Mohan de Hoje August 8, 2003
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.O de ontem....
Some Personal Bear Market History
First off, I need to clarify some comments from yesterday's Morning Briefing. As expected, it's controversial to make a bold statement like "SPX 600 in the next 9 months" or "1000 will be the lid on the SPX for many, many years".
Please don't get me wrong: I don't think this wipeout scenario has to happen right away. Of course not. But this is the ultimate destination, in my opinion. And right or wrong, I'm throwing it out there for your serious consideration.
I got a thoughtful letter from a subscriber asking how I could be this mega-bearish when I was so bullish in October of last year. Long-term subscribers know I was spouting off all sorts of bullish cant at that important bottom. The fact is I was just doing my normal thing, which is to try to think beyond what the crowd is thinking, knowing full-well that at some point they are going to have to surrender their majority position to the few in the minority. Money is ALWAYS going to flow away from the majority towards the minority. That's it. That's the market axiom you can count on, just as water is going to run downhill along the path of least reistance.
It's amazing how few people realize this simple truth. But it's not only the key to success, it's the only way to consistently succeed in financial markets. You have to constantly hop around to be part of the minority. It's almost always going to work out.
But sometimes -- lately being a pertinent example, and the bubble being the best example -- the majority will hold forth for quite a while. This doesn't repudiate the axiom, it exacerbates it. Just ask any bond trader right now how he or she is feeling. Hence my belief that the pay-back for the majority this time will be the most painful experience throughout the entire bear market to date.
Braggadocio is a trait that has absolutely no place in a trader or investor, and this is especially true in a market analyst and commentator. Just when you think you're doing pretty well, "you're going the right way for a smacked bottom" -- to quote my two daughters' all-time favorite movie Shrek. Even though I was calling last October for a major rally, I ended up completely blowing it by skipping the major buy signal on March 13th because of the Iraqi war. That was the fulfillment of all that bullish spew, and I missed it.
I'm not going to make that mistake again, I promise you. I'm sticking with my big picture thesis, no matter how it may look at the time for action. Right now it appears to be so rosy and bullish, but that's the time to be most careful.
At the risk of peeving the Trading Gods even further, I've got to step up in my own defense to let new subscribers know that my "big picture" calls for the market have been pretty darn good since I recognized the start of the major bear market in February 2001. Granted, I was late recognizing the bear market by about six months, but I was earlier than most -- and certainly early enough to capitalize. (By the way, absolutely nobody wanted to hear this message back then.) Since then, we've done many Rydex trades without a single loss, and if you added up all of these Rydex trades -- using end-of-day prices, so there's no fudge factor -- then the cumulative gains have been 250.7%.
At the risk of making this an extremely over-long Morning Briefing, I'm going to attach some pertinent excerpts from what I wrote in April 2001, as it's just amazingly appropriate for our current situation. Again, I wrote this over two years ago, as I was correctly anticipating a rally then as a chance to get out of stocks, and get short. We went short specifically in early July 2001, by the way, in the Rydex funds, and got out during the post 9/11 panic lows. If you're interested, you can read that whole piece at the bottom of this Briefing. Obviously I had the big picture right, but the exact timing of the bear market phases wrong -- and I believe we're on the cusp of the end-stage of bear market that I talked about then right now
Okay, enough of that. I'm attaching it below so you can get some perspective on what I've been thinking over the last few years, if you're a new subscriber. You can read it if you're interested, and make up your own mind.
Now let's talk about what's going on right now. The market should flat-out rally here, if the bullish case is going to have any sort of chance. If it doesn't, that's telling us a whole heckuva lot. My main man Mohan at 21st Century Futures is looking for a dip this morning as a chance to get long for a trip to at least 982, and he is so deadly accurate that you "fade that" at great peril. Also, the market has now put in a double bottom of sorts for this short-term decline phase of sentiment, and now we should see if the short-term advance phase is going to have any punch to it. There's enough "sentiment fuel" to get some upside work done, so if it's going to continue to be a benign environment for stocks, the market should go back up into the trading range right now .
A break down from here means the market has problems. Oversold going to more oversold is the very definition of a potentially big intermediate downtrend. So this is a great defining moment for the market, right now, this week.
I actually don't think the "wipeout SPX 600 scenario" is going to play out until the end of this year and on into 2004, with the potential bear market low in March or April of 2004. So I'm not saying the big problems are going to come right now. But I am saying they are coming, and could come now, so we have to have it on our radar.
Again, you'll find my "bear market" piece from the April 2001 issue of 21st Century Investor below.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Drained by 3 points to 23% on Wednesday.
SHORT-TERM: Turning neutral in a mature decline phase. Poised at a turning point. Could jump either way.
MID-TERM: Progressed 6 points to 53% in its decline phase. However confidence declined a point to a bearish 1 (out of 7) and remains low.
LONG-TERM: Progressed 1 point to 10% but confidence jumped back onto the advance side of 0 at a bullish 1 (out of 7).
BOTTOM LINE: This mid-term decline phase is the first to get much traction since the settled into its low-level consolidation in June. If the tank fills beyond about 26% (the June highs on the tank) that will confirm a further drop in the SPX. A reversal from the tank's move up to 26% would suggest the SPX will hold 960ish support for at least a bounce.
21st Century Investor -- April 2001 -- Don't get mauled by the Bear!
By David Nichols
On February 13th, a seemingly innocuous press release floated across our Bloomberg ticker: General Motors, through its OnStar subsidiary, was teaming with Fidelity Investments to offer one-touch stock trading and account monitoring in new automobiles.
Wow. Stock trading in your car. Does anybody really need to trade stocks in the car? Please, let's be real here. It's smack-in-the-face evidence that the obsession with the stock market has gone too far. What this innocent little press release was actually signaling - like an alarm going off - is that stock prices have a long, long way to go to the downside. Before this bear market is over, craziness such as this will be completely expunged from the financial system.
There are more symptoms of this nuttiness everywhere you turn. "Squawk Box" on CNBC is so full of fluff and light-hearted banter that it's nearly unwatchable. Yet it's by far the most popular "business" show on TV. Online brokers vie for your account with strange, can-you-top-this advertising and bizarre incentive plans. The evening news and morning talk shows constantly talk about the markets and investing.
This simply isn't the kind of thing that happens at a bear market bottom. All these things are not even appropriate for a market that's in such turmoil. At this point, we certainly don't need stock trading in our car, or wisecracking "stock personalities." By the time this market truly finds a bottom, all these relics of the bull market will have disappeared. Pay attention to the signs. At a true bottom, the tone will become much more serious and professional.
It's already too late to hope for any sort of quick recovery. This country is facing a once-in-a-generation financial crisis. True secular bear markets like this are resolved in only one way: they grind everyone but a handful of people completely into dust. Valuations not only revert back to historical norms, they often overshoot dramatically to the downside.
You don't have to be bear fodder. You can have a game plan in place to survive - and even prosper - during the coming economic storm. It's been absolutely brutal up until now, no doubt about it. But once a recession and bear market start, they never resolve quickly and decisively. It's just not realistic to think that a sharp bottom and quick recovery is in store. Even though we expect a nice counter-trend rally - every bear market has one great rally - ultimately it will prove to be the last gasp of the bull. Any rally should be used to completely clear out long positions, and to put on short positions that will bring huge profits, and set you up for the next great bull market that can only start when everyone has really and truly given up.
