Outlook February 28

We finally got some downside action last week.
Hopefully you have used our advise not to buy this Green Period.

The reason not to buy was probably clear for the users of our LunaticTrader program.
This was the LunaticTrader chart for February:

Around 17 – 19 February there was a rare cluster of lunar and planetary events, which indicated a possible major turning point.
On February 17 we had a planetary extreme for Mercury and Neptune, followed by Full Moon in early morning February 18. The lunar perigee came on Feb 19, and lunar latitude extreme on Feb 20, when the market was closed for weekend.

Being in Green Period the market is now trying to recover lost ground. That could continue this week, and there is a chance we will climb to a double top with the Feb 18 highs.
But I think new selling will come in, as several market participants have probably been shocked by the sudden downturn and may want to reduce their exposure on the next good opportunity.
So I am looking for a second leg down into the middle of March.

***

Some readers asked why we are so pessimistic about the economy in our latest message.
It is not about being pessimistic, but about being realistic. And doing some math can go a long way in that regard.

Here is another way to see why QE2 is not likely to work.
The US central bank creates $600 billion new money and is using it to buy treasury bonds over a period of 8 months.
But the US trade deficit stays at $40 billion per month.
At that rate, the newly created $600 billion will have left the country within 15 months.
That much is certain.
So it is like pumping water out of a leaking ship, it keeps things afloat for a while, but as soon as you stop pumping the ship will start sinking again.
Right now the QE2 pumping is scheduled to stop in June.

You can make your own conclusions.

Outlook February 21 – Why stocks keep rising?

The recent Lunar Red Period ended with a 65 point gain on Nasdaq.
So the stock market keeps displaying strength upon strength, and we have been getting some questions how this is possible. We will be trying to give some longer answer today.

It is indeed weird that the Nasdaq seems to close with a 0.2% gain day after day after day, no matter how much it is down intraday, no matter what is the news..
So much for people who contend that stocks are in a random walk, but what we see those days is like tossing a coin 100 times and coming up with heads 90 times.
Over the last 3 months there have been only 2 down days worth talking about.
This means the Nasdaq going up is now more easy to predict than rain in Brittain.
Where are the steady buyers coming from?
More on that below.

We are going into lunar Green Period now, which normally calls for a rising market, but I am not going to buy because this market doesn’t feel ‘right’, and several technical indicators I use are signaling: SELL.
So, it wouldn’t surprise me if we get a rather weak Green Period, followed by more selling in the next Red Period in March.
If you want to take the risk and buy this Green Period, then at least use a very tight stop loss in the coming weeks.

***

So what goes on propelling the stock market?
There are a number of reasons.

First of all, we have governments around the world borrowing and spending (or wasting) $trillions. Even if that money is wasted it always ends up in some pockets or other, because money cannot just disappear.
So we have to ask ourselves where does that money end up.
Well, most of that money simply ends up as ‘profits’ on the books of companies and banks.
Even though these are artificial profits, they do support the share prices.

Secondly, we also have the famous QE2 program going on, where the Fed is buying $600 billion worth of treasury bonds. What happens with this newly printed money?
Well, interestingly bond prices have declined sharply since the Fed announced their QE2. How is this possible? Shouldn’t bond prices go up if there is such a big amount of new buying coming in?
It can only mean one thing: large bond holders are taking this unique opportunity to unload a lot of bonds while prices are still high. When you know there is such a big buyer in the market you can sell a lot without crashing the price.
So these bonds holders suddenly got of plenty of cash on their hands, and they would not sell their bonds if they plan to invest in the very same bonds again. It would also not make sense to sell their bonds and then just sit on the cash earning almost no interest at all. So most of this $600 billion is probably flowing into the global stock markets, which have been gaining 5% per month, not a meager 5% per year.

More and more people are understanding this is going on, and this is creating the current one-way-street stock market, where every little dip is bought immediately.
When and where it will end is very hard to say, and also the astrological cycles cannot help us with that question.
But how it will end is easy to predict : in tears.

We do know that the QE2 program is scheduled to end around June, and there is a strong possibility that savvy investors will anticipate the end of this free QE2 money flowing into stocks, by starting to sell before everybody else does. That could lead to a sudden crash anytime between now and June.
The steady buyers can turn into steady sellers.

And that would only be the start of the problems.
The newly created money would then start flowing into real tangible goods driving up prices (which is happening to some extent already).
With the stock, bond and real estate markets overvalued and stagnating or even declining, and banks paying almost no interest on deposits, people start figuring out that the best way to invest their savings is by buying canned food, clothes, cigarettes and so on.. , all kind of things that are now going up at 10% per year already.
Company managements may realise that it makes more sense to stock up extra supplies (which are going up in price every month) , rather than keeping cash in their accounts where it earns almost nothing.
And this could feed on itself and create a sudden wave of hyperinflation. Possibly by 2012-2013.

