Trader’s Narrative

“I, for one, welcome our new bull market overlords.”

Is this just a really deceptive bear market rally or is it the real thing? While the debate still rages, the market keeps going and going and going… like the Duracell battery rabbit.

A reliable but somewhat esoteric long term indicator is ready to pronounce the birth of a brand new bull market. Just as long as the stock market can hang on to most of its gains by the month’s end.

If you’re not familiar with the Coppock Curve I introduced it last summer as one of the pre-requisite conditions for a new bull market. Click the previous link to learn more. The other conditions (recession, a 20%+ decline, easy monetary policy, etc.) have all been fulfilled. The stage is now set for the last piece of the puzzle.

In January I wrote a Coppock Guide forecast:

In that hypothetical scenario, the Coppock curve would turn up by the end of February 2009 by the minimum. And in March, it would turn up significantly.

I wasn’t trying to predict what the indicator would say and when so much as to show that we would need to see one hell of a rally for it to register a change of direction in the Coppock Curve. And did we ever! From the March bottom the S&P 500 rocketed up 36%. That not only surprised almost everyone, it was finally enough to force the Coppock Guide to curl up:

S&P 500 Index
Probably the most important of all the indices, the Coppock Curve for the S&P 500 Index is about to give us a new signal to indicate a new bull market. But before it can do that, the S&P 500 will have to close at or above 874 at the end of the month. That is a fairly small buffer area of 3.35%. If it can manage that, then we’ll see something like the zoomed in chart shown above.

As the 2002 false signal shows, while this lagging indicator has a fantastic track record, it is far from perfect.

Of importance is not just that we are about to see a respite in the continuous drop in the Coppock Guide but that this upturn (when it comes) will be from an extremely deep level. As you can see from the chart, we haven’t been here for a long, long time. According to the Coppock Guide, a new bull will be proportional to the bear market that preceded it. So a recovery launched from such an extremely negative level means that the new bull market will be powerful and long lasting.

Nasdaq Composite
The Coppock Guide for the Nasdaq Composite already gave us a signal at the end of April 2009. But I hold it with suspicion since in the past the indicator has not been too trustworthy. For example, going back to the last time we transitioned from a bear market to a new bull market, the Nasdaq Coppock Guide was off by a lot. It first turned up in December 2001. But that was a false signal. Then there was another signal in August 2002 and December 2002. Both were again false.

Finally, it curled up yet again in late March 2003, just as the nascent bull market was sprouting its horns. So you can understand my reticence in rushing to accept the Coppock signals from the Nasdaq index. The good news is that because the Nasdaq Coppock Curve has already turned up, it needs to do much less to prove itself and confirm the signal. In fact, we could see the Nasdaq Composite fall 7.7% to 1587 by the end of the month and it would still be enough to keep the Coppock Guide headed upwards.

Dow Jones Industrial Average
The Dow Jones Industrial Coppock Curve is also ready to curl up after topping in October 2007. If it can manage to close at or above 8210 by the end of this month (about 2% from here) a valid signal would be given.

Caveats Galore
So while, “I, for one, welcome our new bull market overlords.” we’ll have to wait at least until the end of the month to get a definitive signal from this trusty indicator. And as a final caveat, while the Coppock Guide has an enviable track record, like anything else, it isn’t foolproof.

Book Giveaway
If you haven’t already, throw your name into the hat for a giveaway of:
Hedge Fund Operational Due Diligence (follow link and submit comment)

Jeremy Grantham, Chairman of Grantham Mayo Van Otterloo, is one of the few that saw the financial crisis coming. In 2007 he wrote, warning that we were caught in “The First Truly Global Bubble“. There was only one asset class that liked back then, and even that didn’t fully escape unscathed.

But Grantham isn’t a perma-bear. Since the brutal bear market, his views have changed completely. Here’s a preview of his newest letter to GMO clients:

In his letter, written before last week’s gains, he says that the market is fully valued at appx. the 900 level:

For the record, we now believe the S&P is worth 900 at fair value or 30% above today’s price. Global equities are even cheaper. (Our estimates of current value are based on the assumption of normal P/Es being applied to normal profit margins.) Our 7-year estimated returns for the various equity categories are in the +10 to +13% range after inflation based on an assumption of a 7-year move from today’s environment back to normal conditions. This compares to a year ago when they were all negative!

Then he discusses briefly how GMO is handling the dilemma of either moving too early, and having to endure further losses, or moving too late and giving up gains as the market moves up:

… you absolutely must have a battle plan for reinvestment and stick to it. Since every action must overcome paralysis, what I recommend is a few large steps, not many small ones. A single giant step at the low would be nice, but without holding a signed contract with the devil, several big moves would be safer.This is what we have been doing at GMO. We made one very large reinvestment move in October, taking us to about half way between neutral and minimum equities, and we have a schedule for further moves contingent on future market declines.