"Circumstantial Contrarianism" can be dangerous
We've got a fairly esoteric theory about contrarianism, which has now become somewhat of a mainstream investment concept, courtesy of CNBC, the Internet, and a more widespread knowledge of markets and market psychology. The main tenet of contrarianism is that the crowd always gets it wrong, which is indisputably correct. Thousands of years of market history prove this, and this concept is played out in the markets every single day.
Perhaps the newfound knowledge of contrarian investing has led to a widespread notion of "letting the other guy capitulate." People now know of such things as the Time and Newsweek indicators: when they put a bear on the cover, then that's the time to buy; or when they hear someone at a party talk about shorting stocks. It's easy to be lulled by such "circumstantial contrarianism" that the crowd is now bearish.
So to get a firm answer on sentiment we turned to the data from Phil Erlanger Research, which tracks investor sentiment quantifiably and in detail. We don't trust what people are saying on TV, or in the Wall Street Journal, or on the Internet - we trust the data on how people are actually betting their money.
The chart that best portrays the true sentiment situation depicts the call and put activity in the QQQs, the trading proxy for the Nasdaq 100. (Note: investors buy calls when they think a stock is going up; they buy puts when they believe a stock is going down.) Looking at QQQ options gives a true picture about sentiment in the Nasdaq (see chart).
Right now, there's far too much call buying in the QQQs. There are too many people playing for a rally. Remember, the heart of contrarian investing is that the crowd gets it wrong, and this chart bears this out graphically. The real capitulation, and bottom, will come when all the call-buying bounce players really and truly throw in the towel.
It's interesting how put buying turned into call buying at precisely the wrong time. We need to see these ratios flip-flop again before we'll get a lasting bottom and a strong move up. When the crowd gets really bearish, and put buying surges, that will indeed mark an important bottom. In the meantime, it will be very hard for a long lasting rally to get going without more put buyers and higher short interest. We need this natural buying pressure to get the markets moving up - just like during the big run-up prior to the crash. A big spike on the put/call chart would be a beautiful thing to see. Instead we're seeing the opposite.
The real question
Knowing sentiment about stocks and markets is incredibly valuable, and we've come to rely on the unique sentiment data from Phil Erlanger Research to let us know the underlying "mental health" of the markets. Yet the most important question going forward concerns the fate of the U.S. economy.
Last month we discussed how the economy had reached a fork in the road, and that we were now headed down the path towards recession. Well, the news hasn't gotten any better over the last month. It appears a recession is now unavoidable.
It's a mystery why we keep hearing so much talk about a miracle recovery in the second half of this year, and how the economy is on the brink of a return to growth. We keep hearing this from the Fed, and from commentators, analysts, and CEOs on TV and the media. We're amazed that anybody can be so certain about a quick recovery for the economy. Aren't they looking around?
Don't get sucked in by the Wall Street machine
Tthe carnage will not be limited to retailers, or tech stocks, or any specific sector. This recession will wipe out stocks across the board. There will be no "safe havens."
Remember, Wall Street's firms exist for one reason: to make money for themselves. They're not out to do anything for you. In fact, if they're looking out for any of their clients, it's the big institutions. You think an analyst from Goldman Sachs goes on CNBC to talk up a stock because he's trying to make you money? Get real. They care only enough to sucker you in so they can unload a bunch of shares at the top. How else can you explain Goldman putting a bunch of retail stocks on their "recommended list" right now, after parabolic moves up?
CNBC is your biggest enemy right now. The best advice we can give you is this: turn it off, and leave it off.
But if you're hooked, and can't stop watching, then here are the things to look for. Right now, almost every guest says the same thing, that now is the time to buy and hold, and that you've got to use the dips to your advantage. The strategists at the major brokerages are urging investors to increase their allocations to equities. This is not what you will see at the actual bottom.
Don't even think about allocating more assets to equities. Even more: don't think for a minute that it's too late to sell your long positions and start making money on the downside. Now that it's crystal clear that the excesses of the rampaging bull market are going to be fully corrected, it's also clear that we haven't even started to plumb the full depths of this bear market. You can make a ton of money over the next year while everyone else throws in the towel, and you put yourself in a position to scoop up as much stock as you can when valuations get to historically cheap levels.
Characteristics of a bear market
At the real bottom in a bear market you will see absolute doom and gloom. Even though some amount of pessimism has started to creep into the media, we're nowhere near the depths. Unbelievably, many people are still clinging to the miracle second half recovery scenario. At the true bottom, there will be absolute despair, and no glimmer of hope in sight. Wall Street won't be telling you to buy and hold - they will be telling you that this recession could go on for years and years. They'll say it's "too early to buy." Of course, right at that point when they're telling you to hold off, they'll be buying like crazy for their own accounts at the bottom.
At the true bear market bottom, unemployment will be high - well over 5%. It's still low at a recent 4.3%, but it's climbing quickly. Consumer confidence will be at rock bottom levels. Last month's reading of 117 from the Conference Board's consumer confidence survey is still historically very high. Before this is over, confidence surveys will have dropped down toward levels seen in the last recessions - somewhere below 60.
At a true bottom, the flow of money will be surging out of mutual funds. Throughout the decline so far, money has still been flowing into mutual funds. February was the first month that had net outflow from funds. The outflow is just beginning. This is vitally important. At the bottom, investors want out at any price, often in a panic - and we're still far from that. Outflows from mutual funds will turn into a river of money coming out of stocks, at any price.
Also, the call buying that we're observing on our sentiment indicators will have dried up, and put buying will be spiking. The negativity will be palpable. Most investors will have completely given up on "that infernal market," and will actually get angry when presented with the idea that now's the time to buy. These will be infallible bottom indicators.
Don't make the mistake of thinking at any given point that "the market can't possibly go any lower." In a bear market, there's no limit to the downside - just as there was no cap on how high the bull market could go. It's entirely logical to assume that the greatest bull market in history is going to be followed by a particularly brutal bear market.
The good news is that bear markets are much swifter than bull markets. They get their savage work done in one-third the time of bull markets as a rule. The easy explanation for this is that recessions and slowdowns in the economy - the things that cause bear markets - are generally of short duration. Since World War II, a typical short recession lasts 8 to 11 months, and the two longer recessions lasted 16 months. It's our belief that we're facing a long recession that will be exacerbated by a slowing global economy. The economic malaise won't be limited to the U.S., so there won't be other healthy economies to pick up the slack, which should extend the contraction.
Since stock prices are predictive, the markets start to come out of the bottom about 4 months before the economy comes out of a recession. The early indicators are all pointing to a recession and bear market that will last until mid 2002.
Another scary data point is the nine-month cycle bottom that's due in October. We think most of the price damage in the indexes will take place heading into this October - as the markets now work very swiftly in getting to their price destinations. This should be the nasty "capitulation" phase of the Bear - the point where investors are looking to raise whatever liquidity they can before it's all vaporized. This could be the true panic.
After this carnage we'll see an extended period that doesn't do particularly much in either direction. This grinding trading range will actually be the thing that really saps investors' spirits, and cause most people to throw in the towel at precisely the wrong time. For some reason, many can understand a sharp decline - because of the promise of a quick rally. But a long sideways period makes most people give up hope completely.
