General Market Index (GMI) table

Mark Hulbert recently published an article saying that another 1987 type crash is inevitable.   I am a firm believer in the hypothesis that major stock market declines are largely precipitated by rises in interest rates caused by Fed tightening and slamming on the economic brakes. This article shows that interest rates were indeed rising for months before the October 87 crash. Also note that the 87 crash came after a super hot market rise. The monthly chart below through October, 1987, shows the Dow had more than doubled since July, 1984, and was up about 45% since the end of 1986 alone. Market declines tend to come after “irrational exuberance,” accompanied by rising interest rates.

I was fortunately out of the market during the 1987 debacle, having reacted to a weak technical pattern I saw in GM stock.   At that time the popular slogan was that as GM goes, so does the U.S. economy.   Given my subsequent experience with technical analysis, I looked back to see if my current indicators indicators would have warned me of the coming crash.   I do this to assure myself that if another 87 type of crash comes my way, as Hulbert predicts, that I will be able to protect myself.   So here goes.

By October 12, 1987, the Dow had already declined almost 300 points to near 2471, from a prior high of around 2746. Note that the 30 day moving average of closing prices (red line) had already curved down.   Note also that during the rise from June to August, the Dow remained nicely above its rising 30 day average.   Note also the failed rally attempt in September where the Dow retook its 30 day average only to retreat.   Using my current techniques, by this time, I would have already declared the Dow to be in a short term down-trend. (Click on charts to enlarge.)

The market then rallied for a day and the next day it went to a lower low.

Remember, these warning signs occurred before the crash.   We then got another larger decline to 2355, again before the crash. Given all of the lower lows and the declining moving averages, I like to think I would have already   taken a lot of $$$ off of the table. Remember, by now I would be declaring an extensive multi-week short term down-trend.

The next day, still before the crash, the Dow fell another 108 points or 4.6%.

Finally, we get the crash, down 22%—hardly out of nowhere! By my trend count model, the crash came on the 9th day of the new Dow short term down-trend, giving plenty of time to get out.

And the next day we got a bounce. Those who ignored the signs and had a “buy and hope” strategy probably finally sold out at the bottom.

This chart shows you the huge volume of shares traded during the panic.

If I had not exited the market based on the daily charts, I might have noticed the critical failure of the Dow to hold above its 30 week average (red line) , early in the decline.

This weekly chart shows how, following stage analysis, I would have been alerted to a new Stage 2 up-trend in the summer of 1988.

While hindsight is 20:20, I think you can see from the above that there were plenty of technical signs portending of a decline, long before the crash.   If we blot out all of the media pundits and their exhortations to stay in the market, we can just let the market tell us what is happening. That is what I strive to do when I publish this blog. The fact that we are in a time of low interest rates and a steady but not irrational market advance suggests to me that we should not be expecting   any 87 type of crash now just because it is its anniversary. Nevertheless, my indicators should alert me to any potential problems?!!

Meanwhile all of my indicators are positive, with the GMI at 6 (of 6) and the GMI-2 at 8 (of 8).   Friday was the 6th day of the new QQQ short term up-trend. From the table below we can see that there were 818 new 52 week highs last Friday. The last time we had more than 800 new highs was November, 2010, at the beginning of a multi-month rally! Note, however, that the QQQ has closed above its critical 10 week   average for 15 straight weeks. The Worden T2108, at 73%, is getting close to the area where it tops out, above 80%. Perhaps of most concern is that the Dow 30 Index has been much weaker. It has closed above its 10 week average for only the last 2 weeks.   The SPY has done so for 6 weeks.   I went back to look at how many of the Dow 30 stocks closed above their   critical 30 week averages.   The number is 20 or 67%.   Key stocks below their 30 week averages include:   KO, T, XOM, WMT, MCD, IBM and HD. On the other hand, 87% of the NASDAQ 100 stocks and 80% of the S&P 500 stocks closed above their 30 week averages.   What is wrong with the blue chips?

