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The Mother Of All Momentum Thrust Years at Trader’s Narrative




The Mother Of All Momentum Thrust Years


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This is a guest post by Wayne Whaley (CTA):

I have written over the last few months on the importance of the historic momentum thrust that we have experienced this year and how they could possibly push the market higher than most would anticipate.

Today, Sept 16th, 58% off the lows of 666 on the S&P, I am rolling my eyes, looking to the heavens in disbelief and sharing with you that today we had the third “Ten Day 2:1 Advance Decline” reading in the last 6 months. The previous two were on March 23rd and July 23rd. I haven’t had a great deal of time to study it yet, but it appears unprecedented with really very little to compare too. But I would caution against interpreting this as a sign of an overbought market. As I have shown in the past, single 2:1 advance decline thrust signals are very bullish. Two in a short period of time, even more so, and I am assuming until I find evidence to the contrary that a third is bullish as well. Since I have no tri-signal data, let’s take a look at the three other occasions where there were double signals in a short period of time.

The table below shows the three previous double signal dates, followed by the percentage change in the S&P 500 and the returns 3, 6 and 12 months later.

Double Ten Day 2:1 Advance Decline Signals in less than six months:
double ten day 2-1 AD signal dates from wayne

Note that these three previous double readings occurred in different decades and notice that although the second reading came well after the initial advance was launched, the S&P 500 gained an average of an additional 26.37% over the next year, with nary a less than 24.28% gain. The S&P 500 index is currently up 9.5% since the second thrust that occurred on July 23rd, 2009.

This market is similar to all three of these markets in some ways. But appears to correlate the closest with 1975, which similar to this rally followed a 48.4% sell-off in equities that lasted 20 months; was often postulated to precede the next great depression and was accompanied by massive federal stimulus.

For much of the last 6 months, analyst have compared the recent rally to the bear market rally that took place between November 13th 1929 and April 17th, 1930 - rising 48% over five months. One can not totally rule that possibility out, but a major difference was the fact that in 1929, the preceding sell-off in stocks occurred in only two months, while the current rally followed a 15 month long bear market. It seems that in just in the last few weeks such comparisons have dissipated.

I understand that it works against human instinct to buy the market this high off the lows, but I assure young readers that investors in 1975 and 1982 had the same dilemma. If you have been waiting and are tempted to reenter, I suggest dollar cost average into it.

I see a lot written on indicators that are at historic levels with many interpreting this market as overbought. But if you look back through history, anytime there is a 50% or more move in the major indexes, the oscillators, sentiment indicators, etc, that are bounded from x to y are going to be tested repeatedly. Divergence analysis between range bound indicators and a potentially rangeless market tend to mislead at such times.

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11 Responses to “The Mother Of All Momentum Thrust Years”  

  1. 1 Dave

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    One of the most important concepts and least understood is the difference between a mkt or stk that IS oversold or overbought and THE ABILITY TO GET (AND stay. That’s a definition of momentum.) oversold or overbought.

    Merely BEING oversold or overbought is relatively unimportant.

    In other words, in first half of 2008 would you have rather been long POT or MO ? In 2nd half of 2008, would you have rather been short POT or MO ?

  2. 2 John F

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    Stocks were much, much cheaper in 1975 and 1982, a very clear distinction between the current downturn.

  3. 3 Anonymous

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    Yep John F, I think they were comming of pe’s of 2 or something ludicrious.

  4. 4 Dave

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    Wayne,

    Posting this here (trying to keep it current rather than burying it in the older post).

    Am not familiar with “the Reverse September Barometer”, but this http://www.kirkreport.com/09/battleforsept.gif caught my eye recently (which is quite odd since i seldom look at all those listings on that site because i think trading & managing is more important than reading 50 articles a day).

    Trading is constantly learning something new, but reading 50 articles a day is IMO beyond the law of diminishing returns.

  5. 5 Dave

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    Last Thurs (Sept 10) i was looking at an uncluttered (w/o MA’s; studies etc) SPX daily chart & i thought that i might need a saliva test.

    May, June, early July looked like an ABC wave 2.

    Aug, early Sept looked like an ABC wave 2 of a lesser degree.

    That would put us near the beginning of a 3 of 3. Even a somewhat mild, brief shakeout would not change that. IF ANYTHING, a brief shakeout just before embarking on a 3 of 3 would be VERY BEFITTING. The train doesn’t leave the station with everyone onboard.

    And surpassing/closing > 43.60 Q’s would go hand-in-hand

    This perspective would not have been apparent before the Sept pullback (& subsequent rally) because the 2nd ABC wave 2 of a lesser degree did not exist yet.
    ————————–
    Something important happened last Weds 9/9 (and the tone of the mkt has changed since then).

