Bonds leading stocks?

Aug 3 2010 Update: Stocks have rallied 11% and bonds haven't moved. I see this as another warning that the bond market is not confirming the stock market rally and short is the better play than long... This same thing happened at the 2007 top as can be seen in the chart.



Markets are all interrelated, including the stock and bond markets. In the world of assets these two securities are the most popular with many 401ks, savings, etc invested in each. Many people make investment decisions choosing between the two in a zero sum game.

Over the past 10 years there seems to be some correlating relationship between bond yields and stock prices. As the chart shows they pretty much move up together and down together. This makes sense since there is that zero sum game trade off between the two. There is a very interesting scenario at market turning points. Bonds look to turn before stocks.

In the 2000 top, bonds topped in January and stocks in March. At the July and October 2007 stock top bonds peaked over a year earlier in June 2006. At the 09 stock market bottom, bonds had already bottomed in Dec 2008. And now, at the April highs, bonds have peaked at about the same level 4 times since May 2009. All of these situations set up divergences with the stock market. Bonds signaled turning points ahead of the stock market turning points!

What this means now is that bonds will need to make a new high above the 3.8% level in order for the stock market to have a chance at taking out its April highs. In fact the sell off since April in bond yields has been hard and fast more similar to 2007 and 2008 than any other time in the past 10 years. This is cause for concern and may tell us that the market is likely to fall from here rather than rally and make new highs. This also supports my general theory that the market is likely to continue to fall hard from these levels.

What this also means is that we should look for an upturn in bond yields before we get too excited about any stock market rally.

Good luck!

Baltic Dry Index Breakdown

One good economic indicator (potentially leading) similar to the railroad stocks and other transportation indices is the baltic dry index. This index measures the cost to ship dry goods by sea averaging the price over several worldwide routes. As you can see by the chart, the index tanked hard during 2008 along with everything else. This index was also dear to my heart, because although not a dry good tanker, GMR is an oil tanker stock I used to follow and invest in (several blogs on this site).

Recently the index has broken down from a triple top and/or potential head and shoulders pattern and is tanking hard...as hard and fast as in 2008. This goes along with the theme that the market has peaked in a wave 2 and we are about to have another crazy ride south, eventually taking out our 2009 lows.

One other thing this index was good for is at the 2009 lows, there was positive divergence on this chart, helping to get comfortable that a bottom in the market may have been in place in March 2009 as this index didn't make a new low and in fact didn't see much selling at all that first quarter of 09. Dont put too much weight on this though, as the 2007 top wasn't confirmed by the BDI

Market Wave 2 top potentially complete

July 22 2010 Update...

Market continues to play out a wave 2 bounce...the question is which one? So far it looks like this is the wave 2 of the 3rd wave down I talk about below with wave 1 of 3 starting late June at $1131. The new low below $1041 in early July solidified the count and helped me get comfortable that the market is impulsing downward. I maintain my TZA holdings at roughly 90%. However, there is a chance that this early July low is actually where the Wave 1 (marked in blue) should be located. This, is pretty much just semantics at this point. What it means is that the market could make a move above the June $1131 high and not violate any wave rules. Once that move finishes, though, then it is down hard flying past the $1011 low. No matter what, unless something is completely wrong with my analysis, the market won't breach its April $1220 high and patience may be needed in the meantime.

If the 1 needs to be moved out to the $1011 low, basically it is because the market is just buying more time before it falls in the 3rd wave. However, the count I have labeled is still valid until $1131 is taken out.

Either way, if you are okay with taking a little pain in the short term, now is a fine spot to start shorting. Alternatively, you can wait until closer to $1131 but a break below yesterday's low likely means you should jump on that train!




After the relentless sell off from last Monday's gap top, it is getting safer to say that the Wave 2 bounce that I blogged about 2 weeks ago has completed. The move only lasted 2 weeks from the beginning of June to the 21st compared to the almost month long move in 2007's comparable position.

