How to use Factor Seasonal Charts to Improve Your Trading and Investing
Market timers love charts, and every now and then they like to put up the decennial cycle, which is finding the stock trading pattern for taking every 10th year. Well, we like to put all such patterns against our best projection line. In our newsletters, on the blog, everywhere we said that the end of May would probably see a bump UP in prices due to seasonals, factor seasonals and now the decennial cycle …
We’ve just completed a major new study here at Market Timing Research on volume cycles in conjunction with seasonal cycles. Using our same proprietary method for developing price seasonals, we did the same analysis for yearly volume to see if volume does indeed go up as prices go up, and down as prices drop, and to see if it could explain volatility in certain times of the year. Sure enough it does, and when there are periods of disconnect between volume and price, this may bespeak to an insecure market or periods of volatility that can be used to your benefit. The following charts shows what we’re talking about.
To our knowledge, no one has ever done this type of analysis previously or produced this type of chart before. As usual, we are market timer firsts. The stock charts suggests we should see a sharp spike UP in the market around now, though that would have to be confirmed with the lunar seasonal.
The other factor seasonal we’d like to highlight is the DJI typical price pattern in years when the government is doing everything possible to provide easy money, as the market has about an 80% correlation with this trend. You can see the forward expectations if this pattern is to hold, once again forecasting a near term bump UP against all expectations.
Naturally you can find lots of individual stocks obeying their seasonal tendencies in our monthly newsletters. Just grab a sample subscription and see for yourself all the money you could be making with this insider information.
The Germans have banned short selling, fearing for the Euro. If the Euro fails, the European union fails, or so goes the theory. France already has a ban or short selling, but stocks have fallen anyway, as they always do when things look bad.
Well, what does that mean for stocks … or for anything that has to do with preserving our capital and making money.The only thing we can do is look at the seasonals, which suggest a fall in the summer months as we have been trumpeting in our newsletters.
Market timers , We’re still expecting a market turnaround at the end of this month, starting around the 24th. The market is currently following the 4 year election cycle better than any other factor seasonal, so here it is for a preview…
Presidential Cycle Seasonal Proejction
The charts this month has lots of opportunities. ATT looks good, CAT looks bad. CVX looks a bit depressed from where it should be, Citibank is on track. JPM seems like it’s ready to pop … If you are expecting bad times ahead, you’d pay attention to Disney, Walmart, Caterpillar and Dupont, and put a MACD trigger on the downward seasonal expectations. Seasonally those stocks go down; if there is a market crash, that decline on top of seasonal expectations should lead to some nice trading profits. Here’s a courtesy look at the recent DJIA newsletter with pure price projections. This type of inside information is how traders make money.
Word just came out that the Wall Street banks, including Morgan Stanley, just had 63 straight days of trading profits. That’s right, not a single day in the previous quarter where their traders lost money. We also now hear that the government is going to probe those firms in a possible criminal investigation. Someone is out for blood.
We looked at Goldman Sachs previously, so how does Morgan Stanley fare? Let’s look at the factor seasonal charts…
The seasonal chart here suggests that we wait for a MACD upturn for a quick rebound in the stock, perhaps a chance for trading profits. But what about during bear markets?
Although we are expecting a severe downturn in July-August, Morgan usually holds steady during market downturns during that period. If it was a normal weakness we were expecting, the seasonal suggests Morgan would be holding its value and thus a safer BUY than we would consider without having any such information. But sine we are expecting a big drop/weakness in August, this typical chart may not hold.
In any case, you now see the power of seasonals in helping to judge a stock for trading purposes. We offer chart books of past stock performance in ALL sorts of trading environments — bull/bear markets, increasing/decreasing inflation rates, increasing/decreasing interest rates, economic expansions/recession, Democrats/Republicans in office, and so on. They are invaluable for both the Technical analyst doing market timing and fundamental trader ho is focusing on earnings and P/E ratios.
Nouriel Roubini just said that he expects the US recovery to slow in the second half of the year. I agree. We do lots of cycles work and have plenty of forecasting techniques at our disposal. Here’s what we expect.
A weak July and TERRIBLE August.
A prolonged decline starting in December
and running on through to February of next year.
Wicked bad.
That’s from cycles and seasonals.
Everyone asks for the reasons why when we talk cycles and here they are …
What drove GDP growth over the last year was inventory adjustments, which called for restocking and thus manufacturing output to increase. Basically, upon the 2007-2008 stock downturn and mention of recession/depression, companies cut inventories, laid of workers, and then last year they started replenishing them because they cut too much. That restocking is all done with now: inventories are replenished.
The question is, will consumers start buying again as they did in days of old, using Mr. Plastic? Doubtful. People have lost jobs, realize they have too much debt already, and as seen in the after effects of the 1929 great depression, are wary about using credit anymore. They are gun shy about using Mr. Visa and Amex.
What about the government stimulus package?
Roubini thinks the impact of the government’s stimulus on GDP growth will peak this quarter, and its contribution to growth will decline from here on in. John Mauldin did a piece awhile back showing that even if we added a ton of jobs every month, WHICH IS IMPOSSIBLE TO BEGIN WITH, it will still take us years to recover all the jobs we’ve lost since the start of the recession. The growth rate we need in GNP must be at historic highs, and that’s science fiction impossible unless we bump into some massive new economic paradigm from some invention that calls for massive Shumpeter destruction and creation, where the creation phase has to make a lot of money for everyone (or cut costs in a magnificent way).