One final rally to lure in every last dollar
Here's the catch to this whole gloomy scenario. Every great bear market has one really good rally in it. This is the last rally that sucks in everyone on the sidelines for one final, disillusioning trip through the grinder. It's our belief that we'll have one last chance to get out of long positions at better prices, as well as a chance to get better positioned for the inevitable horror show.
Coming off lows this dramatic in the Nasdaq, the "sucker's rally" has a chance to gain some momentum. It's going to look and feel exactly like the real thing - the full-fledged return of the Bull. But it won't be. It may even give the economy some measure of reprieve. Since consumer spending is so closely aligned with a rising Nasdaq, the analysts and brokerage economists will be out in force luring you into the markets at precisely the wrong time. Remember, they want you feeling good about the prospects so that they can make money. Every commentator you see on CNBC or Bloomberg will have his or her own agenda - and it won't be making you money.
How low can the indexes go? If you're planning on just staying long and waiting out the storm, then you don't even want to know. Yet...if you are planning on taking advantage of this once-in-a-generation decline, then you can look at this as a true opportunity. See our charts and forecasts in the Trends section for all the details of how to protect yourself in the coming bear market - and how to take advantage of the decline.
How Low Can We Go -- Take steps to protect yourself during the recession
It's easy to get scared when you take a look at the long-term weekly charts of the Dow, S&P500, and the Nasdaq. It's hard to think that anybody will look at these and not at least have a second thought or two about being bullish, or trying to call a bottom here.
If it's recession for the global economy - and all the evidence is pointing to this strongly - then the markets can conceivably give back all of the gains of the late stages of the bull market. These downside scenarios are going to be a dose of shock therapy, no doubt. Yet, if the history of the markets counts for anything, then these downside figures are certainly not out of the question.
Although it was fun while it lasted, the huge upward momentum in stocks since 1995 is now a big problem. The parabolic moves up were too much, too quickly. Once a parabola crests and starts back down, the movement can be just as dramatic to the downside.
Any good market technician will tell you that a parabolic chart that's collapsed will generally not stop falling until it's reached its "launch point." Unbelievably, that would take the S&P500 to 500, the Nasdaq to 800, and the Dow to an incredible 4,000. This seems crazy, even laughable. It would be easy to dismiss such talk as lunacy. But nonetheless - to ignore it as a possibility in the face of a global recession would be the real mistake.
Consider this: all bear markets over the last hundred years ended when stocks became cheap relative to their historic valuations, and incredibly "under-owned." We're very far from either of these conditions. The S&P500 - a gauge of the widest variety of stocks - is still trading at 22 times earnings. Even worse, the earnings estimates for this index are constantly being revised downwards courtesy of the slumping economy. If the S&P were to revert to valuations seen at typical bear market bottoms, then it would trade for a P/E of 10. This is entirely conceivable as year-over-year earnings growth may not materialize for the S&P500 at all during a recession. Investors don't pay high growth premiums for equities that aren't growing; they pay "value" premiums, which are right around 10 times earnings.
Where would this normal low-end P/E of 10 put the S&P500? You guessed it: right around 570. Right now we're at 1,140.
These are the worst-case scenarios for the markets. It would take a once-in-a-century bear market to get us there. But then again, we've had a once-in-a-century bull market, so if it's going to happen, now's as likely a time as ever. It all depends on how bad the economy gets. Again, we don't think that we'll see these levels. This kind of massive wipeout would bring the return of breadlines and soup kitchens. So we're praying fervently right along with you that these charts are "full of it." (Editor's note: okay -- I was exaggerating for effect...hopefully)
One other factor we need to address is this idea that the Fed is going to right the economic ship, and the markets are going to start soaring again. Get real! There's no chance of that anymore. They've already blown it. After all, they are the ones that steered our economic ship straight into a category 5 economic hurricane, and didn't even see it coming. Now they've got the ability to forecast perfectly? Nobody's buying their optimistic "Fed-speak" anymore. If their rate cuts were such a great stimulus to the economy, then why are the markets reaching new lows day after day in the face of hyper-aggressive (for the Fed, anyway) interest rate cuts? It's because investors are fleeing risk of any kind. It's precisely this flight from risk that leads to the excessively low P/E valuations seen at bear market bottoms.
One last factor to consider about this growing penchant for risk aversion is that an entire generation of bright-eyed entrepreneurs has just been wiped out. The best and brightest hopped on the technology freight train, but the train never pulled into the station. This is going to lead a generation to seek more risk-averse activities and investments, which is precisely what a struggling economy doesn't need. This aversion to risk is principally the reason why Japan can't shake off its economic doldrums even after more than a decade - the Japanese consumer won't spend, or take any risks with their cash. We don't think the U.S. will have a problem like this for more than a year or two - we're too entrepreneurial by nature - but risk aversion could have a very dramatic effect in the short term.
You've got to have some protection
Even if you don't believe that the economy is bad, or that things will get worse, then at least do yourself a favor and put on some downside protection. You have to do this at the very least. There are ways for you to make money in a down market, as now a few innovative mutual fund families offer specific funds that go up in value as the major indexes go down. The two big fund families that offer these index bear funds are the Rydex Funds and the ProFunds.
These funds are innovative in that you can also vary your risk exposure. Rydex offers a fund called the Rydex Ursa Fund (RYURX) that is geared to give the exact inverse performance of the S&P500. So if this index is down 10% for the month, then the Ursa Fund will be up 10%. Likewise, they offer the Rydex Arktos Fund (RYAIX), which is geared to offer the exact inverse performance of the Nasdaq 100.
For supercharged returns with some leverage, you can try the Rydex Dynamic Tempest Fund (RYTPX) or the Rydex Venture Fund (RYVNX). These two funds use options to create 2 to 1 leverage on their specific benchmark. The Tempest Fund gives you twice the inverse performance of the S&P500, and the Venture Fund gives you twice the inverse of the Nasdaq 100. So if the benchmark goes down 10%, then these funds will go up 20%. Keep in mind that there's substantially more risk with these as well, as a 10% gain in the index will produce a 20% loss in the fund.
Likewise, ProFunds offers the ProFunds UltraShort OTC Fund (USPIX). We're not affiliated with either of these fund families, so the choice is yours. Most are available through your broker.
Please take our advice on this and throw a portion of your portfolio into one of these bear funds. Think of it as insurance. This way you won't be completely annihilated along with everyone else by the recession and bear market.
There's also one intangible benefit with downside protection that is actually the most important thing of all. This one simple step will bring you enormous piece of mind. You won't cringe every time another company says how bad things are, and you won't be disappointed when the Fed doesn't bail out the markets as everyone hopes. You'll sleep a lot better at night.
What to do if you're overweight in stocks and desperate to get out
There is actually some good news if you're up to your eyeballs in stocks and you just want out. We're now at a crucial point in the bear market - the point where we get one last sucker's rally that gives everyone a false sense of hope that the "final bottom" has been put in.
A bear market works in three stages: the first leg down is followed by a strong rally, where it appears that everything is all right. This was the scary episode back in April and May of 2000, which was followed by a nice summer rally. The second leg of the bear market started in September and is still ongoing. This has taken the markets to drastically oversold levels in the short-term, and moved us so far from the "moving averages" on the charts that a nice rally back up is imminent (see chart). A surprise Fed easing of interest rates in April - or the anticipation of one - could be the spark that gets the rally going. The Fed's going to realize any day how far behind the curve they are, and they're going to get much more aggressive.