That would mean we are currently completing our smaller wave one of the larger wave 3 as I have labeled on the attached chart. The black arrow points to roughly the comparable 2007 position. Notice the selloff that occurred a week after that black arrow bottom.

When this current wave from the 21st bottoms we will once again get a wave 2 bounce (albeit at a smaller degree). This will be a final spot to get out of longs as the following move down will be at least 80 points down, at a minimum. These levels also should be levels we will not see again for a long time assuming the counts are correct (and they are playing out more and more as expected which gives more and more confidence that the counts are correct).

Hold on to your hats as things should get uglier from here. You can see that already the moves down in 2010 are larger than those that occurred at the top of 2007, although they are of the same "degree" and "size" in the wave count. This supports the theory that a new low below 666 will occur as this count plays out.

2007 Top versus 2010 Top

Attached I show the 2007 top compared to the 2010 top and compare where I believe we are at the current moment. We are currently in a wave 2 bounce from the first move down similar to where we were in December of 2007. The blog post from earlier this week states why I think the top is in.

Notice that the wave 2 bounce of Dec 2007 was a 61.8% retrace of the first move down, so a move in the S&P up to $1150 is not out of the question. What would be out of the question is a new price high above $1220. If the market gets to $1150, this would be an excellent spot to add to shorts. Longs should be exited this week thru the week after July 4 as this bounce could last a month similar to Dec 2007.

S&P Top looks to be in - Big Wave 2 bounce in progress

6-15-2010
The S&P has fallen below its 200 day moving average, completed its final "C" Wave, and has formed the 5 waves down needed to get comfortable that a top is in place. The index has also broken down below its trendline and encroached on its previous ranges setting up a very high probability that the top in the S&P is in.

Currently, it is correcting its entire move down since the April high and will try to suck in as many bulls as possible. In reality, this is the point where bulls should be selling out of positions and adding shorts. A large wave 3 of 1 of 3 of 3 of 3 or however many 3rd waves we are in is forming and what this means is that it should be one of the biggest moves with very little relief and bounces to get out of longs in history. Notice on the chart below I have it knocking a few hundred points off the S&P in likely only 1-2 months time.

Bottom Line is the market has shown a pretty clear 5 waves down and is now correcting up in overlapping "corrective" waves that could potentially go as high as 1200 on the S&P (but it will not make a new high). Currently the S&P is flirting with the 200 day moving average, from the bottom, for the 2nd time in two days and a handful of times since breaking below it in mid May.

Now and the next week or two would be a good time to get out of longs and add to shorts!

Good Luck!

Great Risk / Reward Setup Right Now

This week has a wonderful risk / reward set up for us.

As readers of this blog know, I am and have been waiting for a top for awhile. There is a possibility that occurred on Thursday.

But, I am not trying to pick a top. Right now I am proposing a great risk /reward setup that has occurred with that top.

Looking at the chart below it looks like the market has moved down in 5 waves. If this is true, then we should expect at a minimum another five. The great news is that we will know this is not a five wave move down with a new high just a few points above.

So, I really like this downside profile with a tight stop loss above $1214. It's that simple. Buy any of the short ETFs and keep a close eye on the $1214 level of the S&P. If the market makes a new high, close the position for a small loss, but if I am correct the market should fall to at least $1180 which is a $28 to $6 Risk / reward profile. Not bad.

The potential exists as well that we posted a wave 2 high on Thursday, but let's not get ahead of ourselves yet and wait to see what the market cards reveal!

Good Luck.

January Top obviously too early; but only early

April 18, 2010 Update

The chart posted in March is still very valid. The difference seems to be that the B wave I expected was just a sideways triangle with very little retracement not allowing for a good exit point. However, it is possible that the top is in now with the big volume shooting star down day Friday. Looking for a break of the uptrend line currently at $1125 for confirmation of a trend change. More confidence that the Wave 2 top is in when $1050 gets taken out.

Notice too that Friday hit the 38.2% retracement-a potential reversal point. It also is the resistance area from the July 2008 wave 1 of 3 low. I am holding onto my TZA position which is now under water pretty heavily. It will easily make it all back when Wave 3 down comes.

