Legacy Funds

Liquid – Transparent – Alt Investment Strategies

Market Signs

The market is always giving hints to those that are astute students of history.  What has the market been trying to tell us lately?  The biggest sign has been the correlation of traditionally uncorrelated assets.  There has been an unusually high correlation between global equity market indices and commodities.  Surprisingly this has also included gold.  During the rally from March and the correction over the past few weeks, most asset classes — US equities, international equities, commodities including oil and gold, real estate, and many others — have moved in tandem both on the upside and downside in all time frames.  The moves have been inverse the US dollar.   The charts are currently placing high odds on a correction in these asset classes and a rally in the dollar.  Technically, the odds are that the S&P will correct to 810 to 820 area over the next month or so.  At that point careful analysis will be crucial along with risk management to cover shorts and position long for a potential rally to the 1000 or so area.  At that point bullishness will be at high levels and raising the odds for a drop to retest and most likely new lows on the S&P and commodities along with a rally in the dollar, later this year or early next year.  Sounds like I just let you peek into a crystal ball?  Not so fast.  Although this analysis is based on numerous charts, models, cycles, pattern recognition, number crunching, macroeconomic factors, and the list goes on, a change in certain variables will change sometimes drastically the future roadmap.  That is where risk management comes in place — one plays the mathematical odds but is prepared to quickly cut losses when the variables change.  For example, fibonacci calculations (Fibonacci was a brilliant Italian mathematician) are used to determine the retracement for the S&P in the following weekly chart which shows although we have had a great rally off the low, the S&P hasn’t even retraced 38% of the decline:

sc

That is where we place odds that even though the S&P is correcting now possibly down to 810, we are likely to rally to 1015 or so afterwards.  We can zoom into a daily chart using the last high and March low to see likelihoods of targets for this pullback, and this is how we get around 810:

sc

Then we see that if 810 fails, our last line of support is about 780 after which a retest of the lows at a minimum would almost be a given.  Let’s not worry about that for now but manage our trades and risk in accordance to the highest probability set-ups.  Remember this is for informational purposes only and not a recommendation to buy or sell any securities.

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July 9, 2009 - Posted by | Legacy Funds | , ,

11 Comments »

  1. Fibonacci was born in Pisa. Pisa is in Italy. Chances are he is not French.

    Comment by Niko | August 13, 2009 | Reply

    • My bad — thanks for catching that. Correction made.

      Suzanne

      Comment by Suzanne Hamilton | August 13, 2009 | Reply

  2. Hi Suzanne: I hit a link on one of the comments or one of your stock talk and found these charts interesting.

    Another thing one can do is to look at the oscillators (I like the RSI and MACD), Money Flow indicators (Chaikin Money Flow or Trim Tabs), Market Indicators (A/D etc) and sentiment of course to get the timing more precise.

    I think the safe play is following the trend or not fighting the tape until the trend has changed. These indicators can help get the timing right. Of course, the oscillators should not be used to fight the trend, but can be used to identify when the trend is about to run out of time and room

    Comment by Macro_Man | August 16, 2009 | Reply

    • Macro_Man, welcome over and thanks for checking out these charts. For now I am trying to keep the charts clean for those that are getting persuaded to dabble in technicals vs. strictly fundamentals. I agree with you, I like RSI, PPO vs. MACD but very similar, stochastics, fib levels, and a ribbon of 10 moving averages, and I watch each position in 4 time frames, monthly, weekly, daily, and intraday. But it looks like one big messy chart — and sometimes one simple clean chart provides a clear picture.

      Although, divergences are very useful (for example, we are seeing that with the PPO and MACD on the SPX on the daily chart for some time, the SPX has been going higher and it is not confirmed by PPO/MACD. Also, the ndx:spx ratio has broken through the 20e, another warning signal. The TRIN for the VIX gave a bearish signal 8/4. Got a sell on the NASI (naz summation index) 8/14. There are a lot of signals lining up to warrant caution at a minimum.

      I noticed your comment regarding your trades Fri, good calls and good risk control, congrats.

      Comment by Suzanne Hamilton | August 16, 2009 | Reply

  3. Thank you and good luck overnight. The thing with China is, it looks like the double top neckline is broken..but just dont know if it will make another run up..if U.S. picks up the baton.

    Also, even if it the top is in place, the market could revisit the neckline from the bottom and maybe even cross over but then fail after that, setting up a bull trap.

    I am also watching the credit markets closely…it is slowly starting to weaken. Even in the best of years, credit starts to weaken as the 4th quarter approaches and usually the 4th quarter is bad. So, credit would have to weak further I think to make equities wobblier.

    Finally, the macro environment was starting to look terrible last year, despite that it took credit events to drive the market lower. The market happily rallied inbetween. Wouldnt be surprised to see credit rumblings start again..these are the things that could make the market ripe for a fall.

