Long Term Stock Market Cycle: Where Are We Now?

This morning, Market Folly's quote of week focused on wisdom from value investor Joel Greenblatt. A few sentences in particular stuck out where Greenblatt says:

"Over the long term, despite significant drops from time to time, stocks (especially an intelligently selected stock portfolio) will be one of your best investment options. The trick is to GET to the long term. Think in terms of 5 years, 10 years and longer."

Given his commentary, the chart below is a perfect illustration of "the long term." This chart, courtesy of DecisionPoint (via Cynical Advisor) depicts how the stock market has traded in 16-18 year bull/bear cycles ever since 1932.

(click to enlarge)

Currently, the market appears to be in the bear cycle where it essentially chops sideways via wild oscillations every few years. By the chart's calculations, this means the market will be stuck in its current cycle for another 5-7 years before entering another bull cycle. This of course assumes the current trend of alternating cycles remains in tact. Focusing on the drawn-in trendline, a break below the level of 500 on the S&P would obviously be quite a negative signal jeopardizing the multi-decade trend.

In the end, this chart simply illustrates Greenblatt's notion of "long term." In a day and age when everyone is so focused on short-term performance, hopefully this forces you to take a step back and examine things from a multi-decade perspective. While the current trend is choppy to say the least, the long term trend is most definitely up. The problem for most investors though is the lack of ability to remain on course. Whether it be poor market timing or succumbing to emotion, investors have time and time again found a way to deviate offtrack.

Stock Market Technicals: Bearish Engulfing Pattern Is Cause For Concern

It's been a while since we last took a look at the market's technical picture so today we're highlighting MarketClub's latest market analysis video. In it, they highlight a signal that has typically preceded strong market declines. They're currently cautious on the stock market and derive this stance from two signals: a bearish candlestick pattern that just emerged as well as a strong level of support that's about to be broken. You can see their latest analysis in the video.

Let's first focus on the negative candlestick pattern they've identified. MarketClub pulls up a weekly chart of the Nasdaq and notes a negative/bearish engulfing line, a pattern whereby the previous bar is completely eclipsed to the downside. This marks a temporary top around the 2,350 level in the Nasdaq. This is important because they point out this same pattern signaled a sell-off in early May. If that's not enough to elicit concern, they point out another previous time where this pattern preceded a decline. Back on October 15th, 2007, a bearish engulfing line marked the beginning of what would be a massive downtrend during the financial crisis.

Turning next to support levels, MarketClub identifies 2,200 on the Nasdaq as a key place to keep an eye on. If it closes below that on a weekly level, the market is most likely headed lower. Throughout May and June, this level has been tested to the downside numerous times and looks like it is on the verge of breaking. Lastly, they highlight that their proprietary trade triangle indicators are signaling a negative trend, thus suggesting a cautionary stance on the markets. You can view their stock market technical analysis by clicking the video below:

Battle of Bulls & Bears: Key Stock Market Levels

Adam over at MarketClub recently took a look at the S&P 500 from a technical analysis perspective and has concluded that we'll continue to see choppy market action for a while. In his latest market analysis, he points out a series of lower highs, typically a sign that favors the bears. Basically, he argues that the key level to watch in the market is S&P 1,100. If the market rallies above that level, it has a strong chance of resuming the longer term uptrend we've seen over the past year or so. However, if the market continues to stall at 1,100 (as it has previously), then the bears are in control. This level becomes even more interesting when you consider it's currently right around where the market is trading and this could be a potentially pivotal point.

Additionally, he points out 1,040 as a second key level to watch in the S&P 500. This level could potentially be a double bottom as the market tested that level in late May and then again in early June. He notes that we'll get confirmation of this double-bottom (a bullish pattern) if the market rallies above that 1,100 level. So, all said and done, 1,100 is the key level to watch on the upside as it seems to hold all the technical keys. Overall though, Adam concludes that it will continue to be rough waters throughout the summer, typically a time of lighter volume as many traders/investors are on vacation. Click below to watch the latest analysis of the S&P 500:

Key Level to Watch in the Stock Market

Adam over at MarketClub just recently put out his latest technical analysis video on the Dow Jones. In it, he identifies a key level to watch in the market as we've started to see a few distribution days. While he is by no means saying the market will crater from here, he is definitely cautious. Drawing a fibonacci retracement from the highs in 2008 to the lows in 2009, he starts to outline a clear area to watch out for. The Dow Jones recently traded around 11,254, right at the 61.8% retracement level, an area Adam feels the market is bound to find as resistance. Thus far, the market has failed at that level and declined to the present 11,000 region. You can hear his latest analysis in the video below:



Simply put, he feels it's time to protect some capital by reducing some long exposure as there's nothing wrong with taking some profits. Head to MarketClub's latest look at the stock market to hear his thoughts.

