LunaticTrader

Investing with the Moon

Refusing the downside

Posted by Danny on April 27, 2015

The S&P 500 has edged out new highs. The Nasdaq shows a but more vigor. The Dow is lagging. Is this the end of the sideways period that started in November? Or just a false breakout that pulls in the last buyers? It is hard to tell. Let’s have a look at the S&P (click image to enlarge it):

S&P

The support levels have held and the S&P is pushing higher again. But the move seems to lack energy. It has taken a whole month to climb 60 points, which was the loss sustained in just a few days in March. My technical indicators reflect the weakness of this move, barely reaching above zero while the S&P is setting new record highs. This is painting bearish divergences. A quick move to 2200+ would remove those objections and give an “all clear”. Will we get it?
We remain in a lunar red period, which favors some kind of pull back or pause in the next week or two. And our LT wave chart for April, which did indicate the strength of last week, is a lot weaker for this week. So, I would look for the market to give back some of the recent gains.
If the market keeps refusing the downside, then it will tell us the Dow 32000 scenario remains firmly on the table. I will revisit and update that scenario in my next post.

Stay tuned,
Danny

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Outlook for Week of April 27, 2015

Posted by Danny on April 26, 2015

Outlook for world markets with my comments for next week. Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then you can also click here.

Happy trading, Danny

Posted in Market Commentary | Tagged: , , | Leave a Comment »

Weekly Reversal Levels for April 25, 2015

Posted by Danny on April 25, 2015

Keeping an eye on the bigger picture once a week is helpful because trading in the direction of the weekly trend has better odds of being profitable. Below are the weekly reversal levels for over 1500 stocks and ETF. Click the “Expand” button (bottom right) to watch in full screen mode.

For shorter term trading and more optimal entries you can use our daily reversal levels, which are available every day as premium info on Scutify.com for just a few $. The current version is a 54 page PDF with the latest reversal levels and buy or sell signals for over 1500 stocks from Dow Composite, Nasdaq 100, S&P 500, S&P 400 mid caps, S&P 600 small caps, and more than 100 popular ETF. Instructions for use are included. Give it a try.

Trade smart, Danny

Note: If you have any trouble to see the presentation below, then you can also click here.

Posted in Market Commentary | Tagged: , | 3 Comments »

Book review: The 17.6 Year Stock Market Cycle

Posted by Danny on April 22, 2015

I have been invited to review this book, which intends to connect the big stock market panics into one cycle. Kerry Balenthiran, the author of the book, studied mathematics and works as a financial consultant.

I have kept to the principle of reading a book twice before giving a review. At about 8o pages it is a book that can be read in one go.

In the opening chapters of the book a variety of known business cycles are presented, like the Kitchin and the Kondratieff cycles. The author points to long term commodity cycles and to human psychology as the main reasons for cycles in the economy and in the stock markets. He does not claim to have invented this 17 to 18 year cycle, indeed such a cycle has been proposed by various economists. The new idea that is being proposed is in the intermediate term turning points that supposedly occur within this longer 17.6 year cycle.

More specifically, the cycle gets divided into 2.2 year portions and in chapter 4 that concept is explained in further detail. An interesting detail is that the author considers a bull and a bear version of his 17.6 year cycle, and they alternate in what is basically a 35 year cycle. I don’t know why the book was not called 35 year cycle, but maybe it was considered that 17 year cycle sounds better as a book title (like in sweet 17).

Reading further we also learn that the cycled is considered in a very flexible way, especially in the bearish part where the lowest low of the cycle does not have to come at the end, and it can come as much as 9 years before the official end of a bearish 17 year cycle. I think that will have some readers question the usefulness of this cycle. The book continues with detailed descriptions and study of five 17 year cycles starting from 1929, with an emphasis on the 2.2 year segments. But in more than a few parts it feels like a curve-fitting exercise where the lows and highs seem chosen to fit the proposed cycle. The normal principle in science is to change our theories to fit the data, rather than mold our data to fit the theory. Sure, the author mentions regularly that it is an idealized cycle, and even writes: “It is easy to identify bull markets in hindsight..”, but readers are likely to wonder how to use this cycle without the benefit of hindsight.

