25 Mar 2012

As anyone would do when something has not worked perfectly for them, I began to study what has went wrong with my analysis in the first quarter.

First, I believe I became too prideful after my results from 2011.  I plan to try further suppressing the ego.

Second, I would say that my assumption of something needing to decline because it is overbought or rise because it is oversold is mostly what has caused pain.  From looking at my charts, I've found that it is the divergence of oversold/overbought conditions that are the most important.

Third, I decided I need a more formal way of making decisions with my investments.  I've noticed trends in the past, but never fully put them down in something that reminds me constantly of them.  I am still trying to figure out a way to do this as Excel doesn't easily allow graphical annotations.  The main trend I refer to is the cycle of  strong to weak stocks.  The strong ones (stocks that remain above or near 50/200 day moving averages) will almost always bottom first, and the weak ones will also almost always bottom (just later) in a given positive investment cycle.

Fourth, in order to invest and survive, you have to acknowledge present reality, but remain optimistic for the long haul.  It seems that optimism persists in the stock market for up to 2/3rds of the time.  Stock market declines that erase previous gains generally take place in 1/3rd of the time taken to get to a given height.

For the Dow:  10/17/2002 - 10/5/2007:  1829 days;  10/5/2007 - 3/9/2009:  521 days; about 28% of the time.  I'll still just use 1/3rd for simplicity.

Depending on when you would say the generational high is, here is another example.  S&P:  8/06/1982 - 10/5/2007:  9191 days; 10/5/2007 + 3063 days = Feb 23, 2016.

This is also near the time I predicted the gold bull market would end as well while comparing its faster cycle (hard asset cycles historically seem shorter than soft asset cycles).

Housing topped around May 2006, although its "bottom" is harder because prices in nominal terms steadily rose from 1970 until 2006.  Using 1982 as the real price bottom, it should bottom around April 17, 2014.

If you like this, try some out for yourself.  http://www.timeanddate.com/date/

As part of cleaning up, I restricted my charts to only show the hold long values and made the color coding match for each time frame.

Long term view.

 I think the medium term index (not the moving average) probably shows this pattern best.  The key is to look for persistent divergences in peaks or lows.    If you look at the dates of divergences and compare them to a variety of stocks, you will that sometimes it affects them, sometimes it doesn't.

However, you will see that after persistent weakness (the gold line declined from 11/1/2010 to 8/1/2010) that the odds of seeing the weakness in individual stocks also went up - seems obvious.  The opposite also applied to the recent rally.  There is a reason it didn't really show up in the Dow until after most of the bottom forming work had completed in August.

Short term view.


Update 1729 EDT:  Saw this and thought it was worth posting.  Gold in terms of miners (GDX) back to 2008 levels which marked a low for both the miners and gold.

"Constant development is the law of life, and a man who always tries to maintain his dogmas in order to appear consistent drives himself into a false position."
Mohandas Gandhi

"When I despair, I remember that all through history the ways of truth and love have always won. There have been tyrants, and murderers, and for a time they can seem invincible, but in the end they always fall. Think of it. Always."
Mahatma Gandhi