________________________________________________________________
The January high, which I thought was a high probability for the Wave 2 top, was obviously an early call. The market has recently made new highs above that $1150 top. However I still believe that the market is in a topping process and not in a new bull market. I have taken a big hit for trying to pick the top, which is a bad trading move. Picking tops is a losing game. I had my rules in place and didn't sell as soon as the new high was made, as I laid out in my last blog. The way to play this next move is to wait for the top to show itself, then add to your position as you are proven right and as the market is falling, not rising. This will occur first when $1150 is penetrated, and even higher probability of being right when the $1050 low is again taken out. This should occur in 5 wave structures down at which point a 3 wave correction should occur. This 3 wave correction is when short positions should be added as there are many solid rules that can be used for stops, etc. I will take some of my losses on my shorts in the (Black B) next move down before the final push to the high and wait for the top to be confirmed before trying to nail it.

Updated Chart below.

Below are some reasons I am still bearish...

1) The waves look to have morphed into a triple zigzag top. What this means is the pattern reflects three separate corrective waves up. The key to recognize that this is not a new bull market is the internal wave structure. A new bull would have 5 waves up and 3 waves down at all levels. Looking at the move up since March of 2009, it is virtually impossible to find a clear 5 waves up that don't overlapor break key rules. The waves, therefore are corrective in nature and thus reflect that this is a corrective wave of the impulsive wave down from October 2007 to March 2009 which means no new high should be made above the 2007 highs.

2) Volume has not been as great as occured in the down move. In fact, volume in the January sell off was higher than most of the other advances in the market. This shows that the rally is being supported by fewer and fewer buyers.

3) The angles of the ascent are not bull market angles. In a bull market the initial thrust is fairly slow as the early movers push the market up and then the middle move should be the largest as the most buyers enter the market. The final move should also be strong as blow off tops and retail investors all jump into the market as it's peaking out. This has not occured this last year. In fact, the initial move had the most momentum, the middle move had less momentum, and now we have been largely flat for the last few months squeaking out new highs the last few weeks. This is represented directionally by the Blue A boxes on the chart. You can see almost a rolling over effect when connecting the As to the other As and the Bs to the other Bs.

4) The S&P as measured in real dollars is performing nowhere near as well as the nominal markets. When the markets are adjusted for the price of gold (real inflation and dollar deflation), the retracement is laughable at best. This is shown in the 4th line chart under the main chart. Take it as you will, but this could show that the markets are being propped up by cheap & easy money and not necessarily smart money. It also shows that even though stock prices are up, they are not moving ahead of inflation.

5) Bullish Percents: Bullish percents measure how many stocks are breaking out of point and figure patterns which helps measure the breadth of the moves. This indicator is still showing divergence, meaning more stocks participated in the rally ending in October 2009 than are participating and making new highs now. This is bearish and shows only those "big name" stocks are the ones moving the markets. This supports the theory that retail investors buy at the tops as they typically buy the big name stocks like Apple, Google, Cisco, and General Electrics.

6) Fundamentals: Have they really changed? Unemployment, Housing, Deficit, Social Mood...has any of this really improved?

Bottom Line: The moves up since March 2009 have been corrective in nature which means this is not a new bull market. With a typical retrace already occuring in the markets (between 38 and 62%), the time now is to be bearish again and not bullish. DO NOT CHASE THIS RALLY! It has been weak since October of last year and with the next B wave retrace price will be back to the October 09 levels as well.

After the 1929 deflationary crash, the DOW fell down to $195 from $387, a 50% drop. It then retraced back up over 50% to $300 in only 6 months just to peak there and fall down another 85% or so to below $50 by 1932. So, even after the dreaded 1929 crash, prices rebounded over 50% in just a few months only to be beat back down ultimately falling a lot harder and farther over the next few years. Just giving some historical perspective and to show that this has all happened before. Big % retraces occur often.

S&P Top in? "Summer" Rally finally over?

