Monday, October 31, 2011

Quote Of The Day

"Choose a job you love, and you will never have to work a day in your life." ~ Confucius

Sunday, October 30, 2011

Weekly Recap: October 2011, Week V

It was a super week for Commodities with Copper and Silver achieving double digit gains. Platinum, Natural Gas, Palladium, Cotton, Cocoa, Crude Oil ands Gold weren't too far off either, with each of them achieving a minimum gain of at least 6.5%. Why such powerful gains, you might ask? Didn't you hear... Europe has been "saved"! On a serious note, all risk assets became extremely oversold starting first week of October and obviously now we are experiencing a strong rebound.

Portfolio Thoughts
Regarding our own portfolio, both of our small US Dollar long trades have been stopped out now. The Dollar has failed to maintain its uptrend against all currencies, including the weak Eastern European ones as well. Our position in the Singapore Dollar got stopped out as the price triggered a sell order just below 200 day moving average, while the Czech Krona short, which was opened Tuesday as price bounced, got stopped out on Wednesday on a reversal for a break even. We are now in 100% cash for our portfolio.

A lot of people have been asking me why we are so heavily cash overweight, despite calling the bottom around early October (Article: Equities: Sentiment Overview) in the recent risk on asst rally?

Well the answer is quite simple actually. While the market sentiment got extremely bearish, justifying a rally, in my opinion it will only be a short to medium term one. We are coming closer to the end of the business cycle - this is not the beginning of a new business cycle. Since the economy is now in the last inning of the current business cycle, our main goal as long term investors does not line up with risk reward. Our goal is to always buy proper long term bottoms.
How do we know what a proper long term bottom looks like? Consider the chart above, which shows some of the main economic indicators for G3 countries - US, Germany (EU leader) and Japan. Long term bottoms in risk assets occurred in late 2002/03 and late 2008/09. At that point the economy was in a recession or just coming out of one, earnings were contracting and very low, business confidence was pessimistic, manufacturing was depressed and finally job losses were the name of the game. The best time to buy is during awful times like those, because what waits over the other side of the fence is a whole new upturn in business cycle.

Lets compare those conditions to today... earnings are at record, business confidence is still at elevated optimistic levels, manufacturing is still expending and we do not have any sustainable job losses yet. Does that sound like a pessimistic scenario to put large amount of money to work? No. Therefore, it is safe to say that the business cycle that started after a 2008 recession, is still alive and well.

I have maintained my view that a recession will still not happen in the US, because it is too early. Business cycles last about 4 to 5 years. Bears have failed many times to call a recession and made themselves look like idiots in the process. They get too bearish, over do the short side thinking its 2008 all over again, buy a ton of Treasury bonds and than get killed by huge short squeezes! It's quite hilarious actually. Having said that, recessions in the US occur every 4 to 5 years when we look at the history, therefore this cycle is overdue for a recession in either 2012 or 2013. I rather think its the earlier figure due to sluggish growth and huge amounts of debt. Keeping that in mind, a trader can make money for a powerful rally and I am considering buying some Agriculture soon.

The big move so far has been the sustained uptrend since early 2009. However, the next big move, in this secular bear market for stocks, will be down once the business cycle together with earnings and the economy starts to turn towards negative surprises. Therefore, you can see that our view is slowly becoming more and more negative, but obviously this rally could still have some legs until early next year.
Be warned though, not all is well with global economy. I continue to believe China is now heading for a serious slowdown. Recent reports, like the video above, suggets the property market is which has been overdue for a correction, is finally entering one. That doesn't mean everything will crash today or tomorrow, but it is just another important signal that the global economic is not on a good foot. In summary, we refuse to be doing any big buying, as we approach the end of a business cycle... that is just a suckers game!
"One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people, always have to be playing - they always have to be doing something." ~ Jim Rogers
On that wise note by Mr Rogers, I hope you enjoy the rest of your weekend!

Saturday, October 29, 2011

Chart Of The Day

Taking a break from the Chinese slowdown theme, which has been a regular for Chart Of The Day posts, today I thought I just post a basic six window mini charts thanks to Bespoke. What we have here are main six asset classes and their performance over the six months.
While equities and Crude Oil are in the process of breaking upwards above its 200 day moving averages, US Dollar just did the opposite by breaking down bellows its moving average. The 30 Yr Bond is still selling off after recently breaking below its 50 day moving average, while Gold is trying to rally back above its 50 day moving average. Over the last month, US Dollar and Treasury Bonds have been the worst performers.

Friday, October 28, 2011

Stocks: What's Next For Equities - Part II

Note: This is part two of a two part write up re-visiting current equity market conditions. Part I is posted just below this article.

Come on... lets all be honest here, even the bulls are surprised by the current rally, at least a bit. I know I am. Look at that pop last night and the accompaning volume. Bears really got squeezed and they are squealing. Statistics state that this is currently the best month of gains Dow Jones has ever seen in its glorious history, while S&P 500 hasn't done this well in one month since the famous 1974 bottom. When was the last time in your lifetime you saw Dow Jones post the best monthly gain ever?

And what about deflation fears, European banking collapse, global recession and Chinese property collapse? Where are all those bears who constantly argue these things... including myself when it comes to China (hahaha) or that specific one guy who always posts links about global deflation on this blog? Looks like all of those worries are a perfect wall for the bulls to climb, so they will be put aside until some later date. In the meantime, even bears have being buying risk on assets or retreating back to their caves.

Introduction
Do you remember the crash analogue I posted during August and September as the VIX spiked? It turned out the bottom was nailed perfectly around the same time that 1990 and 1998 bottoms occurred when looking at both percentage and time. As a matter of fact, majority of the bear markets or downtrends tend to bottom between 60 and 70 trading days after the VIX spikes to extreme levels. It turns out that time wise, this was a plain vanilla downtrend. So.... where to from here?

Short Term
From the short term technical point of view, S&P 500 is now trading 2 standard deviations away from its 50 day moving average. It is also near 200 MA as well as previous neckline resistance. The rally has moved about 17% to the upside, in about three or so weeks - a tad overdone from the short term, don't you think?
Breadth wise every single sector is now overbought from the short term perspective as well. Consider the following when we look at cyclical sectors with stocks above 10 MA and 50 MA:
  • Discretionary: Above 10MA @ 94% & 50MA @ 97%
  • Energy: Above 10MA @ 100% & 50MA @ 100%
  • Financials: Above 10MA @ 100% & 50MA @ 100%
  • Materials: Above 10MA @ 96% & 50MA @ 93%
  • Industrials: Above 10MA @ 96% & 50MA @ 100%
  • Technology: Above 10MA @ 92% & 50MA @ 95%
Definitely looks like the market needs to take a bit of a breather with a pullback, however one should also note that powerful breadth moves like these create continuos rallies - more on that later.
All of these signs signals that a pullback could now be in the cards and same is true with certain sentiment indicators. When I look at the Equity Put Call Ratio, it shows some signs for concern after such a powerful run up in the last 4 weeks. Retail investors are now loving equities, but that doesn't necessarily tell us that an immediate sell off is in the cards. It is just a cautious warning and something to keep in mind, not the chase the price with the rest of the crowd, but to wait for a pullback if you consider buying this rally.

