Marveloussanders, Paul, et.al.
I appreciate all the comments and perspectives presented in this thread. I think it is important to understand that analyst and investors approach the market in different ways. Some from a short-term trader's point-of-view and some from a long view. Both are valid ways of looking at the market.
Sarah says she uses technical analysis and Paul's discussion of wave counts is technical analysis. Based on the infrequency of Sarah's moves, I believe she focuses on the longer term technical picture.
Technical analysis is an important investor tool and a simplified explanation is that it assumes price and volume patterns repeat and can be used in various ways to improve trading percentages. I agree to a point and I also agree with the view that price and market internals takes into account all trader's opinions and thus conveys important information to us. Technical analysis does not care about the fundamentals, only market action.
An underlying psychology to many price patterns exists such as after a market pullback an investor who bought at the top decides they want to get out once they break even so they sell when the market returns to the same level. This creates overhead resistance and sometimes a double market top. I also think there is a self-fulfilling component of technical analysis since so many investors are using the same technics today. It also appears to me that computer algorithms (deception) are now taking advantage of those who follow some of old school technical analysis too closely.
Other comments on the thread and on the website come from a trader's point-of-view. Don't get me wrong, there is nothing wrong with trading. Most investor services are set up for traders since traders spend the more money on advice and tools. I provide market commentary from time to time when I see something interesting, but my primary focus is on the long view. Where are we in the market cycle? What are the market risks? What is the smart money doing and thinking? What the heck are those crazy central bankers up to now?
Why? Because the only way I found to improve on the seasonal strategy would have been to sit out the bear markets even during the favorable season for equities. And I am by nature interested in learning how the world really works since as you know so much of what we hear are really assumptions and not facts.
While I zoom in to short term charts, I prefer to start with the 20 year charts first. When you do this you come away with the perspective that the plus or minus moves at the top are playing in the margins. The larger movements of the stock markets are moves of over 150% in both bull and bear markets. Okay, I know the last two bear markets only when down around 50 to 60% - but that is misleading. A 60% decline requires a 150% gain to breakeven and that is what counts.
My view that we entered a bear market in the summer of 2015 (and not a correction) is only partially based on long term technical analysis of the stock market. A lot of pre-conditions were in place that are still in place. And a double top in the SP500 does not negate the start date of the bear market, it only extends the top for this one index.
As for when to sell the S fund if you are still in? For long term investors - Now and do not consider re-entering until October when the unfavorable season for equities usually ends. And while you are waiting on the sidelines watch the market action, investor risk preferences, corporate revenue, and key economic indicators. Then consider whether to re-enter.
Why so defensive? Here are some long term factors to consider beyond wave counts and short term market action:
GAAP corporate profits are down 20% from their peak and back to 2010 levels when the SP500 was 46% lower than it is today. Global debt is at an all-time high and global trade is in contraction. Corporate revenues have posted five quarters of declines. Business sales and industrial production have been in decline since 2014.
While consumer spending makes up 70% of the GDP model it actually only accounts for 30% of sales in the US. Business-to-business sales make up the majority of transactions so think of it similar to market internals. Typically retail sales only levels off at worst during recessions. In 2000-03 bear market that lost around 50%, GDP only declined 0.3% so what does that tell you about using this economic model or the news media's focus on the lagging economic indicators to make investment decisions.
The amount of losses in bear markets correlate to the market valuations at the peak based on long-term yard sticks (not short term earnings measures which are very cyclical). Since this is one of the most over-valued markets in history we should expect another run-of-the-mill 40-60% decline before the bear market is over.
BlackRock, the largest global asset manager, joined JP Morgan and Goldman Sachs this week in downgrading US and global equities to neutral. Neutral means "Sell" if history is a guide. And my favorite news story comes out of the G-7 meeting where the Prime Minister of Japan requested that the G-7 warn of the risk of a global economic crisis – they of course declined it and replaced it with happy talk.
So I hope this helps explain where my perspective comes from – a long term perspective that includes technical, fundamental and seasonal analysis along with a lot of reading. It does not negate Paul's wave count perspective since yes the markets can stay detached from fundamentals for long periods of time. I just see elevated risk in the markets based on the back drop I presented and other factors. And bear market rallies are most impressive especially when supported by panicky central banks. Trade in the margins if you must, but just don't buy and hold until you retire because you may not be able to retire.
I want to convey that regardless of the short term direction of the market I strongly believe you will have a much better level to re-enter the market over the next few years. Current levels offer low future returns with high risk. In the meantime, unlike the vast majority of investors, you can sit in the TSP G fund and earn something close to the rate of inflation. I *do* have a set of criteria for reversing my bear market view, but we are not close.
Cheers,
Michael Bond
TSPsmart.com
Posted by: michaelhbond@yahoo.com
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