Update 2-19-2010
Updated Count doesn't change much just allows for more upside wiggle room. But, the good news is the market looks to be reaching the end of its counter trend rally and I still expect that sell off soon. $1150 new high is now the ultimate stop loss point but just ahead is the 62% retrace which is a prime rejection point.





Update 2-16-2010
It is very hard to stay bearish on days like today, but that is what 2nd waves are supposed to do and that is why you must have rules to trade by. 2nd waves are supposed to convince everyone that went short that they made a mistake. This looks to be occurring now. I have attached an updated chart with very little changes from the last one except the added days. The Sell Area in red is still in tact from the Feb 1 update and until this area gets violated, that sell signal is still valid. I am staying short until a breach of $1105. Right now is a very high risk reward as the next move should be down and down hard if my counts are correct. I will be adding to my short position with a tight stop of ~2% higher or ~$1110 with the expectation of the market falling below $1045 imminently.

Other things that keep me happy about my short position...
1) Negative divergences are robust today as shown on the bottom of my chart
2) Very choppy action the last week would be very hard to count as impulsive
3) Volume is nothing spectacular over the same period.
4) Market should move quicker in the direction of its prevailing trend which it did from the January top.
5) My sell area is still above current prices (theoretically keeps my position in the black)

Compare this chart to the original posted.





Update 2-1-2010
[I have updated the linked chart. Potential bottom on Friday with the correction starting today. The down move lasted 8 days, so a correction of 3-5 days could be expected. With the extensions downward, the target retrace and 3rd of a 3rd area has moved downward about 15 points. Therefore I am expecting to add some TZA to my longer term portfolio around $1100. If the move up easily takes out $1105 then I will hold off until $1120 to add even more. As before, prices can move up to $1150 before the down move count is invalid, so a pretty large room for error, but the ensuing move down should more than make up for it.]

Update 1-27-2010 10:30am
[Market looks to have extended its waves, but this does not change the total theme, just pushes the timing out another day or two]


After last week's sell off and then a new low today there is good evidence of a completed 5 wave count on the S&P500. What this means is the top could finally be in.

The attached chart is a continuation of the one I built yesterday which had us in the 4th wave triangle of an extended fifth wave. I was hoping for a fall below that triangle to complete the 5th wave of the 5th wave extension, which happened this morning. With that and the so far decent bounce in the markets, the 5 wave move down could be complete.

That means a counter-trend correction wave would be underway, which so far looks as such. Of course I will know more as the market reveals its pattern. But, with the five waves down and the pretty high confidence that they are impulsively down, I will be shorting the market in the target area outlined on the chart in red. At the minimum I expect another five wave move down after the completion of this correction, and given the size of this first five wave move down, the next one should generate at least another 5% move.

I will be adding some more TZA to my account probably tomorrow as an anchor and then try to nail the top in the target red area with another slug. I will have a first stop above $1125 (black area) as I don't think the market should penetrate the 3rd wave quick move down from Wednesday morning keeping in mind that retracements can have a tendency to retrace back to the area of the prior 4th wave which tops out at $1122.84. Ultimately if a new high above $1150 is put in then my count is wrong and I will cut all losses.

As always the link in the title is of a live chart which can be checked at your convenience.

Good Luck

GMR Update

I sold all of my GMR shares yesterday with the big run up in price the last 2 weeks. The reason for the big rise is of course unknown, but there have been a few analyst upgrades and some articles in some papers about the cold weather increasing the need for tankers. Contrary, I read an article this week in the FT about the significantly hot temperatures in the southern hemisphere which could mean less need for oil and tankers in the coming winter...who knows. That's why I don't invest based on the press or other analyst's work. I do my own diligence when investing; it's the only way to make sure my interests are 100% represented!

Also, looking back at other share price runs on big volume for GMR, one occured in May and another in August and October which all eventually peaked out on the volume then sold off to give the run all back.

Regardless, I don't like what their latest earnings report says, and I particularly don't like them raising more debt (why are they raising debt and why at such high rates?). There also has been very little news since that announcement which would most likely mean either a deal or some more bad news; the same way the company was quiet before yanking the dividend and becoming more gloomy.