In the 5th chapter of the book the cycle is applied and translated into stock trading advice for the coming years all the way to year 2053. The author contends that based on the idealized cycle we can “forecast with a high degree of confidence” where market lows can be expected. But where does that confidence come from? The book doesn’t have any chapter on how confident we can actually be in this pattern. That’s something I would like to see added in a next version of the book. Let’s not forget that less than three complete 35 year cycles have been properly observed. The question if this pattern also shows up in stock markets that have a low correlation with the US (for example Japan and China) has not been asked. We would probably be more confident if the pattern appeared in other markets too. And as a mathematician the author can probably say something about the likelihood that this pattern is genuine, rather than an artifact of random chance. It is also not considered that while this pattern may be valid, it could be only the most common pattern among two or three variations. It could have a cousin brother that has not been seen since the 1800s. Several good chapters could have been written on these questions and that would have made it a better book. Unfortunately the reader has to do his own guessing on that point.

All in all, I think the book does a good job at laying out some well known economic cycles, and presents an interesting hypothesis with an elegant pattern that tries to connect them. And in a field like economics and stock market, which are not exact science, we can allow cycles to have a few misses here and there. We shouldn’t expect a perfect match with any proposed cycle. But the author of this book appears to be too optimistic that this pattern is for real and will keep showing up, and hasn’t done much to determine how much confidence we can have in it. As such the book risks becoming an example of making conclusions based on too few observed cycles, also known as the law of small numbers. A bit more skepticism would have been more convincing to me, and I hope the author can add a few chapters to answer some questions that readers will be left with if they read it.

Be well,

Danny

 

 

 

 

Posted in Market Commentary | Tagged: , , | 6 Comments »

Forget the VIX, watch the SKEW

Posted by Danny on April 20, 2015

In the recent weeks I have been recommending to stand aside and stay cautious until the stock market offers a bit more clarity. And it is not as if we have missed much by doing so. Friday’s drop tells us that some caution is warranted at this point. Is it just a one day dip, or the start of a bigger storm? I don’t know, but my indicators are still not looking good. And this week I will add something else to keep an eye on, the SKEW index, that little brother of the widely watched VIX index. But, more on that later on in my post. Let’s start with our weekly look at the Nasdaq chart and see if we can read something in the tea leaves (click image to enlarge it):

Nasdaq

The Nasdaq remains stuck within a huge narrowing wedge. A breakout (up or down) will be inevitable sooner or later. The most recent rally in the Nasdaq has petered out just short of its March highs, and now the Earl and MoM indicators are turning down already. The slower Earl2 remains flat near the zero line, so can go either way from here. This is not the kind of setup I want to buy.
Friday’s dip has taken the Nasdaq down to the lower border of the wedge. It may try to hold on for a few more days, but with indicators turning down and a new lunar red period starting later this week, we have an elevated risk for a sudden drop. The 4800 level is still a major support, and below that it would go down to 4700 quickly, with 4550 the next major support.
This doesn’t mean a drop *has* to happen, but it’s just an unattractive risk/reward ratio to be long at this point.

***

Many people like to watch the VIX index, also known as the “fear index”. Personally, I have never found the VIX to be useful. At the most it is a concurrent indicator, it has no predictive value. Yes, the VIX goes up when there is panic in the market. But the VIX (~fear) being low doesn’t mean the market is going to panic anytime soon. Sometimes the VIX is low (and stays low) because volatility is and stays low.
The VIX has a little brother in the SKEW index, and that one is more interesting to watch. Here is a good introduction on the SKEW. The SKEW index is calculated on the basis of far out of the money options (with average duration of about 30 days), and is specifically designed to measure perceived “tail risk”. E.g. if many investors are afraid that the market may crash, they can buy some protective put options at strike prices that are 10% below the market. Those options are usually inexpensive and in the case of a sudden drop those option can become very profitable bets. If there is a lot of demand for this kind of “crash insurance”, then the premiums of those options rise more than rest of the options spectrum, and that gets reflected in a higher SKEW index. So, basically, when the SKEW is high it tells us that a lot of crash insurance is being bought, and when the SKEW is low it means that investors are buying less insurance (for example because they feel safe that the market will not drop in the next month).

