Principles of the Stock Market : Lower Highs & Lower Lows

"No One Can Time The Stock Market"

Richard Schwartz — Tue, 11 Nov 2008 14:18:00 GMT

TECHNICAL VIEW. The Principle of Technical Analysis. I don’t want to jinx myself but I can’t keep quiet. Not after hearing the usual Wall Street mantra again this morning. That is, that no one can time the stock market so it’s always best to ride out its ups and downs. I mean this type of misleading & confusing information is one big reason why I started this stock market letter back some 18 years ago. Part of my motivation, to quote myself, was to “unveil the mystery surrounding the stock market.” I saw numerous misstatements and unfounded general beliefs which I just thought were plain wrong being foisted on the investing public, not large institutional investors but aimed at individual investors. After working as a stockbroker/financial consultant for 15 years, I realized that Wall Street kept nurturing the stock market’s mystery. Why? For Wall Street’s best interest. Why pay a stockbroker or brokerage firm big bucks if individuals could understood for themselves the market? No, only if individuals felt (and kept feeling) overwhelmed by the market’s workings would there be a need for advisors and a way to charge big fees.

Anyway, I don’t want to get off track. I just want to comment on the one line of reasoning which we’ve all heard repeated so often that most now take it as fact. That is that no one can call the tops or bottoms of bull and bear markets. We hear it from about 50% of the mutual fund managers, market strategists and others every time they come on TV. Many begin with something like: “Since no one can call a bottom, …” Not only does this perpetuate the need for market advisors it also justifies the roller coaster performance of these money managers. Hey, it takes the pressure off them, right? As long as they are doing about as well or as poorly as the overall stock market, then they are doing their jobs well. At least that’s the thinking.

But then what about all the traders out there? Why did hedge funds start then? If no one can time the market what about this whole cadre of people trying to outperform the market? And what about those fabulously successful speculators we hear about? Some do time the market correctly is my answer.

Schwartz View: I’m sure many others did as well so I’m speaking just for myself now. After studying the stock market for 35 years, all facets from timing to investment themes and much, much more, I was able to correctly identify last year’s market collapse as the beginning of a bear market pretty early on. In spite of those who say no one can do such a thing. And I stepped up, following my own reasoning and got Lucy’s 401k or 403b or whatever it is into 100% cash. Right before we went away on our annual Christmas beach vacation last year. And thus kept her retirement account from falling about in half! With my managed accounts, I followed generally the same path, figuring my top priority was protecting our downsides because the market was turning bearish. Since then I’ve been able to keep mostly to the sidelines, watching this bear market unfold, gather steam and keep on rolling. This in spite of hearing the “Trillion Dollar Man,” BlackRock’s Bob Doll, incorrectly call a bottom in March, Mad Man Cramer call a bottom in July and other bullish, skin-in-the-game advisors come on CNBC and say they are buying, that a bottom is near or building a bottom is a process and you’d better get in now “…since no one can call the bottom.” Well, the bear market continues and we keep seeing further and deeper declines. My sense, as I’ve been writing for months now, is that this bear market will last for at least two years or until at least next October simply because what’s hit us is the worst mess since the Great Depression of the 1930s. So why wouldn’t this bear market last at least as long as the last Papa Bear market, the two year long drop in 1973-1974?

Bottom line, while I don’t expect to call the bear market bottom before it arrives or to the day (except in hindsight) I believe with the tools, skill sets and experience I’ve now got, after studying the market’s primary trend, history, psychology, value, technicals, etc. for decades, I should be able to identify the bottom reasonably well. Part of my overall game plan entails trading most possible rallies so when one does prove to be the real thing, I’m in with at least one foot near the start. Then, as I see prices rising, I should be able to get in more heavily. Bottom line, I believe anyone who’s willing to put in the time and effort should be able to quickly identity tops and bottoms in the stock market, totally counter to what we always hear. Oh, one last point. Be careful of the fear that these always 100% invested advisors love to leave you with (just like dentists do). That is the mantra that if you miss the first days of a new bull market, you’re in trouble. Sure the first days up are normally exciting and big. But bottoms generally are retested, providing the sharp-eyed observer more than one reentry point. And bull markets run for years not just for a couple of days. So don’t worry, be happy, if you’re now 50% or more in cash on the sidelines. Just stay tuned here. Because one way to indeed miss the bottom is to lose interest in stocks during a long bear market. Go ahead, lose interest if you’re 100% invested now because you’re already in a bind. But don’t lose interest if you’ve played out this hand fundamentally correct. If you’re saved yourself a bundle by already going against the Wall Street mantra of staying invested “because no one can time the market,” then stay in touch with stocks for your reentry point. One good and easy way to do so is by just reading this letter each day. It’s only a couple pages long, doesn’t take much time to read, you’ll learn something new most of the time AND you’ll be aware pretty quickly, & ready to profit, when this market turns up.

Dow 12,000 Now A Memory

Richard Schwartz — Thu, 26 Jun 2008 13:45:00 GMT

Thursday, June 26^th, 2008: Written 6:30 a.m. EST Going to find our “way to San Jose” next week, on vacation, so I’m been auditioning books for the plane rides. One coming along is Hamish McRae’s THE WORLD IN 2020. I previewed it and got caught up by his writing, the history he provides and his insights and conclusions. Anyway I’m in Monday am so one last missive then and next Friday is the 4^th of July so I’m only missing 3 letters.