At $8.25 I am taking my profits and will revisit the company if the price falls below $7 again where my existing cost basis is. I think the stock is too expensive with the knowledge I currently have. See below for some quick math on that.

I posted some comments on the yahoo finance message board summarizing my thoughts. In particular there is solid support around $7 for this stock, so that is why I waited to sell until yesterday instead of when the earnings report came out.

I have copied my message board posts below...

12-16-09
Post 1
I apologize for not being caught up on this stock. When I heard the conf. call I sold most of my shares with the announcement of the semi surprising divy drop, but havent done the deep dive analysis needed. The surprise to me was the additional debt needed.

Some quick math below...
This all comes down to how much the ships are worth TODAY and will be in the next few years? That is a way to come up with the terminal value and assume what can pay off the debt principals. As long as the company's Enterprise value is less than its "market" book value (terminal value) plus future cash flows (which I have assumed at a generous $50MM/year) I am okay continuing to hold this stock.

Quick math after new debt and current price says EV~$1.64B and assuming $50MM/year FCF discounted at at least 15% (rate now way up with increased debt load) says in 5 years FCF is only worth $167MM today. That means the fleet needs to be worth well more than the $1.3B the latest Q has (needs to be worth at least $1.5B) to support thh current share price.

I am disappointed and have sold a bulk of my shares. I think the writing on the wall was when the CEO was leaving and took the huge $20MM or whatever it was bonus.

I am way behind on this stock, but did the company disclose how they were going to use the $300MM debt? If my memory recalls this rate is well beyond the existing debt on the books of around 5-6% which I assume is because it is not backed by the assets, which the quick math above would support. Also, if it is true the company is using the debt to maintain the divy, then no thanks...paying 12% to give me a tax effective 4% yield is hideous.

On the surface I need to be convinced that my cash flow estimates are wrong, or that they are using the new debt for something more than "surviving" or dividends.

I keep trying to give this company one more quarter, but with the latest surprises, I believe its time is up.

On the positive side there does appear to be strong support at any price below $7.00.

Post 2
I agree with some of your points, but at what discount rate are you willing to accept that "things might improve in 2010-2011"? That is potentially at least 2 years from now and 3 years from earlier this year when things started heading south. Your discount rate must be at least 15% now since the company just issued at 12%...that's a lot of time value.

If things truly are going to get better, don't you think the markets would reflect that?

I am not trying to argue, just saying that I think there needs to be more solid footing to buy this stock than "the cycle will turn upwards" as that upward turn may not come for 3-4 years and it almost certainly will not be anything like the one of 3 years ago.

Also, in times like these most companies are scaling back debt, and GMR is approaching crazy debt coverage ratios (EBITDA/interest)--it's as if the company was just levered up as if it was private equity owned!

I wonder how secure 2010's contracts are and at what rates???

The hidden Decline in the Stock Market

Below I have created a very interesting (and I think very telling) chart. I have taken the S&P500 index and adjusted it for inflation by using the price of Gold. The green line graph is the $SPX as typically measured, in US Dollars (at $1092 as of the time of the chart). The candlestick graph is that of the S&P500 divided by Gold which takes out the $USD part of the equation.

This chart is very telling from the standpoint of an American investor. The Rally of the past few months is what I am coining, "the rogue rally". Since July the market has risen significantly, but this chart shows only a portion of that was for reasons other than the $USD decline. In fact, this chart peaked in August suggesting that since then the primary driver of the rally has been the decline in the $USD (increase in Gold's price).

If this is true then in fact the market peaked in real dollars in August and has been making lower lows ever since. Another way of thinking about this is that Gold (inflation) has been rising faster than the market and that an investor is actually losing ground from a purchasing power perspective since August.

A theory resulting from this is if the dollar is in a bottoming process (Gold Topping) then I expect the market to also be in a topping process. Also, the spread between the two indices is pretty wide. I expect them to converge over time as they did during the decline.

