Guest Post: Major Sell Signal Triggered

Tyler Durden's picture

Submitted by Lance Roberts of Street Talk Live,

For some time now we have been warning about the danger to portfolios given the deteriorating fundamental, economic and technical backdrop in the markets.  Our warnings, for the most part, have been ignored as individuals continue to chase stocks in hopes that "this time will be different", and somehow, stocks will continue to ramp higher even though all three support legs are weakening.  Currently, it is the imminent arrival of the next round of Quantitative Easing (QE) that keeps "hope" elevated but further Central Bank intervention is unlikely in the near term leaving the markets at risk of a further correction.

My job is to analyze the trend of the data, both economic, fundamental and technical, to build a frame work of possibilities and probabilities about what might happen soon.  Like any good poker player before making a "bet," which requires putting my capital at risk of loss, I want to make sure that the odds are in my favor of winning.  If I am highly confident of success - I bet a lot.  If not - I do not.  The same philosophy goes into managing money.  Wall Street tells you to be invested all the time because that is how they make money.  However, the reality is that investing is very akin to playing poker - you are making bets today based on the possibilities of some future outcome. 

The reason for this framework is that I have been negative on the markets since early April.  The weight of evidence has clearly been negative.  While the mainstream media continues to look for glimmers of "hope" - hope is not an effective investment strategy.  However, when the flow of data changes and price action becomes more constructive - my outlook will also. (Read "Thoughts On Long Term Investing")

For new readers, welcome to the site, here is a brief compendium of previous articles which have been guiding our readers through the current market correction process that began in early April:

 

Major Sell Signal Is In

This bit of history leads us to our latest, and most important, sell signal to date.  With the economy continuing to weaken, corporate earnings, showing severe signs of strain and the Eurocrisis emerging once again - the risk at the moment is clearly to the downside.  The continued deterioration, in both the fundamental and technical frameworks, has significantly increased the risk of further equity market declines. 

The decline in the markets on July 24th pushed the two main moving averages that we follow into negative territory initiating a major SELL signal for the markets.  These major sell signals should not be ignored.  The first chart plots our two moving averages relative to the S&P 500 over the last 12 years.  During this time frame there has only been 7 "sell" and 6 "buy" signals.  As with all investment strategies and disciplines there is always the possibility of getting a false signal.  The same is true for this particular indicator.  Since 1930, there have been a total of 51 major "sell" signals of which 9 gave a false reading translating into a 17.6% failure rate.  As I said, no indicator is perfect, but as an investment manager I am willing to make investment decisions based on an indicator that has an 82% success rate. 

More importantly, as shown in the chart, this strategy helped us avoid the bulk of the last two recessionary market debacles.  The problem is that while it is easy to assume that the current correction could be shallow, like previous two summers as the Federal Reserve stepped in to prop up asset prices, there is always a chance that it could be a much bigger correction.  Following the signals previously would have limited downside risk while keeping you primarily invested in for the majority of bullish trends.

 

The next chart shows the similarities of the 2011 and 2012 markets.  In both cases rallies in June, post a May decline, led to sloppy sideways trading in July.  The major "Sell" signal occurred on August 5th of 2011 as the markets began a steep sell off.  While there is no guarantee that the market is about to plunge towards the 1200-1250 level this August - the striking similarities of market action certainly does suggest a more cautionary stance be taken.

Sell Into The Bounce

Technical signals must be put into "context" based on current market conditions. In order to strip out the "noise" in our analysis we use weekly instead of daily price data.  This smoothing of the daily data allows for better clarity of the trends in the market.   However, due to this smoothing process by the time a signal is given the markets are generally overbought, or oversold, on a daily basis and are generally close for a reflexive bounce.  That bounce should be sold into.

The problem for most investors is that when the market bounces in order to correct the short term oversold condition they assume that the "sell signal" was incorrect.  More than 80% of the time, as our data shows, the market will bounce and then decline to lower levels.  Therefore, the rules are simple:

  • In negative trending markets - sell rallies.
  • In positive trending markets - buy dips.

The technical and fundamental setup is currently a negatively trending market.  It is very likely that, in the current environment, we will retest the May lows, if not ultimately set new lows, in August.  Those lows will likely coincide with further weakness in the economy which should be the perfect setup for the Fed to launch a third round of Quantitative Easing.  Should that occur that will provide the best opportunity to take the cash we are holding in reserve and increase equity exposure at lower price levels. 

The caveat to all of this is if the Fed acts early with QE 3 at the end of this month.  I don't think this is likely but it is a possibility.  In that event the boost to asset prices will reverse the current signal and we will need to add equity exposure back into portfolios.  However, until then, with the major "sell" signal in place it is more important to remain cautious, and conserve investment capital, until a better risk/reward opportunity presents itself.

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SheepRevolution's picture

Here is Harry Read, defending an audit of the Fed:

 

http://www.youtube.com/watch?v=oXOsZ7Ad7dM

 

Spread it!

Dr. Richard Head's picture

But Harry was all pissed because savers were being supported. Great fucking find. Sharing it now.

Precious's picture

None of these "signals" mean squat.  The only thing that matters if whether big brother is going to manipulate the market again.

derek_vineyard's picture

am i just really out of it or did he give no formula for how he calculated the sell signal?

Mr Lennon Hendrix's picture

To equity bears all you have to do is yell "King Dollar" loudly and deflation will happen....

Any minute now....

Any minute....

Muppet of the Universe's picture

BTFD GODDAMNIT. 

Disclosure: Short Big Dow from 880.

jeff montanye's picture

when does btfd evolve into stfb (sell the bounce)?

bdfromkg's picture

He didn't give a formula, but with a little "trial and error" it's clear that the short-term MA (moving average) shown is the 50-day MA, while the long-term MA appears to be about a 160-day MA. Both of these can be overlaid on almost any graph (including the S&P 500) on many sites such as yahoo (finance.yahoo.com). The signal is simply that these two averages have just crossed, as they did in 2011, and also in 2008, before much damage was done. This is a simple and common technique, although the use of a 160-day MA is a little nonstandard, but it seems to work pretty well. As to whether technical analysis like this "works", make of it what you will. My own opinion is that TA is not much help in deciding what to do, but it helps in deciding just when to do it (timing). There are lots of indications (IMHO) that the market is going to have a significant turndown soon, and this "signal" may be a good indicator that it's time to sell (or short).

emersonreturn's picture

audit the f***ing fed, sure...then sue the fed!  

AldousHuxley's picture

Harry Reid representing mob casinos?

 

VEgas mobsters just want to find out the secret of the Fed in running gambling scams, so that they can implement it themselves.

 

Mobsters KNOW banksters have better casino operation strategies. FED is the ultimate HOUSE.

Missiondweller's picture

He was actually for it before he was against it.

 

Channeling John Kerry?

fuu's picture

In 1995 Sen. Harry Reid said:

 

"Mr. President, I would like to extend my congratulations to the Senator from North Dakota, of course for authoring this amendment which I am a sponsor. But more importantly for speaking out about the Federal Reserve, for years, I have sponsored legislation that would call for an audit of the Federal Reserve System. I offer that amendment every year, every year the legislation gets nowhere. I think it would be interesting to know about the Federal Reserve. I think we should audit the Federal Reserve. It's taxpayers money that's being used there but we don't do that.

Senator Dorgan has spoke out on the secrecy of the Federal Reserve System. He's spoken out on the Federal Reserve more than anyone that I know in either body. But even though there is no entity in the world that controls our lives more than the Federal Reserve System, his speeches go unnoticed I'm sorry to say.

People just don't care, it seems, about the Federal Reserve. Maybe because it's a subject that isn't very interesting. You know it's not pornography. It's not, um, murder. It's not, uh, an issue that deals with the wild west, water grazing , uh, doesn't deal with issues that we talk about here a lot. But we don't talk enough about the Federal Reserve and the impact it has in our lives. So I acknowledge the work that my friend from North Dakota has done on this issue, and I am sorry that his very lucid statements have received very little attention.

I was thinking, as the Senator from North Dakota was outlining the secrecy of the Federal Reserve system, that maybe what we should do is, the Central Intelligence Agency has received a lot of criticism lately of not doing a real good job. One reason maybe is that their not secret enough in some of the things they do, um, maybe we should combine them with Federal Reserve Board. What the Federal Reserve Board does, nobody knows what they're doing. CIA it seems everyone has some idea what they are doing. So maybe we could combine the two, it might not be a bad idea.

Mr. President, the Federal Reserve has raised interest rates 6 times since February of 1994. If someone likes this legislation, generally speaking, that is we're going to try stop unfunded mandates then they should love this amendment. If the principle of underfunded mandates being stopped sounds good to Senators, then they should jump with joy and run over here and co-sponsor this legislation. Because this really overshadows all other unfunded mandates, because these go on all the time. Not only do they affect government because of the money that governments borrow but it also affects the private sector significantly. There isn't a person that's in, that's listening to this debate or could listen to the debate that higher interest rates doesn't impact them. Doesn't matter if they are homeless or they're making a multimillion dollar transaction on Wall Street as we speak, higher interest rates affects everyone in this country.

What we are saying is that the Federal Reserve Board would provide a report to Congress and to the President about anticipated costs of changes in interest rates on the Public and Private sectors. All we're aware of each time the Fed raises interest rates is we pay more. We should have a little more foundation as to what we really do pay.

This amendment requires the Fed to prepare a report, this report will detail the costs imposed by interest rate changes within 30 days after the Fed decision to change such rates. The report will include an analysis of the aggregate costs that interest rate changes would impose on Federal, State, and Local governments. Will provide a cost analysis of interest rate changes on Private sector borrowing. This Mr. President will allow us to see the increases in borrowing costs for consumers, small businesses, home owners. and commercial lenders.

I am glad that there has been a roll call vote called on this matter. I think it's important if people are in favor of doing away with unfunded mandates that they support the largest unfunded mandate we have in America today."

UP Forester's picture

Buy a safe place away from cities, food, guns and PMs with what's left, and STFU.

j8h9's picture

I can't but I'll find you in the UP. Keep a chair waiting.

fonzannoon's picture

"The spx is on my radar"....

HD's picture

"It's hitting new highs"

I roll my eyes at that commercial every time it's on.

MrTouchdown's picture

"Inflation is transitory"

sessinpo's picture

Most things are and relative too

jeff montanye's picture

on a long enough timeline ....

j8h9's picture

buy low, sell high, that's my strategy. Good material for a book.

tawse57's picture

Akamai up 20 percent after hours, Western Digital up 16 percent. This market will not pause let alone die

fonzannoon's picture

This site is all about the boomers and their dividend payers and how they are cashing out. There must be some other site for the 20somethings and their crackhead tech stocks.

fonzannoon's picture

i have no idea what pmsl means but if it is unpleasant then my apologies. i was just fkin around. 

kito's picture

that was a testament to your humor.....google it....and stop apologizing....it ruins the effect of your post....this is fight club...thin skinned ones need not apply...........

Treeplanter's picture

We're all in this together, Jack. 

sessinpo's picture

Actually I think there is a wide variety of people here. Libertarians, conservatives and socialist that don't realize they are closet commies. Many different age groups and financial backgrounds. I don't find ZH to be MSM yet, which is a good thing IMO. Otherwise I'd be able to walk up to any boomer aged person on the street and say, "What did you think of that thread titled ________?" Not going to happen. Most boomers, like most of the world buy what is sold on TV as real news. I'm so glad I gave up TV for the most part. Watch less then 1 hour a week.

Anyway, it is interesting to see others jumping on board to sell signals and such. Makes me a little uncomfortable to be followed.

RockyRacoon's picture

I wear my ZH t-shirt now and then without a comment nor nod from others.  I'm 63 years old so I guess they think it's some kind of old rock bank logo.   I like being smug.

WillyGroper's picture

>>>>>>> I don't find ZH to be MSM yet, which is a good thing IMO. Otherwise I'd be able to walk up to any boomer aged person on the street and say, "What did you think of that thread titled ________?"Most boomers, like most of the world buy what is sold on TV as real news.

 

Where'd u get this mindset sport?

vintageyz's picture

Try MSN.  It has all sorts of great stuff like Steven's Puppy Love and Other Stars Get Goofy.

ihedgemyhedges's picture

Yeah, but what does RoboTrader think?????????

bnbdnb's picture

Looking at futures, todays small "rally" basically went nowhere.

ArkansasAngie's picture

Benny ... Benny ... Benny.

Go ahead and print.

Only ... since it won't work this time ... especially since you are a gutless $*^%%( and will print little ... we'll be rid of you and your bankster buddies sooner.

Treeplanter's picture

Yeah, Ben, I want a good price on my last gold miner, cash for buying back in after the Big crash.  Sell the first spike, guys, may be the last.

MrSteve's picture

So we sell unless the Fed eases yet again: that is just stupid!

of course the Fed is backstopping Yurp and the yur-a-0 as are all central banks in a now obvious, highly coordinated program.

Junk IPO stocks and junk TrUsury bonds are just signs of the junk times of junk currencies. The time to get real is now, with real assets, not promises some from virtual flimflam artiste. Using historic charts to call hysterical market manipulating currency programs is like using a tide clock to tell when to wipe your ass. Pardon my French!

MrTouchdown's picture

On the bright side - all the crap they pull to bouy the markets is subject the the law of marginal returns. They peaked a while ago and now each additional measure has less and less effect. The market will rear its head soon, and when it does, no amount of policy put in place by the guys we gave wedgies to in High School will save their precious little scheme.

sessinpo's picture

That law of marginal returns applies to QE also which is why BB is trying to suggest this is a fiscal, not monetary problem.

mayhem_korner's picture

 

 

Sadly, I have nothing left in this rigged market to sell...

Muppet Pimp's picture

That is no reason to stop selling, for best results borrow some more & sell it also...

Gringo Viejo's picture

Doesn't matter. The Fed will rig interest rates & the stock market until they can't. That day approaches.

 Forget capital appreciation, preservation of capital is paramount. Got PMs?

rubearish10's picture

STFU! Major moves are never iminent by prediction!

HD's picture

I don't know about that. I predict major moves imminent for anyone eating at Taco Bell...

Meesohaawnee's picture

heres the problem.. Your talking data , earnings, technicals. Ben has made them irrelevant.

another problem. Your talking investors. There gone,,Well except Robo.

1200 to 1250 ?? this should be trading 1100 or below but hey when you algo ramp it up so high. 1200 looks deep to the sheep

Bennie Noakes's picture

Did I just hear a bell ringing?

goldfreak's picture

anybody remember the Hindenburg Omen or the death cross?