Medium Term
Well, this rare occasion in the last 60 years, where the market fell 15% or more during the past six months, then rallied 15% or more during the current month. The other dates were October 1974, October 1998, October 2002, November 2008 and March 2009. All of these dates were major bottoms in some shape or form. Therefore, it will be a total surprise if this market just stops dead in its tracks right here, right now. History shows that these types of momentum moves follow through at least for awhile. Keep that mind, before you start screaming about how everyone is in complacency mode again. Also keep that in mind, if you are thinking of shorting this market again.
I discussed breadth from the short term perspective, however from a medium point of view, the current readings just hit a decade highs. Percentage of stocks above the 50 day MA within the S&P 500 just got to 94%! This type of price actions indicates that the whole market is now participating in this rally - a huge bonus for the bulls. From the positive view, we can also see that the bearish breadth divergence has finally been taken out. Another thing that the bulls will be glad to see as recently as last night, was that NYSE registered 173 52-Week New Highs vs. only 7 52-Week New Lows. This is the highest bullish breadth reading since July 2011.
On top of the breadth readings above, we also registered a NYSE 90% upside day yesterday. That means more than 90% of the breadth and 90% of the volume was moving towards the upside. In the short term, this can signal a decent pullback in the cards, but from the medium term perspective, this type of price, breadth and volume action is quite positive as it shows strong commitment by the bulls. After so many 90% downside days during August and September (even into early October), it looks as if the  bulls are now saying - we are finally in charge. Also to note is that as of last nights close S&P 500 is now up for year... fancy that!
I also mentioned some warning signs from the short term perspective when it comes to sentiment and the amount of calls currently being bought. Having said that, majority of the sentiment indicators still remain either very bearish or neutral at best. Short interest still remains high, cash levels by hedge funds according to Merrill Lynch Fund Managers Survey remains extremely high and deflationists are still in love with bonds. All in all, these signals are a wall of worry for the stock market. The chart above shows AAII, Investor Intelligence, Market Vane Sentiment and Consensus Survey together in one indicator. I placed a three month moving average on the readings and all I can say is... boy do investors hate stocks!

Long Term
After spelling all of this out for you, one should ask themselves, why didn't I participate after calling the bottom in early late September and early October? Well, for a decent rally, one would argue that I should have, but is this really a proper bottom? I will try and answer this from the business cycle perspective.
This was a very weak bear market from the historical point of view. That is probably because the business cycle did not turn down and a recession was escaped for now (I did argue this for majority of the 2011). A proper bear market, accompanied with a recession, usually sends the markets down between 30% to 40% and lasts for over a year. S&P 500 missed the bear market by a percent or two and corrected for only 5 months since it topped on 02nd of May this year. 

One could argue that 1990 and 1998 bear markets were very similar and they produced very good returns afterwards. Here I would say, yes that is true, but both of those bear markets occurred during a secular bull market in equities, and currently we are in a secular bear market.

On top of that, while I think this business cycle has been very impressive with very strong earnings (this is where recession predictors should turn a red face), eventually all business cycles come to an end, margins starts contracting and earnings starts to disappoint.

I am not sure when this will happen, but usually it is safe to assume recessions in United States have come about every 4 to 6 years from historical perspective. Currently fundamentals are very weak, so it will probably be the earlier figure. That means if the last proper downturn occurred in 2008, we are overdue for a recession sometime between 2012/13 or maybe even earlier.

Long term investors, like myself, tend not to buy and hold any assets with a large potation of capital unless they see earnings are depressed, assets are beaten down hard and recessions occur. Recessions clean out the system and create great buying opportunities that are self sustaining afterwards - in this months bottom, we didn't get that. So hopefully that answers your question. Traders on the other hand so be having a play day in this volatility, so knock yourself out. 

Summary
Well basically, from the short term the market is over-stretched and one should be cautious buying stocks from here onwards. We have had a 4 to 5 week advance of 17%, so I would expect consolidations, pullbacks, whipsaws etc etc. 

Some bears are still arguing this is now a new top. Squealing perma bears also argued this will be worse than 2008 and look where that got them! From the work I presented in the medium term, while anything can happen, I think we have bottomed for now. Strong breadth expansion indicates the whole market is participating, financials are now in a bull market outperforming the overall index (very positive leadership sign) and sentiment itself still remains cautious, giving bulls the wall of worry necessary for higher prices.

Does that means we are out of the woods now? I do not think we are at all. Europeans only really saved Greece. They didn't deal with other countries. And besides, the more bailouts Germany and Franc does, the worse position they put themselves in - so the whole thing is a disaster.

Eventually something bad will happen, so from the long term business cycle perspective, a recession is coming sooner or later. There will be pain. Expansionary business cycles last about 4 years in secular bear markets and by 2012, we are in the fourth year of this very weak expansion. I therefore expect more surprised as the market is bound by 1500 on the upside and about 1000 on the downside. Will stocks sink straight into a hole? No during secular bear markets, stocks move sideways, something bears constantly fail to understand!

Survey Poll
Finally, thanks to all who voted in last nights poll, it was a quick 24 hour turn around, which shows majority of you do not believe this is a new bull market.

Thursday, October 27, 2011

Stocks: What's Next For Equities - Part I

Note: This is part one of a two part write up re-visiting current equity market conditions.

I don't follow politicians too much and I don't really take notice of what they say. They always blab on about nonsense and majority of the time get things wrong. However, if you were to take at least some interest this morning in Asia, you would be reading the front page headlines of various business media outlets informing you that EU leaders have finally come to a solution agreement for the debt crisis. Wow... what a surprise... this was only the 14th time EU leaders have managed to put forward a solution in last 21 months (sarcasm). But is it the real deal this time?

