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Market Timing

Sunday, 15 May 2016

We are all wondering where this market will go from here.  On Friday of last week, the SPY closed very near a critical point - almost right on the 204.0 support level and dead-on the 50-day EMA (green line in graph below).  Of course, in the short-term, the market can move either way from here.  We will rely on MIPS to tell us how to trade this market now.


At this time, after a 7-year Bull Market, it is interesting and prudent to start analyzing the longer-term outlook.  Consider this ...

There are thousands of things that make the stock market move up and down all day long (daily cycles). And, there are others that affect what the market does on a longer-term basis; such as on daily-weekly cycles (short-term), monthly-quarterly cycles (intermediate-term), and annual cycles (long-term).

"Things" that affect short and intermediate-term cycles, (fundamental and technical) are overwhelming, such as:
- natural disasters (earthquakes, tsunamies, etc.)
- terrorist attacks
- foreign crisis (Greece, China, etc.)
- tech leader failure (Apple, Amazon, etc.)
- economic growth
- consumer prices
- inflation
- stock values (extreme P/E ratios)
- companies earnings/profits
- Fed Action
- interest rates
- quantitative easing
- dangerously low oil prices
- sentiment
- etc., etc., etc.

Short/Intermediate Term
The above are impossible to predict, but the impact on the market from "all of the above" combined can be measured and analyzed on an intermediate-term basis.  That is what MIPS does for us.  MIPS uses applied mathematics, pattern recognition, artificial intelligence, and common sense to tell us if the intermediate-term trend is moving up or down. Furthermore, each decision is analyzed in light of what MIPS sees the "big guys" doing (that is, institutional investors, like Morgan Stanley, Goldman Sachs, etc.).   MIPS does this by "weighting" market changes by trading volume, using our proprietary "volume-weighted data".  Basically, this means that market changes on high volume have a greater impact on decision than market changes on low volume. Of course, since high volume can only come from the big guys, we are basically tracking what the big guys are doing (high volume is like their "foot prints" in the sand).

The long-term trend should be a little easier to predict because of one single indicator. This indicator is NOT a technical indicator.  Rather, it is a core fundamental fact which always shows which way the market should/will be moving.  I say "should" because it sometimes takes a while to "sink in" (lag); and I say "will" because the market WILL ultimately follow this indicator.

Of course, this is not something that I made up or discovered.  Big, smart investors like Warren Buffett have followed this fundamental indicator throughout their entire careers.  It's not a new one either, as it was emphasized in Benjamin Graham's book "The Intelligent Investor" in 1949.  This non-magical indicator is companies' PROFITS. 

Ultimately, the long-term trend in stock prices is driven almost 100% by profits, but sometimes with a few months lag.  [I believe that stock prices start moving up or dropping a few months before profits move up or down because the fat kats (CEOs, top management, board members, institutional investors, etc.) know in advance what direction their companies' quarterly profits will be, and they (and their family/friends) take action long before the profits are released to the public.]

See the graph below (from and

In the graph above, you can see that PROFITS "peaked" at the end of 2015, and have been DROPPING for over 1 year now.  I believe that the Fed, and only the Fed, has been keeping stock prices high throughout 2015 with quantitative easing and extremely low interest rates. This is not good and cannot continue to happen forever.  When the Fed's "tricks" no longer have a positive impact on stock prices, and if the US economy does not improved significantly, we will most likely have a drop in the stock market like in 2000 and 2008 (see graph below).

Good trading ...

Posted by: Dr. G. Paul Distefano AT 02:58 pm   |  Permalink   |  Email

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