The final leg of the bear market will be the worst, and it will come when this rally ultimately fails. The Fed can't save the day. The global economy is collapsing. Investors will panic. Mutual funds will be swamped with redemption requests, and many will sell all of their holdings and simply go out of business. Stock prices will be hammered relentlessly down as investors seek to completely eliminate all risk in a drive towards liquidity at any cost.
Look, if you can avoid this last leg of the bear market, then you can avoid the worst of it. You can even make enormous profits while everyone else is panicking. Then you can step in at the true bottom - when nobody will even think of owning stocks anymore (except the professionals, of course) - and scoop up massive amounts of shares of the very best companies. Absolute fortunes are going to be made during this period, while most are being completely wiped out.
A common thing for investors to do is to extrapolate the present circumstance too far into the future. Just as everybody thought the good times in the markets were going to keep going and going, now we're going to see the exact opposite on the downside. Nobody will want to own stocks one year from now. Everyone will think the economy is never coming back - we'll hear lots of comparisons to Japan and the Nikkei bubble. But that will be the sign that the trend is going to change. At some point, the stimulus from the Fed will kick in, and stocks will become ridiculously cheap as the growth cycles start back up. The key will be having capital available to take advantage of the negativity.
So it's essential if you're overweight in stocks now to use this rally as a chance to drastically cut back your holdings. This rally is going to feel so good that the "greed" part of your brain is going to kick in and want to trump the "fear" part. You're going to have to listen to the "fear" this time. The best time to sell is when everything feels good.
We've got some timing model signals that are pointing to a top as late as July - but we're not putting much faith in a rally lasting that long. There's just too much overhead supply of shares for sale, which will put a lid on too much upside. But that's not really the point - the point now is to get out as much as you can, and start making bundles when the market turns south again for the last really harrowing leg down. This last leg should be followed by a period of contracting volatility that saps the life out of everybody. During the last phase of the bear market, prices will just be stuck in the mud for a seemingly interminable period.
So plan accordingly! Your entire financial future can be made over the next few years. Only a lucky few are going to emerge richer from this economic and financial storm. If you play this right, you could be sitting on a fortune by the middle of this decade.
First off, I need to clarify some comments from yesterday's Morning Briefing. As expected, it's controversial to make a bold statement like "SPX 600 in the next 9 months" or "1000 will be the lid on the SPX for many, many years".
Please don't get me wrong: I don't think this wipeout scenario has to happen right away. Of course not. But this is the ultimate destination, in my opinion. And right or wrong, I'm throwing it out there for your serious consideration.
I got a thoughtful letter from a subscriber asking how I could be this mega-bearish when I was so bullish in October of last year. Long-term subscribers know I was spouting off all sorts of bullish cant at that important bottom. The fact is I was just doing my normal thing, which is to try to think beyond what the crowd is thinking, knowing full-well that at some point they are going to have to surrender their majority position to the few in the minority. Money is ALWAYS going to flow away from the majority towards the minority. That's it. That's the market axiom you can count on, just as water is going to run downhill along the path of least reistance.
It's amazing how few people realize this simple truth. But it's not only the key to success, it's the only way to consistently succeed in financial markets. You have to constantly hop around to be part of the minority. It's almost always going to work out.
But sometimes -- lately being a pertinent example, and the bubble being the best example -- the majority will hold forth for quite a while. This doesn't repudiate the axiom, it exacerbates it. Just ask any bond trader right now how he or she is feeling. Hence my belief that the pay-back for the majority this time will be the most painful experience throughout the entire bear market to date.
Braggadocio is a trait that has absolutely no place in a trader or investor, and this is especially true in a market analyst and commentator. Just when you think you're doing pretty well, "you're going the right way for a smacked bottom" -- to quote my two daughters' all-time favorite movie Shrek. Even though I was calling last October for a major rally, I ended up completely blowing it by skipping the major buy signal on March 13th because of the Iraqi war. That was the fulfillment of all that bullish spew, and I missed it.
I'm not going to make that mistake again, I promise you. I'm sticking with my big picture thesis, no matter how it may look at the time for action. Right now it appears to be so rosy and bullish, but that's the time to be most careful.
At the risk of peeving the Trading Gods even further, I've got to step up in my own defense to let new subscribers know that my "big picture" calls for the market have been pretty darn good since I recognized the start of the major bear market in February 2001. Granted, I was late recognizing the bear market by about six months, but I was earlier than most -- and certainly early enough to capitalize. (By the way, absolutely nobody wanted to hear this message back then.) Since then, we've done many Rydex trades without a single loss, and if you added up all of these Rydex trades -- using end-of-day prices, so there's no fudge factor -- then the cumulative gains have been 250.7%.
At the risk of making this an extremely over-long Morning Briefing, I'm going to attach some pertinent excerpts from what I wrote in April 2001, as it's just amazingly appropriate for our current situation. Again, I wrote this over two years ago, as I was correctly anticipating a rally then as a chance to get out of stocks, and get short. We went short specifically in early July 2001, by the way, in the Rydex funds, and got out during the post 9/11 panic lows. If you're interested, you can read that whole piece at the bottom of this Briefing. Obviously I had the big picture right, but the exact timing of the bear market phases wrong -- and I believe we're on the cusp of the end-stage of bear market that I talked about then right now
Okay, enough of that. I'm attaching it below so you can get some perspective on what I've been thinking over the last few years, if you're a new subscriber. You can read it if you're interested, and make up your own mind.
Now let's talk about what's going on right now. The market should flat-out rally here, if the bullish case is going to have any sort of chance. If it doesn't, that's telling us a whole heckuva lot. My main man Mohan at 21st Century Futures is looking for a dip this morning as a chance to get long for a trip to at least 982, and he is so deadly accurate that you "fade that" at great peril. Also, the market has now put in a double bottom of sorts for this short-term decline phase of sentiment, and now we should see if the short-term advance phase is going to have any punch to it. There's enough "sentiment fuel" to get some upside work done, so if it's going to continue to be a benign environment for stocks, the market should go back up into the trading range right now .
A break down from here means the market has problems. Oversold going to more oversold is the very definition of a potentially big intermediate downtrend. So this is a great defining moment for the market, right now, this week.
I actually don't think the "wipeout SPX 600 scenario" is going to play out until the end of this year and on into 2004, with the potential bear market low in March or April of 2004. So I'm not saying the big problems are going to come right now. But I am saying they are coming, and could come now, so we have to have it on our radar.
Again, you'll find my "bear market" piece from the April 2001 issue of 21st Century Investor below.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Drained by 3 points to 23% on Wednesday.
SHORT-TERM: Turning neutral in a mature decline phase. Poised at a turning point. Could jump either way.
MID-TERM: Progressed 6 points to 53% in its decline phase. However confidence declined a point to a bearish 1 (out of 7) and remains low.
LONG-TERM: Progressed 1 point to 10% but confidence jumped back onto the advance side of 0 at a bullish 1 (out of 7).