Well that depends on your time horizon. The details are Greece is in voluntary 50% haircut and the EFSF is going to be leveraged un to 5 times towards one trillion Euros. That means, a panic default has been averted for the time being. However, we should all know by now that the only way to fix the problem is in one of two ways: either default by writing down the debt in proper losses or inflating the debt away by making it worthless to the purchasing power. I always argued that global governments will be using the "inflate" strategy, hence why I remain bullish on commodities and bearish on government bonds. And if you think about it, while equities are in a secular bear market, this does not mean they must move down in nominal terms, but rather sideways in a long trading range as they adjust to high inflation rates. I am sure some person will argue that we have no inflation, but that is just total stupidity.

Between September 27th and October 04th, I wrote a two part in depth article focusing on sentiment, breadth, seasonality and technicals of the S&P 500 (Articles: Equities: Sentiment Overview - Part I and Equities: Sentiment Overview - Part II). The first article warned investors who were short equities that sentiment was becoming extremely pessimistic indicating that a rally was coming, while the second article pretty much nailed the bottom on a day arguing that internal breadth was extremely oversold and bullishly diverging. Similar, but not the same occurrences happened at March 09 and August 10 lows.

One of the more important charts I put forward is re-posted above. On October 04th I argued that:
Usually intermediate bottoms occur when the overall index itself makes new lows and yet the Declines do not outnumber Advances, like they did on the first trough. So for example, the recent stock market crash bottomed into 09th of August with 21 Day AD Line hitting a reading of -800. That means over the last 21 days, we have had 800 more Declines compared to Advances on average per day. Now the S&P 500 is making a lower low towards 1040 support area, and yet AD Line is diverging. This is a bullish divergence and it lets us know bears are slowly but surly exhausting themselves.
So here we are almost a month later and the S&P 500 is still at that famous 1250 cross road. The question now stands, what is about to happen next? Has Europe finally solved majority of its problems? Does the equity market have an all clear to now break 1250 resistance? Can we move higher above 1270 level where 200 day moving average sits? Are we now in a sustainable uptrend? Is the market overextended to the upside? Is this a great time to short the market and not trust the Europeans? As you can see, there are a lot of questions to be answered, but before I start putting forward some ideas in Part II, I would like to ask you - the readers of this blog - what your opinion is...

Wednesday, October 26, 2011

Currencies: Comparing Dollar's Rally To 2008

Boy... is the US Dollar a weak currency! We are starring at the potential crisis, which most likely will not be averted by the European Union and yet the US Dollar is failing to benefit in any dramatic way, shape or form - when compared to its super rally in 2008. Potentially, there could be more safe haven buying and more strength to come when things get out of control in the EU - I admit that, but all in all, this is all quite temporary in my opinion. We are looking at a short to medium term point of view, but my stance on the Dollar is still very very very negative from the long term perspective. The currency is toast!
What is interesting to see is that we had quite a similar base formation in early 2008, as we did this year (chart below). Prices bottomed into August, where the Dollar started a massive short squeeze rally. At the same time commodities and equities collapsed as Lehman Brothers went bust. From the technical point of view, the Dollar Index never closed below the 50 Day moving average, nor did it flirt with the 200 Day moving average either. This showed desperate demand during the time of crisis, where investors did not bother waiting for lower prices. They needed Dollars at any price and they bought them pushing the index higher and higher.
The situation has changed dramatically since than. While the Dollar Index formed a same type of a base during mid 2011 and started to stage a rally in August once again, that rally has already lost half of its gains. From a technical point of view, the Dollar Index has recently broken its 50 Day moving average as well as started flirting with its 200 Day moving average. That is not a sign of strong demand, at least currently.

Now, before majority assume I am just plain bearish on the Dollar right now, I would like to point out that I remain long Dollars against some of the global currencies like Singapore Dollar, Czech Krona and European Euro - however these positions are very small fractions of my overall portfolio.

I would also like to add that the Congress is considering reducing taxes on repatriation of corporate profits by US companies. If this was to pass as a bill of law, I am sure it would help the US Dollar stage somewhat more of a rally, where capital flows back home to United States. This could create more of an uptrend, compared to the temporary short squeeze that we witnessed last month.
Over the short term, the Dollar is now at cross roads. The previous resistance which was at around 76 on the US Dollar Index (DXY), should now be acting as support - like it did in early September. At the same time, the 200 Day moving average also happens to be at the same point as well. These two supports now increase a probability that the US Dollar will stage at least some form of a bounce. If this happens, all eyes (including my own) will be watching to see how sustainable this bounce will be and if we can move towards a new high above 80 on the index. A failed rally and a break below 200 Day moving average will lead to renewed selling pressure. We have shaken off overwhelming bullish sentiment we saw in early October, so there is now more room to rally. All we have to do is wait and see...
Having said everything, it seems that global investors today are much smarter than in 2008 - especially the Asian ones, as they continue to accumulate Euros. They aren't just fleeing into the Dollar at any price as they seem to understand the US has even bigger problems than Europe. While the Dollar and the Euro might still be in a pull and push relationship as they are both sick currencies since the late 2007, any slowdown in the economy will bring about more money printing by the glorious Federal Reserve in the form of QE3. This will be a Dollar killer, as the next program will likely be in trillions and trillions. At that point, the question is how far lower will the US Dollar go?
On the other hand, if... and its a big if, General Bernanke does not expand Feds balance sheet anytime soon, while central banks around the world cut rates and the EU starts its own version of QE, than the Dollar might be in a temporary bull market for awhile longer. The chart above shows how the US Dollar rally starts before global central banks rate differential to the Fed narrows. In other words US Dollar tends to discount easing moves ahead of time. We are now at important cross road and it will be interesting to see what happens, as US Dollar strength has many implications for other assets like equities and commodities.

Commodities: Farming Is The Future!



Thank you to a friend for sending me this video link.

Tuesday, October 25, 2011

Portfolio Update: Short Czech Krona

First of all I want to apologies for the lack of posts. I'm finally back to work now, but quite exhausted from the travels - so I will slowly be returning to regular posting over the coming days.
Today I just wanted to touch on a topic that our fund opened some short contracts on Czech Krona just recently. We have been very patient in our wait to add some positions against East European currencies like Hungarian Forint, Polish Zloty and Czech Krona. The current position is about 1% of our current fund, so not a serious investment on relative terms - but we are happy to maintain US Dollar exposure in the current environment.

We believe that growth slowdown will be most felt in Europe and their surrounding emerging economies, where some of the central banks might soon start cutting interest rates. In general, the US Dollar could be pricing in a global easing phenomenon, where average monetary policy rate is being reduced against that of the Federal Reserve's 0.25% stance.
In the chart above, you can see that the US Dollar tends to stage a rally before central banks move into easing stance relative to the Fed. We should all remember that markets are discounting mechanisms, so the current rally in the "King Dollar" could be doing just that, similar to that of 2004/05 and 2008/09, especially against the Eastern European currencies.