This technical look coincides with a few other heedful stances as we noted hedge funds were selling equities and market strategist Jeff Saut recommended caution. Not to mention, we also saw legendary investor and former manager of the Quantum Fund Jim Rogers start some short positions and we also started to see emotional reactions often found in the investor psychology cycle as the market booms from peak to trough and back again. Overall, it seems many are becoming more cautious on the stock market in the near-term and the technicals seem to agree according to Adam.

Investor Psychology Illustrated: Where Are We in the Cycle?

It's funny how cycles work. Exactly one year ago we posted up a chart illustrating investor psychology. As we now look back, April of 2009 marked a time when the market had just bottomed and was in the nascent stage of a comeback. Today, we find ourselves in a completely converse situation. Rather than watch the market decline and decimate, we're now faced with a seemingly never ending market rally that some would label an anomaly of an ascension. Ahh the market cycle, don't you just love it? Investors have certainly experienced a wide array of emotions over the past few years. Behavioral finance has long been a compelling topic and if you're interested in learning more, we defer to hedge fund Blue Ridge Capital's recommended reading list.

One year ago, for whatever reason, we were compelled to post up a chart illustrating investor psychology. Today, one year later, we felt compelled again. Below you'll find the 17 stages of investor psychology ranging from rage to disbelief to euphoria. Here is how investors feel during the peak-to-trough market cycle:

(click to enlarge)

As you can see, there are 19 stages in the cycle. By all accounts, it would seem that we are currently somewhere between points 15 and 19 on the chart. Are we past the "what the hell???" stage yet? Some would argue that we passed that point at around 1,100 on the S&P 500. Some would also argue that we are at point 17 in the cycle, the "more crazies who are going to get taken to the cleaners" stage. Who knows.

While it's uncertain where exactly in the cycle we are, the point is that we're still in a cycle. Given that we posted this chart up exactly one year ago, we found it fitting to remind everyone of the various levels of mania an investor can experience. We do know this though: many have turned cautious. While he admits market timing is not his forte, legendary investor Jim Rogers recently started some short positions. Additionally, over the past few weeks, hedge funds have drastically reduced long exposure as the smart money's been selling equities. Lastly, we covered how market strategist Jeff Saut summoned the old market adage, "sell in May and go away" and then said don't wait 'til then to do so. Many will deem this as rational thinking given the run the market's had. At the same time, this all reminds us of stage 18 in the cycle where everyone thinks the correction is coming but then the market actually heads higher. In this liquidity driven environment, it certainly wouldn't be the first time.

Couple the above chart with this additional one from Prieur du Plessis, and you've covered the full spectrum of investor psychology:

(click to enlarge)

For more on this topic, we recommend you check out the compendium that hedge fund Blue Ridge Capital has assembled via their behavioral finance reading list. Ahh the market cycle, don't you just love it? Round and round we go. Where we'll stop, nobody knows.

Key Technical Levels to Watch in the Markets

Adam over at MarketClub is out with his latest technical analysis video on the stock market. In it, he takes a look at the extended market as this rally just continues to march on and take no prisoners. He immediately points out that the Dow Jones is trading around 11,144 and that the 61.8% fibonacci retracement is just up ahead at 11,241 and could potentially be a source of resistance for the market.

Looking at the S&P 500, the fibonacci retracement situation is nearly identical as the market is trading around 1,211 and the retracement sits just ahead at 1,226. Adam points out that this will be a very key area to watch. By no means is he recommending you short this market just yet as that's essentially a deathwish. Everyone that has tried that thus far has burned. However, it's always helpful to be cognizant of key levels to watch in the markets. Click the chart below to watch the video:



Those above fibonacci levels are something to keep an eye on and you should really only consider putting out shorts once the market starts showing signs of weakness first. In the mean time, it never hurts to lock in some profits, trim some positions, and raise cash levels. While hedge funds will almost always have short positions on, you have to remember that they've been burned by the majority of those positions as of late. This technical analysis is obviously more from a market timing perspective and you can view MarketClub's latest video analysis here.

