Many of you know me as the guy who nailed the turn of the 2007 bear market six months ahead of time. What I told many of you in April 2007 was an important time window was developing for September/October that had the potential to be the most important turn of the decade. I was wrong. It turned out to be the most important turn of our lifetime. Up to that time, our work had nailed just about every important market turn since 2001. I had good mentors. I learned a lot about market timing from Bob Prechter. I’ve been in this market timing game for over 14 years and rarely have we missed an important window on any important index. I’m not meaning to pound my chest; just trying to prove a point, so bear with me for a minute.
Let’s face it. The star of the game is always Gann or Fibonacci. It’s never me. The best any of us could hope to do is identify and recognize when the windows materialize.
Fast forward to October 2012 where we had the next great time window that was five years off the 2007 top and 10 years off the end of the Internet bear bottom. Certainly we got the reaction but in no way was it what bears hoped for. Were they capable of more? Who knows? They got marginalized so badly in 2011. But there was a correction and then a bottom when members of Congress got together for that photo opp at the beginning of the fiscal cliff negotiation.
We got that turn as the sneaky bull turned up again. A major window was marginalized. Then we had the next turn in March at the Gann master time window. We got that turn too, as Europe peaked, but that selling cycle didn’t last either. What gives? A couple of weeks back we hit 233 days off the June low from a year ago. We are also beyond 233 weeks off the November 2008 bottom in the NDX.
The best I can come up with here is that market timing doesn’t work anymore. To corroborate that view the VIX has been super low for almost a year and a half. That doesn’t work anymore either. It seems that we’ve reached a new era where traders expect low volatility and are getting it. Markets continue higher so obviously we don’t need to pay the VIX any attention.
In fact, because market timing and the VIX don’t work anymore, we must come to admit the Random Walk crowd was right all along. Malkiel and his buddies were on the money all along. You know them. They are the guys who tell you to be invested all the time so you won’t miss the six biggest days in the market because you can’t time markets. In fact we can go so far as to say technical analysis doesn’t work either. Perhaps we should just do what the fundamental crowd suggests and just buy good companies.
So because you know me as the ultimate market timing guy, if I’m coming here to tell you market timing doesn’t work anymore you should consider using me as a contrary indicator, right? If I’m telling you all this, I must be losing my mind, right?
It’s not even April.
Okay, now that I got your attention, let’s get to brass tacks. There’s a point to this discussion. The more this rally goes on, the more you are going to hear from folks that in fact, truly the VIX doesn’t work anymore and we’ve reached a new era of low volatility. You might as well hear it from me first than from some talking head on television who couldn’t tell a flag pole from a flag pattern.
First of all, the VIX does work, it’s an iron law. When it gets low it will cause the market to turn eventually. We have good precedent for this. It bottomed at the end of 2006 and it took roughly 7 months (the Russell) to get the first important turn. So if you want to be lulled into complacency, be my guest. It’s just going to take the patience of a saint to see this turn.
Here’s the problem with the timing cycles right now. The SPX is in the path of least resistance up.
Those of you who follow my work know I got long term bullish probably before most people. Our take on the 2011 turn was it was likely to be of intermediate level damage but not likely to challenge the 09 Haines bottom. That’s because we had numerous calculations that suggested the 09 bottom was a generational low. So far, that has worked. We are seeing the payoff to all of those calculations and symmetries right now. In fact, market timing does work because that wonderful photo opp we had in November with Boehner, Pelosi, Reid and Mitch McConnell happened within a day of the NASDAQ being down 386 points in about 39 days. See, the problem isn’t that market timing doesn’t work. The problem is its only validating on the bullish side.
But one of the problems we are having getting a turn is Andrews on this chart and I want you to think of Andrews the same way you would the Jetstream on The Weather Channel. Once it gets above the mid line, the stream is heading a certain way and it will take more than a few measly time windows to reverse a freight train. That’s why all of nice symmetry we’ve seen since March has bit the dust.
Then we have another problem. I’m not going to comment here on the AP, Benghazi or the IRS scandal. All I’m going to tell you is the psychology has been so negative on the 24/7 news cycle you could cut it with a knife. That kind of sentiment acts as a crowding out effect for those of you who’ve take econ 101. People can’t get euphoric when they are upset with the news. If they can’t get euphoric they aren’t going to top the market out.
But last week we finally did get a reaction to the 233 week window off the November 08 bottom. To this point it’s been mild. I do think we can see a continuation of it and even get a shake of the trees but in no way do I think THIS is the one we’ve been looking for.
What about the answer to the bigger time windows? I’m looking at a few big ones again and I’m really concerned about them. By the end of August we’ll be 161 months off the Internet bubble peak. At the same time we’ll be 233 weeks off the March 09 bottom. These are the biggest windows of the year. Simply because they come around September one had to respect them. Since we have a freight train now, it’s feasible we could be at the back end of a cycle that is completing and we all know when a cycle completes it becomes a one way market. It’s hard to imagine the markets will stay up another 3 months but it’s the end of May and these markets still have any number of upside targets.
Next page: Valid concerns...
So what should we be concerned about? It’s the bond market that worries me. It’s seriously off its high and in recent posts I’ve shown you the longer term chart which is very choppy and I think has the potential to accelerate interest rates to the upside much quicker than the market would like. So what we accomplished last week was a trial balloon by Bernanke to see how markets would react to the potential of the Fed taking away the sugar addiction. The market didn’t like it and that’s why we got that smaller reaction to the 233 week window. But the Fed also left the end of QE open to speculation as to not really upset the apple cart.
Truth of the matter is the Fed really isn’t even in control in the first place. When long term money really wants to turn, it’s going to turn and there’s a possibility it already did. Remember last year when the crowd got really noisy about the end of the bond market bull? They were wrong of course but now that the bond market has dropped from 149 to 142 we don’t hear much talk about the end of a 31 year bull market. That has me really concerned. When the bond market goes, all those people who bought in for fixed income are going to get killed on the principal.
If it somehow manages to stay up and it really needs to hold the 142 level because it’s an excellent demand imbalance point which launched the last rally, it’s only another 3 months to those bigger time windows. Those are the ones I’m watching and since they materialize just at the time of year markets can have a dangerous reaction, now is not the time to get complacent.