General Market Index (GMI) table

I am still waiting for to see whether this base will hold.   Friday was the 18th day of the QQQ short term down-trend.   The longer term trend remains   down.   It is very tempting to nibble at stocks that are rebounding.   The problem is that the decline could resume quickly for such stocks.   It is much safer to own stocks when the GMI is at least 4.   With the GMI still at zero, I will let the bottom feeders get in before me.   When my indicators signal a true up-trend, I will get back in.   A trend follower always waits for a trend to develop and therefore identifies     bottoms and tops after they have been established. The GMI2 contains several more sensitive short term indicators which can turn up in a counter-trend rally   during a down-trend. Friday was the 18th day (D-18) of the current QQQ short term down-trend. Only 2 of the 9 leaders I follow have closed above their critical 10 week averages: AAPL and AZO.

I had the opportunity the past few weeks to listen to CNBC and other financial reporters more than usual.   I am tired of listening to them pontificate about how long the decline will last and whether gold can climb higher.   No one knows the answers to such questions.   The market is a collection of people and machines voting with their money millions of time each day.   Trying to predict their actions is a foolish endeavor.

One of the most stupid ideas I have heard   is to suggest that the current market decline is unique and caused by   high frequency traders or program traders.   Human psychology has not changed and market behaviors continually repeat themselves. I decided to look at the long multi-week declines of the Dow 30 Index since 1916.   I computed the duration and depth of every multi-week decline that has occurred.   I defined a   multi-week decline as one when the Dow declined at least 15% in a few weeks without a consolidation along the way, in other words, a steep, unceasing   decline.   My calculations were quick and dirty so do not hold me to them exactly.   They still paint a valid picture. I found that the current decline is not unusual.   The Dow has now declined about 15% in 4 weeks.   Since 1916, there were 4 other declines (in red) that lasted just 4 weeks and lost at least 15%.   They occurred in 1916, 1931, 1987, 2001.   This does not include the other declines in this table that lasted longer than 4 weeks and probably fell as much in the first 4 weeks of decline.   My point is that the current decline is nothing new.   How many of these   declines that occurred before the PC can we blame on program trading or high frequency trading!   Note that   30 of these 33 declines were greater than the current 15%.   So this decline may have a lot further to go…….

With bullish sentiment about twice bearish sentiment, I think this decline may have a lot further to go.   But, as I said before, nobody knows.   So the best strategy for me is to remain out of the market until the new bottom is in.   I could go short by buying puts or inverse ETF’s.   But sometimes it is just relaxing to be away from the market.   In declines I continue to monitor the new high list for potential leaders in the next up-trend.

The GMI and GMI-2 remain at zero.  

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.