Market of 2010 = Market of 1929? Historical Comparison

Adam and MarketClub just posted up an interesting analytical video where they look at whether or not this is deja vu all over again for the stock market with historical comparisons to 1929. They examine the current 2010 market and outline the similarities to past markets. History often repeats itself, especially in market patterns. Adam notes that this chart is not meant to scare people, but rather to keep in the back of your mind as a possibility given the ferocious nature of bear markets and their massive gyrations. After all, people often become complacent when everything is fine and dandy and stocks are heading higher. The red underline in the chart below highlights the part of the historical pattern that the 2010 market has already completed. As you can see, the 1929 market fell drastically lower after completing that pattern. Click below to watch their analytical video:



They highlight that investors are nervous, especially the babyboomers who are worried about their retirement funds. If the market starts to drop dramatically again, you can bet there will be a stampede to the exits of investors wanting to preserve what they have left. Just like the market of back in the 1930's, this market has seen a massive sell-off and a strong reflexive rebound. The same pattern occurred back then and was followed by a massive leg down. Now, obviously we're not in the Great Depression, but we've certainly been in the great recession. While the severity of that 1929-1933 bear market might not be replicated, there are still chances we could see the massive swings so often associated with bear markets.

Again, this is only to highlight possible historical similarities and is not meant to be some harbinger of doom. In the markets, it always pays to be nimble and to avoid complacency. Keep your eye on the fibonacci retracements and the overarching technical pattern of the stock market for clues as we go forward. As they always say, the trend is your friend.

Technical Analysis Roundup: Stock Market, Treasuries, & Trends

We haven't done a technical analysis roundup in some time so we decided to post up some charts on various topics. Included in this post is:

- A look at the Dow Jones
- A possible trade in long-term treasuries
- Historical comparisons between 1930 and the current market
- And a look at a multi-decade stock market trendline

Since a lot of people seem to be worried that the primary trend in the markets has recently been violated, Adam decided to create another technical analysis video on the Dow Jones Industrial Average (DJIA). Regarding this video, he writes, "For some time now we've been very concerned that all the major indexes are in the 'thin air' and have exceeded some key Fibonacci retracement levels. This new short video explores that and looks at a key Japanese candlestick formation that could really make a difference and be the first clue in the demise of the Dow. I'll also show and share with you a specific number to look for in February. Should this level be broken, then it will signal a major reversal to the downside for the Dow."

Below he outlines some of the retracement levels that could act as support if the market starts to break down:



He outlines two key levels to watch in the Dow Jones Industrial Average. Firstly, he notes that if the market closes below 9,678 then look out below. Secondly, based off of Fibonacci retracements, he identifies a downside target level of 9,712. Adam and MarketClub are currently out of the market as they let the prices dictate the action and wait for a better signal. They are definitely very cautious here. Watch his video for further technical analysis insight.


Secondly, we wanted to highlight something that we've noticed recently regarding technical action in long-term treasuries. Just yesterday we posted up Oaktree Capital and Howard Marks' plays for inflation and shorting long-term bonds was one of his suggestions. Not to mention, we've covered numerous hedge funds that have been in curve steepening plays as they bet on higher interest rates. Now, it could very well be a longtime before we truly see signs of inflation. However, there seems to be a trading opportunity at hand. See our annotated chart below for the play:

(click to enlarge)

Basically, long-term treasuries have rallied right up to the 50-day moving average and a previous support level. Both of these are now resistance and the short-term trend is downward. Additionally, the iShares 20+ Year Treasury exchange traded fund TLT seems overbought, you could have a low-risk setup with clearly defined exit points.

Lastly, we also wanted to post up some charts from Steve Puri. He highlights some historical trends to put the giant stock market rally of 2009 into perspective. Given that the market has sold-off hard as of late, Steve points out a chart that could really scare you by comparing the current stock market to that of 1929-1930, where after a large rally the bear market returned and another leg down began:

(click to enlarge)

Potentially scary stuff there as bear markets are known for their vicious rallies and declines. Are we heading down further? We'll have to wait and see, but it never hurts to be cautious. We also wanted to highlight another chart Steve posted up regarding long-term trendlines. The chart he posts illustrates that in 2009 we broke a long-term trendline, but the market has subsequently rallied right back up to it. He suggests to go short as this will serve as resistance and to exit the short on a monthly close above that trendline he's drawn:

(click to enlarge)

Through all of the above, keep in mind that technical analysis is in the eye of the beholder. You can almost always annotate charts in a way that supports your case. That said, it is definitely one of the many useful tools in the investment toolbox. Note that this isn't meant to be some doomsday post. We just wanted to share these charts because they do make you stop and think.

S&P 500: Key Levels To Watch (Technical Analysis)

Adam over at MarketClub is back with a fresh look at the S&P 500 to decide whether or not the market is about to collapse or take off higher. You can check out his technical analysis video on the S&P 500 here. He pulls up a chart of the S&P and uses the fibonacci retracement tool to connect levels from 2008 to the lows in March of this year. Upon doing so, he notices that the 50% retracement level, often an important retracement, lands right where the market is currently and is serving as resistance for the S&P 500. Click the chart below to watch the video:



He also points out that there's been a divergence in the MACD for a long time as it has headed progressively lower while the market has headed higher. This divergence has been building over time and can be telling. He then zooms in to recent action and notes that the market has been rangebound lately and has been trading sideways. The 1,110 level has been serving as resistance for the market while 1,083 has been serving as support in the range. So, if it falls below that level, it could mean the market is going lower. And conversely, if the market breaks out above 1,110 then look for prices to head much higher. He says these are important because the market has become very technically-driven. Check out the video for Adam's full technical analysis of the S&P 500.

