IT'S ALIVE!!!

I've finally done it!  After years of planning, reams of research and plenty of trial-and-error, my first market bots are operational.  You can view the daily updates on past performance and current stock market positions here.  Both versions (bot13_10.A1 and A2) are currently long on the S&P 500 index, and the all-important proprietary "internals" are on the bullish side of neutral at 6.0 out of 10.  (In the back-test they've been long on stocks since late 2011.)  Over the next few months I'll be adding lots of information to the nowcast/forecast page as well as tweaking the bots themselves to improve the returns and reduce the frequency of buying and selling that they require.

My motivation for making an automated method for choosing when to buy and sell the stock market is to take my own biases and emotions out of the equation.  As much as I've learned about how technical analysis can predict future market performance, I'm still a fallible human being who can be swayed by fear, greed, mob psychology, general moodiness, and the 24-hour news cycle.  My plan is to obey the bots, much as a pilot relies on his instruments when flying on a cloudy night.

Rallying past the record - or not?

The S&P 500 index record closing price of 1565 held for more than five years since October 2007.  Then on April 10th the S&P shot up to a record close of 1587, looking like it might be a decisive start to a rally.  However it stayed flat for the next couple of days, and then on Monday - an April 15th which will live in infamy - the S&P fell back to earth to close at 1552, accompanied by the largest one-day decline in the price of gold in decades.

If you're wondering what the stock market is going to do next, then join the club.  We're "due" for a modest correction soon, and sentiment is still leaning towards optimism, which is bearish.  However other indicators, such as volatility and volume-related metrics, are still bullish.  Hopefully the market will pick a direction soon and pull most of the indicators into agreement one way or another, at which point a more confident forecast may be possible.

The beginning of the end of the IRA is here

A couple of years ago I predicted that individual retirement accounts (IRAs) were ultimately doomed due to warped socialist ideas of "fairness." If the president's 2014 budget is approved as is, then the IRA's death scene has already begun. The budget includes an annuity-rate-dependent cap on the total savings in all of one's IRA accounts which assumes that an annual annuity payout of $205,000 is sufficient for all retirees.

As always, big things have small beginnings, and there's no doubt that if this IRA cap is passed, the "fair annual payout limit" - and therefore the limit on the amount of savings - will descend to lower and lower levels in subsequent budget years as the government scrounges for more money to pay the ever-increasing bloated federal budget.

These moves by the government are perfectly predictable if you think like a socialist.

Bill Whittle: Canaries in Coal Mines

The next phase of the collapse is starting

In my headline post titled "The Collapse," I speculated that eventually every nation will suffer one of three fates: (1) the fortitude to pay down public debts and allowance for orderly bankruptcies, (2) continued bailouts ending in bond defaults or hyperinflation, or (3) raising taxes to pay for everything until the economy collapses.  Now it looks like the trend being set in Cyprus and the European Union is some combination of the above.

It's not exactly clear yet what's going to happen with the Bank of Cyprus, but it appears that the government will freeze all savings accounts over a certain size limit (perhaps 100,000 Euros) and then confiscate some fraction of those accounts (perhaps 40%) to pay down debts.  One interpretation is that this is a new property tax on the rich, where your property is now your savings account instead of your home.  To wealthy depositors it will also feel like an unfair default that only hurts those who put the greatest amount of faith in the bank.

Sure, it's only in Cyprus for now, and it's only large accounts for now, but there's a lot more debt out there in Europe and around the world, and once this money-confiscating precedent is set, it can be expanded to other banks, and the "large account" threshold can be lowered.

Cyprus bail-out: savers will be raided to save euro in future crises, says eurozone chief:

Savings accounts in Spain, Italy and other European countries will be raided if needed to preserve Europe's single currency by propping up failing banks, a senior eurozone official has announced.

If you think that this phenomenon is not coming to a bank near you - and soon - then I've got a bridge I'd like to sell to you.  It's time to question whether your "savings" account will really be yours in the near future.

Technical forecast: Up, up and away

This is something to see.  As the stock market reaches towards an all-time high, short-term sentiment is becoming more pessimistic.  This is an uncommon but not unknown phenomenon sometimes referred to as "climbing the wall of worry," because the negative sentiment actually helps to maintain the rally.  Money flow has also recently crossed to the bullish side, so if the S&P 500 and Dow 30 really do rise decisively into record territory, then I'll have no choice but to make a bullish bet with my money.

The idea of betting on a continued rally scares the **** out of me, but it's usually best to bet against one's emotions, so that will be my only reassurance.

So it's come to this...

In the long run, it was inevitable that both the S&P 500 index and Dow Jones Industrial average would return to the important resistance levels of their all-time highs.  I just didn't think it would happen this soon.  The Dow 30 has now reached the vicinity of 14,000 for the second time in history,

Dow 30

while the S&P 500 index has poked above 1,500 for the third time.

S&P 500

If I had to place a bet at this point (fortunately I don't) I'd say the stock market has finally reached a price too far and is poised to reverse course for a while, but I'm still staying in neutral cash for now.  If these two indices jump above these lines significantly, meaning the stock market has reached a general all-time high by any definition, then the last long-term resistance line will be out of play, and I would be hard pressed to make a bearish argument from the perspective of a price trend.