Thursday, October 20, 2011

Quote Of The Day

"I wouldn't advise anybody to buy bonds, I would advise you to sell bonds. If I were a bond portfolio manager, I would get another job." ~ Jim Rogers

Poll: S&P's 2011 Performance

Thank you for all who participated in the voting over the last week. Majority of you who read this blog seem to think that equities will finish higher than 1224 - which was last Friday's close on the S&P 500. On the other hand, minority of you think equities will finish lower than 1224. It will be interesting to see how things play out with two and half months of the year remaining.

I also have to apologies for the lack of updates, but I promise I will be returning to normality soon enough. Currently I am away from normal daily routines. Once again, thank you so much for voting!

Monday, October 17, 2011

Weekly Recap: October 2011, Week III

The relief rally continues with risk assets. Commodities and equities had a stelar week, while Government Bonds and the US Dollar experienced sell offs. This week I will be away travelling to Hong Kong so posting might be more limited. Majority of the weeks headlines should be dominated by EU debt crisis meetings and US earnings reports.
On that note, I hope everyone has enjoyed their weekend and does so with the up and coming week! Last but not least, if you haven't voted in the poll, please do let us know where you think S&P 500 is heading for the rest of the year...

Saturday, October 15, 2011

Poll: S&P's 2011 Performance

After recently being down as much as 15% as of October 04th and up as much as 9% on 02nd of May, S&P 500 is currently down 2.5% for the year. Right after 2010, one could say that this has been another very volatile year without a doubt. This weekends survey poll asks if you think S&P 500 will finish higher or lower from the current level of 1,224? Thank you for voting in advance!

Friday, October 14, 2011

Quote Of The Day

"A difference is when Japan did monetary easing, that they were the largest creditor nation in the world, America is the largest debtor nation - not just in the world - but in the history of the world and the U.S. dollar has been - and is the world's reserve currency. So there are some factors that might not keep the interest rate down in the U.S." ~ Jim Rogers
The U.S. economy is likely to experience a period of stagflation worse than the 1970s, which would cause bond yields to spike, commodity bull Jim Rogers say recently. Rogers went onto say that governments were lying about the inflation problem and the recent rally in Treasurys was a bubble. This has also been my view for a long time, as I wait for the final top in shorting Treasuries.

Wednesday, October 12, 2011

Currencies: Sentiment Update

I'll just like to touch up on a quick post regarding sentiment in the currency markets, as there seems to be so much interest there with constant bearish news coming from both Eurozone and China. I have been reading a lot of blogs as of late to track what the markets view currently stands at. I like doing that from time to time because blogger-sphere seems to be a good barometer of consensus thinking. So it turns out some of these very poplar and quite well followed blogs are currently surprised with the current risk-on rally. Funny, these same bloggers were recommending continuation of downtrend and further selling just couple of weeks ago.
Common sense stated we were overdue for a huge short squeeze or a technical rally or whatever you want to call it. I have actually been warning of a US Dollar pullback for weeks. However, majority of these "blogger experts" disagreed, saying "No, no, no... Europe is in huge trouble... run back home and short some Euros quickly before its too late!" Now, I look at the Euro just reaching $1.38 and above today - after trading at $1.31 just recently. That is 7 handles in a week... ouch! Even the British Pound is gaining, despite so many "pundits" recommending shorting it after further QE was re-started by BoE.
Commodity currency complex is pretty much similar. As of last two weeks, speculators were net short commodity currencies for the first time since March 2009. I'll quote this for you...
"So you better be quick and short the Aussie Dollar, before Chinese property blows up! Price will never reach parity again." said one blogger, who I won't mention here, while referring to a Jim Chanos' video.
Haha. Speaking of parity, Aussie Dollar is stronger than its US counterpart again - as a matter a fact it is now close to $1.02 after trading at 93 cent handle just a week or so ago. That is almost 10 handles in a week or so - ouch! Kiwi Dollar is also back towards 80 cents, while the Loonie now trading below $1.02 and moving toward parity again. Even other less popular commodity currencies like the NOK are also gaining very rapidly, now trading back to $5.60 from $6.00 just couple of weeks ago.

I can here a lot of squealing and pain coming from the Johnny-Come-Lately's who insisted that shorting the Euro or Commodity Currencies was the priority only few weeks ago. It is not just currencies either, S&P 500 has now rallied 12% from the bear trap, while Crude Oil is edging towards $90 a barrel again. The whole thing is a bit hilarious really and the funniest thing of all is these gentleman speak at conferences for finance and investing, charging money on us citizens.

So what is my view on the currency complex?

Well, I remain optimistic on the US Dollar, so you could claim I belong in the same boat. Well maybe I hold the same view as the professional bloggers slash conference speakers, but in this business, timing is almost everything and I prefer not to get squeeze by 10 handles on the Aussie Dollar within 10 trading days. You are either a contrarian or a victim. Don't get me wrong, even being contrarian gets you into trouble from time to time, but you are still better of being wrong some of the time, then all of the time.
So understanding execution is the main part of making money, we should soon enough be looking at adding some US Dollar longs or some puts (depending on your strategy), while a lot of weak hands get squeezed. We still might have some squeezing to go first, judging by the remaining bearish talk. The whole purpose of this blog is to follow a contrarian analysis from both the short, medium as well as long term perspectives. The goal for a contrarian investor is to always try to buy low and sell high!

Tuesday, October 11, 2011

Quote Of The Day

"If you're a long-term investor, each time the market drops 40 percent from the peak, you should start buying. You will then have satisfactory returns in the long run." ~ Marc Faber

Chart Of The Day

Today's chart of the day shows that Agri-commodities have taken an absolute beating over the last couple of months just like every other market apart from US Dollar and DM Government Bonds. However, unlike majority of the markets, Agricultural commodities have great fundamentals within the demand and supply context.
The truth of the matter is that demand and supply outlook only continues to get worse with time, as we continue to neglect supply shortages in almost every major grain and soft. This will guarantee that Agriculture will have a great future. Therefore, I do not think that the current cyclical downturn in Agriculture will last for too much longer, before secular fundamentals take over.

Therefore, another leg down in selling pressure will be enough to lure me to invest for a longer term buy. My favourite commodities in this space continue to be Rice, Soybeans, Sugar and Cocoa.

Monday, October 10, 2011

Stocks: Luxury Sector Signalling Chinese Slowdown

Over the last couple of weeks I have posted many charts in regards to the possibility of the Chinese slowdown. I could have posted five times more charts, but the point of it all is... if China does go into a economic recession, how could one profit from it?