The same divergences I am seeing in the cash index are also showing up in inflation adjusted charts as well. Just another tool supporting a topping process may be playing out.

Another version of the options index

I read an article today that got me thinking about this index. The theory is that most speculators buy call options near the tops and buy put options near the bottoms. Therefore, you can use an options index as a contrarian indicator. Even better since 2004, the CBOE has given us data that allows us to split equity options and index options. Simplistically the big boys use the options index and the speculators use the equity index more. The speculators help us to pick euphoric highs and lows since they are usually wrong at the tops and bottoms.

Looking at the chart and the history there is some pretty favorable data that may help us confirm the next top. The way to use this chart is not to look for a peak or trough in the index and call a bottom or a top, but to use the chart to help confirm a top or bottom and tell you when things are getting a little out of hand. I have also added moving averages to help smooth out the data.

Right now the index and 30 day MA are below .60. This has only occurred a few times in the past few years and not once since the 2007 top. Those times have also in all 4 instances called decent few months tops.

This is just another indicator that is helping me get comfort that the market's top will soon be upon us.

Market Update 10-16-09; Still think top is soon.

I continue to think the top is very close. There are now numerous technical signals that lead me to this. For one, there is a possible 5 wave move in its final gasp. Also, volume continues to be weak. Divergences are all still very strong. And, all the markets are still in typical retrace area. See the chart below and compare to the former post Market Update 8-31-2009. Not much has changed as far as technical signals when looking at the two charts.

It will be interesting to see if the Dow closes above 10K today, my guess is yes. I may put a small put on the market at the close just for fun.

On another note Gold and the US Dollar also look to be at potential turning points. I heard on CNBC today that Tiffanies is going to be selling gold bricks, and Pisani said "looks to be the top in gold", which I agree with. There are other reasons to think gold is close to topping as well. The reason I mention the Dollar and Gold is that all these markets are interconnected and should all turn around the same time.

Good Luck

5 waves down last week; Expecting another similar move tomorrow

2:30pm 9-30-09 Link updated. Updated Count...3 leg down instead of 5 says something else is going on.


I was out last week, but noticed that the moves over the last 3 days last week seem to trace out an impulsive wave. Similar to my post back in June, this setup is looking comparable. I see a five wave move down off of a new high price of $1080. Initial five wave moves always have another five wave move to follow after a correction. So far it looks like today is that correction and thus I expect another five wave move south in the days to come. Pretty crazy to call a big down move after a hefty move up like today, but we are still in retrace territory and the waves say it so. A safe short would be right now with a stop very close above.

Options Index indicator topping point?

Quick post but this index is looking toppy. It has been pretty reliable confirming tops and bottoms previously. Something to watch out for...

Market Update 8-31-2009 Summer Almost over and so Might be the Rally?

It has been a month since I last updated and expected a 10%+ rally in the markets to the retrace zone. So far that has played out quite nicely. The corrective moves I expected in between haven't been the cleanest, but overall the continuation of the summer rally has not disappointed and has satisfied my expectations. Compare the attached chart to the one from last month.

Right now, though, there are reasons to be cautious. It looks like the market may be playing out a 4th wave triangle the last few days which would be a warning sign that the top could be coming soon.

There are also other reasons to be cautious such as the negative divergence showing between a few key indicators and price (see chart). Also, bullishness is at a peak as the Bullish %s are higher than they have been since 2006 and anytime since the rally began. Another item I continue to watch is the weak volume. It is expected over the summer and in particular August, but it has to raise a caution flag as the rally continues on less and less volume.

I have also attached a longer term chart of the markets below. Notice how miniscule the rally of 40-50% looks compared to where we were in 2007 as well as 2000. This rally is following very closely to what occurred in 1931 after the crash but before another huge brutal move down to the ultimate 1933 bottom which is another reason to be cautious.

Summary: I will be looking to get short before I get long, but will wait for more confirmation before I make that trade. Now is a good time to take any profits on longs as the risk reward is now high for those positions.