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With the year drawing to a close, I’m reviewing my commentary and analysis for this past trading year to see what I got right and what I got wrong. But mainly, my objective is to recap the important points and to learn from the historic year that we just went through and prepare for 2010.
- Bona Fide Hedging Exemption Reinflates Oil Bubble
Previously I had warned about the ‘bubble’ characteristics of oil as it approached its 2008 highs. This comment detailed the role of large institutional index funds and their hand in the raging commodity markets.
- Head & Shoulder Formation
In the first week of July, the S&P 500 index (as well as all other major equity indexes), were showing a clear head and shoulder pattern which was obvious to everyone a mile away. As the Wall Street maxim goes, when a trade is obvious to everyone, it is obviously wrong.
- Approaching Oversold in the Short Term
Relying on breadth measures I suggested on July 10th that the market would bounce in the short term. This was when the S&P 500 was trading at 880 - that turned out to be the low for the month. It went on to gain 12% by the end of July.
- Lowry Research Update: Market Going Lower
The oldest technical analysis firm on Wall Street continued to argue the bearish case in July. In hindsight, they were of course, wrong. But before you fault them, remember that no one is infallible. Furthermore, they were consistent in relying on the same indicators that helped them gain such a wide following.
- 18 Year Stock Market Commodity Cycle
The relationship between the stock market and the commodity markets plays out over 18 years (17.6 if you want to get technical). This decade has been one of the worst for the stock market and moderately successful for commodities. If we count the start of the sideways trading for stocks from 2009, we can look forward to a real secular bull market to start in 2017-2018. Until then, it is a timers market.
Not surprisingly, Buffet warned anyone who cared to listen 10 years ago.
- Head and Shoulder Failure
The failure of the perfect head and shoulder setup was a classic signal that a massive head fake was about to play out. Since many were keying off the pattern and were short, they provided added momentum to the initial move as they were forced to close out their losing positions by going long. The market rallied non-stop to hit the round number 1000 by month’s end.
- Deflation: A Story Told in Pictures
While many are gravely concerned with inflation (even hyper-inflation), a walk through the economic statistics tells us that we should in fact be really worried about the opposite: deflation. Honestly, I don’t know when the massive Fed induced liquidity will come back to bite the market in the ass. But it certainly didn’t in 2009 and 2010 isn’t shaping up any different.
- Chinese Market Sizzling Hot Again - But Be Careful
After pinpointing the exact low for the Shanghai market late last year, I warned about the high-flying Chinese stock market. This was another prescient call based on simple technical analysis and sentiment. The Shanghai market peaked in a matter of days at 3480 and have been trading below it since.
- S&P 500 Buy Signal That’s Worked Since 1950
What if you bought the S&P 500 index after it traded 10% below its 200 day moving average and then closed above it by 10%? You would only have 11 signals in 60 years but every single one of them would be winners on short, medium and long term time horizons. The msot recent one came July 23rd and gained you a 90 day return of almost +12%. Time will tell if it too is a winner in the medium and long term.
- Sentiment Overview
The month ended with sentiment reacting to the incredible strong showing in the stock market and becoming decidedly optimistic. Both the traditional sentiment surveys as well as the options market reflected an investor populace ready to take on more risk (in the hope of gaining the same return as they had seen recently). We also began to see the flow of massive amounts of funds away from cash (money market funds). But surprisingly, a very small amount was finding its way to equity funds.
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