Key Levels In the S&P 500

MarketClub just posted up a new video examining the S&P 500 and in it they've outlined two key levels in the market. They highlight that while the trend is up, you still have to be cautious and know when to switch from long to short. So, they've identified a level at which to exit longs (S&P 1072) and then they've identified a separate level which would signify a trend break where you would want to then get short (S&P 991). These are obviously important areas to watch because the trend is your friend... until it's not. Hear what they have to say in their S&P 500 video.

Use those levels to help you place your stops or know when to exit your longs as the market continues to melt up higher. It's never a bad thing to have an exit strategy in place.

Ten Rules For Successful Investing

The following is a guest post from Keith Fitz-Gerald, chief investment strategist of Money Morning.

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With all the financial woes in the global economy, the worst thing an investor can do is to “freeze up.” With all the ups and downs in the market, it’s all too easy for investors to allow their emotions to take control. That’s when the smallest mistakes turn into the biggest mistakes.

There’s one antidote for this problem … remembering a few basic rules. Just embrace the 10 ideas that follow and you’ll be in line to make some serious money in the months ahead.

Rule Number 1: Invest on the Right Side of Major Economic Trends:That old investing adage “Don’t fight the Fed” serves as a good example here. Rising interest-rate environments make meaningful gains difficult to sustain – unless you know what to look for. Far too many investors got it wrong in the 2000-2003 and 2008-2009 periods by betting on growth stocks in a recessionary economy, and they’re still getting it wrong. Those investors are likely to get burned again should the economy slow even more, despite the government-bailout and federal-stimulus efforts. Make sure to analyze all of the other major global trends, as well – and ride the ones that are truly unstoppable. You’ll know them when you see them, because they’ll have trillions of dollars in new capital flowing directly at them – investment plays in such areas as infrastructure, inflation, energy, food, and water (both supply and purity) are great examples.

Rule Number 2: Sell Your Winners: This may seem counterintuitive, but – if you want to succeed – you must sell your winners. Rule Number 6 – thinking like a plumber to prevent losses – is only part of the success equation. To be really effective, you have to take profits, too. That way, you get more capital that you can put to work. Think of it this way – Safeway Inc. (SWY) regularly replenishes the inventory in its Produce Department to keep it fresh. You should do the same with the “inventory” in your portfolio because, if you let your stocks sit on the shelf too long, they’ll eventually go bad – just like fruit that’s past its expiration date.

Rule Number 3: Always Sit in an Exit Row:This rule goes hand in hand with Rule Number 2. One of the most common problems investors have is not knowing when to sell. Sometimes, they’ll let a big loss get out of control (which violates Rule Number 6) – or, worse, they’ll notch a big gain and then sit on the investment so long that it sneakily turns into a loss. The bottom line is that, up or down, you should always have planned exit points when you initiate a position – and enforce them with "protective stops,"adjusting them as prices move in your favor (but never when they go against you).

Rule Number 4: Your Broker is a Salesman. So unless you know you want to buy what he has, don’t go shopping today! Wall Street is not a service business. Brokers exist for one reason and one reason only – to sell you stuff and make money . . . from your money. And the more of your money you give to them, the less you have to make more for yourself. So buy only what you want and what fits your goals and objectives – not the “stock of the day ” the broker is pushing to meet his weekly quota.

Rule Number 5: Invest for High Yields:Contrary to popular belief, rather than investing for capital gains, you should aim for the highest possible yields and the most certainty you can find. The real secret to wealth-building is compounding small gains over long periods of time. In fact, studies show that compound returns can outperform so-called "growth stocks" by as much as 22-to-1. Furthermore, dividends account for a huge percentage of total returns – varying studies have claimed anywhere from 60% to as much as 97% over time. So, don’t ignore them!

Rule Number 6: Think Like a Plumber: Big losses – like six inches of water in your living room – are expensive and can set you back years. Professional traders – and I’m not including the risk-junkie cowboys who drove the derivatives mess to heck in a handbasket – understand this. And because they do, they focus the majority of their efforts on avoiding losses, instead of on capturing gains. It’s counter-intuitive, but it really makes a difference. Besides, if you keep those portfolio pipes from bursting, you won’t have to worry about your assets leaking away, drip by drip.