    I am just waiting and waiting and waiting and waiting and waiting. And, I will be equally patient once the patient goes down to sit on my positions.

    In the past I have been in too early and out too early. And, despite my efforts, I think I will be early this time as well.

    I was reading a good book…Market Wizards. Apparently Julian Robertson liked to get the peaks. He always kept trying in small size and often got the very tops and bottoms after multiple failed attempts.

    Comment by Macro_Man | August 16, 2009 | Reply

    • Thanks. Yes, I read all 3 books Market Wizards, New Market Wizards, and Stock Market Wizards. I also read the book on Julian Robertson A Tiger in the Land of Bulls and Bears.

      Comment by Suzanne Hamilton | August 17, 2009 | Reply

      • Thank you, I have 2 more books to read now. Looks like you are right and about to enjoy a good day. Good luck. Taking profits or keeping the positions?

        My Treasury longs, stock shorts and gold and silver shorts will all work well. Going to keep the Auggie SPY 102 calls on for now. I think the die hard bulls will give me a better exit later in the week. Perhaps after LEI.

        Will be an interesting day. Will take profits on Treasuries, keep the gold and silver shorts. Depending upon the market action and how low we go, I am inclined to buy some cheap out of the money calls into September, say SPY 105 or something like that. I think there will be another attempt by the bulls and these calls will give me enormous cover when I put on large shorts. This way I dont have to worry about overnight risk or a second stimulus plan.

        Comment by Macro_Man | August 17, 2009

  4. Yes, I know how it goes, for every 2 books I read, I have 3 to 5 more I want to read.

    For positions, usually I just move the volatility stops and let the market take me out when trend changes. You are probably right, we will have weakness for a few days, and then rally up into opts exp Fri. I wouldn’t do it, but it may be possible to buy some calls that are about to expire worthless for pennies on the $ and sell them into the runup Fri.

    Comment by Suzanne Hamilton | August 17, 2009 | Reply

  5. I like your idea…I need to rely more on stops and let the market take me out more. Whenever we are this close to option expiry, I use puts and calls as they get quite cheap in dollar terms.

    I am going to take a close look at the volume pattern today. If the selling is heavy and continues to be heavy, will sit tight. The correction could be meaningful.

    If the selling is not convincing, wouldnt be surprised to see people buying on the dip, so I would probably take some profits. Own SPY 95 puts and 100 puts. May even buy some SPY so long as I am covered fully by the 100 puts.

    The reason I like the September 103 to 108 calls (depending upon the cost) is so long as I can get them very cheap, I can go short very heavily sometime in September with full protection. As you saw the Empire Mfg numbers today, there could be many reasons for the bulls to push the market higher after any correction.

    I could be wrong, but I am inclined to think it is a correction within the bear market rally and not the next leg of the bear market. But, I think China holds the key at the moment and if China continues to keep going down, then time to go short. If China meanders while the rest of the world hangs in there, then patience will continue to be the watchword.

    Good luck today 🙂

    Comment by Macro_Man | August 17, 2009 | Reply

  6. I was not only thinking the same thing, I just posted a comment on seeking alpha:

    “We needed the SPX to take out 992 to confirm a short term correction. Looks like we will get that this morning. There is still the chance that this is just a short term correction to 950/920/860 and then a rally higher to 1050 or 1100. Only when 860 doesn’t hold do we have a high probability of a retest of the lows or worse.

    There is nothing wrong with short or long positions provided there are predetermined stops, a trend on a short time frame (really, really short time frame with the 3x), and the volatility-based stops keep rising with the trend — one gets taken out when the trend changes.”

    Good luck today as well,

    Suzanne

    Comment by Suzanne Hamilton | August 17, 2009 | Reply

  7. cashed in TBT puts, SPY 100 puts. bought a little spy against some shorts and spy 95puts. Trying to buy some calls on the cheap over the next few days.

    This rally has been a pack of cards, but self sustaining. I think it will have enough resilience to handle sideways or shallow corrections but not a deep one. So, I dont think this bounces back if it breaks 900…not at this time of the year and not with China starting to become flaky.

    Also, I think once we get into October, the jig is up; the credit conditions will be deteriorating rapidly and liquidity will be drying up. I would expect to see all sorts of spreads widen out with High Yield getting hammered. 3rd Q earnings and outlooks could be shocking. Throw in the swine flu and some weak countries and companies being under threat, the cup of sorrow for the bulls will be full.

    So, either a top is in place already or should be within about 6 to 7 weeks or so. Dont know if that gives us enough time to go below 900 and then back to 1100. Right now, I am trading as if we have at most another 2% to 3% of downside and then it is frat party time again

    Comment by Macro_Man | August 17, 2009 | Reply


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