There are many different ways to accomplish this, if one becomes right - remember nothing is for certain and neither is the Chinese property collapse. Famous short seller Jim Chanos has been famously shorting property companies, equipment manufacturers and commodity producers. On the other hand Hugh Hendry, a famous super bear hedge fund managers, is betting on Chinese collapse through Japanese company credit default swaps. One could also look at shorting industrial metals like Copper (maybe a tad too late there haha). I do not like shorting commodities, because they are in a cyclical bear market, but a secular bull market. Therefore I rather focus on other industries.
Basically, one of the ways I have been planning to play the Chinese credit bubble is to short luxury retailers who have been benefiting from the boom in not just China, but the overall South East Asia. Companies like LVMH, Christian Dior, Tiffany & Co and Hermes are prime examples. I'll spare you all the walk through on why I think there is a huge access in this industry. If you are a tad behind, I recommend you travel a bit more and see what has been happening on this side of the world (and also drop me an email if you are in Hong Kong next week). Travelling the world is actually one of the best ways to improve becoming an investor - daily swing traders need not apply as your technical indicators are sufficient enough.
It seems to be that the luxury sector is now showing signs of topping out after gaining somewhat in the area of 2.5 times since March 2009 - quite a bull market might I add. Its not that I am a fan of any technical patterns, like the one shown in the chart above, but that some of these companies like Hermes are now trading at 50 times reported earnings, having gone parabolic in the last three years.
On top of that, when I look at relative strength of Luxury Sector vs MSCI World Index, we can see that since March 2009, this sector has been a leader of the cyclical bull market. However, in the last few months we have signals that this strength is breaking down. Something is not right in Asia and especially China. Strong companies like LVMH, Christian Dior and Tiffany & Co are also breaking down and after failing to make new highs in September. Furthermore, Mulberry and Burberry also fit this type of price action.
The excesses of the luxury boom aren't just witness in the high end apparel labels. The wealthy Chinese have been enjoying themselves in Macau, the Las Vegas of the East. But... if the market is a discount mechanism we all claim it to be, than the current signals might be showing signs of that boom ending soon enough. In the chart above, we can see Wynn Resorts also signalling a potential topping pattern. Sands China looks quite similar too.
Summary
While majority are focused on Greece and EU, I have been watching China for weeks now. One might argue that Chinese credit bubble has been obvious for years, but I would say that its all about timing... and that timing might be now. Some of the strongest pillars of the cyclical bull market from March 2009 until recently, are now starting to break down - and they have very strong links to China as well as Asia.

From luxury labels to casino companies, one might view these signals as a sign that there is definitely something wrong with Eastern booming economy. Despite of its strong fundamentals, favourable demographics and great future potential, even Asia including China might now be ready to roll over and join its cousins in the West for a medium term correction and a potential slowdown in 2012.

Caution is heavily advised despite the current rally which started last week due to bearish sentiment. The dare devils (aka trading accounts) should take a peak at the opportunity to open some shorts on some of these companies as they participate in the current short covering rally.

Sunday, October 9, 2011

Weekly Recap: October 2011, Week II

This week saw some of the assets rebound for selling pressure over the last quarter. In particular, the stand outs were industrial commodities like Crude Oil and Copper, that became somewhat oversold from the neat term perspective. Both were up over 4% for the week. It is also worth mentioning the impressive reversal equities staged from Tuesday onwards as both sentiment and breadth became oversold (Article: Equities: Sentiment Overview - Part II).

Natural Gas was the worst performer this week. Weather in the Gulf of Mexico stayed quite calm - usually notorious for cyclones this time of the year. Therefore, inventory levels on Thursday came above expectations again. All in all, an awful performance for Natural Gas during its very strong seasonal period triggered my stop loss for capital loss of 1.3%. While we are also on the top of the current investments I hold, while I opened Long Swiss Franc on Friday (Article: Portfolio Upate: Long Swiss Franc), I ended up squaring that positions for a break even straight after. Since the position was opened and than closed at the same day, I will not count it as a trade - but I will be back to buy some Swiss Francs in the near future again! I mentioned in the original article that:
A small position is at least worth the risk for its reward right now and as the trend starts to eventually change again, I will be adding some real decent positions.
As I wait for major inflection points to deploy majority of my cash holdings, I have noticed that the current volatility and market swings have slowly lured me into trading the market instead of investing - something that is definitely not my style, even though some of the time I have had periods of good return when trading. Therefore I am putting a stop to that type of a strategy.

I prefer to be out of the market right now because speculating while we have down side risks remain, is not the best way to allocate my cash. But having said that, I do not want to short any risk asset because they are currently very oversold and sentiment is very negative. So when I look at the broad macro picture, I come to a basic and simple realisation that the only asset in a proper uptrend is the US Dollar and that is only place where I remain long and am willing to add further capital on any decent pullback.

For those dare devils willing to take a risk and feel more comfortable trading as their main strategy, I have to admit a few assets look good for a trade currently. One of these is the Treasury Long Bond (chart below), which is currently three standard deviations above its 52 week range, over 20% away from its 200 day moving average and just put in a weekly reversal candle... very similar to the way 2008 played out.
On that note, I hope you enjoy the rest of your weekend!

Saturday, October 8, 2011

Quote Of The Day

“All through time, people have basically acted and re-acted the same way in the market as a result of: greed, fear, ignorance, and hope – that is why the numerical formations and patterns recur on a constant basis” ~ Jesse Livermore

Friday, October 7, 2011

Stocks: Sentiment Survey's Update

It seems that the noise all last week was about what to short as the S&P 500 started breaking below its support line in the sand. However, on Tuesday this week, just as the market broke 1100 support from August 09th, it trapped a lot of bears by doing a quick reversal.

Why didn't we go lower? Well, we still might to be honest with you. However, one can argue so many different reasons why the market staged a rally both fundamentally and technically, neither of which really move it like emotion can. So my answer today focuses on contrarian analysis and looks at extreme bearish sentiment, which is now squeezing the shorts that joined the game late.
So after a three day power rally, many are calling this just a plain vanilla short squeeze, but does the market have juice for further gains? According to contrarian sentiment survey's it just might.

Investor Intelligence Survey

On Wednesday, Investor Intelligence survey reported that newsletter advisors who were bullish stood at 34.4% and while the bearish advisors stood at 45.2%. This is now the highest reading since March 2009 and the readings are 1 standard deviation above mean. Historically, this type of a reading has always signalled very strong positive returns going forward, but sometimes drawdowns can be quite excessive. For example, in late 2008 pessimism remained high for awhile.