But as my uncle used to say: “In the stock market it never rains when everybody is wearing boots”. The market will rarely crash when “everybody” is loaded up on crash insurance. It would take highly unusual news to create the necessary selling to get a crash. Because the people who have crash insurance do not need to sell (they are protected), and those who sold the crash insurance have no incentive to sell either (because that would be like shooting themselves in the foot on purpose). Crashes are generally caused by (small) investors panicking, and they are less likely to panic if they own crash insurance in the form of out of the money puts.

If we study the history of the SKEW index since the early 1990s we can see that concept in action. Here is a chart showing how the SKEW behaved going into the 2000 market top. (click image to enlarge it):

SKEW 2000

During the 1990s bull market the SKEW averaged around 115. A few brief panics in 1997 and 1998 made investors more aware that the market was becoming risky, so more crash insurance was being bought, lifting the SKEW index above 120 with peaks above 140. Note that this was the equivalent of buying boots after the flood. Most of this crash insurance expired worthless because the market kept rising. So, the good folks who sold those out of the money put options were raking in nice premiums month after month. And the people who bought crash insurance gradually stopped doing it, because it never paid off. A few dips in late 1999 again pushed the SKEW above 120, but lower than at its peaks in 1998. And by early 2000, with the market at record highs the SKEW started dipping below 110, its lowest level in years. For some reason investors stopped buying crash insurance at the top. Perhaps they felt too good. Fear disappeared and complacency took its place. Buying out of the money put options had not worked for years, and investors gave up on it. And when nobody had boots, that’s when it started to rain..

And surprisingly, the SKEW stayed below average for most of the market’s slide into the 2003 lows. People did not buy much crash insurance when it would have paid off. Then as the market recovered and kept climbing in 2003-2006, people started worrying about another crash and they bought more out of the money puts again to be on the safe side. From late 2003 until early 2007 the SKEW index stayed above average with regular spikes above 130. Image (click to enlarge):

SKEW 2005

Of course, once again most of that crash insurance never paid off, because just like 1998-99, the market kept climbing 2004 to 2007. And then the same thing happened in 2007, investors got tired of wasting money on crash insurance that never pays off. And the SKEW index started going down, just when the market was on the verge of crashing (click image to enlarge):

SKEW 2007

By the end of 2007 the SKEW had dropped below its historic average again, and the demand for crash insurance remained low (as evidenced by low SKEW) for most of the slide into the 2009 lows. In August 2008, right before the most dramatic part of the crash, the SKEW was even trading below 110.

After the 2009 lows, investors had once again learned to hedge against tail risk (buying boots after the flood). The SKEW traded above historic average again, as people stayed fearful during the recovery that started in 2010. And then something funny happened (click image to enlarge it):

SKEW 2010

In late 2013 the SKEW started trading at even higher levels, with occasional spikes above 140. That hasn’t happened before. Apparently, with the market at new record highs, plenty of people became convinced that a crash was coming again. Having seen big losses twice in the recent decade, many traders may have been determined to not get caught in the next crash without insurance. Fear ruled, despite record highs. But once again, all those premiums paid for out of the money put options have only been profits in the pockets of those who sell those options. The market has kept going up in 2014.
But since the beginning of 2015 we suddenly see a strong downtrend in the SKEW. This is the first sign that we may be getting into a new stage of complacency. Markets are at record highs (just like in 2000 and 2007) and the SKEW drops to lows suggesting that crash insurance is no longer in vogue. That can be a deadly combination, so we want to keep and eye on the SKEW. And if it goes on to drop to 110 for extended periods, then we will know it is that time again.