Rule Number 7: Buy Value: Buying when the underlying value is “right” can mean the difference between pathetic single-digit gain and truly market-beating returns. It’s hard to make money when valuations – as reflected by Price/Earnings (P/E) ratios are greater than 20. More normal valuations sit in the 12 to 14 range. However, to really make money, you need to buy when valuations have been beaten down into the single digits – assuming, of course, that the company’s underlying value is real. Doing so puts the odds strongly in your favor and can dramatically boost returns.

Rule Number 8: Retirement is a Lifestyle Issue, Not a Monetary One: When

most people think about retirement, they think about safety. Big mistake. The single biggest problem facing us today is running out of money before we run out of life. If you’ve followed Rule Number 9, this shouldn’t be a problem. However, if you’ve thought about safety and have not invested enough, what you’re really doing is crippling your ability to earn future income – income you’re going to need in order to eat, keep a roof over your head, and provide lifelong life health care. Oh yeah, and have some fun.

Rule Number 9: Start Early and Leave Your Money Alone For as Long as Possible: This is not the same thing as "buy-and-hold" investing. Buy-and-hold is not an investing strategy, it’s a marketing gimmick – and, these days, it’s more like “hope-and-pray” investing, anyway. The world’s most successful investors – think Jim Rogers, Warren Buffet and the late Sir John Templeton, to name a few – don’t buy and hold. And I don’t believe you should, either. These experts buy and “manage,” confining themselves to stocks and strategies that meet their specific objectives. Given that one of our critical objectives is to have our money working hard for us rather than us working hard for it, the point is that you want to start as early in your life as possible and never miss an opportunity to invest. The longer you have your money in play, the better you will be paid when you’re ready to cash out!

Rule Number 10: All Investments Contain Risks – But Not All Investments

Contain the Same Risks:Despite all my talk about avoiding losses, the simple truth is this: If you want to grow your wealth, you have to take on risk. It’s unavoidable. Every investment involves risk – the only questions are how much and under what circumstances. Remember, success is not about how much money you can make, but about how much money you keep. As such, the true secret of wealth-building is taking risk properly.

Indeed, the late legendary U.S. Army Gen. George S. Patton Jr., once said: “There is nothing wrong with taking risks.” But he also cautioned: “That’s quite different from being rash.” I completely agree. What’s more, I think that Patton would have agreed with my belief that if you want to be successful in anything, you have to take a certain amount of risk every day. It’s just a fact of life.

Yet, most folks are unwilling to do so – or they spread themselves too thin, and over-diversify, all with the goal of “protecting” themselves. Unfortunately, by doing so, these investors actually set themselves up for failure – not because they take too much risk, but because they don’t concentrate the risks they do take in the right places!

What are those “right” spots? They’re the investments that can provide the potential rewards to justify the risks the investor has taken.

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The above was a guest post from Money Morning, thanks to them for an interesting read! Keith Fitz-Gerald (the author of the post) has also recently released his new book, so check out Fiscal Hangover: How to Profit From The New Global Economy.

How Long Can The Rally Last?

First and foremost, no one can deny that the trend right now is up. The guys over at MarketClub have placed an emphasis on the saying, "don't fight the tape." At the same time though, they wonder how long the market rally can really last. They highlight the 50% fibonacci retracement as potential resistance ahead at Dow 10,339 in their latest market technical analysis video. They don't debate that the trend is up. However, they feel that the market has the potential to begin to roll-over and so they're watching cautiously. The market has been stair-stepping higher and each sell-off is met with more buying. What's important to watch is those levels where the market reversed and headed higher yet again. If the market takes out those mini-dip levels to the downside, they say that could be your signal it is starting to roll over. But still, "don't fight the tape." Wait for the weakness at the levels they outline in the video.



Also, if you're interested in technical analysis on specific equities, they recently put out a video on Research in Motion (RIMM). They think this name could potentially trade all the way down to the $40s, even after their announcement of a share buyback. The current technical pattern is bearish for RIMM in the coming weeks according to the video.

Lastly, they turn to commodities. In a crude oil video, they are taking a look at classic charting patterns that are taking shape. They note to pay attention to the MACD, saying that if it crosses the average it will be bullish. Aditionally, the commodity itself has gone into a flag pattern which has the potential to send oil much higher. So, they say to keep an eye on the chart. See their crude oil analysis here.

Goldman Sachs Presentation: Market Structure Overview (September 2009)

The fine folks over at Business Insider have obtained a copy of Goldman Sachs' September presentation on the overall market structure these days. The topics covered include short selling, dark pools, high frequency trading, and more. (Primer on high frequency trading for those unfamiliar here). This is a broad overview of the markets and you can check it out embedded below or you can download the .pdf here.