    When the Q’s closed @ 41.09, they closed above the low on 3/17/08 (41.05) which was the bottom of wave 1.

    Many who have been bearish since the March low have been looking for a new low (THIS year).

    One hard & fast rule of EW is “W 4 never enters the price territory of W 1″ p 21.

    By closing above the bottom of Wave 1 that would deductively label the March low as 5 complete waves to the downside.

    Also, RUT joined the Q’s Monday as having surpassed 50% RT of their bear mkt decline.

    However, surpassing 61.8% Q’s (next) is a really big deal … a game changer.

    If anyone thinks this view is idiotic, please send the hate mail to Wayne because i’m deaf.

  6. 6 wayne

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    Dave,

    In Yale Hirsh Stock Traders Almanac, He refers to September as a Reverse Barometer, but I think he is looking at the 12 mt outlook, and gives some stats. The opposite of the January effect. Your article suggest ow. at least for eoy. I will double check. I was thinking about running the numbers for October today, given Sept performance. I will run the numbers on the end of the year performance as well, to substantiate your article.

    One of the frustrating things for people who miss the first rally in a bull market is that they wait for the big correction and it never comes. The market just keeps climbing and climbing. It feeds on itself in frenzied fashion and propels prices considerably higher for six mts or so, and sometimes longer. I work with people who now admit that we are in a bull mkt, but were waiting for a 10% correction to get in. Now they are looking for a 5% correction. Eventually they have to throw in the towel.

    I am of the growing opinion, that at the end of the year, a lot of people who do their once a year portfolio assessments, will sit down, look at their accounts, and say, you know, the market is up 50%, I still have $100,000 sitting in my 401K drawing 0.1% interest, I probably should get back in the game. Possibly the next big push.

    The Sept options expiration are 15-15, but the last 5 have been up. Expirations in up wks, have slight upward bias.

    Let me research the end of year stats, be back later today.

  7. 7 wayne

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    When September Flexes Its Muscle

    If we are fortunate enough to rally into the end of the month and finish September up by more than 5%, the fourth quarter stats are 5-0 with an average gaudy gain of 9.24%.

    Thanks to my BFF Dave for the heads up.

  8. 8 wayne

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    Note to Wayne from Wayne

    There were actually two nasty 4th quarters after Up September, 1973 and 2007. Both of those led to severe downturns the following year.

  9. 9 Dave

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    Wayne,

    The 10 down Octobers are not INconsistent with what i’m looking for. However, the pertinent question to me is where does that pullback begin (from). It’s one thing if it started from somewhere near where we are now; it’s another thing if it started from substantially higher.

    I’ve always been a fan of your work because i believe that mkts are 45% psychology; 45% physics; 20% macro economics (yeah, i know that’s 110%, LOL). The first expanded comments of yours that i recall were many 100 pts lower & i thought “Whoa, this is powerful stuff.”

    You should combine several of your submissions; expand them a bit with rationale, etc & submit them to http://www.mta.org/EWEB/dynamicpage.aspx?webcode=charlesdowaward

    You do really good work, Wayne.

    Much thanks & regards,
    dave

  10. 10 Dave

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    Wayne wrote “…since most Nov-Decembers are up, the loss in 07 was a very timely harbinger of worse things to come in 2008.” EXACTLY - the mkt was telling us something although we may not have understood it at the time.

    I wrote the following & sent to friends & clients in my “Looking Forward to 2008″ statement at the end of December 2007:

    “While some people are expecting a further rally in the mkt this yr of 20%; AT THIS POINT IN TIME, i do NOT see such a scenario. I believe that the mkt is vulnerable to quite the opposite at some point this yr…perhaps/probably as early as in the first quarter of this yr. This 5 yr bull market is very long-in-the-tooth & very vulnerable to such a deeper decline.”
    ———————–
    On January 14, 2008 I wrote (in part):

    6) Down Novembers are usually followed by up Decembers. But this past Nov (07)was followed by a down Dec. While unusual, i couldn’t find the statistical significance online although i’m sure that i heard it on CNBC.

    My version of an old saying is “If Santa Claus doesn’t come to Broad & Wall, then a bear will surely come to call.”

    7) Nasdaq was down the first 8 days of the new year. Again while unusual, i couldn’t find the statistical significance online although i’m sure that i heard it on CNBC. Either this or the Nov/Dec decline, i believe i heard, was the first time in 32 yrs.

    (NOTE: #7 was factually incorrect. The Nasdaq had declined from Dec, 26, 07 (the day after Christmas) til Jan 8, 08 - 8 trading days but NOT the FIRST 8 days of the new year as i had stated. However, not a good sign at the time in a seasonally bullish time.)

  11. 11 Travis

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    If I wanted to do a similar study, could you tell me the best place to get historical A/D data in raw form?

    Thanks,

    Travis

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