Monthly Archives: August 2014

Hello Folks

Well as we finish up the week, my immediate observation over the last few days is that the market volumes are very low.   The fundamental/economic situation aka “background” has not changed (and how could it, my last update was merely six days ago), and I still see no justification to leave the G-Fund in pursuit of questionable upticks.  

It should be noted that the SP 500 Index made a new All-Time-High (“ATH”) on August 26, attaining 2005.04.    This is a new, all time, historical high.   Now, many will recall that I love ATH’s, and if you trade a personal stock account, when a stock makes an ATH, this is a very reliable signal to buy some of that stock.  I don’t want to get side-tracked on personal trading, but the concept is equally important when looking at the indexes.  However the ATH “buy signal” must, or almost-must, always have above average volume with it.

Above average volume is reflective that the underlying event (the ATH), is sustainable, as there are “voters” (buyers) in large numbers, behind the move.  Versus a floating sailboat on the lake which just, by the stroke of luck, caught a breeze towards Bull Market Island.   A light breeze and a random drift, even if in the “correct direction”, does not equal a clear cut path, with sustainable force.

It should be noted that Bull Markets need volume to propel and to sustain them, but Bear Markets can fall apart on their own.  Volume is not a requirement to make a market cavitate and go down.   That’s what makes this particular situation somewhat dicey, we have a mature Bull Market (depending on what indicator you are using, most accept that the current Bull Market has existed since late 2011), and the volumes are starting to dry up.   Furthermore “Institutional participation” (pension fund plans, mutual funds, hedge funds, etc.) is slowing down.   Institutional money is what moves markets, not Uncle Raymond with his E-Trade account.    Investors Business Daily measures this in their Accumulation/Distribution Rating.    Basically “A” is strong buying (which tends to send stocks upward) and “E” is heavy selling (which tends to send stocks downward).    Heavy selling is a bad sign.   Unfortunately, while our sailboat apparently caught a breeze and sent it upwards, since August-1, the SP 500 distribution has hovered between D and E distribution.  

I use the Accumulation/Distribution Rating as one of many tools to assess the temperature of the market.   See photo of my whiteboard at home, with dates and accompanying rating, below:

I do this every evening, as a “supplemental tool” in addition to other tools in my system.   Notice a few “E” ratings over the last few days.   The highly desirable “A” or “B” are nowhere to be found.

Gee Bill, that is great, but can you give us some charts of what we should see ?

Yes, of course, lets take a look at the chart of the SP 500 back in March 2003.  Note that “war” is a major catalyst for the markets (FAQ #6) and back in 2003, we were not battle fatigued like most agree our country is now.  Sept-11-2001 was still very fresh in our memories and the nation was “coming together” and being patriotic on all fronts.  We also (in 2003 to 2008) had a major housing boom (inspired as we now know) by some easy lending and mortgage activity.   People bought houses, and send bank stocks, home builder stocks, Home Depot stock, etc, higher.    Lets take a look at the 2003 charts, with no comments, and with comments.   Pay special attention to the VOLUME activity.

That is what we are looking for.   Now, I doubt we will see those kinds of volumes now, as in March 2003 most folks were out of the market, having been hurt in the previous cycle of NASDAQ 2000 crash.   So the swimming pool had water but no swimmers.   In March 2003, the whole neighborhood jumped into the pool and a resulting major splash was seen on the volumes.    Today, 2014, in our three year old (or so) Bull Market, those who are inclined to buy stocks, are already in stocks.   So a legit question to be asked is “who is on the sidelines that can come in and send stocks higher.”   And by looking at the Accumulation/Distribution ratings, the institutional investors are exiting, versus entering, stocks.

Lets take a look at the charts, without comments and with.   Keep the above volume observations from the 2003 charts, fresh in your mind, as you look at the August 2014 volumes while the market is “making new record highs.”   Again, hey, I would rather have a new high versus a new low, as I am the last guy who wants to spend his life in G-Fund, but the fact remains that the volumes are low and things are still questionable, in my opinion.   Charts:

Lets take a look at a closer up view now:

You can see the clear uptrend, past the 1990 area (area of prior resistance) but the volume just isn’t there.   Now:  If we get just one day (ok, maybe two) of above average volume, with the index closing higher than the open, with clear, obvious, “thrust” upward, I will be back in C or S fund.    I will send everyone letters of apology for those who spent August in G-Fund.   Just remember, the recent “uptrend” has been on low volume.   Volume is as important, if not more important that the actual price movement itself of the underlying index or stock.  