American Association of Individual Investors
On Thursday, AAII survey reported that individuals who were bullish stood at 35.2% and while the bearish ones stood at 45.7%. We aren't as extreme in readings when it comes to this survey, however pessimism is on the rise here too. The best way to follow this indicator is to apply a 4 week moving average, as weekly readings tend to be quite volatile at times. Further selling could have pushed us to that extreme 2 standard deviation territory last seen in March 2009, but we never really got there.

National Association of Active Investment Managers

NAAIM survey reported on Thursday that fund managers recorded the first net short exposure towards US equities in a very long time. In other words, fund managers believe now is the right time to short equities, with average exposure sitting at -3.6%. This is now the lowest exposure to stocks since the first week of October 2008. Historically, last six times managers had exposure to equities lower than +5%, S&P 500 returns were positive 100% of the time on average gaining 4%.

Hulbert Newsletter Stock Sentiment
Newsletter advisors tracked by Mark Hulbert showed average equity exposure recommendation of -16.8% net short. That is the lowest reading since the first week in March 2009, just as the stock market bottomed. The chart I have is not my own, so I will not update it, but historically the returns were quite good when this much pessimism was present.

Since the start of the secular bear market in March 2000, anytime the sentiment survey dropped this low, the S&P 500 was positive a month later 13 out of 13 times or in other words 100% of the time. However, the data does not include late 2008, when negative readings weren't enough to stop an almighty post-Lehman crash. It should remind all that contrarian analysis is very good tool, but not a holy grail. So it works almost always, until it doesn't and that it wipes you out hehe!

Market Vane Bullish Consensus
Market Vane bull readings are compiled by tracking the recommendations of leading market Commodity Trading Advisers also known as CTAs. This sentiment survey does not work on a range level similar to II, NAAIM or AAII, but more so on a relative level with regards to the price and standard deviations.

Keeping in that in mind, the current reading stands at 44% bulls. Relative to that, other major bottoms like March 2009 had readings of 33% bulls and July 2010 had readings of 39% bulls. Recent readings of major tops stand at 60% bulls for April 2010 just before the flash crash and 66% bulls during February 2011, just as the Financial Sector topped out. Therefore, currently the readings are very bearish indeed, but maybe not as extreme just yet.
Summary
Contrarians who feel like dare devils, stand a good chance of catching a multi-week rally from these levels due to extremely negative sentiment towards stocks. Having said that, the market could keep squeezing shorts for much longer as majority feel very negative towards equities and expect a recession with a big bear market like a repeat of 2008, that is still stuck in the minds of investors. I believe we won't get either!

Note: Say that you are willing to play the long side here. A word of caution. We just had 3 days where the S&P 500 posted gains of more than 1%. The wise thing to do is not to jump in right here right now, but maybe wait a day or two or even a week, where a potential pullback occurs.

Portfolio Upate: Long Swiss Franc

Our fund just opened some long contracts on Swiss Franc earlier this morning. If you a regular follower of this blog, you might remember that back in late July, just before Swiss Franc crashed from its dizzy heights, I argued extremely hard against buying the currency (Article: Swiss Franc At Extremes & Currencies: Swiss Franc Love Is Everywhere). We have now opened a very small position with a tight stop loss, as we anticipate a reversal of the trend in the Franc either here or very soon down the track - which means we might try again later if unsuccessful here.

The reason for our favourable Franc outlook is due to changed times. What followed after those articles above was a peg by SNB linking the currency to the Euro at $1.20 minimum rate. Swiss Franc sold off all across the board and fell a whopping 31% in August and September against the US Dollar. However, only strong language has so far been used to devalue Francs amazing gains. Has the market tested this peg with its full force and might? No, not yet, but it will soon!
While this might not the bottom just yet for the Franc, various sentiment survey's I follow show that speculators, traders and investors are now so bearish on the Swiss Franc, that this type of uniformity and agreement for it to fall further has not been witnessed for at least a decade according to my data. Therefore, a small position is at least worth the risk for its reward right now and as the trend starts to eventually change again, I will be adding some real decent positions. On the other hand, the love affair with the US Dollar is now towards multi year highs in sentiment readings - I already warned about this last weekend (Article: Weekly Recap: October 2011, Week I).
Currently, majority of the investments have been small speculative trades with risks of a 1% of the capital within our fund. Nothing serious to write home about really. Our cash levels are growing from both revenue made in our private business connected to mining as well as recent returns as we caught crashes on both Gold and Silver. I've also received specific questions, which seem to be very similar in nature from a lot of readers, so I would like to answer these on the blog as well as individually.

Why is your cash position so large and why not short something?

Currently we are 98% cash, but in Australia we earn 6% interest to sit and wait for the right time to invest. In other words, our central bank does not punish savers and actually admits there is inflation, unlike US and UK. Therefore, we aren't forced to speculate on consistent basis or enter dangerous short positions with large amounts of capital.

What are you most bullish on and what will you be buying next?

1.) That depends on the time frames. In the short to medium term I like the US Dollar still, but for example in the long term, I think it will be a total disaster to hold your savings in Dollars.

2.) I also like the whole Agriculture right now including both Grains and Softs. I am actually thinking of deploying first real proper chunk of our capital into Agriculture very soon, especially if we sell off further down in coming days or a week.

3.) I almost shorted the Treasury Long Bond earlier this week, but since we still have risks from both EU and China, I think we are not yet at the final top. But we could be much much closer than before. I'm still got my finger on the trigger here, but not yet ready to shoot!

4.) Finally, while I think Gold and Silver might drop further or at least consolidate in the short term to medium term, over the long term Silver will go so much higher into triple digit territory.

Thursday, October 6, 2011

Quote Of The Day

"Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life. Because almost everything - all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important.

Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma -- which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice." ~ Steve Jobs
Today's quote of the day is a tribute to one of the greatest industrialist of 21st century - Steve Jobs. The quote above applies to almost everything in life, including investing. As Steve famously said during his speech to university students in 2005: don't be trapped by dogma. Investment wise, that would mean some of the following:
  • Don't buy assets just because majority of others are too
  • Don't buy assets that have been running up for a long time
  • Don't listen to economists and academics justifications
  • Don't buy assets on extremely favourable fundamental news
  • Don't buy assets due to their amazing future outlook
  • Don't believe that this time is going to be different
  • Not believing in consensus agreement gives you an edge
  • Being a minority in your thinking gives you an edge
  • Studying previous historical mistakes gives you an edge
  • Buying panics and selling hysterias gives you an edge
  • Majority disagreeing with you gives you an edge
Investment world is full of opinions where herding and following is common, but almost always wrong over the longer period. In the end it costs investors large amount of money and leaves them in a devastated mental state of mind. Finally, I would just like to say: R.I.P. Steve Jobs.

