Market Tests Successful!!! Now What??

In my last posting, I mentioned that the coming two Fridays would be "telling" in my world.  On Friday, January 29, we would be testing the August closing low on the monthly basis.  A successful monthly test of the lows is quite rare and could indicate a long-term basing formation.

The monthly line chart shows this successful test here.  The closing low for January was not below the August low.

What does this mean?  Simply this.  If you don't look at the market on a day-to-day basis, but only once a month, at the end of the month, it is my expectation that going forward, the market will be up.

While most seem to be guessing that the worst is still yet to come, I believe that there is a good shot for the Standard and Poor's 500 index and the accompanying Exchange Traded Fund (EFT), SPY, to go to new highs.  That surely would leave most scratching their heads.

The next important test was completed yesterday with the three week test of the low.

This, being a weekly indicator, in an intermediate-term signal, where the monthly test is a long-term signal.  I can recently remember that last year, we got a three month test of the HIGH, followed by a three week test of the high and then finally a three day test of the high before the market started going down.  It was as if the market just didn't want to go down and was trying every conceivable way to continue going up. 

This is the weekly line chart showing the recent test of the low.  If you look to the left, you can see that we previously had a similar formation, a three week test of the low that marked the bottom before a rally to the top of the range.

Of note, after the last three week test of the low, the market dropped significantly the following Monday but that was it.  The market then rallied for the next 6-7 weeks.

One must keep in mind but one important thing and that is that the weekly momentum is still increasing.

My general rule is that when the Volatility Levels are increasing, you need to stick with the trend. 

This chart is the 20 week volatility measurements.  It is at its highest point and expanding.  That is a troubling indicator.

But if I look at shorter time frames, volatility is decreasing.

This is the 20 day volatility level.  And even though it appears that market volatility has been high because of the large point moves, this can be deceiving.

How else can we look at this volatility level?

One way is by viewing a chart of the Bollinger Bands. 

Look at how these bands are moving together.  From this chart, we can expect that the daily fluctuations would range between 185 and 195 on SPY, translating to roughly 1850 and 1950 on the S&P 500 index.

The weekly volatility bands still reflect the extreme volatility level.

The weekly bands show that the realm of possibilities range from 185 (we are currently at 188) to a high of 216.

The all time weekly close high was 212.99 so there is some possibility that the market could go to all time highs here.  And if it did, it would happen in a hurry as the volatility levels are high. 

If we would see the market move higher at an orderly pace, then the volatility levels would diminish and the possibility of new highs would also diminish.

SO, I think that there are exciting times ahead.  Of course, I don't know and at this moment, I have positions both for the possibility that we experience a blood bath in the market.  But given the information that I just provided, there is the possibility that the market surges to the other extreme.

Many are saying that earnings are dismal, the Federal Reserve is no longer accommodative, etc.  But for the past couple of years, I have believed that the market would collapse because the reality of the market being an actual market has disappeared.  That reality has not returned.  The market is a casino, in my opinion, with the High Frequency Traders and institutions continually gaming the system.  Even Congress can trade based on secret information they receive.  Not too long ago, a vote came up to prohibit "insider trading for Congress" but that measure was soundly defeated.

You must realize that the cards are stacked against you if you wish to be involved in the markets.  You must buy low and sell high.  If you are not willing to be nimble, then I suggest that you shouldn't really be in the markets.

The risk of collapse is too great and when the collapse does happen, there will be no way for you to escape, unless you hedge your positions.

Think about it.  If you have other sources of wealth, do you not protect them with insurance?  Of course you do.  You determine a deductible that you can afford and protect the rest with insurance.  Your investments should be no different.  You can protect yourself.

"There Will Come a Time"

"There will come a time where the lack of Chinese participation may have a significant impact," said Illinois Congressman, Mark Kirk recently after touring the Bureau of Public Debt. In a recent AFT article
China Cancels US Credit Card, Kirk, a co-chair of a group of lawmakers promoting relations with China, said that China was discretely shifting investments away from US denominated Treasury Securities. Kirk further said that China's concerns were legitimate.

We have noted in early reports how China has been less than discrete at times concerning excessive US debt levels as well as the expanding US money supply. China has been diversifying away from US investments, investing heavily in other Western Hemisphere countries. While they have continued to participate in treasury securities purchases, they have focused more on short termed maturity paper, moving away from longer-termed debt issues.

This week, the US markets, received quite a wakeup call even while stock prices were rallying. Both long term bonds and the US Dollar fell sharply. Our mantra for the year has been to be short the dollar and bonds and long oil, gold and commodities. We are going to review our positions this weekend now that momentum might be starting to develop. Until now, the dollar has been considerably strong as have long term bonds, despite the heavy monthly supply of debt amounting to more than $100 billion per month!.

For those, especially outside of the US, with heavy US dollar exposure, it could be time to review your risk parameters and consider applying hedging techniques to protect your wealth.