General Market Index (GMI) table

I transferred all of my university pension from mutual funds to a money market fund.   I know I should have done this in stages, but I just got tired of worrying about the risks.   I am willing to give up subsequent gains for a while in return for the comfortable thought that I probably will not lose any more of the money I will have for retirement. I did not act solely because of my emotional fatigue, however.   I am mainly acting on my established rules that say that when the GMI is very weak and the major indexes are below their 30 week averages, I am supposed to be in cash.   So I took advantage of Friday’s strength to sell out at the closing prices at the end of the day, which is how mutual funds are priced for sale each day.

In addition to having all of my technical indicators negative, I do not like the way so many sectors look.   The banks are declining fast again, just like they did in 2008.   In addition, many industry indexes have broken below the levels they found support   at in the 2010 consolidation. An example is this weekly chart of the Morningstar Midwest Banks index. Note the break below the bottom reached in August, 2010.   (Click on chart to enlarge.) The same pattern can be seen in the following banking sectors, to name just a few examples:   Southeast banks, Pacific banks, Money Center Banks, Northeast Banks.   Similar chart patterns can be found in investment brokerage, trucks, construction, health care, steel and iron, appliances and regional airlines.   What is this market telling us?   The last time I saw similar consistent breakdowns in banking stocks was in 2008 near the beginning of the financial crisis.

As of Friday, the percentage of stocks closing below their critical 30 week long term averages are:   Dow 30, 83%; S&P500, 87% and Nasdaq 100, 81%.   I do not own any stock that is below its 30 week average.

Could I have sold out near the bottom of the decline?   Of course, but I have to follow my rules.   I exited to cash at the proper time a few weeks ago in my IRA and margin accounts, both of which retain nice gains for this year.   I did not do so in my university pension accounts at the time because of the penalties for market timing, and I did therefore lose   some money.   I am now content to wait for the all-clear signal from my indicators and to then go back into the market slowly.

Most bottoms do not end with a sudden burst up.   There usually is a multi-week period of backing and filling as a base is formed.   I therefore would not be surprised to see the market give back some of its recent gains in coming weeks.   What I am trying to do is to avoid being swept up in a new leg down.   If one cannot exit the market to go to cash, one should not be in the market at all.   Too many people are addicted to the rush of trading.   But all of my trading gurus have written that there is a time to be out of the market.

The main indicator that makes me question my decision to sell is the Worden T2108 indicator, which went into single digits last week and is now at 13%.   Single digits i T2108 are rare and tend to occur near market ottoms.   But the T2108 could rise with a market rebound, and then decline again.   I was tempted to go long the indexes last week in my trading accounts, but resisted the temptation.   So, the T2108 may yet prove me wrong……

The GMI and GMI-2 each remain at zero. Friday was the 8th day of the new QQQ short term down-trend.   The QQQ has closed below its 10 week average for 2 weeks, the SPY, for 3 weeks.   In 2008, the SPY broke down before the QQQ, because the QQQ does not include financial stocks,which were leading the market down.   Only 6% of the Nasdaq 100 stocks have now closed with their MACD above its signal line, reflecting the short term weakness in most tech stocks.

Speaking of tech stocks, AAPL has held up beautifully during this decline.   That is a very good sign.   However, if this decline turns into a bear, look for it to end only after it gets around to AAPL. The bear will eventually devour everything, even the market’s darlings.

I have thought all weekend about what I should post Monday morning.   Everyone is trying to predict what will happen on Monday.   That is not my game.   No one knows what will happen and surely the media will tout the few persons they are aware of who get it right, simply by luck.   With all of the predictions out there, someone has to be right.

So, what do we know right now?   First, we now know why the market had so much trouble rebounding from the debt deal mess.   Insiders who knew what S&P was about to do unloaded stocks or took up short positions last week.   That is the nature of the stock market.   This shows the folly of fundamental analysis.   Earnings of many companies are good and PE ratios are low, so the fundamentals of the markets are quite good. But that means nothing!   PE ratios will probably get even lower this week. It is investor psychology that drives stocks, cycling from extreme optimism and greed to fear and panic.   The use of fundamental analysis alone misleads us.   Only technical analysis can warn us of a change in trend.   As Darvas wrote, it allows us to discern what insiders are doing. I therefore always concentrate on the direction the market is moving.

So, my trend indicators as measured by the GMI, have been flashing warning signals.   The GMI has been below 4 since July 27.   I have written many times that I become defensive when the GMI is below 4. In fact, with the exception of one day since July 27, the GMI has been below 3. For this reason, my IRA and margin accounts are almost 100% in cash.   Unfortunately, my university pension is still invested 100% in growth mutual funds–I was afraid to get out again because it would have triggered their market timing rules.   I got out too soon a few weeks ago and then got back in. This will be an expensive lesson for me.   No one should stay in an investment vehicle that prohibits them from going to cash when they want. That is why exchange traded funds (ETFs) offer investors so much more of an advantage over traditional mutual funds   to manage market risk–one can buy or sell them intraday–at will.

So, there are a few technical indicators that concern me.   Investment sentiment surveys, at least for last week, are too bullish.   We want to see   more bears than bulls for a bottom to occur.   Most disturbing to me is that my short term trend count for the QQQ is only day 3 of the new down-trend.   Down-trends often last for many days.   Finally, I have an   indicator that has been below 20 at almost all major bear market bottoms, going back to 1933.   That indicator is currently around 83.   During the quick decline in 1987, that indicator only went to 40, primarily because the market snapped back quickly and did not produce a multi-month decline. So, we are left with the fact that the major equity markets are in down-trends.   We do not know how long the decline will last.

However, the following chart makes me question the strength of   this decline.   The weekly GMMA chart of the QQQ shown below puts the current decline in perspective; it shows that the shorter term averages (red) remain above the longer term averages (blue), suggesting that we have not yet entered a serious down-trend phase, at least compared with the pattern in 2008. (Click on chart to enlarge.) Thus far, the current decline looks more like the consolidation period we experienced in 2010. A major decline will have the red lines declining below the falling blue lines. Maybe I should not be swept up in the current bearish hysteria.

For those of you who are in cash, good job!   Those of us who still own mutual funds have the tough choice of determining how far we want to ride the down-trend.   This is a personal decision based on one’s tolerance for risk and one’s personal financial situation.   I can tell you that the Worden T2108 is at 11%.   In 1987 it reached a low below 1%.   In 2001 and in 2002 it got to around 7%, and in 2008, it got close to 1%. So, at 11% the T2108 is in oversold territory, but it could go much lower if this turns into   a multi-month decline. This has been a very rapid decline thus far.   I will be watching to see if a rebound rally occurs. The strength and duration of any rebound may provide clues to the actions I must take. Furthermore, after every decline has ended, I promise that during the next one I will buy a bullish index ETF (QLD) if the T2108 goes into single digits.   Will I have the courage this time?

Be careful and thank you for the nice feedback on my blog.   I just talked to my stock buddy, Judy, who urged me to post tonight so that my readers can have the benefit of my thoughts.   She thinks it might help them have a balanced perspective on the current situation. I hope it does.