BOTTOM LINE: This mid-term decline phase is the first to get much traction since the settled into its low-level consolidation in June. If the tank fills beyond about 26% (the June highs on the tank) that will confirm a further drop in the SPX. A reversal from the tank's move up to 26% would suggest the SPX will hold 960ish support for at least a bounce.
21st Century Investor -- April 2001 -- Don't get mauled by the Bear!
By David Nichols
On February 13th, a seemingly innocuous press release floated across our Bloomberg ticker: General Motors, through its OnStar subsidiary, was teaming with Fidelity Investments to offer one-touch stock trading and account monitoring in new automobiles.
Wow. Stock trading in your car. Does anybody really need to trade stocks in the car? Please, let's be real here. It's smack-in-the-face evidence that the obsession with the stock market has gone too far. What this innocent little press release was actually signaling - like an alarm going off - is that stock prices have a long, long way to go to the downside. Before this bear market is over, craziness such as this will be completely expunged from the financial system.
There are more symptoms of this nuttiness everywhere you turn. "Squawk Box" on CNBC is so full of fluff and light-hearted banter that it's nearly unwatchable. Yet it's by far the most popular "business" show on TV. Online brokers vie for your account with strange, can-you-top-this advertising and bizarre incentive plans. The evening news and morning talk shows constantly talk about the markets and investing.
This simply isn't the kind of thing that happens at a bear market bottom. All these things are not even appropriate for a market that's in such turmoil. At this point, we certainly don't need stock trading in our car, or wisecracking "stock personalities." By the time this market truly finds a bottom, all these relics of the bull market will have disappeared. Pay attention to the signs. At a true bottom, the tone will become much more serious and professional.
It's already too late to hope for any sort of quick recovery. This country is facing a once-in-a-generation financial crisis. True secular bear markets like this are resolved in only one way: they grind everyone but a handful of people completely into dust. Valuations not only revert back to historical norms, they often overshoot dramatically to the downside.
You don't have to be bear fodder. You can have a game plan in place to survive - and even prosper - during the coming economic storm. It's been absolutely brutal up until now, no doubt about it. But once a recession and bear market start, they never resolve quickly and decisively. It's just not realistic to think that a sharp bottom and quick recovery is in store. Even though we expect a nice counter-trend rally - every bear market has one great rally - ultimately it will prove to be the last gasp of the bull. Any rally should be used to completely clear out long positions, and to put on short positions that will bring huge profits, and set you up for the next great bull market that can only start when everyone has really and truly given up.
"Circumstantial Contrarianism" can be dangerous
We've got a fairly esoteric theory about contrarianism, which has now become somewhat of a mainstream investment concept, courtesy of CNBC, the Internet, and a more widespread knowledge of markets and market psychology. The main tenet of contrarianism is that the crowd always gets it wrong, which is indisputably correct. Thousands of years of market history prove this, and this concept is played out in the markets every single day.
Perhaps the newfound knowledge of contrarian investing has led to a widespread notion of "letting the other guy capitulate." People now know of such things as the Time and Newsweek indicators: when they put a bear on the cover, then that's the time to buy; or when they hear someone at a party talk about shorting stocks. It's easy to be lulled by such "circumstantial contrarianism" that the crowd is now bearish.
So to get a firm answer on sentiment we turned to the data from Phil Erlanger Research, which tracks investor sentiment quantifiably and in detail. We don't trust what people are saying on TV, or in the Wall Street Journal, or on the Internet - we trust the data on how people are actually betting their money.
The chart that best portrays the true sentiment situation depicts the call and put activity in the QQQs, the trading proxy for the Nasdaq 100. (Note: investors buy calls when they think a stock is going up; they buy puts when they believe a stock is going down.) Looking at QQQ options gives a true picture about sentiment in the Nasdaq (see chart).
Right now, there's far too much call buying in the QQQs. There are too many people playing for a rally. Remember, the heart of contrarian investing is that the crowd gets it wrong, and this chart bears this out graphically. The real capitulation, and bottom, will come when all the call-buying bounce players really and truly throw in the towel.
It's interesting how put buying turned into call buying at precisely the wrong time. We need to see these ratios flip-flop again before we'll get a lasting bottom and a strong move up. When the crowd gets really bearish, and put buying surges, that will indeed mark an important bottom. In the meantime, it will be very hard for a long lasting rally to get going without more put buyers and higher short interest. We need this natural buying pressure to get the markets moving up - just like during the big run-up prior to the crash. A big spike on the put/call chart would be a beautiful thing to see. Instead we're seeing the opposite.
The real question
Knowing sentiment about stocks and markets is incredibly valuable, and we've come to rely on the unique sentiment data from Phil Erlanger Research to let us know the underlying "mental health" of the markets. Yet the most important question going forward concerns the fate of the U.S. economy.
Last month we discussed how the economy had reached a fork in the road, and that we were now headed down the path towards recession. Well, the news hasn't gotten any better over the last month. It appears a recession is now unavoidable.
It's a mystery why we keep hearing so much talk about a miracle recovery in the second half of this year, and how the economy is on the brink of a return to growth. We keep hearing this from the Fed, and from commentators, analysts, and CEOs on TV and the media. We're amazed that anybody can be so certain about a quick recovery for the economy. Aren't they looking around?
Don't get sucked in by the Wall Street machine
Tthe carnage will not be limited to retailers, or tech stocks, or any specific sector. This recession will wipe out stocks across the board. There will be no "safe havens."
Remember, Wall Street's firms exist for one reason: to make money for themselves. They're not out to do anything for you. In fact, if they're looking out for any of their clients, it's the big institutions. You think an analyst from Goldman Sachs goes on CNBC to talk up a stock because he's trying to make you money? Get real. They care only enough to sucker you in so they can unload a bunch of shares at the top. How else can you explain Goldman putting a bunch of retail stocks on their "recommended list" right now, after parabolic moves up?
CNBC is your biggest enemy right now. The best advice we can give you is this: turn it off, and leave it off.
But if you're hooked, and can't stop watching, then here are the things to look for. Right now, almost every guest says the same thing, that now is the time to buy and hold, and that you've got to use the dips to your advantage. The strategists at the major brokerages are urging investors to increase their allocations to equities. This is not what you will see at the actual bottom.
Don't even think about allocating more assets to equities. Even more: don't think for a minute that it's too late to sell your long positions and start making money on the downside. Now that it's crystal clear that the excesses of the rampaging bull market are going to be fully corrected, it's also clear that we haven't even started to plumb the full depths of this bear market. You can make a ton of money over the next year while everyone else throws in the towel, and you put yourself in a position to scoop up as much stock as you can when valuations get to historically cheap levels.
Characteristics of a bear market
At the real bottom in a bear market you will see absolute doom and gloom. Even though some amount of pessimism has started to creep into the media, we're nowhere near the depths. Unbelievably, many people are still clinging to the miracle second half recovery scenario. At the true bottom, there will be absolute despair, and no glimmer of hope in sight. Wall Street won't be telling you to buy and hold - they will be telling you that this recession could go on for years and years. They'll say it's "too early to buy." Of course, right at that point when they're telling you to hold off, they'll be buying like crazy for their own accounts at the bottom.
At the true bear market bottom, unemployment will be high - well over 5%. It's still low at a recent 4.3%, but it's climbing quickly. Consumer confidence will be at rock bottom levels. Last month's reading of 117 from the Conference Board's consumer confidence survey is still historically very high. Before this is over, confidence surveys will have dropped down toward levels seen in the last recessions - somewhere below 60.