Governments wants us to believe that the economy is recovering thanks to their policies, but is it?
A very simple calculation tells us it is not.
The size of the US economy is about $15 trillion per year.
The government plans to borrow and spend at least $1.5 trillion this year, so that is 10% of the overal size of the economy. Yet, they project only 3% economic growth for the year.
This means that with a balanced budget the economy would actually decline by 7%, and this shows you the true condition of the real economy.
A similar calculation can be made for the EU.
So, Western economies are actually continuing to decline by 7% per year, but the decline is being masked by the government’s lavish borrowing and spending.
It is not sustainable, so something got to give…

Be prepared.

Danny

About buying random stocks

“A 73% gain on SBIB, 63% profit on KEYN, 51% on LINTA, 49% on EP,… in less than 9 months.”

It could be the opening lines in a teaser mail for some expensive stock picking newsletter.
But the point is, this are some of the random stocks we bought for our 2 experimental portfolios on tickerspy.com
Since we started them on May 28th last year, portfolio 1 has gained 19%, portfolio 2 is up 25.2%

What we try to do is simple.
Start with 10 random stocks in each portfolio ( I use a spreadsheet with all the tickers for that purpose).
Once per month the worst performing stock (over the previous 4 weeks) is sold and replaced by another random stock.
The idea is that one lagging stock is removed every month, while the new random addition has at least 50% chance to be a better stock.
The result is that losing positions do not stay in the portfolio for too long, while the winners are automatically kept until they end up being the worst stock of the month. So profits can run.

How did this pan out?
Here are the quity curves (blue line shows the portfolio return, grey = S&P500):

As you can see the performance does not differ very much from the overall market, but in the last few months both portfolios are doing better than the benchmark. Maybe it takes some time for the ‘natural selection’ effect to kick in. We will see how it continues.

Anyway, there are already a number of things I have learned from this experiment:

1) Buying random stocks may be better than buying the ‘names’ the media or newsletters are touting.
I was quite skeptical about some of the random picks that came out (unknown = unloved?), but they ended up being good performers. I would never have chosen some of these stocks on my own initiative.
It always feels safer to buy familiar names or the stocks that Jim Cramer mentions, but is it?
If other small investors feel equally tempted to buy the same stocks they see in the same media, doesn’t that make these stocks less safe?

2) Buying random stocks has the advantage of not being emotionally attached to (some of) *my* choices. So there is no internal resistance to selling them as soon as they do poorly for one month. This is what often causes people to ride a stock all the way down.

3) I don’t need any mutual fund or etf. Most of them underperform the market, so I am not going to do any worse if I run my own random portfolio. Buying a mutual fund only means throwing away 1% per year because of the fund management fees.
Given today’s low brokerage fees, small investors can easily run their own portfolio and reinvest that 1% year after year.
1% accumulated over 20 years becomes 22%, over 40 years it becomes almost 50%. That’s how much money you throw away if you invest in funds.

We will continue these experimental portfolios on tickerspy.com
Any changes to the portfolios are also mentioned on our Twitter account

Danny

Outlook February 14

The stock market keeps going up as if there is only one way to go.
Bad news can only take it down for one day, or sometimes even only half a day.
The Nasdaq has become as dependable as a Swiss clock.
But, this too will pass.
The last time markets went up in similar uninterrupted fashion was February-April 2010, and we know what happened next.

Another week of lunar Red Period is now coming up, let’s see what happens.
Here is a chart of the Nasdaq Composite. Two parallel trendline channels have defined a lot of turning points in this market since 2008. (click for larger image):

We are currently bumping into the ceiling of two overhead trendlines. A clear break above these levels would probably lead to an upward acceleration.
Possible? Yes.
Probable? Hmmm?…

More likely we will fall back and then build a base from which a new advance can start.
So I am not a buyer at this point.
Don’t try to board a runaway train, also don’t try to stand in front of it.

Good luck.
Danny

Outlook February 7

The Green Period produced an 80 point gain on the Nasdaq. Not bad.

Now our lunar phases go into Red Period again, which means the odds favor a pause or downside correction in the next couple of weeks.

Let’s take a look at the current chart for S&P500 (click for larger image):

We seem to be in a rally that knows no end, but obviously it cannot go on like this.
The S&P has been rising at a 70% annualized rate since August. That’s not sustainable.
I am looking for downside action to start in the current Red Period.
Overhead resistance is near 1320 on the S&P, not far above current levels.
Support is around 1275, next 1225.

Some practical news: we are now on Twitter , where we will post some occasional mid-week comments.
So you can follow us there : http://twitter.com/lunatictrader1
You can also find us on Stocktwits : http://stocktwits.com/LunaticTrader

Be well,  Danny