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Market Timing

Saturday, March 24 2012
MIPS Members:


The stock market is now in relatively new, uncharted waters (as least for newcomers).  Said another way, the SPY has not been in the “territory” above $145/share since 2008.

So, where do we go from here and how do we get there ?

Intermediate-Term Cycles
We all know that MIPS3/MF identifies intermediate-term cycles (weekly/monthly cycles) in the market, and not short-term cycles (daily cycles) nor long-term cycles (annual cycles).  For example, in graph #1 below, the black line would be indicative of a very long-term cycle (5-year trend), and the red lines would be indicative of intermediate-term cycles (monthly/quarterly trends). Of course, any timing model that could accurately identify intermediate cycles, and trade the resulting trends long and short, would produce much better results than just “riding the long-term wave”.  This is what MIPS2/LF and MIPS3/MF do, and they do it well.  And, these are he models that we follow.  [BTW – MIPS1/VLF tracks long-term (annual) cycles and trades an average of only 1 time per year.]

BUT, IS THERE ANYTHING THAT WE CAN LEARN FROM LONG-TERM CYCLES.  The answer is yes, so lets go to graphs #2/3  below to see what we can learn.

Graph #1



Graphs #2/3 – Long-Term Cycles
Everyone knows (or should know) that over the last 50 years, the market has a long history of repeating the same pattern (or cycle) over-and over.  This cycle goes up for roughly 4-6 years and then drops 30-50% over the next 1-2 years.  For simplicity, let’s just say that a very frequent stock market cycle is up for 5 years and then down for 2 years.

You can see these repetitive cycles in graph #2 below for the 18-year period between 1965-1983 and in graph #3 below for the period 1995-2012.  These are the type of market movements where the fat cats and the hedge funds make most their money (NOT in up markets only), and where the little guys get clobbered.

Graph #2
This graph shows the Dow from 1965-1983.  In this 18-year period, buy-and-hope investors would have been down about 15% (really much more, because they could have basically doubled their money by being invested in 4% CDs or US Gov’t bonds in those 18 years) !!!   Without some type of market timing, how could anyone have made money in this 18-year market ???


G
raph #3
The graph below is for the period 1995-2012.  In this graph, the red lines show the long-term trend lines.  Even though MIPS3/MF trades the intermediate term cycles within the long-term cycles, by observing the long-term cycles we can see that:
   (a) long-term trends are not random,
   (b) long-term trends seem to be very similar in nature,
   (c) there are very good “shorting” opportunities, even in up-trending markets, and
   (d) once started, they go on for years (again, like up for 5 years and down for 2 years). 
The first long-term cycle in graph #3 ran for 5 years (from 1995-1999) and the second one also ran for 5 years (2003-2007); but the third (current) long-term cycle has been going up for only 3 years (2009-2011).  Does this mean that our current 3-year “bull” has two more years to run?  Maybe, or even likely.

And, the entire world is anxious to see if the Dow will break its all-time high of 14,164 or if the SPY will break its all-time high of $157.5/share made in 2007 (which is only 11.5% higher than Friday’s close).  To do so, the SPY would have to break major resistance levels at 144.5 and 152.1 to get there (see these resistance levels in graph 3). My guess is that the big guys would like to see the SPY break its all-time high (and they can make it happen) and the little guys are just now likely to start moving money from fixed income assets into equities.  Both (or maybe just either) of these would push the market higher. This is NOT a prediction, just an observation. 

And remember, if the above does not happen, the market will most likely drop and drop fast.  Either way, MIPS will detect the trend.  So, let’s be patient and wait for MIPS to tell us what to do.

Graph #3
Posted by: Dr. G. Paul Distefano AT 09:34 pm   |  Permalink   |  Email
Thursday, March 15 2012
1st Graph (daily data)
FINALLY, the SPY definitively broke its upside resistance at $137.2, but only after about 8-10 failed tries. (See the 1st graph below). The Buyers finally "yanked" the SPY away from the Sellers in this tug-of-war and we are now at $139.91, and that is a good position to be in.  So, what happens from here (see 2nd Graph)
Graph #1 - SPY Breaks $137.2 Resistance




2nd Graph (weekly data)
This is simply a graphic view of the next three upcoming "resistance levels" that we will have to contend with, at 144.3 and 152.8 and "The Big One" at 157.5.  The latter is "The Big One" because it was the HIGH for 2007.  Does the market have enough "steam" to reach or surpass this "pinnacle" point at $157.5?
Wouldn't that be nice?  None of us knows the answer to that, but we do have MIPS to guide us along the way.  Stay tuned...
2nd Graph - Future Resistance Levels


Posted by: Dr. G. Paul Distefano AT 05:42 pm   |  Permalink   |  Email
Wednesday, March 07 2012
So far this week the market did what the market usually does at a "hard" resistance level; that is, it hit/slightly broke its "hard" upside resistance line and then bounced back.  This is not one bit surprising.  Many times it takes 4-5 tries to break a resistance level, and if it fails to break, the market then makes a substantial move in the opposite direction (5-10%). This is kind of like a tug-of-war between buyers and sellers, where each side makes attempts to drag the other side "across the line".  After several tries, the losers start giving up as their efforts are thwarted and they understand the strength of the other side.  Then, their will to resist disappears and the other side virtually yanks them across the line.

On Tuesday, the S&P 500 dropped around 20 points after 7 attempts in the last 2 weeks to break or hold above its resistance line.  There were several reasons from the "pundits" about why the market dropped, but my guess is that they were all guesses.  Most likely, it had nothing to do with Greece or China because there was really nothing new from either of them.  We believe the market dropped because some big guys decided to take profits, and a ton of little guys followed them (right or wrong).  Most likely, this was not a one-day reversal and it does NOT mean that the markets upside run is over.  But, if the SPY does not retaliate with another assault on its $137.2 resistance level soon, this could signal a reversal of the current uptrend.

Remember, MIPS is looking for mid-term trend changes (up or down), and does not respond to 1-3 day changes.  Thus, MIPS is trying to identify trend direction, NOT predict it.  Usually timing systems that respond to 1-3 day changes are fast-trading systems (100+ trades/year), and they must attempt to "predict" or "forecast" market direction because they do not have enough time between trades to "analyze" much of anything.

So, let's wait a few days and MIPS will tell us what to do next.
Posted by: Dr. G. Paul Distefano AT 10:58 pm   |  Permalink   |  Email
Friday, March 02 2012
The SPY closed at $136.63 on Thursday...

The current upside resistance is at $137.2, less than 1/2 of 1% above this close (see graph below)
- there is a good chance that the SPY will break this resistance level to the upside on Friday
- since we are still long, let's hope so
- if that happens, we could have smooth sailing because the next upside resistance is about 6.6% higher !!!

Of course, the market is not always that accommodating.  So, if the SPY doesn't break up (or breaks up and falls back quickly), MIPS will get us out.

Posted by: Dr. G. Paul Distefano AT 02:56 pm   |  Permalink   |  Email

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