Chart Of The Day

Keeping with the theme of Chinese hard landing and the various charts I have presented over the last week or two, I thought I would present the HK residential property price index in the today's chart of the day.
We are now starting to decline, so the bulls say this is just a much needed correction while the bears say a hard landing in China will be a repeat of 1997 Asian Financial Crisis. Some bears say the majority of the worlds economy could enter a huge deflationary bust and a prolonged period of no growth, similar to that 1930s. Finally, super bears say the world is about to end haha!

What do you say?

Wednesday, October 5, 2011

Potfolio Update: Profit Taking On Short Gold & Silver Positions

[Update] I've just added some charts.

Our fund just covered Gold and Silver shorts earlier this morning, which we established in middle of August and also September (Article: Portfolio Update: Short Gold). Our profits on this investment were decent compared to the capital we risked, but to be honest I am personally a little disappointed with the Gold trade because I think it will go lower while we cannot hold anymore due to option time expiry.

Our style of investment has always been to buy or sell something and hold it until the trend ends - similar to what we have done on Sugar earlier this year (Article: Portfolio Update: Profit Taking On Sugar). Unfortunately, with options one cannot achieve that type of execution due to time factors. To me Gold and Silver are oversold, but could very easily go lower - especially Gold which might break below its 200 day MA.
Having said that, various Silver sentiment surveys reached bearish levels I have not seen in almost a decade, this week. We now have more bears than we had when Silver dropped 60% during post Lehman Brothers in October 2008. That in itself is a signal of skewed probabilities for the bears, so we thought profit taking outweighs risks for further gains.
We purchased OTM Puts on Gold when it was trading above $1,900 at its first peak of the double top, while the IV was still reasonable compared to these days. With Silver we used CFDs with very high leverage and minimal capital risk on a second peak in early September - in other words our stop loss was very tight. Gold returned about 4 times our risk and Silver returned over 5 times.

With that in mind, I have also updated our Portfolio page and our outlook on various asset classes. With such dramatic falls in various commodities, junk bonds, foreign currencies and emerging market equities, we now have a neutral or even bullish stance - like Agriculture - from previous cautious outlook. At the same time, an insane rally in government bonds has now turned us very cautious on this asset class from previous stance of being neutral. LT means Long Term, ST means Short Term. Long term means 12 months or more, short term means few months or more. Here is the update:

Quote Of The Day

"What has really happened is there is a flight into the US Dollar. Now, the US dollar is not a safe haven. I assure you, the US Dollar has got terrible problems and it is a very flawed currency, but in the panic, people are rushing into Dollars because they do not know what else to do. That is going to continue to make other currencies weak at least for a while and as long as people stay terrified, they are going to run into places like Swiss Franc or the Yen or the US Dollar." ~ Jim Rogers

Tuesday, October 4, 2011

Equities: Sentiment Overview - Part II

Note: Instead of answering individual emails about sentiment, I am continuing the topic which tries to cover majority of the important indicators for a possible intermediate bottom. Please note that equities still remain in a secular bear market that started in March 2000. Tail risks include real world economic events such as a crisis default event in EU and Chinese property market crash or various other themes you read on front pages of newspapers every morning.

The the first part of this two part post was written last Tuesday (Article: Equities: Sentiment Overview - Part I). If you haven't read it yet, I highly recommend you start there first and come back to this article afterwards. I've covered a lot of sentiment indicators in Part I including volatility, sentiment survey's, hedge fund performance, options, insider activity, analyst sentiment, fund flows and many more. Therefore, before I start, I will do a mini update on how these indicators are progressing since last week - it seems that last weeks post wasn't enough for some.
  • Volatility remains elevated. Last nights close was above 45 and now we are testing to see if we will go higher than 48 we hit on August 09th. A new low in the S&P 500 towards 1040 support without a new high in the VIX will be a positive development. A new high in the VIX would not be a negative indicator either, because standard deviation wise, VIX spends only 3% of the time above the level of 40.
  • Certain sentiment survey's became more bearish last week and one of the more noticeable ones was Fund Managers long exposure (NAAIM). Managers seem to have capitulated last week reducing their long exposure to 4%. As we can see in the chart above, these market Pros" were 80% plus net long couple of quarters ago. Hulbert Stock Newsletter Sentiment now shows a reading of -16.8% net short exposure, same as March 2009. In other words, newsletter advisors are now recommending to short the market. How thoughtful!
  • History shows that bearish seasonality tends to end in October. Even though some of the worst crashes occur around this time of the year, October is still a “bear killer" and there is a lot of bears to be killed right now! Since World War II, 11 bear markets were turned around or ended in October including 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, and 2002. Emerging Markets as well as Nasdaq also bottomed in October/November of 2008 as well, while S&P 500 took a bit longer due to the financial sector.
  • Short interest jumped in middle of September to the highest level since March 2009, according to New York Stock Exchange data. Total NYSE short interest was 15.69 billion shares as of Sept. 15, up 5.4% from the end of August and up nearly 18% from the end of July, when the market was building the "right shoulder".
Contrarians should definitely take note of these developments (and many more) as we get closer and closer to an inflection point. Now lets get into Part II - Breadth.

Selling Volume
When we average the NYSE Down Pressure readings over the last 10 days, we can see that we are once again reaching an extreme we last saw on August 09th (chart below). These types of readings, especially more than one occurring in a short period of several weeks or months, usually signals some type of intermediate bottom.
Also consider that 5 of the past 10 days saw down volume make up 90% or more of all NYSE volume. That might not sound like such a scary thought to you, but in the past 62 years only three other time periods come even close to matching this type of extreme down pressure. You might become a bit more interested now and ask me what periods were those? Well, the first two occurred before I was born and I was a baby to remember the last. The dates were August 1943, October 1978 and October 1987 (see... Octobers once again).

So some of you now might might ask, what happened afterwards? According to history (and it is just three cases only) during the next month, next three months and the next six months, the S&P 500 edged out a positive return each time.

Advance & Declines
There are a lot of ways an investor or a trader might use Advances and Declines. The more popular indicators such as Cumulative AD Line, McClellan's Oscillator, McClellan's Summation Index and a 10 Day Advances minus Declines. I could also put up various charts I do myself, but it is not necessary. Basically, consider the simple chart below:

It is the 21 Day AD Line. I prefer to use this because my perspective is not that of a trader or a short term swing speculator. Usually intermediate bottoms occur when the overall index itself makes new lows and yet the Declines do not outnumber Advances, like they did on the first trough.