This presentation comes in contrast with the other two we've covered on the blog. If you're looking more for strategy and analysis, we've covered the best long & short strategies for the current market from their perspective. Additionally, turning more to our focus on hedge fund portfolios, we've posted up Goldman's hedge fund trend monitor which looks at what positions have the highest hedge fund presence.

Here's the market structure overview:

Stock Market Resources: Bank Loan Performance, Value Screener, & Trend Plotting

This week, we've also stumbled upon some useful tools for investors/traders. We wanted to share these great finds but make sure they didn't get lost in our weekly linkfest. Without further ado:

Great site for analyzing bank loan performance of financial institutions [wlm lab]

Interesting Valuecruncher app [Valuecruncher]

Google finance domestic trends for plotting unique economic insight [Google Finance]

Bear Market Comparisons, Similarities & Projections (Charts)

We wanted to quickly compile a great set of charts we've stumbled upon in order to put some things in perspective. Specifically, we want to focus on stock market comparisons between the current bear market and bear markets of past. Let's dive right in and start with a prediction.

Steve Puri has posted up an Elliott Wave projection chart for the S&P 500 and has also overlayed Fibonacci retracements:

(click to enlarge)

As you can see above, Steve hypothesizes that the S&P could hit 1,120 before reaching major resistance. He sees one more short-term pullback followed by a spring higher up to 1,120. That level, however, will prove difficult to spring above due to both the downtrending line and the fibonacci retracement level serving as resistance. This somewhat coincides with the video we posted up just last week regarding possible market scenarios outlined by fibonacci retracements. (If you're unfamiliar with fibonacci, then this educational video serves as a great primer).


Next, turning to some historical comparisons, we want to highlight a series of charts that point out some intriguing similarities. Dshort has compared the current crisis, the Nikkei collapse in 1989, and the 1929 Great Depression.

(click to enlarge)

The overlay is intriguing as it puts the timeframe and severity of drops in context. All three charts would seem to imply that there is still another drop and then another subsequent rally in store on this bumpy ride. The current market is in blue, the Nikkei in red, and the Great Depression in grey.


Zero Hedge then furthers this comparison by overlaying only the Nikkei on top of the current US market via the S&P 500.

(click to enlarge)

Once again, the comparisons are interesting. However, in this specific instance, it could possibly imply a much more abrasive rally is still ahead. Even though US markets are already up 50+% from the lows, a rally to match that of Japan's would mean there's quite a bit more room to run. We would however like to point out though that each crisis is specific and no two are identical in nature.


In another intriguing chart from Zero Hedge, they highlight the correlation between shares of AIG and the overall stock market.

(click to enlarge)

They are indeed quite similar and echo the fact that some of the stocks with the highest volume traded as of late have essentially determined where the market is headed. (AIG in orange and the S&P in white).


Lastly, shifting our focus away from the overall market, we see that Kevin has highlighted the practically omnipresent symmetrical triangle in Gold (via exchange traded fund GLD). This chart has been in this pattern for some time now, as evidenced by the weekly chart below.

(click to enlarge)

When symmetrical triangles breakout to the upside, they can be quite powerful. At the same time, you still have to be aware that they can breakout to the downside as well. Simply put, just wait for a break in either direction of the lines drawn. This also shifts the focus yet again to the $1000 level in gold that we've highlighted in the past as a very important level. In order for gold to really breakout, it has to get above the monster psychological and technical level of $1000. Kevin points out that the level of $95.25 is important for an upside breakout specifically for the exchange traded fund that tracks gold, GLD.

We highlight the gold chart in conjunction with the stock market charts because we've seen many investors flock to gold as a safe haven in times of uncertainty. And, if the market begins to plummet or if uncertainty rises again, we could potentially see a surge in GLD. After all, Third Point LLC hedge fund manager Dan Loeb flocked to GLD as he waited for uncertainty to pass at the beginning of the year. Not to mention, hedge fund Sprott Asset Management was also out recently with a recent research piece calling gold the 'Ultimate Triple-A Asset.'

That wraps up the interesting charts we've been taking a gander at lately. As such, we have yet again received conflicting research. Fibonacci retracements could imply further upside before encountering resistance. A potential gold spike could imply a negative future for markets if investors begin to flee from uncertainty. If we're comparing this crisis to that of Japan's, then the current market rally could have further to run. But just last week, we also focused on two reasons to be bearish. Around, around, and around in circles we go.

It is important to evaluate both sides of the argument and determine which one makes the most sense. Unfortunately, we may just have too much conflicting data at this point. Instead, we'll simply let the market guide us in the mean time since we're pretty much at her mercy. Because while the economy may be doing one thing, it's unfortunately perfectly normal for the market to be doing something completely different.