And what jobs are you thinking of stimulating anyway when you start trumping that feel good catch phrase (“jobs stimulus”) designed to cheer the nation with rah, rah, rah? Sorry folks, the manufacturing jobs are gone, which is what you need in a nation because it’s usually only manufacturing that produces increasing margins per scale, meaning wealth. Finance does a little bit, but we killed that golden goose. Erik Reinert in How Rich Countries Got Rich surveyed the last 500 years of wealth creation and nations which became impoverished as well. How did they get rich? They went into increasing returns activities, namely manufacturing. Lose that and your wealth goes with it. The equation that mattered was:
(Increasing margins per scale) * (Inceasing demand for the goods) = Wealth
Countless English speaking jobs that don’t even require technical skills, as does manufacturing, have been outsourced to India and the Philippines, and quite a few IT jobs as well. These jobs are NOT coming back. Why would they since they are cheaper over there? Bartending and restaurant jobs will get a bump up for a short while along with other near minimum wage jobs that are service based, but “service based jobs” means their existence is dependent on good times and the use of credit. So with the expensive jobs going/gone and loss of the manufacturing base that used to pay for them, slowly wave goodbye to a premier national standing. You hate to hear that? I hate to write it. Go read Reinert.
I think it was John Bogle of Vanguard fame who warned that we’d have a long time period (a decade or more) of poor stock market returns and they have started. I didn’t believe him at the time, but it turned out to be true. Mauldin said the same thing in his last book, Bulls Eye Investing. With Europe in a frazzle ready to split at the seams, the likelihood is tilting toward more bad times ahead rather than good, so I side with ROubini and turn a deaf ear to Obama proclamations. Expect these coming periods as BAD times for the US Economy and thus stocks:
July-August 2010
Dec 2010-Feb 2011
Here are the latest seasonals for the US market … our SP500 forecast inthe nesletter is spot on but the NASDAQ seasonal projection line is off, and continues to be off even with this updated data. That’s because there are few years within the past history of the NASDAQ where the market turned down so much in May, and hence we cannot build such an accurate seasonal for it. That tells you someting in itself …
S&P 500 Index Weekly Trend Projection
NASDAQ Index Weekly Trend Projection
The world seems to hate Goldman Sachs right now. Rarely have I seen such vehemence, except perhaps the hate for Monsanto and its business practices which seem, to an astute observer, possible even more dangerous than what cretaed our banking crsisis.
In the case of Goldman, I suppose all that greed eventually catches up with you. With the threat of a government lawsuit that hit the firm by surprise, the stock stumbled taking Wall Street with it. But the seasonals suggest that this may soon present a great bargain hunting bottom.
Goldman Sachs Trend Projection
I spent two months in China recently and can only confirm what I always say. This century will belong to the Chinese. This is coming from someone who has lived there and visits once or twice a year for a month or so each time, talking to countless politicians, businessmen, monks, factory owners, professors, students, military men … you name it.
I’d throw in Brazil and India as two other coming powers because they also will be producers and exporters, and can grow their middle class of consumers which as yet do not have access to lots of consumer credit. Nevertheless, in my view China will be king.
China is becoming the world’s manufacturing capital before our eyes and will be that in the near future. We cannot stimulate jobs but they can. They can export. They can close in on themselves and develop internally without need of exports. They’re not shackled with expensive health care burdens, nor with union problems or expensive labor (yet) nor expensive foreign wars. Naturally they have other probems and one that I’d worry about is the potential for political problems around 2012…
China ETF Trend Projection
As to the rest of the US market …
S&P 500 Index Weekly Trend Projection
Dow Jones Industrial Average Trend Projection
NASDAQ Index Weekly Trend Projection
Today’s Factor Seasonal Charts offer solace to traders worried about this week’s market drops. Take a look at the regular seasonal trend lines (in GREEN) for all three indexes – the Dow Jones, S&P 500 and NASDAQ. Notice how January tends to see 1-2 drops before running up into February.
This is exactly the patterns we’re seeing right now in the current market action (shown in YELLOW).
S&P 500 Index Weekly Trend Projection
Dow Jones Industrial Average Trend Projection
NASDAQ Index Weekly Trend Projection
Folks, these trend projections have been running remarkably accurate all year long. And we’re seeing significant support for the two-three month trend projections (in ORANGE) for these indexes.
The Dow Jones Industrial Average seasonal trend forecasting chart for this week. The 2009 price trend is in YELLOW, the annual seasonal trend is in GREEN and the Factor Seasonal Projection is in ORANGE:
The S&P500 seasonal trend forecasting chart for this week. The 2009 price trend is in YELLOW, the annual seasonal trend is in GREEN and the Factor Seasonal Projection is in ORANGE:
The Nasdaq Composite seasonal trend projection for this week.The 2009 price trend is in YELLOW, the annual seasonal trend is in GREEN and the Factor Seasonal Projection is in ORANGE:
