Sunday, June 13, 2010

What Happened To All Those Can't Miss Signals?

It has been 7 weeks since the S&P500 made its highs, and it has been 7 weeks since we had analysts finding every reason under the sun why this is a can't miss market? Ooops!

As I stated on April 23, 2010: "one of the aspects about this cyclical bull market rally has been the ability of the bulls to extrapolate into the future the meaning of higher prices. The stock market is up, so it must mean something good. In my opinion, market participants are looking for reasons as to why the market is higher, and they selectively apply what they want to validate that position."

It was my belief that analysts love affair with market breadth was just such a thing. A fair indicator that sometimes works and sometimes doesn't, and for the most part, breadth adds little to the information that I can obtain from price itself. There were all these wonderful, can't miss signals which you can read about here and here. It is almost comical the lengths people go to explain the unexplainable.

What got me thinking about market breadth this weekend was several articles where I read about how terrible market breadth has been and in fact, the way I read these articles (here and here), we were just one banana peel away from a market crash. That could be but there is no way of predicting this from market breadth or any other data that I know of.

Also I want to take a minute and push one of my own things: market sentiment. On April 21, 2010, I wrote about the Rydex Bull/ Bear ratio, which is the indicator I highlight in the weekly report on sentiment. With the indicator above a 60% value, I stated: "The indicator moves above 58%; you go short; by the time the next bull signal arrives it is unlikely that you would have lost more than 2% of your equity, and it is very likely that you would have added to your equity (as 5 out of 11 trades had gains > 5%); there is a better probability of the trade turning out a winner....It is evidence such as this that suggests to me that the market is a better short than long. I have no reason to believe that the cycle of fear and greed is broken, and if this plays out as expected, the market should be trading lower by the time the next bull signal arrives." This turned out to be the true.

Luck? Maybe. However, the observation was based upon the data --all the data across various market environments.

So what now? Our next bullish signal has arrived, and the market is struggling to find a bottom. Bearish market sentiment is not a guarantee that we will see higher prices, but if I were to pick a spot of when I would like to put my money to work it would be in betting against the consensus opinion. Of course, this isn't done with disregard for risk, and I have suggested several ways to get in and out of the market, and most importantly, I have discussed the significance of a failed signal.

As far as market breadth is concerned, I will let those prognosticators continue to prognosticate utilizing data that sometimes works and sometimes doesn't.

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2 comments:

inversorX said...

Like you I´m contrarian and sometime we see what other people say as absolutly ridiculous.

We must be humble, cause our tendency is to laugh of what people say. Is easy to laugh cause they are optimist when we are cautious and we don´t see a great risk/reward ratio.

Said this I think market breath is very useful, but of course not to buy the market when 90% of the shares are above 50 sma. In fact, that reading in a bull market will be and exit for me. Of course sometimes will work, but very strong trends are not as usual as a sideway market. So I will prefer catch sideways market and the half of the very trendy markets.

Also is ridiculous to see the breath indicators in absolute levels. Doesn´t mind if the level today is lower than 3 months ago. That is not the way to check it. In a very trendy market the lows of the breath indicator are trendy too, but when te market is a bit more mature, and not in the original stages, we will see new lows in the breath indicator. Don´t accept this is like sell anytime the 50 sma cross down the 200 sma...and between 2003 to 2005 this was a horrible strategy.

The best way to use breath indicator is like a guide to know when a dip is interesting enough to start to buy or when the market is being very oversold.

In other hand, these days Im reading a lot of people calling a H & S pattern. Sincerely this is absolute ridiculous as far as the pattern doesn´t exist!! They are not only talking about a pattern, but they are inventing it.Pure futurology.

In my opinion, and for several reasons not aligned with yours (wich I like to read) the market is headed to at lest go back the top of april.

The sentiment is quite bearish http://www.marketwatch.com/story/crash-is-dead-ahead-sell-get-liquid-now-2010-05-25 exactly as bearish as bullish it was in april.

People don´t learn from the past and don´t have a great hability to measure risk/reward for their oportunities. Sometimes you lose the tren, but limiting to be the idiot buying the last.

Of course, after all this sideways movements, the Murphy´s law say we will have other 33% upward trend ;-)

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