At a true bottom, the flow of money will be surging out of mutual funds. Throughout the decline so far, money has still been flowing into mutual funds. February was the first month that had net outflow from funds. The outflow is just beginning. This is vitally important. At the bottom, investors want out at any price, often in a panic - and we're still far from that. Outflows from mutual funds will turn into a river of money coming out of stocks, at any price.
Also, the call buying that we're observing on our sentiment indicators will have dried up, and put buying will be spiking. The negativity will be palpable. Most investors will have completely given up on "that infernal market," and will actually get angry when presented with the idea that now's the time to buy. These will be infallible bottom indicators.
Don't make the mistake of thinking at any given point that "the market can't possibly go any lower." In a bear market, there's no limit to the downside - just as there was no cap on how high the bull market could go. It's entirely logical to assume that the greatest bull market in history is going to be followed by a particularly brutal bear market.
The good news is that bear markets are much swifter than bull markets. They get their savage work done in one-third the time of bull markets as a rule. The easy explanation for this is that recessions and slowdowns in the economy - the things that cause bear markets - are generally of short duration. Since World War II, a typical short recession lasts 8 to 11 months, and the two longer recessions lasted 16 months. It's our belief that we're facing a long recession that will be exacerbated by a slowing global economy. The economic malaise won't be limited to the U.S., so there won't be other healthy economies to pick up the slack, which should extend the contraction.
Since stock prices are predictive, the markets start to come out of the bottom about 4 months before the economy comes out of a recession. The early indicators are all pointing to a recession and bear market that will last until mid 2002.
Another scary data point is the nine-month cycle bottom that's due in October. We think most of the price damage in the indexes will take place heading into this October - as the markets now work very swiftly in getting to their price destinations. This should be the nasty "capitulation" phase of the Bear - the point where investors are looking to raise whatever liquidity they can before it's all vaporized. This could be the true panic.
After this carnage we'll see an extended period that doesn't do particularly much in either direction. This grinding trading range will actually be the thing that really saps investors' spirits, and cause most people to throw in the towel at precisely the wrong time. For some reason, many can understand a sharp decline - because of the promise of a quick rally. But a long sideways period makes most people give up hope completely.
One final rally to lure in every last dollar
Here's the catch to this whole gloomy scenario. Every great bear market has one really good rally in it. This is the last rally that sucks in everyone on the sidelines for one final, disillusioning trip through the grinder. It's our belief that we'll have one last chance to get out of long positions at better prices, as well as a chance to get better positioned for the inevitable horror show.
Coming off lows this dramatic in the Nasdaq, the "sucker's rally" has a chance to gain some momentum. It's going to look and feel exactly like the real thing - the full-fledged return of the Bull. But it won't be. It may even give the economy some measure of reprieve. Since consumer spending is so closely aligned with a rising Nasdaq, the analysts and brokerage economists will be out in force luring you into the markets at precisely the wrong time. Remember, they want you feeling good about the prospects so that they can make money. Every commentator you see on CNBC or Bloomberg will have his or her own agenda - and it won't be making you money.
How low can the indexes go? If you're planning on just staying long and waiting out the storm, then you don't even want to know. Yet...if you are planning on taking advantage of this once-in-a-generation decline, then you can look at this as a true opportunity. See our charts and forecasts in the Trends section for all the details of how to protect yourself in the coming bear market - and how to take advantage of the decline.
How Low Can We Go -- Take steps to protect yourself during the recession
It's easy to get scared when you take a look at the long-term weekly charts of the Dow, S&P500, and the Nasdaq. It's hard to think that anybody will look at these and not at least have a second thought or two about being bullish, or trying to call a bottom here.
If it's recession for the global economy - and all the evidence is pointing to this strongly - then the markets can conceivably give back all of the gains of the late stages of the bull market. These downside scenarios are going to be a dose of shock therapy, no doubt. Yet, if the history of the markets counts for anything, then these downside figures are certainly not out of the question.
Although it was fun while it lasted, the huge upward momentum in stocks since 1995 is now a big problem. The parabolic moves up were too much, too quickly. Once a parabola crests and starts back down, the movement can be just as dramatic to the downside.
Any good market technician will tell you that a parabolic chart that's collapsed will generally not stop falling until it's reached its "launch point." Unbelievably, that would take the S&P500 to 500, the Nasdaq to 800, and the Dow to an incredible 4,000. This seems crazy, even laughable. It would be easy to dismiss such talk as lunacy. But nonetheless - to ignore it as a possibility in the face of a global recession would be the real mistake.
Consider this: all bear markets over the last hundred years ended when stocks became cheap relative to their historic valuations, and incredibly "under-owned." We're very far from either of these conditions. The S&P500 - a gauge of the widest variety of stocks - is still trading at 22 times earnings. Even worse, the earnings estimates for this index are constantly being revised downwards courtesy of the slumping economy. If the S&P were to revert to valuations seen at typical bear market bottoms, then it would trade for a P/E of 10. This is entirely conceivable as year-over-year earnings growth may not materialize for the S&P500 at all during a recession. Investors don't pay high growth premiums for equities that aren't growing; they pay "value" premiums, which are right around 10 times earnings.
Where would this normal low-end P/E of 10 put the S&P500? You guessed it: right around 570. Right now we're at 1,140.
These are the worst-case scenarios for the markets. It would take a once-in-a-century bear market to get us there. But then again, we've had a once-in-a-century bull market, so if it's going to happen, now's as likely a time as ever. It all depends on how bad the economy gets. Again, we don't think that we'll see these levels. This kind of massive wipeout would bring the return of breadlines and soup kitchens. So we're praying fervently right along with you that these charts are "full of it." (Editor's note: okay -- I was exaggerating for effect...hopefully)
One other factor we need to address is this idea that the Fed is going to right the economic ship, and the markets are going to start soaring again. Get real! There's no chance of that anymore. They've already blown it. After all, they are the ones that steered our economic ship straight into a category 5 economic hurricane, and didn't even see it coming. Now they've got the ability to forecast perfectly? Nobody's buying their optimistic "Fed-speak" anymore. If their rate cuts were such a great stimulus to the economy, then why are the markets reaching new lows day after day in the face of hyper-aggressive (for the Fed, anyway) interest rate cuts? It's because investors are fleeing risk of any kind. It's precisely this flight from risk that leads to the excessively low P/E valuations seen at bear market bottoms.
One last factor to consider about this growing penchant for risk aversion is that an entire generation of bright-eyed entrepreneurs has just been wiped out. The best and brightest hopped on the technology freight train, but the train never pulled into the station. This is going to lead a generation to seek more risk-averse activities and investments, which is precisely what a struggling economy doesn't need. This aversion to risk is principally the reason why Japan can't shake off its economic doldrums even after more than a decade - the Japanese consumer won't spend, or take any risks with their cash. We don't think the U.S. will have a problem like this for more than a year or two - we're too entrepreneurial by nature - but risk aversion could have a very dramatic effect in the short term.
