Times sure have changed. Of course you probably didn’t need me to tell you that. Still there are plenty of examples. For instance, back in the day if a large brokerage firm stole all of its customers' (not so) “segregated funds” and then lost it all on some crazy bet in the market and then afterwards everyone in the company simply claimed to have absolutely no idea where the money went, there would have been hell to pay. Today no one, except the people who actually have their money stolen from them, seems to care. To wit, as far as I know, to date no one from MF Global has been arrested and charged with anything (to prove my point, how many of you - and be honest here - are presently scratching your heads thinking, "MF Global - yeah I remember hearing something about that").
Regarding the financial markets – and on a personal level – I used to have a pretty good “feel” for the markets. Now truth be told, after “flying by the seat of my pants” for a while as a youth (and subsequently have to spend large amounts of time standing up, figuratively speaking), I have ever since relied on my “instruments” (i.e., my indicators) far more than on my gut. Still, like a pilot flying cross country, I always kind of felt like I could look out the window and tell with a pretty high degree of accuracy if we were in for a smooth flight or a bumpy ride. Today I am almost afraid to look out of the windows. I just keep my head down and stare intently at my “instruments”. And to make matters “worse” – now I find myself questioning my own instruments. Because they are turning more and more bullish for the stock market – and what appears outside of the windows seems completely incongruous with that outlook.
The Good News
A number of “instruments’ that I follow are flashing green lights at the moment. To name a few:
*All Major Averages are either in objectively established uptrends or will be in the next several days – I follow ETF’s DIA, SPY, QQQ, IWM and VTI. For each, the 50-day moving average is now above the 200-day moving average. This defines an uptrend. Granted there is no “prediction” built in, nor any guarantee that prices will absolutely, positively move higher. But for now the trend is “up”.
Figure 1 – Major Stock Market Averages back in an uptrend
*The S&P 500 gained 4% during the month of January – So why does this matter? Figure 2 displays the performance of the Dow Industrials from January 31st through December 31st only during those years when the Dow or the S&P 500 registered a January gain of +4% or more.
Figure 2 – Growth of $1,000 invested in Dow from end of January to end of December when Dow or S&P 500 is up +4% or more during the month of January (1937-2012)
*My Own “JayNewary Barometer” flashed a bullish reading of +2 during an Election Year – Why does this matter? Figure 3 displays performance of the Dow Industrials from January 31st through December 31st only during prior Presidential election years when the JayNewary Barometer registered a reading of +2 or +3.
Figure 3 – Dow Industrials %+(-) Jan. 31 through Dec. 31 during Presidential Election years when JayNewary Barometer registers a reading of +2 or higher
*My own overbought/oversold oscillator just registered a very bullish reading – Like any “market guy” I spend a lot of time crunching different numbers together just because I can. Over the years I have developed my own overbought/oversold oscillator, which – to no one’s surprise – oscillates as the stock market goes up and down. Ground breaking stuff, eh? Anyway, typically when the market goes down and the oscillator signals that the market is oversold this is viewed as a bullish sign. However, somewhat counter intuitively, there is an even more bullish – albeit more rare signal.
Marty Zweig first popularized the notion of a “bullish thrust” that sort of launches a new bullish move in his 1980’s classic “Winning on Wall Street.” The theory is basically that if the market rallies strongly enough, then rather than being “overbought” and due for a decline, it actually signals something of a self-perpetuating advance. This is what my oscillator recently signaled by crossing above +16.5. Figure 4 displays the raw oscillator.
Figure 4 – Jays Overbought/Oversold Oscillator (blue line) with S&P 100 divided by 10 (May1996-present)
What is interesting to note however, is that on 1/19/2012 it reached a reading in excess of +16.5. As you can see in Figure 5, while there haven’t been many, each previous reading has been followed by a surge in stock prices. The average 12-month gain by the S&P 100 has been +24.5%.
Figure 5 – Performance of S&P 100 following previous readings above +16.5 by Jay’s Oscillator
So What Could Possibly Go Wrong?
Clearly there are – as I interpret them - some very bullish signs flashing at the moment. And like a “pilot flying at night with only his instruments” I know I should be extremely bullish, and as such I have money in the market. But I am filled with dread. Why? Unfortunately I do not have enough space to adequately list all of the things of which people can rightfully be fearful of these days. So let’s just hit some of the obvious – er, highlights?
The World Economy remains on the edge of the precipice with many things that could push it over the edge, such as:
- Some sort of economic collapse in the Eurozone, whether it be a country defaulting on its debt or a general collapse in the Euro currency.
- The Chinese economy turns out in fact to be a bubble and that bubble bursts.
- An actual shooting war with Iran breaks out.
- An actual shooting war with Iran does not break out and Iran gets the Bomb.
- (If you are a Republican or Conservative) Obama gets re-elected.
- (If you are a Democrat or Liberal) a Republican gets elected.
- One of a couple dozen other scenarios that I don’t have the space to include.
So on and so forth. At this point in time, it seems there is greater potential for calamity than at any time in the past. So putting money at risk in the stock market just because, for instance, the stock market went up during the month of January, certainly requires something of a leap of faith.
Summary
They say that the stock market “climbs a wall of worry.” If that is true then don’t be surprised if the Dow rises +30% or more this year. On one hand we (OK, at least “I”) have a group of indicators flashing very bullish signals. On the other hand we have a laundry list of reasons to simply curl up in a ball and hide in the corner.
The choice of what to do here is yours. But to complete the analogy, a pilot flying in the dark is more likely to experience a positive outcome by trusting his instruments than he is by succumbing to fear.
But whatever you do, don’t look out the window.
Jay Kaeppel
Staff Writer and Author of “Seasonal Stock Market Trends”
Optionetics.com ~ Your Options Education Site
NOTES:
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