Two Reasons To Be Bearish

.... At the very least for the short-term. While we could throw out all kinds of economic data and a laundry list of fundamental problems, we instead want to focus on two market related datapoints. Firstly, short interest was recently released and the fine folks over at Bespoke have highlighted that, "the average short interest as a percentage of float for stocks in the S&P 1500 is currently at 6.9% This is the lowest level since February 2007." They also point out that extremes typically happen in each polar direction. When short interest is high and all the late-to-the-party bears have arrived, the market can run. Conversely, when short interest is at the lows, be scared.

(click to enlarge)

That information all but ties into what hedge fund manager Doug Kass highlighted recently: everyone is bullish and rushing into stocks. Mutual fund inflows have risen and they have put their new cash to work while hedge funds have had their highest net long exposure in some time.

The second datapoint we want to highlight is not so much data as it is a flowchart of market possibilities. Specifically, we are talking about the four stages of secular bear markets. Barry Ritholtz over at the Big Picture has posted up an excellent chart that illustrates just that.

(click to enlarge)

As you can see, it argues that we are almost out of the 'rebound rally' phase of the secular bear market. What's on deck next, you might ask? A roughly anticipated 25% correction downwards, assuming this is a secular bear market. That's a whole 'nother debate but we wanted to post up these interesting tidbits as we start to become cautious ourselves. After all, the market is up over 50% since the March 2009 lows. While such caution is most likely warranted, we could be early with such sentiment. (Forgive us for such a sin as 'being early' ... we attribute this to the volatile market of 2007-08 that has scarred us for life). And as always, we are reminded that markets can remain irrational longer than you can remain solvent. In the mean time, our list for reasons to be bearish continues to grow.

The Future Of Hedge Fund Regulation

Just yesterday, we had an intriguing guest post regarding the future of hedge funds. Today, we follow it up with another excellent guest post examining the future regulation of the hedge fund industry. The following is a guest post from Hedge Fund Blog Man, who covers articles of note regarding the hedge fund industry.

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The Future of Hedge Fund Regulation in the United States

Summary
Over the last couple of years there has been a lot of political discourse about the need for greater regulation of the financial industry, including hedge funds. Much of the information (and rumors) about possible hedge fund regulation is somewhat contradictory. We will wade through the debate and provide a summary of current proposals for hedge fund regulation in the US and discuss hedge fund regulation in the EU and other countries.

Though it was highly regulated financial institutions that are widely believed to be the cause of the recent financial crisis and subsequent economic malaise, there is talk of regulating hedge funds and private equity firms as well. There have been a huge number of proposals for regulating hedge funds ranging from registration requirements for just the largest to funds, to almost authoritarian regulation for all private money managers. However, the current proposals with the most support appear to be hedge fund registration requirements, without significant additional oversight.

Current Hedge Fund Regulations
Under the existing system hedge funds and private equity firms are far less regulated than mutual funds and other investment vehicles open to the public. Though some hedge funds are registered with the SEC, a couple clauses in the Investment Company Act of 1940 allow must hedge funds to operate without registering with the SEC or any other government agency. Probably fewer than half of all hedge funds are currently registered as investment advisors with the SEC. For funds that are registered, the SEC requires certain filings, but does not provide operational oversight.

The Need for Hedge Fund Regulation
Hedge funds were clearly not the major players in the current financial crisis. However, the $50 billion fraud perpetrated by Bernard Madoff sparked plenty of public outrage and there have been a couple of multi billion dollar hedge fund failures since 2007. Additionally, many politicians still fear another hedge fund collapse ala Long Term Capital Management, the giant hedge fund that collapsed in 1998 and necessitated a Federal Reserve orchestrated bailout.

Treasury Secretary Timothy Geithner voiced his concern in April, "Today, the consequences of (hedge funds') failure is greater. They need to be subject to a higher set of standards.”

Proposals for Regulating Hedge Funds and Recent Developments (2009)
In January 2009, Senators Charles Grassley (R-Iowa) and Carl Levin (D-Mich.) introduced the Hedge Fund Transparency Act of 2009. The Act would affect funds with more than $50 million in assets (“large firms”). All funds in excess of $50 million would be required to register with the SEC and maintain books and records according to SEC requirements. It would also require disclosure of including information regarding the identity (including addresses) of the fund’s “beneficial owners,” the amount of the fund’s assets, the fund’s equity structure, affiliations the fund may have with other financial institutions, the minimum investment commitment required of investors, and the total number of investors. The bill did not get to a vote.

In March of 2009, Larry Summers , Director of the National Economic Council for Barack Obama, said the U.S. wants large hedge funds and private-equity firms to be subjected to "rigorous public scrutiny," compared with the minimal oversight they now face. Before joining the Obama Administration, Summers was a Managing Director with one of the worlds largest hedge funds, D.E. Shaw Group.

