Greetings and Happy Festivus Week
! As the holiday season and year-end approaches, I wanted to update you with my view on the current states of markets via my DeMark work and discuss the longer-term view for 2012 and beyond. Beginning in June 2009, and reinforced by the late July 2009 technical DeMark TDST level breakout, an indicator that the market's trend shifted from negative to positive, I've slowly reevaluated my approach to markets, trading and expectations for returns and correlations. Much of this was spelled out in my June 3, 2009 article, The Time for Bearishness Has Passed
Since then I've updated that view three separate times in the past year. In May I warned to Stop Fighting the Last War
, and made it clear that I was seeing bullish dispersion in financial markets; in June, in I'm Finished
, I discussed the dangers of falling in love with a stucturally bearish and inflexible viewpoint; and more recently, in late October in The Fluidity of Change
, I again outlined the reasons I am longer-term bullish.
Nothing has changed. In fact, the more I hear, read and see from market participants, the more bullish I become.
Before I discuss this bullishness more, let's look at DeMark indicators for the indices short and long-term.
: We are on bar 12 of a DAILY TD Sequential 13 sell signal that requires a high above 1275.92 to record. TDST Down support is at 1151.81.
: We have a qualified TDST Down break at 1219.50, with a target down of 1144.76.
: We are on bar 6 down of a potential TD Buy Setup 9, but there is an overlapping TD Sequential 13 sell signal that could potentially record if we get a high above 1327.22 before we reach bar 9 of the Buy Setup. TDST Down support here is 1049.33.
: Similar to SPX, a high above 2355.78 is necessary to complete a TD Sequential 13 sell signal. TDST Down support is at 2169.57.
: We are on bar 4 down of a potential TD 9 Buy Setup with TDST Down support at 1854.43.
: A TD Sequential 13 sell signal recorded in May. We are now more than halfway through it with TDST Down support at 1767.43. That's about 22 percent lower.
: Bar 3 up of a potential TD 9 Sell Setup, TDST Up resistance at 841.82.
: Bar 2 down of potential TD 9 Buy Setup. TDST Down support at 628.48.
: Bar 5 down of TD ( Buy Setup. TDST Down support at 602.43.
Of the three indexes, the RTY is most bullish. The SPX and NDX have near-term downside risk, but I expect in the worst case for MONTHLY TDST Down levels to hold. With the NDX TDST Down level 22 percent lower the downside risk is apparent, but I view those longer-term TDST levels as low probability.
In all my years of being involved in financial markets, this is the most bearish I have ever seen people in the aggregate. Of course, utilizing Socionomics we anticipated this would be the case years ago. We knew that social mood would drive people to be angry, to view politicians in the worst light, to view the icons of the former bull market with skepticism, envy and even hate, to embrace anti-heroes, become infatuated with zombies and horror, listen to atonal music, find compromise among groups difficult leading to labor strikes in business, government and even sports... I could go on. The point is that everything we have prepared for has arrived. It has happened. We are here.
The domestic economy is presently at risk for stagnation in 2012 and, less probable, a new leg down, while there is a non-trivial probability for an upside surprise. Real GDP year-over-year estimates for 2012 range from 1.2% to a mean of 2.2%. The mean-to-lower range is likely if Congress fails to extend the payroll tax cut and/or unemployment benefits. But given the extreme negative sentiment even a miss below the lower end estimates of 1.2% is already priced in at MONTHLY TDST Down levels mentioned above. If those measures are extended, and if the upper tier of consumers who have been less harmed by economic stagnation surprise in consumption in the present quarter, it is likely those TDST levels are not even tested. Put another way, no one would be surprised by sluggish GDP growth and no one expects an upside surprise.
One of the trending pieces of advice I've read lately is for investors to be "cautious of risk" and "to remain nimble." A large firm put out just such a note yesterday. Leaving aside the fact that brokerage firms certainly have a vested interest in keeping investors "nimble," my view over the next decade is that "nimble" investing is precisely the wrong strategy.
By 2015, we will have had about 17 years of weak equities performance; a pretty good bear market. Buried within that bear market, particularly in the next five years, will be individual stocks making bottoms that will never be seen again in our lifetimes. It is already happening brick-by-brick, stock-by-stock. The probability is that indices as a whole continue to struggle over the next few years as individual components now showing dispersion take their turns bottoming. This process will continue to disguise the origins of the next bull market.
I realize it is difficult for people to grasp their own situations to the extent where they understand that, while social mood in the aggregate is negative, time horizons compressed, risk aversion high, to understand that they should begin lengthening their time horizons, expanding their volatility bands for risk management and anticipating a two- to three-year window where they need to be aggressively accumulating stocks on exogenous shocks (Europe, Asia, energy crises, commodities booms and busts, etc).
In a sense this time period reminds me very much of 1999... inverted. People who are shorting the 3% declines in the market are mirror images of the people who were buying the up 3% momentum moves in 1999 and early 2000. It will work for a while, but the one week it doesn't will wipe out a hundred positive days. I made the decision to stop shorting stocks in March 2009 because I was just like those traders, looking for the final 3% down day. I lost 100 days of performance in a week that month. In hindsight I can see now that short selling is mostly driven by ego and hubris. There are some good short sellers out there, but it's unlikely you are one of them. And now that the cycle is changing, the successful short sellers will become fewer and fewer.
On an individual basis stocks are bottoming. Sectors are transitioning from old leadership (FIRE and Basic Materials) to new leadership (data technology, IT, eventually health care) with individual stocks within those emerging leadership sectors showing relative strength on an early basis versus peers and the broad market. Most at risk in the emerging leadership sectors are the large capitalization-weighted stocks. The least risky are small capitalization stocks that hedge funds have avoided due to high risk aversion and lack of liquidity.
The bottom line: This is not a call to say we have formed a V-bottom or reached a "buy point," although I believe that in 20 years anyone who buys just about anything here will be very glad they did, rather, it's a call to begin extending time horizons, increasing equities allocations and selling bonds. Over the next three to five years velocity in markets will continue to decrease, volume will decrease, interest will continue to wane. Eventually, probably by 2013, certainly by 2015, traders will become bored with the lack of volatility and movement and many will simply give up. The next 20 years will not be a trading environment, it will be an investing environment.