Pausing at the top?

After the announcement of the New Years Federal budget deal, the S&P 500 index rocketed up to the overhead resistance line near 1460 - and there is has remained for the past five trading days.

 This rapid rise and subsequent stall look bearish for the short term.  In addition, market sentiment, money flow, and volatility all point to a bearish forecast.  The big question now is whether the market will put in a simple correction like the one following the September-October top, or something bigger that will allow me to make use of a bear market fund.

Closing trend lines

The multi-year rising support line for the S&P 500 index now stands at around 1350.  Meanwhile the S&P has closed to within 20 points of a resistance line around 1460.

Since these trend lines are converging, eventually the market will either have to rise above the upper limit, or fall below the lower one, signaling either a continuation or the end of the current rally.

Big support line at S&P 1310

The S&P 500 index is declining towards a long-term rising trend line that goes back to the 2009 low.

The support line presently lies around 1310.  If the S&P falls below this level, it will be a strong indicator that the multi-year rally is over.

Market correction: 9% and counting

So far the price movements of the S&P 500 index are consistent with a simple short-term correction.  There was no crash-predicting signal at the September-October top, and there's no indication (yet) that this is a bear market.

Longer term indicators, however, are pretty bearish.  Even if this current correction proves to be short-lived and the market resumes rallying, the only thing that might encourage me to get back into the market would be the threat of hyperinflation.

Update

First Marxist president is re-elected for another four years.

Stock market tanks the next day.

Flat top

My last post was more than a month ago, when the S&P 500 index had just crossed above 1450.  Today the S&P 500 index has just crossed above ... 1450 again.

On the bright side, neither bears, bulls, nor cash sitters (like me) have lost anything over the past 5 weeks.  On the down side, this low volatility combined with other bearish indicators sure smells like a market top to me.

The prevailing wisdom seems to be that the market is poised to rally strongly if Mitt Romney wins the election 3 weeks from now.  I agree that certain economic conditions would improve when business owners finally felt safe to hire people and spend capital again, but I'm not convinced that it would translate to an across-the-board economic turnaround or an immediate stock market rally.  Even in the best case (from my perspective) government spending will have to be cut sharply just to balance the budget and eliminate the $1.5 Trillion yearly deficit, let alone pay down the $16 Trillion debt.  That reduction in federal spending, while highly beneficial in the long run, would lead to short-term pain in certain sectors that were inflated by the irresponsible deficit spending.

Yeah! We love counterfeiting!

In the past couple of weeks both the European Central Bank and our own Federal Reserve Bank have announced plans to create money out of thin air for buying bonds and mortgages in order to stave off further economic contraction. The stock market jumped after the ECB announcement, but then quickly leveled off and resumed a new flat level.

We got another jump today after the Fed announcement - let's see how long this lasts.

Oops! Is the Dow the Dominant Descriminator This Time?

Yes, the S&P 500 index closed at a multi-year high yesterday, but for once I think I should have been watching the Dow Jones Industrial Average instead.

The Dow has bumped into an overhead resistance line that's been tested several times as far back as March. If the Dow breaks through, then there will be no more trend-line arguments against a new rally.

Flatness

The S&P 500 index crawled above 1400 on August 7. More than three weeks later it's sitting at 1410, and has yet to close above 1420 or below 1400. The April 2nd peak of 1419 (not April 19) looks increasingly like a solid resistance level each time the S&P fails to breach it.

This rally has no legs

None of my stock market indicators have anything good to say about the current 2-month rally. Optimism is returning (bearish), seasonality is poor (neutral), and other market indicators say we're in the vicinity of a market top. The April 2nd S&P peak of 1419 is a potential resistance level, while the October 9, 2007 peak of 1565 is a more formidable one, since it's paired with the 2000 market peak of S&P 1527.

In other words, I'm watching for the next bear market signal.

I told ya so.

Here's more proof that short-term market manipulation is being performed by high-frequency trading computers. Today was just one of those rare times when the system hiccuped. It's usually performed more subtly and to the financial benefit of the market makers.

Flood of Errant Trades Is a Black Eye for Wall Street
An automated stock-trading program accidentally flooded the market with millions of trades Wednesday morning, spreading turmoil across Wall Street and drawing renewed attention to the fragility and instability of the nation’s stock markets ...

“The machines have taken over, right?” said Patrick Healy, the chief executive of the Issuer Advisory Group, a capital-markets consulting firm. “When events like this happen they just reaffirm that these aren’t investors, these are traders.”

No more trend line guidance

The S&P 500 index has violated both of its converging medium-term trend lines, thus precluding any short-term forecast.


If you suspect as I do that the S&P 500 will top out around 1550 for a third time before plunging again, then any rally from this point would gain ~15% at best. Is it just me, or does that seem like a small reward given the downside risk of a collapsing global economy?

Trend line collision imminent

A declining tops trend line (red) has defined a general decline in the S&P 500 since early April, while a rising channel pattern (blue and green lines) has been in place since late May. The peak on July 3rd (circled) confirmed both trends, but soon the S&P will have to violate at least one of the trends and thereby forecast either continued rallying or another downward leg.