Trader’s Narrative

For economic and market news and to see what interesting reading you may have missed last week, check out the list below. To see it all, go to news.tradersnarrative.com:

• Elizabeth Warren on the Economy & Stock Market
• When Is There No Opportunity for Your Trading?
• The Guys Who Bet Against the Bubble and Won
• The Lloyd’s Prayer (doing God’s work is hard work)
• Get a FREE Subscription to SFO Magazine (US residents only)
• Strategist at Morgan Stanley: Multi-Year Bull Market
• Wall St Fights Congressional Momentum to Break Up Banks
• SocGen’s top analyst sees market lows next year
• Analysis of corporate insiders’ behavior
• Has Gold Topped Out for the Year?
• Peter Eliades throws cold water on rally

The above is a small sample, for the complete list, follow the graphic link below to news.tradersnarrative.com:

And remember to check back during the week as there are interesting links added throughout the week. If you are a twitter user, add the news.tradersnarrative.com twitter stream to get new stories in real time.

The Week Ahead:

Every once in a while, deferring to a self-made promise to hold myself accountable, I dust off the archives and go over past calls, both beautiful and ugly. This is neither a masochistic endeavor in the case of failures, nor a narcissistic indulgence in the case of successes. The main purpose is to encourage myself and others to make such introspection a normal part of our schedule. And to learn from our previous decision making processes with an eye to improving and honing our skill set.

Here are the highlights of my past commentary on the Chinese stock market in chronological order:

May 9th, 2007: Want To See A Real Stock Market Bubble?

June 4th, 2007: Chinese Stamp Duty Increase: Death Knell For Mania

November 15th, 2007: Betting On A Bear Market In China

November 3rd, 2008: Time to Consider Chinese Stocks

April 14th, 2009: Coppock Curve Approves Of The Chinese Stock Market

July 28th, 2009: Chinese Market Sizzling Hot (Again), But Be Careful

August 5th, 2009: China’s Bubble 2.0 Threatens Global Recovery

Which brings us to the here and now. Since my last comment, the Shanghai stock exchange fell about 24% to its swing low, offering some juicy returns for those who were short or foregone losses for those that sold and stepped off the market stage for a breather.
Continue reading ‘Nailing The Chinese Market’s Gyrations’

There are a few frameworks we can use to build a model of the stock market. We’ve looked at the Weinstein stage analysis of the market and compared the previous bear market to this one. A recent Morgan Stanley report authored by Teun Draaisma, Ronan Carr, Graham Secker, Edmund Ng, Matthew Garman provides a more nuanced model.

They looked at 19 historical secular bear markets. Most of them were in equity markets around the world but they also considered one bear market in gold. Then they looked at what happens in the aftermath of each secular bear market. The report identifies 4 separate stages:

1. a decline which on average slices market valuation by half in a little more than 2 years
2. a rebound or counter-trend rally - taking prices 70% higher in 17 months
3. a shallow correction which lasts almost as long as the rebound rally
4. finally a trading range which lasts almost 6 years

Click to see full size:

Applying this script, the current bear market showed a 56% decline from its peak in October 2007. That’s perfectly within the historical parameters.

In the next stage, the S&P 500 climbed +53% from the March 2009 lows. According to the historical pattern of secular bear markets, we would have expect the S&P 500 to climb 70% from its low to 1150. But if it had followed this pattern, then it would arrive there by July 2010. However, the S&P 500 has managed to climb two thirds of its allotted 70% counter rally in only 5 months. So this rally is anomalous because its slope is much, much steeper than the average historical one.

The third stage is understandable as such a large move usually gives back a portion due to profit taking. But the next and last stage is the most interesting.

This is where the market has to finally digest the consequences of what initiated the bear market in the first place. A trading range or base building - according to Weinstein’s model - is necessary because it sets the stage for the next bull market.

Broad multi-year trading ranges followed the initial rebound in 10 of 19 bear markets. In most cases, structural problems in the real economy acted as a headwind to a new bull market…

During this moribund time in the market, structural pains such as inflation, deflation, inordinate debt levels, unemployment, etc. work themselves through the economy.

But for now, the consequence of this research is that the counter trend rally which we seem to be in right now can go on for much longer than most anticipate. Even if we do manage to climb the remaining 20% to 1150 on the S&P 500, the market can take its time until the summer of next year. The report concludes:

If the aftermath of these 19 secular bear markets is anything to go by, the current rally could go on a bit longer; is likely to stall a few months before the first Fed rate hike, which we expect in Q3 of 2010 … and is likely to be followed by some sort of trading range for years to come because of the structural problems of financial sector and household deleveraging as well as the poor state of government finances.

But as the study itself proves, while the past may rhyme - it hardly ever repeats.

Examples of the Four Stages of Secular Bear Markets
The following charts are 4 examples of individual markets which demonstrate the stages mentioned above. Notice that while the trading range may sound boring, on average they have a +50% width, making them extremely tradeable and lucrative. For example, the first instance, the 1930’s experience had a trading range of +/- 147%:
Continue reading ‘The Aftermath Of Secular Bear Markets’

For economic and market news and to see what you may have missed last week, check out the list below. It is a small sample, to see it all go to news.tradersnarrative.com:

• Inside Ron Insana’s Time Machine
• Larry Summers: “I don’t think the worst is over”
• Morgan Stanley Plays Alchemist (Again)
• Fake Alpha
• Get a FREE Subscription to Financial Magazines
• How low can crude oil go?
• Worst Financial Gurus
• Everyone Talking about the Head & Shoulder Formation
• Rosenberg: Market Halfway Through Bear Cycle
• Smuggled $134 billion of bearer bonds fake or real?
• Smells like deflation
• The Wall Street White House
• Japan to Limit FX Trading

For the complete list, follow the graphic below:

And remember to check back regularly since there are interesting links added throughout the week.

The Week Ahead

The following is from San Francisco magazine (online). I’ve included it here because, for some odd reason, the original site shows it as a 404 error now. This is much too good to let disappear into the ether, so bookmark this, delicious it or just print it off and read it.

Just remember to not get drunk on the indexing Kool-Aid. All methods of investing are active, even indexes like the Dow Jones. Passivity does not exist. All indexes have their components picked by someone and regularly rebalanced and modified by someone (or some committee).

The best investment advice you’ll never get
For 35 years, Bay Area finance revolutionaries have been pushing a personal investing strategy that brokers despise and hope you ignore. The story of a rebellion that’s slowly but surely putting money into the pockets of millions of Americans, winning powerful converts, and making money managers from California Street to Wall Street squirm.
By Mark Dowie

As Google’s historic August 2004 IPO approached, the company’s senior vice president, Jonathan Rosenberg, realized he was about to spawn hundreds of impetuous young multimillionaires. They would, he feared, become the prey of Wall Street brokers, financial advisers, and wealth managers, all offering their own get-even-richer investment schemes. Scores of them from firms like J.P. Morgan Chase, UBS, Morgan Stanley, and Presidio Financial Partners were already circling company headquarters in Mountain View with hopes of presenting their wares to some soon-to-be-very-wealthy new clients.

Rosenberg didn’t turn the suitors away; he simply placed them in a holding pattern. Then, to protect Google’s staff, he proposed a series of in-house investment teach-ins, to be held before the investment counselors were given a green light to land. Company founders Sergey Brin and Larry Page and CEO Eric Schmidt were excited by the idea and gave it the go-ahead.

Continue reading ‘The Best Investment Advice You’ll Never Get’