I have a suspicion that we are seeing the beginning of the more speculative stage of the bull market.   After a major decline, people buy the blue chips because they are scared to buy the more speculative companies and think that dividends will protect their portfolios.   After the bull has been going for a while and people have profits, they become more confident of the bull and move on to the riskier companies.   With the debt crisis over and Halloween buy signal approaching, people may be more optimistic and willing to take on the growth stocks.

 

By the way, the monthly chart below shows that TPLM has had a recent green line break-out to an all-time high. TPLM has growing earnings and revenue.   Check it out.

 

I spoke at the   Baltimore AAII meeting on Saturday and enjoyed meeting many people.   Some had traveled from Philadelphia!   I neglected to tell them of a great vegetarian restaurant in Philadelphia, which I have traveled to, just for dinner–Vedge!   It was the best vegetarian dinner I have ever experienced–outside of my wonderful wife’s! The travel to that restaurant venue is worth it!

So thank you for coming out of your way to learn about my experiences.   Many were TC2000 users.     I talked about the green line charts and the many successful authors I have read who have shared their methods.   I always ran out of time. If you missed it, you can get a summary of much of my strategy by listening to my December 2012 webinar with the Houston TC2000 users group, the link to which also appears to the right of my blog.   The attendees yesterday were largely “Boomers” who are thirsty for ways to preserve their wealth and survive in retirement–as am I.   We all have vivid memories of the market melt-downs in 2000 and 2008 and are trying to grow our assets while preserving them from another market debacle. Perhaps the most important lesson from my experiences that I wanted to pass onto them is that it is not a crime to get out of the market and to sell down to the sleeping point (when one is comfortable with one’s portfolio risk). Of course, when one sells in a taxable account one has to be mindful of the tax consequences and wash sales rules. My trading accounts are in IRA’s and tax deferred, so I have no immediate tax consequences when I buy and sell……

I told you last week that I went to cash in my trading accounts.   I saw no reason to try to navigate this volatile market environment until the debt limit extension has been passed.   However, I remain invested in mutual funds in my university pension accounts because the markets I follow   (SPY, DIA, QQQ) appear to be in Stage 2 up-trends.   I also noted that one does not have to exit or enter all at once.   I often wade in and out, in stages.   I only add more to my position if the market moves in the intended direction of my prior purchase.   I never average down and add good money to bad. I also told the audience that the   best strategy for me might be just to own the SPY, using Stage Analysis to time entries and exits. For larger returns, one might use the leveraged short and long S&P500 ETF (like SDS, UPRO, SH, SPXU). Leveraged ETF’s are more risky because they go up and down faster than the underlying index. I also said to have an exit plan for every trade.

I spoke a lot about green line charts and Weinstein Stage Analysis.   I think this chart of GLD (the gold ETF) illustrates the strength of both.   When a green line break-out fails, it is often a sign of technical weakness. Stocks should break through a green line top and keep rising. When a new green line top is formed (after 3 months without breaking its all-time high), I watch for an exit. When the equity also enters a stage 4 decline, it is a sign to me that I should be out of the security or short it.   Look at this weekly chart of GLD. After forming a new green line top in late 2011, GLD entered a long Stage 3 with a somewhat flat 30 week average (red line),   and entered   a clear Stage 4 by April, 2013, below a declining 30 week average.   I never hold a security that closes below its 30 week average. (Click on chart to enlarge) While I do not show the chart, GLD had been in a Stage 2 up-trend from 2009-2012!   When might GLD be a good investment for me?   When it enters a Stage 2 up-trend.

Meanwhile, the SPY is in a clear Stage 2 up-trend and above its recent green line top.   This weekly chart shows that SPY found support last week at its 30 week average. Note that it already re-tested its green line break-out 15 weeks ago.   A close back below the 30 week average (around 164)   would be a serious break-down, but it would take a long time for SPY to enter a confirmed Stage 4 decline.

I will therefore wait out the week in cash in my trading accounts.

Meanwhile, IBD still sees the market to be in an “uptrend under pressure.” The GMI and GMI-2, however,   are both at maximum readings.   If I flew just on instruments I would be long–but then there is the debt ceiling……   I prefer to wait before I wade back in.

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