UPDATE ON THE STOCK MARKET. After any break to new lows, one can generally expect a reflex rally. So after Tuesday’s confirming lows in numerous key US indices, “telling” us the near term stock market trend remains down, it wasn’t surprising to see the stocks up from the get-go yesterday, tracking a prior bounce in Europe. Later yesterday, the Federal Reserve’s 2:15 p.m. “no change” interest rate announcement didn’t change anything. Still, we had the normal late day sell off, common these days. As I see it, the mornings recently have been characterized by bulls rallying the market after the usual opening sell off runs its course, buyers stepping in after sellers temporarily exhaust themselves, just when a little buying can be very effective. Buyers looking to support their stance that things are and will be all right. Then these, now summer, afternoons are characterized by late day sell offs as large, institutional investors sell into the strength, lightening their heavy loads of stocks, as the bear camp grows slowly, but ever larger.

Schwartz View: We’re now very likely morphing into a steady and sustained stock market decline, i.e. a firmly entrenched bear market. Take a look around yourself, it could be sneaking up on you, you don’t want to be missing it. This bear is of the deceptive nature, not outright grizzly, not yet. Take the Dow Jones Industrials, “the Dow,” for example. Take a peek. We’re now below Dow 12,000 which we’ve only been below twice before now since the subprime implosion last summer, and then only briefly. First time down, the Dow closed below 12,000 for just one day, at 11,971 on January 22^nd, before jumping back above 12,000. Then the Dow closed below 12,000 on four days in mid-March, surrounding nervous weekends. The Dow closed at 11,893 on Friday, March 7^th and at 11,740 on the following Monday, March 10^th. Then after watching Bear Stearns rapidly fall apart the next week, from, oh, $70.08 down to $30.00 the Dow fiddled slightly above 12,000 for three days before closing again below its psychologically key, big Round Number on Friday, March 14^th at 11,951 and again the following Monday, March 17^th at 11,972. That was it. Since then its held above Dow 12,000 … until this past week. This third time down (may be the charm) the Dow closed below 12,000 last Friday and has traded below it for four straight days. To me this is a sign of more admittance and acknowledgement that things are getting worse not better, a sign of resignation. That likely a new and second leg down in stock prices has begun.

Charts Reinforce Latest Downtrend

Richard Schwartz — Wed, 25 Jun 2008 13:03:00 GMT

TECHNICAL VIEW. Charts Say Down, Again! Yesterday, the Dow Transports, S&P 400 Midcap & S&P 600 Smallcap joined the bear market party, err, pardon my loose use of the word party. Whatever, first it was the Dow Industrials closing below their June 11^th lows last Wednesday. Then the S&P 500 closed below its June 11^th low last Friday. Then this Monday, the Nasdaq Composite closed below its previous June 11^th low. And yesterday, capitulation. The Dow Transports, S&P Midcap and S&P Smallcap all closed below their June 11^th lows. Thus what we now have in place is a series of lower highs & lower lows since the two-month bounce from the lows of mid-March to the highs of mid-May ended.

Bulls, that includes most all professionals with only one job to do, invest in the stock market through good times and bad, a.k.a relative return investors, still disagree. In fact one such bullish guest on CNBC yesterday, resurrected the argument that “a bottom is a process not a one day event.” This is the argument that the Trillion Dollar Man, Bob Doll of BlackRock, Inc., the influential institutional money manager, proffered after the Fed backstopped the whole financial system at the bottom in March. She, yesterday’s CNBC guest, when asked why she thinks the stock market has bottomed, pulled out Mr. Doll’s mantra, that a bottom is an event not an event. And added that’s the way the stock market bottomed in 2002, 2003, three bottoms in relatively the same price range over nine months. Guess that strategy works for money managers with seemingly unlimited funds, they just keep buying, scaling in near what they figure is good value and a bottom. But other times that doesn’t work if the stock market confounds and breaks decisively below what the pros think, and have focused in on as a long term solid bottom. Then the relative return investors fall back on, “Hey, we’re all going down together.” So no one looks particularly bad. That’s what happened in the subprime mortgage, securitization implosion last year, they all went down together.

Schwartz View: Anyhow, the Dow Industrials is the first important index to come close to it’s mid-March, first leg down, bear market lows. After losing a modest 35 points or -0.3% yesterday it starts off today at Dow 11,807.43 only 67.20 points or +0.57% above its March 10^th closing low of 11,740.20. As I’ve written for some time now, I expect a rocky summer ahead. We could retest successfully here and if so, get stuck in an extended trading range. But I’d venture more likely we slowly, just like we’ve been doing since mid-May work our way lower and lower. First, one key index breaking below its previous bear market lows set in March. Then a bounce. Then another key index breaking lower. And so on and so on. Just what’s happened over the last two weeks in breaking this latest declines lows. That’s the way economically-spawned bear markets operate. Sorry Mr. Market, I know you just want this decline over right away, hey, we all do, but that’s just not how recession-stylized bear markets unfold. Economic trends take lots of time to work their ways through the marketplace and stock markets are mirrors of this, only operating in advance with their discounting feature. So it still looks like a rough and rocky summer ahead, a good time to take a close-to-home vacation (with minimal driving).