Good luck,

Danny

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Outlook for Week of April 20, 2015

Posted by Danny on April 20, 2015

Outlook for world markets with my comments for next week. Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then you can also click here.

Happy trading, Danny

Posted in Market Commentary | Tagged: , , | Leave a Comment »

Weekly Reversal Levels for April 18, 2015

Posted by Danny on April 18, 2015

Our weekly reversal levels are useful for market orientation and long term investing. Keeping an eye on the bigger picture once a week is helpful because trading in the direction of the weekly trend has better odds of being profitable. Below are the levels for over 1500 stocks and ETF. Click the “Expand” button (bottom right) to watch in full screen mode.

For shorter term trading and more optimal entries you can use our daily reversal levels, which are available every day as premium info on Scutify.com for just a few $. The current version is a 54 page PDF with the latest reversal levels and buy or sell signals for over 1500 stocks from Dow Composite, Nasdaq 100, S&P 500, S&P 400 mid caps, S&P 600 small caps, and more than 100 popular ETF. Instructions for use are included. Give it a try.

Trade smart, Danny

Note: If you have any trouble to see the presentation below, then you can also click here.

Posted in Market Commentary | Tagged: , | Leave a Comment »

Still cautious

Posted by Danny on April 13, 2015

Stock markets did better than I expected last week. US indexes are once again climbing towards their recent highs. But I am still cautious and keep standing aside. One doesn’t need to be invested at all times, and taking a little holiday once in a while is never a bad thing, if only to recharge our investor batteries. The outlook is too uncertain for now, so I don’t see much of an edge to trade in either direction. Maybe that will change by next week, so let’s have a little look at the S&P 500 chart (click image to enlarge it):

S&P 500

The S&P is back above 2100, but still short of its recent highs. A climb to new highs would give us more clarity. A failure to climb to new highs would give us a more alarming type of clarity. My technical indicators have improved, but also not massively so. We got a very shallow bottom in the Earl and Mom, and the slower Earl2 seems to be painting a shallow bottom as well. Shallow bottoms are a good thing if they mark bullish divergences, but that’s not the case. So this is not necessarily an indication of underlying strength. We have to wait and see how the market comes out of this sideways period that started in November last year. And that’s why I stay cautious at this point.

Good luck, and keep an eye on the reversal levels I post on Twitter and Scutify every day. That’s where I share some day to day comments and charts. So, follow me to get latest info. I don’t tweet very often, so I won’t flood your timeline with messages.

Danny

Posted in Financial Astrology, Market Commentary | 2 Comments »

Outlook for Week of April 13, 2015

Posted by Danny on April 13, 2015

Outlook for world markets with my comments for next week. Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then you can also click here.

Happy trading, Danny

Posted in Market Commentary | Tagged: , | Leave a Comment »

Weekly Reversal Levels for April 11, 2015

Posted by Danny on April 11, 2015

Weekly reversal levels are useful for market orientation and long term investing. Trading in the direction of the weekly trend has better odds of being profitable. Below are the levels for over 1500 stocks and ETF. Click the “Expand” button (bottom right) to watch in full screen mode.

For shorter term trading you can use the daily reversal levels, which are available every day as premium info on Scutify.com for just a few $. The current version is a 54 page PDF with the latest reversal levels and buy or sell signals for over 1500 stocks from Dow Composite, Nasdaq 100, S&P 500, S&P 400 mid caps, S&P 600 small caps, and more than 100 popular ETF. Instructions for use are included. Give it a try.

Happy trading, Danny

Note: If you have any trouble to see the presentation below, then you can also click here.

Posted in Market Commentary | Tagged: , | Leave a Comment »

 
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