the Sabinal Portfolio, in particular, I do have the regulatory authority to provide financial and securities trading advice to specific individuals whom I have met with and profiled for suitability with regard to the Sabinal One portfolio trading strategies and methodologies.

The Sabinal One portfolio has up to 20 positions. Each position has an identified trading set of securities that are bought or sold depending on market conditions. This is a long/short portfolio. This means that each of the 20 positions has a long strategy (and identified securities for that position) and a short strategy (and identified securities for short-biased trades). The portfolio shorts by buying long shares in inverse ETFs. The trade durations are typically less than 40 days. Each position has an identified ETF that represents a specific segment of the market. This means that each position represents a different segment of the market. Each position, therefore, has an ETF that is used to trigger when to be long in the segment or short in the segment. If long in the segment, most of the positions have an identified stock that tends to have a far higher upside beta to the ETF that represents the market segment. When the ETF probability forecast indicates it is time to go long in that market segment, we buy long shares of the high beta stock. When the ETF probability forecast indicates it is time to go short in that market segment, we buy long shares in the market segment's inverse ETF.

At any given time, the Sabinal One portfolio could be partially long and partially short (via inverse ETFs).

You can visit my Sabinal website (www.sabinalcapitalinvestments.com) where I provide a lot more information, but it is important to know that for accounts of $250,000 or less, my management fees (which include trading transaction costs) are generally less than if you were making the same trades yourself in your personal account. In other words, my management fees are, in many cases, less than what most people pay in trading transaction fees.

So, to make a long story short... My trading style and methodology are significantly different between CycleProphet and Sabinal. If you would like to discuss my money management and whether or not you might want to consider using me for a portion of your investable net worth and if you have at least $50,000 available for trading in the stock market, give Jan Rushing a call at 888-646-1116 and she will set up a phone call appointment where you and I can discuss your situation. Sabinal One is available for traditional and Roth IRAs as well.

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. To read our full disclosure, please go to: http://www.equities.com/disclaimer


Symbol Name Price Change % Volume
NUE Nucor Corporation 47.87 -0.49 -1.01 3,547,581


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