You've got to have some protection
Even if you don't believe that the economy is bad, or that things will get worse, then at least do yourself a favor and put on some downside protection. You have to do this at the very least. There are ways for you to make money in a down market, as now a few innovative mutual fund families offer specific funds that go up in value as the major indexes go down. The two big fund families that offer these index bear funds are the Rydex Funds and the ProFunds.
These funds are innovative in that you can also vary your risk exposure. Rydex offers a fund called the Rydex Ursa Fund (RYURX) that is geared to give the exact inverse performance of the S&P500. So if this index is down 10% for the month, then the Ursa Fund will be up 10%. Likewise, they offer the Rydex Arktos Fund (RYAIX), which is geared to offer the exact inverse performance of the Nasdaq 100.
For supercharged returns with some leverage, you can try the Rydex Dynamic Tempest Fund (RYTPX) or the Rydex Venture Fund (RYVNX). These two funds use options to create 2 to 1 leverage on their specific benchmark. The Tempest Fund gives you twice the inverse performance of the S&P500, and the Venture Fund gives you twice the inverse of the Nasdaq 100. So if the benchmark goes down 10%, then these funds will go up 20%. Keep in mind that there's substantially more risk with these as well, as a 10% gain in the index will produce a 20% loss in the fund.
Likewise, ProFunds offers the ProFunds UltraShort OTC Fund (USPIX). We're not affiliated with either of these fund families, so the choice is yours. Most are available through your broker.
Please take our advice on this and throw a portion of your portfolio into one of these bear funds. Think of it as insurance. This way you won't be completely annihilated along with everyone else by the recession and bear market.
There's also one intangible benefit with downside protection that is actually the most important thing of all. This one simple step will bring you enormous piece of mind. You won't cringe every time another company says how bad things are, and you won't be disappointed when the Fed doesn't bail out the markets as everyone hopes. You'll sleep a lot better at night.
What to do if you're overweight in stocks and desperate to get out
There is actually some good news if you're up to your eyeballs in stocks and you just want out. We're now at a crucial point in the bear market - the point where we get one last sucker's rally that gives everyone a false sense of hope that the "final bottom" has been put in.
A bear market works in three stages: the first leg down is followed by a strong rally, where it appears that everything is all right. This was the scary episode back in April and May of 2000, which was followed by a nice summer rally. The second leg of the bear market started in September and is still ongoing. This has taken the markets to drastically oversold levels in the short-term, and moved us so far from the "moving averages" on the charts that a nice rally back up is imminent (see chart). A surprise Fed easing of interest rates in April - or the anticipation of one - could be the spark that gets the rally going. The Fed's going to realize any day how far behind the curve they are, and they're going to get much more aggressive.
The final leg of the bear market will be the worst, and it will come when this rally ultimately fails. The Fed can't save the day. The global economy is collapsing. Investors will panic. Mutual funds will be swamped with redemption requests, and many will sell all of their holdings and simply go out of business. Stock prices will be hammered relentlessly down as investors seek to completely eliminate all risk in a drive towards liquidity at any cost.
Look, if you can avoid this last leg of the bear market, then you can avoid the worst of it. You can even make enormous profits while everyone else is panicking. Then you can step in at the true bottom - when nobody will even think of owning stocks anymore (except the professionals, of course) - and scoop up massive amounts of shares of the very best companies. Absolute fortunes are going to be made during this period, while most are being completely wiped out.
A common thing for investors to do is to extrapolate the present circumstance too far into the future. Just as everybody thought the good times in the markets were going to keep going and going, now we're going to see the exact opposite on the downside. Nobody will want to own stocks one year from now. Everyone will think the economy is never coming back - we'll hear lots of comparisons to Japan and the Nikkei bubble. But that will be the sign that the trend is going to change. At some point, the stimulus from the Fed will kick in, and stocks will become ridiculously cheap as the growth cycles start back up. The key will be having capital available to take advantage of the negativity.
So it's essential if you're overweight in stocks now to use this rally as a chance to drastically cut back your holdings. This rally is going to feel so good that the "greed" part of your brain is going to kick in and want to trump the "fear" part. You're going to have to listen to the "fear" this time. The best time to sell is when everything feels good.
We've got some timing model signals that are pointing to a top as late as July - but we're not putting much faith in a rally lasting that long. There's just too much overhead supply of shares for sale, which will put a lid on too much upside. But that's not really the point - the point now is to get out as much as you can, and start making bundles when the market turns south again for the last really harrowing leg down. This last leg should be followed by a period of contracting volatility that saps the life out of everybody. During the last phase of the bear market, prices will just be stuck in the mud for a seemingly interminable period.
So plan accordingly! Your entire financial future can be made over the next few years. Only a lucky few are going to emerge richer from this economic and financial storm. If you play this right, you could be sitting on a fortune by the middle of this decade.
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Trade Setup Summary for Thursday, August 7, 2003:
No TCF Trade Setups today.
Recap of Thursday's Action:
Good Morning and thank you for joining us today.
Our Headline Call on Thursday was looking for lower early prices to find support and move higher to begin a larger scale bullish move over the next week or so.
We got the lower early action and the gradual rise we expected with prices closing near top tick giving us almost a perfect call scenario. The problem with today's action in this "sneak up rally" type move was there was not very much force behind the market. The High 5 were very unusually NEUTRAL all day and were so flaccid that it convinced us to stay out and not trade at the BreakOut which was the first Hour One pivot hit.
Initially the market ran up and traded near the top of the VA around 968.25, stopped and then pulled back. The BreakOut occurred at 10:49 est as shown on the chart but moved in a small range, herky jerky type trade pattern gradually pushing up into the close as expected. Our TCF parameters for standing aside were clear as we did not get an extended Dow with the NAZ holding back like we usually like to see to the short the BreakOut nor did we get a solid bullish High 5 scenario to buy.
At the time of the B/O the TRIN was at .95 (a very difficult Crossroad type spot for the TRIN), NAZ was down --5, Dow +25 and surprisingly VIX was -.50 which was giving hints for the higher prices to come. But overall we rarely see such a blasé' type High 5. This had "stand aside" stamped all over it.
As followers of the TCF trade setups we must always be very willing to stand aside when this type of scenario is present and the market is not clear. There was just not enough force to kick the prices even up to the Pit Bull at 982 which would have been a forgone conclusion if we had had a genuine BreakOut Buy setup on the High 5.
However, I am still convinced that Thursday was the "opening up" of a new Market Force direction for higher prices to come soon. We had strong +800-1000 TICKs showing up today and this usually will correspond with new directions opening upward unless we are at the tail end of a move. The jury may still be out on this. Here is what we expect for today's action.
Today's Call & Briefing:
Our Headline Call for today will be looking for a specific setup in prices on and near the open to create the Headline Call.
With the Market opening LOWER and moving lower in the early session we are expecting for prices to find support and start moving higher again and possibly surpassing the Highs of Thursday.
Now what would "throw water on" this scenario would be if we had PRICES OPENING HIGHER above 974.50 and making an early higher price run up FIRST. IF THIS PRICE ACTION OCCURS THEN WE WOULD EXPECT A SELL OFF FOR TODAY THAT WOULD SEE PRICES SLOWLY ERODE ALL DAY. The higher open and run up would be a bearish setup today to finish off an important pattern to create a washout to the downside that would FEED higher prices next week as the convinced Bears would then start shorting the rallies. For our larger scale bullish scenario to pan out this type of market action today would actually be the most favorable. Why? Because the lower prices that would be created today would help start a mind set that things are bearish...a necessary ingredient for higher prices.