Then in late April, President Obama lashed out at hedge funds refusing to accept a government offer for Chrysler debt. "A group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout," Obama said, "They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don't stand with them."

In July, the Obama Administration, released TG-214, a fact sheet with the Administration’s proposals for regulating hedge funds. Funds with more than $30 million would be required to register with the SEC. Once registered funds would be subject to:
• Substantial regulatory reporting requirements with respect to the assets, leverage, and off-balance sheet exposure of their advised private funds
• Disclosure requirements to investors, creditors, and counterparties of their advised private funds
• Strong conflict-of-interest and anti-fraud prohibitions
• Robust SEC examination and enforcement authority and recordkeeping requirements
• Requirements to establish a comprehensive compliance program
The main rationale for the above requirements is to “protect the financial system from systemic risk”

The most recent House of Representatives proposal for hedge fund regulation, from Aug 6, 2009, seems to have lost some of the initial enthusiasm and would regulate hedge funds under less-stringent conditions than banks and lenders. According to House Financial Services Chairman, Barney Frank, “How can you regulate a hedge fund like a mortgage? It doesn’t make any sense. It will be a form appropriate to them.” In apparent moment of bipartisanship, both Democrats and Republicans seem to be in agreement that hedge fund and private equity firms should be more lightly regulated than other traditional financial firms. It should also be noted that hedge fund industry groups spent almost $4 million in lobbying in the first half of 2009.

Hedge Fund Regulation in Europe
Europe has been quicker to attempt hedge fund regulation and proposals there have generally been more severe than in the US. Likewise, hedge funds and private equity firms in the EU have been more vocal in their opposition to regulation than their US counterparts. The most contentious issue in EU hedge fund regulation appears to be an attempt to limit or place caps on the amount of leverage funds can employ. Because of the possibility of regulatory arbitrage, look for the EU and US to finalize regulations that are relatively consistent.

When Will We Get New Hedge Fund Regulations?
Though there are ongoing talks, there is currently no bill for hedge fund regulation in Congress that is likely to pass. It is unlikely any new regulation will be finalized until 2010. Because compliance with new rules could be costly and time consuming, it is conceivable that new hedge fund regulations might not be enforceable until 2011.

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Thanks to HFBM for the excellent write-up as we will definitely be watching the developments on this front going forward. Regulation and transparency have been big talking points given the crisis, forced liquidations, frauds like Madoff, and numerous other crazy events that have happened recently. The above was a guest post from Hedge Fund Blog Man, who covers articles of note regarding the hedge fund industry.

Doug Kass Turns Bearish

While we haven't covered the musings of Doug Kass in a while, we found his latest piece on TheStreet.com to be timely and insightful. Some of you may remember that Kass, noted short-seller and manager of hedge fund Seabreeze Partners, was very bullish back in March and essentially nailed 'the bottom' as a great trade. Our hats off to him as that was an excellent market timing call. He seems to zig when others zag and this occasion is no different. While bullish sentiment is reaching highs and everyone seems to think that risk has abated from the markets, Kass thinks otherwise. He is bearish now and points out many signals telling him to be so, writing

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1. Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.

2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.

3. The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.

4. The credit aftershock will continue to haunt the economy.

5. The effect of the Fed’s monetarist experiment and its impact on investing and spending still remain uncertain.

6. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.

7. Commercial real estate has only begun to enter a cyclical downturn.

8. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

9. Municipalities have historically provided economic stability — no more.

10. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.

"

Insightful stuff from Kass and it will be interesting to see if he can time the market so perfectly yet again. We wouldn't doubt it, as we've been noticing much of the same rampant bullishness amidst a still tepid economy. When everyone is headed one direction, tides almost always find a way to change. We also note that Kass joins prolific hedge fund manager Paul Tudor Jones in the act of calling for a pullback. Last week, Tudor noted that he thought the current market euphoria is a bear market rally.

Kass posted up his 'signs needed for a market recovery' back in February and it's interesting to look over them again. While some of them have partially come true, there is still plenty of room left for improvement. For those of you interested in more of Kass' thoughts, we posted up Kass' model portfolio update back in the middle of June. We'll check back in on Kass' bearish call in a few months, but our guess is that he'll be right on this one as well.

Source: TheStreet

Stock Market Collapse: Simply a Reversion to the Mean

Doug Short has shown us that we are merely reverting to the mean...

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Mutual Funds Getting Killed

The Stock Market is kicking ass and taking names (of fund managers everywhere).

"Out of almost 2,100 diversified retail U.S. stock mutual funds that are open to new investors, just 17 have positive returns for both the past 12 months and year-to-date, according to investment researcher Morningstar Inc."

Source: MarketWatch