A very easy, non-chart, way, to monitor volume is go to Yahoo Finance and look at the SPY ETF, which tracks the SP 500.  I apologize for the full size image with all the white space, I am cutting and pasting screenshots past midnight on minimal sleep….

So, you can use the SPY ETF to monitor volume.   If the individual trader gets a grasp of volume and trend direction, you can enhance your performance greatly.

OK, most folks are worn out by now with all this volume talk.   Long story short, I remain 100% G-Fund, pending some volume increases and “reassurance” that these new highs are sustainable.  

I will be monitoring things and any major events, I will post an update on this site.

Thanks and everybody have a good Labor Day weekend.  Markets are closed on Monday Sept 1, FYI.  Friday Aug 29 volumes should be very light, as Wall Street prepares for the long weekend.

– Bill Pritchard

Hello Folks

Well, on August 7, I told the world (well, told my multi-thousand email subscribers, and who knows how many web-only viewers) that I was going to G-Fund, and articulated my reasoning behind this decision.

As luck would have it, the market of course resumed its uptrend just as I was exiting to the G-Fund.   The positive “spin” on this is that due to the typical two-day delay to process fund changes, I remained in stock funds and still grabbed some of the uptrend while my fund change was being processed.   However, I missed out on any gains which continued to develop in the markets once I arrived into G-Fund.   Dang it I hate it when that happens.   I just wish I could always buy the bottom and sell the top, perfectly, every time.   Of course, reality is different that that.

Not surprisingly, some of my sharp readers have contacted me regarding “my system” and my tolerance for risk.   The readership ranges literally from new rookie entry level folks with 30 years in front of them, to senior folks pending retirement, to already-retired-folks.   Some of my retired readers, if they are 98% G-Fund and 2% S-Fund, they are sweating bullets and can’t sleep at night.  So the “one tool approach” does not necessarily work for every single person, due to the variety of circumstances out there.   I got a good email from a younger reader, which I will paraphrase to protect the innocent, but it went along these lines:

Bill, I wonder if you are too conservative.  I have 20 years ahead of me, and am willing to accept some risk to get some gains.   Great site, just sharing my thoughts.

Since Bill (that would be me) is much closer to retirement eligibility than not being close, yes, I am a little more conservative.   Or maybe much more.

With leads me to discuss my system.   This is already in the FAQ Section but the FAQ section tends to get cobwebs and not read much, so I will touch on my system on this post.

The system combines fundamental analysis and economic concepts with market volume, price performance, technical analysis, and other metrics and this is what is used to determine my trading decisions.   I have taken bits and pieces from other systems, studied (and continue to study) for over 20 years, and developed my own system.    Similar to someone (Grandma) who develops their own soup recipe.   Different ingredients from different recipes and a personal twist on things and now you have Grandma’s recipe.  You can’t put a Patent on carrots or chicken broth, so Grandma’s recipe is probably not patented, and neither is mine, however I am going to go out on a limb here (remember, I will be searching for employment in the after life when I retire….) and push the envelope some, and call my system proprietary. 

With that said, I am not going to hand over the launch codes, but I will say that my system derives “Sell Signals” and “Buy Signals” based on abnormal price and volume behavior, along with mathematical smoothing and time based parameters.   It is my belief that behind the markets are people, and price behavior is a direct reflection of those people.  In addition, if “background events” such as war, bombs, new political leadership, economic policy changes, are existing and “in sync” with my system’s signals, then I will go ahead and pull the trigger (this could be to enter G-Fund or to enter stock funds, depending on the situation).  However I do not pull the trigger without having what I believe is the proper sight picture (discussed above).   It so happened on August 7, that Ukraine/Russia, ISIS in Iraq, Argentina default, PLUS the markets flashing warning signs, led me to believe that I could put rounds on target and that the sight picture was correct.

Ok, enough beating myself up.  On a positive note, the indexes are inches away from historical, All-Time-Highs, a concept discussed numerous times on this site.   This week, Aug 18 – Aug 22, the Central Bankers Summit is happening at Jackson Hole, Wyoming, and market participation (aka volume) is less than average, as most major traders and money managers probably want this week to “clear” before they jump back into things.   The general consensus so far, if you read the financial press, is that the economy is rebounding faster than anticipated, and that the interest rates may be raised even earlier than expected (currently believed to be summer or fall 2015).   So while the markets have indeed gone up this week, the volume has been lackluster, and I am waiting until mid-next week to see how the markets are behaving, prior to making any TSP decisions.     Lets take a look at some charts.   Charts are shown with no comments, then with comments, for readability.

