Five Things You Need to Know: End of Days Signs
Strange dead animals. Stock market crashes. Sovereign debt downgrades. It feels like the end is nigh.
A reader named LB writes:
Always appreciate the insights with respect to Demark indicators. Wondering if you could shed some of your wisdom on the current monthly setup on the SPX versus what was happening back in 2008 before the market tanked in the fall. Similar pattern or different?
LB, that's a very good question.
First, a brief refresher on DeMark indicators. There are two components to TD Sequential and its cousin TD Combo. The prerequisite for a TD Sequential or TD Combo buy or sell signal is what is called the 9-bar TD Setup. TD Setup captures and identifies the momentum phase of a trend that may be beginning by comparing the close of the current bar to the close four price bars earlier. If there are 9 consecutive closes greater (for a sell setup) or less than (for a buy setup) four price bars earlier then we have a completed buy or sell setup. A setup tells us to expect 1-4 bars of correction. Once the setup is in place, the countdown begins. This countdown component identifies the less obvious and less momentum-driven trend in place, and once a 13 is counted we have a buy or sell signal with a duration for the immediate 12 bars. This duration is good for whatever time frame one is considering. Twelve bars after a MONTHLY TD Sequential or TD Combo 13, for example, would be one full year. The response to the exhaustion marked by the 13 typically happens within that 12-bar duration. Finally, unlike the Setup phase the Countdown phase does not require consecutive bars. It simply compares the close to the high or low two price bars earlier until we have 13 closes greater than the high or low two price bars earlier. In this manner it identifies trends that may be more subtle and go undetected in conventional technical analysis.
Okay, with that out of the way, let's revisit the MONTHLY time frame for SPX from 2007 and 2008. The first chart below is SPX from 2005-2009. Below are things to view on this chart.
1. On the left, the 9 in March 2006 identified a TD Sell Setup 9. This warned that we should expect a window of 1-4 months where sellers were in charge.
2. The purple numbers overlapping are the TD Combo count that began in conjunction with the TD Sell Setup 9 that recorded in March 2006. It took a couple of years for this count to eventually complete, but it did so finally in Oct. 2007.
3. Once that Oct. 2007 TD Combo Sell Signal was in place, it warned that we should expect a 12-bar or 12-month window where sellers were again in control of the market due to an exhaustion of buyers.
4. Note the the solid red line (called TDST Down, the DeMark version of a trend line) that was broken a couple of times (Jan. 2008, Mar 2008 and then June 2008). The June 2008 qualified the breakdown whereas the first two breaks did not. This breakdown forecast a serious market trend change in June 2008.
5. Lastly, note the TD Buy Setup 9 that recorded in Feb. 2009. The low in March 2009 was horrifying despite the MONTHLY buy setup in place. I simply point this out when someone asks, "Hey, what if everyone starts following DeMark, will it still work?" Hahaha. Think back to March 2009. I know I was not buying despite this buy setup and it took me almost three full months, until June 3, 2009, to gather up enough courage to say The Time for Bearishness Has Passed.
So that's 2005-2009. Let's look at the more recent chart on a MONTHLY basis to see how similar things are.
1. Once again we have a TD Combo 13 Sell Signal in place from April of this year. We also have a TD 9 Sell Setup that recorded in May. Our window for the sell setup is four bars and extends through September. Our window for the TD Combo Sell Signal extends for another eight months.
2. The key difference, so far, is we have not yet tested or even come near the long-term measure of trend TDST Down, marked by the dashed green line at 1049.33.
3. Shorter-term WEEKLY and DAILY DeMark indicators show selling exhaustion on the DAILY likely Monday, and so far the WEEKLY TDST level at 1219.50 has not been qualified.
Finally, this is the analysis for the index, not the individual stocks that make up a market. Index investors are going to struggle for some time. Individual stock buyers, however, will find more favorable opportunities. That is my long-term thesis. So I look for stocks that do not share the broad market long-term MONTHLY pattern and which have business models not really tied to whether Greece, Italy or Portugal can pay their bills and leave it at that. The economy is not going to materially improve for some time. This is a long-term secular bear that is working its way toward closure, but it will indeed end. And a new secular bull market will begin. I have no idea how much longer that will take, but if pressed to bet I'd say it will begin sooner than is being priced in currently. Buying individual stocks here without leverage is my way of getting a head start on the day when we can once again all be bull market geniuses.
S&P 500 MONTHLY, 2005-2009
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S&P 500 MONTHLY, 2009 TO PRESENT
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5. No Cash? So What. The Future of Currency Is Social.
Of course debt downgrades and dollar debasement aside, whatever all that means, it may simply be the case that we move beyond our "filthy lucre" altogether:
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