Of course, he is an institutional investor, having to position billions of assets. But the lesson is the same no matter the size of your account. You must have a battle plan laid out before hand so that when the market reveals itself, you know exactly what to do and aren’t caught off guard.

You can read the whole March 2009 letter from GMO in the Free Trading Resource section - in the Reports & Articles folder, where you’ll also find other interesting reports, articles and even complete trading books.

Book Giveaway
If you haven’t already, throw your name into the hat for a giveaway of:
Hedge Fund Operational Due Diligence (follow link and submit comment)

In late November 2008, the S&P 500 index was trading at 850, when we looked at a chart of the 10 year rolling returns. The 10 year return back then was -23% - although horrendous, not one of the worst we’ve seen in history. It still made me consider that it was reason enough Why Long Term Investors Should Consider Buying:

Flash forward a few months to take into account the continued erosion of the S&P 500 and we have the updated chart above. Using the most current data, we have a rolling 10 year return of -45.67% (not including dividends).

How bad is that? There are only a few months that were worse. And they were all around the 10 year anniversary of the 1920’s top:

• 8/1/1939 -61.66%
• 9/1/1939 -59.20%
• 7/1/1939 -58.88%
• 4/1/1939 -57.16%
• 6/1/1939 -56.29%
• 5/1/1939 -56.24%
• 5/1/1940 -55.81%
• 6/1/1940 -55.07%
• 10/1/1939 -53.91%
• 7/1/1940 -52.56%
• 4/1/1940 -51.81%
• 3/1/1939 -51.28%
• 8/1/1940 -50.94%
• 2/1/1939 -50.38%
• 1/1/1939 -49.72%
• 3/1/1940 -49.25%
• 9/1/1940 -48.85%
• 2/1/1940 -47.03%

The monthly data I used went from January 1st 1910 to present (March 1st 2009) so what we are saw as a 10 year simple rolling return is in the worst 1.5% of months for almost 100 years.

Just imagine the stories you’ll tell your grandchildren about the Great Decession. And all the major players: Madoff, Bernanke, Bush, Obama, Greenspan, etc. These are truly historic times we are living through.

Some have written me and questioned the validity of the original market call back in November 25th, 2008. As way of explanation, let me say first, that unlike a loud TV personality, I don’t pretend to know what the market will do - nor am I claiming that you should in me trust (cough Cramer cough). You should base market decisions on your own due diligence. Taking into account something I write is fine, as long as you do your own thinking afterward.

In any case, I made it clear that this was intended for long term investors. Not traders. Long term investors can still make a killing even if they are off a bit. You are either going to get in early, and share in the continued decline of the market, or you’re going to get in late, and pay opportunity costs. But if your time horizon is 25+ years, you don’t really care about a few percentage points here or there, your aim is to catch the big wave.

Even if you disregard the chart above and the fact that we are going through a rare and magnificent opportunity, you have to sit up and take notice when great market timers like Barry Ritholtz, Doug Kass, Jeremy Grantham, Warren Buffett, etc. turn bullish en masse.

Back in November 2008, when the market was just days away from making that year’s lows I pointed out an ominous double top formation on the S&P 500 index.

The market managed to bounce from that support but when it was tested again last week, it wasn’t strong enough. The double top formation has unquestionably completed. The only remaining quandary is will it complete?

Before I showed a log scale chart (see above link), so here’s an arithmetically scaled chart of the double top:

If we take the neckline to be 776 on the S&P 500 (the 2002-2003 bear market low) and the top to be 1576 reached in October 2007, then a measured move would be meaningless because it would require the market to drop 800 points - something it can’t do right now. Unless we invent a way for stocks to go into negative integers.

Even half-way completing such a measured move would mean utter catastrophe for the stock market and by extension the global economy. Especially if it happens suddenly.

Before you think that is completely impossible, consider the reality that a long term Japanese investor faces:
Continue reading ‘Are We Headed Back To 1980?’

Late last year when things were looking down right rotten, I featured a chart of the rolling 10 year returns for the S&P 500 index going back to the early 1900’s: Why Long-Term Investors Should Buy

Since the data was for a simple calculation that excluded dividend reinvestment and the effects of inflation, it raised some questions by readers whether it could be trusted to provide any insight.

Wonder no more thanks to the New York Times. They recently showed that accounting for a reinvested index, adjusted for inflation/deflation, an investor for the past 10 years (including January) would have a return of -5.1%.

This is slightly worse than the previous record set in September 1974 (for -4.3%). The data shows that my hunch was right about reinvested dividends and inflation canceling each other out since the two charts look very similar. The chart they provide doesn’t go back as far as mine but you get the idea:

Source: Off the Charts: The Worst Decade Ever for the S&P