As can be seen, we had some very valid warning signs last week, but a few days later, this apparent new downtrend reversed itself.

With the bile still in my throat after the above trend reversal, I am tweaking my system and making some minor adjustments.   Somebody somewhere said once that if you are not constantly learning and improving and seeking development, then you are dying, and I agree with that statement.   Thus I plan to be improving my own methodologies.  I have found (as one example) that by removing the 2008-2009 dataset from my research that my system is much improved.   This time period was the notorious mortgage meltdown/housing crisis/financial doomsday market.  But I still have work to do.  I have sought out the advice of trusted fellow traders and colleagues, to include big name folks who I am fortunate to have internet e-mail relationships with.   So this is a work in progress.  My customer base (that would be you) demands it, so I am working on some minor tweaks to the recipe.  

I would like to insert a link to an MP3 broadcast by Michael Covel, a bestselling author who is a proponent of Trend Following, which my style can be categorized as.   This 15 minute audio file is entertaining, and relevant, his views and mine have little variation and are in agreement in almost all respects.    File and audio is the work of Michael Covel.

LINK:  http://hwcdn.libsyn.com/p/3/0/b/30bd55df63fb83db/231.mp3?c_id=7096268&expiration=1408687522&hwt=72fcaa4915fa2882439369ba690d990c

The Fed Trader site has grown huge since it went “live” a few years ago, with no marketing or advertising on my part.  I must be offering something of value, something useful, something informative, and something entertaining, thus resulting in such a huge followership.    Just to refresh the disclaimer, this site is indeed entertainment only and the individual investor or TSP participant is ultimately responsible for his investment decisions.

I remain 100% G-Fund at the present time.

Thank YOU for reading and please continue to pass this site to your colleagues and coworkers.

Thanks and talk to everyone soon…

– Bill Pritchard

Tonight August 7 , per public news sources, President Obama authorized military air strikes in Iraq.    A review of both the markets since August 1 (the last update to this site, released in evening July 31) and the behavior of the SP 500 evening futures (likely “in response” to Mr. Obama’s announcement), has caused me to return to 100% G-Fund.   Note that the Ukraine situation is ongoing, as is the Gaza/Israel situation.   As stated before, “we are in challenging times” right now.

As previously discussed, on July 31, Argentina defaulted on its debt.   I argued that “Argentina didn’t matter” and I believe I was largely correct, however the indexes continued to go lower.   On August 1, the Department of Labor released data reflecting a 6.2% unemployment rate.   As discussed previously on this site, improved unemployment rates below the 6.5% threshold level are believed by many to be the “green light” that the FOMC needs to raise the Federal Funds Rate.   We now have a guaranteed future rate hike, as prior unemployment data has shown a continued trend of improvement, versus a one-time data anomaly.  Furthermore, “rate hikes” are not welcomed with open arms by Wall Street, and this will continue to cause additional indigestion for the markets.  The next rate hike will likely occur in Summer/Fall 2015.

Also, since August 1 (a mere six days ago), the Gaza/Israel and Ukraine situation has grown worse, or at the minimum, not improved.   This has caused additional heartburn for the markets.

Lets look at the long-term chart of SP 500, a one month chart of the SP 500, and charts of the SPY ETF which tracks the SP 500 Index and is helpful in order to monitor volume activity.   Comments are on the charts themselves.    Important to note is the 1930 level on the SP 500 has been penetrated to the downside and the index has not shown a desire to resume its uptrend.    Also important to note is the overall uptrend of the market, existing since early 2013, is still largely intact (and why getting on and off the “train” is fine, as long as the train is still going in the direction you want).    However it is my opinion that greater, more severe, pain may occur in the markets in two to four weeks.   I am getting off the train, which appears to be slowing down.   As the train slows, I am jumping off now (and maybe twisting my ankle and getting some bruises) versus remain a passenger, as the train approaches (a possible) a fallen bridge a few miles ahead and plunges into the river below.

Lets take a look at the SP 500 futures evening session.   Note that the only major event I can associate with tonight’s sell-off is the news announcement regarding airstrikes in Iraq.

In summary, I am going 100% G-Fund (request submitted tonight, will likely not take effect until Monday) for the time being.   In addition, I am placing tight sell-stop orders in my personal brokerage account, regarding my personal stock holdings.

Thanks for reading !    This post done via my MacBook (TDY right now…) so some graphics or text may end up looking different from prior posts.

Please share this update and my free site with others who may find it useful or interesting.    Thank You.

– Bill Pritchard