You see, for those of you new to futures trading and those who have been working towards becoming an intermediate trader (which is for someone who has been trading the S&P500 EVERYDAY for less than 5 years) this is why S&P500 futures trading is totally different from other aspects of stock trading. To succeed at this game you are practically always living in a mindset that is FADING the consensus of the moment. Because the S&P500 is the leader in the reversals of the markets direction we make our trading moves on this index contract. WE AS TRADERS AT TCF HAVE TO BE ON THE FRONT LINES IN OUR THINKING OF KNOWING WHERE THE MARKET WILL REACT TO THE CURRENT PRICE ENVIROMENT. If you are not on this wavelength constantly you stand the risk of being left in the dust.
Sometimes traders will send me an email and tell me how smart they are because they "just react to prices". Well sure you do, but in this business of S&P500 trading that is pretty much going to be a break even bet at best. Once your so called "reaction" to the price occurs and you click on your trading platform and make your trade those S&P's are back in your face showing you a loss in most cases.
The key is to be able to FADE the market moves at the key turn around spots with speed and precision. That is the purpose of the TCF Trade setups and these Morning Call briefings. However, that is also why it is important to learn what a market looks like that is going nowhere or is NOT giving us an ideal TCF Trade setup. That will take a little time, patience, research and practice. But totally worth it if you want to have a career in this business.
If we get the rise in prices we are expecting then the next level will be the Pit Bull up there in the 982.00 area with the next goal up 991 and then our first level goal higher of 1004-5.
TCF TRADE SETUPS TO WATCH FOR TODAY: We are going to be on the lookout first for a rally to occur that hits the BreakOut as the first Hour One pivot. If that is the case on a higher opening then we will want to Sell that BreakOut and hold short for lower prices possibly into the close. This would create the negativity necessary to launch the market higher next week.
Now if they open lower and run lower early FIRST then we want to be on the lookout to be buying the BreakDown. If the High 5 are really bearish then look to get a price below the B/O to buy between 2-4 points lower.
As always be on the lookout for those RARE days where we get a Bear Ugly market condition. If that occurs we are going to be shorting the B/D. Remember though, these Bear Ugly days are rare and are described in full in our Trading Handbook. Don't be over anxious to short the market pretending it's Bear Ugly because you have a bearish bias stuck in your mind from some personal opinion.
Professional S&P500 trading has nothing to do with "personal opinions" about the market. It is about knowing how to read the market and having a PROVEN SYSTEM to be able to trade what the market is telling you to do. This requires vast, extensive research to be able to find such a system and then be able to develop the psychology to be able to trade it properly. But the rewards are the ability to make a very substantial nice living working at home.
Value Area: 966.50 - 974.00
If we see a HIGHER OPENING and then a rise in prices that FALLS BACK INTO THIS ZONE then a move such as this is bearish. If we end up short at the B/O or at the Sell Pivot target/ Pit Bull area we would want to see a move back below 974.00 and holding in the VA for 2-3 minutes. This would be a signal that there is a good chance they could run lower and cover up to 75% of the VA. This corresponds to about a 6 point lower move or 968.00 area. Keep an eye out for this action.
Buy Pivot Target: 966.00 - 967.00
No trade at this Buy Pivot today. Let's observe this pivot in relation to the BreakDown and see if there is some correlation with this price, the B/D and the -4.25 stop/pivot at 961.75.
Sell Pivot Target: 979.00 - 978.00
No Trade at this pivot today. If we open lower and move lower first this could be a point above the BreakOut where they falter. Keep this in mind. I will not recommend it officially for today as a trade but be willing to trade it if: 1) the market opens HIGHER and moves higher hitting this number with the Dow up +60 or more
2)the NAZ is weak up only +10 or less with a high TRIN above 1.00 or so. This would then be a valid sell most likely.
10 Day "Pit Bull" Moving Average: 981.50
About the same price as yesterday. We are expecting a climb up here so if the High 5 are bullish at all today then be careful not to trade the Sell Pivot too early without seeing a reaction to this number. On a higher opening, as mentioned above, we expect this 981-82 area to have some resistance to overcome.
Pro Trader's Action
There are two scenarios we are going to be watching for today. However, the Headline Call is focused on just the lower open and early move lower. I am rather expecting this is the one that is going to occur as this would tend to support our idea of a larger scale bullish move coming. Of course, we are completely open here at TCF and that is why we usually will offer the alternative scenario for you to fade our Headline Call or discover the right trade no matter what occurs.
There is a HUGE difference between this and hedging a call. We do not hedge our calls here at TCF. The hedging B.S. goes like this (you hear it on CNBC all the time), "We are bearish right now but feel we may get a rally within the context of a bear market". How useless is that? I'll tell you...worthless. I hear this EVERYWHERE all the time. Here at TCF we offer EXACT alternative trading scenarios so that as you memorize our TCF Trade setups and learn how to read the market you will be able to react IN ANY ENVIRONMENT. It is important to understand this distinction not only because I am not interested in Hedging calls like everyone else does but also because I WANT YOU TO SUCCEED AT TRADING THE TCF TRADE SETUPS.
All of my work here is based on this reality only. My only purpose in doing these TCF Morning Call briefings is to assist YOU in making profitable trades and organizing your psychology so you can handle this business succesfully. Otherwise I am completely content to just stay home and privately trade for my families trust accounts like I have been doing for quite some time. Your success keeps me motivated to show you new ideas and secrets. The hundreds of emails I get each from traders telling me of their success in catching these TCF setups keeps me rockin and rolling along and discovering new ways to assist your further progress. Of course to get to this point it is necessary to struggle to discover the best means of learning all of this and on our ASK MOHAN section I seek to answer your most important questions. Most of your questions regarding the days setups should be answered in the RECAP section at the top of each Morning Call briefing.
So my request to you is to take these briefings as seriously as I do in writing them and study all the material I have presented to you here with the goal of LEARNING HOW TO TRADE THE S&P500. Did you hear that? NOT with the goal of being an expert reader or memorizer of "what the manual or Mohan says to do" but for YOU to take this bull (or bear) by the horns, trade the hell out of it (using the TCF setups of course) and make your family some dough$ to pay the bills PLUS go on some nice vacations. There is a BIG difference between the two.
There is nothing better than being on a nice beach somewhere knowing that you are there staying in a fabulous resort hotel because you traded the S&P500 like a PRO. NOT BECAUSE SOME TRADER GAVE YOU A SIGNAL AND YOU CLICKED ON YOUR TRADING PLATFORM AND MADE SOME MONEY.
I am working day and night (ask my staff) to bring you the most cutting edge, up to the minute information to help you succeed. I will be stepping out EVEN MORE this year and next year to RAISE THE BAR EVEN HIGHER and bring you more rock and roll trading ideas that you can use in real time that really work.
Have a great weekend and all the best to you and your family who support you in your trading career. Mohan
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- Mensagens: 420
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Mohan de Hoje August 8, 2003
August 8, 2003
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Abraços
Figas
Sempre a aprender
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Sempre a aprender
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- Mensagens: 420
- Registado: 3/12/2002 17:45
- Localização: Portugal
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