So for example, the recent stock market crash bottomed into 09th of August with 21 Day AD Line hitting a reading of -800. That means over the last 21 days, we have had 800 more Declines compared to Advances on average per day. Now the S&P 500 is making a lower low towards 1040 support area, and yet AD Line is diverging. This is a bullish divergence and it lets us know bears are slowly but surly exhausting themselves. As a side note, not on my blog however, as some are still posting super bear deflationary collapse links everyday.

Arms Index (TRIN)
So we just covered Volume and Advances vs Declines. This is where Arms Index or TRIN comes in handy. Created by Richards Arms long time ago, this is a great indicator to follow overall breadth momentum. Basically, despite its somewhat technical name, it is very simple - the indicators job is to find a ratio between Advance Decline Breadth and Up Down Volume. I tend to use a 21 day (one month) average for these readings, because I am not a trader majority of the time.

As we can see in the chart below, neutral readings are at 1.00, but as of late, these readings are slowly moving towards 1.20 majority of the time. Readings lower than that tend to signal a lot more advances than declines and a lot more up volume compared to down volume. In other words a lot of buying, a lot of complacency and a lot of optimism. On the opposite side of the spectrum, we should pay attention to readings that go higher than 1.50 or even as high as 2.00. These readings show us that there are a lot more declines and a lot more selling pressure in the volume. These times are associated with dumping of stocks due to fear as many start to forecast the awful economic conditions ahead - and there are plenty of them around now!
Currently we just hit a reading of 1.95 of the last 21 days. Lets put that in perspective over the last decade or so and see what other major stock market collapses managed to produce when averaged over 21 days (one month) of TRIN:
  • May 2010 flash crash reached 2.10 twice
  • Post Lehman 2008 crash reached 1.87
  • World.com 2002 crash reached 1.55
  • September 11th 2001 crash reached 1.47
  • LTCM crash in 1998 reached 1.18
The current sell off is very extreme to say the least, and while it could continue for awhile longer without a doubt, this type of intensity is associated with panic and not complacency. I have to underline this point, because there are many novice investors who believe we are in a period of "complacency". I guess the old saying states that it is not what you look at, it is what you see!

52 Week New Highs & Lows

A large number of 52 Week New Lows tends to create an oversold condition like we had on 09th of August when S&P 500 fell to 1100. However, that does not necessarily bottom the overall market. It just creates an oversold bounce. For the overall market to bottom, we need to see lower index price while we have less and less 52 Week New Lows occur. In other words, bears are exhausted and are struggling to push the majority of index components lower. As fewer and fewer components keep making new lows, eventually the index itself regains strength to turn around and stage a real rally, not just a small bounce... and we are just about there now.

Percentage Of Stocks Above MAs
This indicator can also be used in many different ways, shapes or forms. You have traders looking at the short term side of things with Stocks Above 10, 20 or 50 Day MAs; or you have investors looking at the long term side of things. And than you have your basic divergences, which can be followed too.
Once again, I try to keep it simple. Basically, the way I like to use this type of indicator is with the Percentage of Stocks Above 200 Day MA. If you study history of market breadth in any major post World War II crash, you will notice that when breadth becomes extremely oversold like in the chart above, usually it marks a bottom - at least an intermediate one. Currently we are in that oversold area once again with a reading of only 14% of stocks above 200 MA within the S&P 500.

The more time we spend here, the more oversold the market becomes and better the probability we have as contrarians in buying an up and coming bottom. During the Financial Crisis of 2008, this indicator spent over 6 months at readings below 10, so we are not as oversold as some truly historical events. Sector and industry wise, in alphabetical order, readings are as follows:
  • Biotech has 18% of Stocks Above 200 MA
  • Discretionary has 14% of Stocks Above 200 MA
  • Energy has 0% of Stocks Above 200 MA
  • Financials has 2% of Stocks Above 200 MA
  • Gold Miners has 15% of Stocks Above 200 MA
  • Health Care has 16% of Stocks Above 200 MA
  • Housing has 5% of Stocks Above 200 MA
  • Industrials has 4% of Stocks Above 200 MA
  • Materials has 7% of Stocks Above 200 MA
  • Semiconductors has 0% of Stocks Above 200 MA
  • Staples has 25% of Stocks Above 200 MA
  • Technology has 5% of Stocks Above 200 MA
  • Utilities has 55% of Stocks Above 200 MA
If I was going to buy something, I definitely know what I would be buying - and lets just say it would not be Utilities!

Crash Analogue
When the Volatility Index spikes, it takes awhile for the prices to calm down and establish a bottom. That is what sentiment and breadth help us achieve. Another way to do that, is to look at previous historical capitulation processes.

In the chart above, I have my own Crash Analogue, which follows the S&P 500 price just as it starts crash - in other words just as the VIX starts to spike. In all the cases above, S&P 500 declines about 20% on average before staging a rally. Investors forget that markets correct with both price and time. In 2001, the index decline the most and in the quickest time frame, while in 2010 the index declined the least but in the longest time frame. Currently, we following similar bear market patterns of 1990 Savings & Loan Crisis and 1998 LTCM / Russian Default Crisis. Note: Certain extreme cases have been removed from this study. The study of all the crash analogues can be found here.

Technicals
I don't really focus on Technical Analysis and do not really believe in it too much. Here, I just want to highlight the basics, which many would already consider common sense. There is basically a strong support - in other words buying memory of investors - on the S&P 500 at 1040 level, plus the 1000 level. Also, 1000 is a psychological round number, which tends to reenforce this opinion even more. Look for the index to find a lot of buyers between this polarity.

Summary
Just because I wrote this article today, does not mean one should automatically buy S&P 500 futures right now, right here. This is just information, which could help you make a decision, whatever that decision it might be, whenever that time comes. No one is putting a gun to your head and telling you to buy stocks right now, and it does not mean a bear market could not continue lower if one of Chinese banks were to blow up tomorrow due to property price declines. Also of important note is that, S&P 500's 200 day moving average is now point downwards. Usually these indicators work better when this line is pointing upwards.

But at the same time, do not get carried away with fear and bearish arguments, which try to convince you from an academic point of view on how we are following in the path of Japan - a prolonged black hole of deflation and falling prices. Investing has nothing to do with academics. You best leave that for analysts, economists and professors, majority of whom just work for a wage.

Finally, I came across this and I thought I would share it with you. At the end of last month, CNBC was asking its viewers if they believe the economy is now heading into "depression". In my opinion, it doesn't even matter what you believe the answer is, just the question itself is enough of a contrarian indicator...