BUY OR SELL THE STOCKS?

Last week US and European markets were under severe sell-off and technically showed a big red flag that Russell 2000’s 50-day moving average crossed below its 200-day moving average this week, a development known as a “death cross.” They are warning for a great correction? This “death cross” pattern means bad for stock markets. The volatility is huge and shows the fear of investors. Looks like this the “death cross” chart pattern.

The last couple of day’s correction increased the fear in investors, but the 3-4% drop is not a real correction. That is only the noise of the market and normal behaviour of a bull market too. The real correction starts from 6-7%. The Russell 2000 index has dropped 3.5% during the last week, more than double the S&P 500’s 1.4%. Everybody is concerned about the Russell because is down 7.4% from its 52-week high in March while S&P 500 and other major benchmarks which still near to record territory.

Technically the good news is that in the short view there is no resistance on S&P 500 or in DJIA. The bullish trend is still intact and has not been violated so the long side is the only side recently and close out all the concerns and fears and ignore the “death cross” concerns.

The BFM Assets Team.

BUY THE DIPS?

I have read in many forums "just buy the dips now," buy the corrections because it has been working fine in the last 5 years. I am not fully convinced that there is any general rule on the market which works forever, including this too. Buy the dips has been good for years, but one day it won’t work anymore for sure. I would ask the dip buyers that, does it mean it will work that way for the next 20 years?

If you are trading from the past data and chart history and you typically drive by looking out your rear view mirror, the answer is yes. But Mr. Market has much more tricks what we can imagine and always does which creates the biggest pain.

Buy the dips sounds easy, but I am suspicious not all the guys have done in the last years as they say. I guess they really did panic and were scared to buy at big sell offs like at those severe sell-offs:

Each year we experienced double digit corrections – the exception is 2013. Normally, more than 10% drop creates huge pessimism and I am sure those very optimistic guys were so scared and pessimistic and weren’t brave enough to pull the trigger and add more to the losing trades. Retrospectively sounds easy, but at those days was really hard, only few people could make it.

All in all buy the dips strategy working many times, especially in bullish market, but don’t forget as an old saying on Wall Street is, "They don't ring a bell when a bear market starts."

The BFM Assets Team.

DEAD CAT HAS NOT REBOUNCED

Yesterday the massacre continued after one day rebounce. Thursday was the capitulation of the bulls and US indices saw their biggest one-day drop since July 31. An old saying is that stocks goes up like escalator and goes down as an elevator was absolutely true yesterday. Since long time we haven't seen a day like this. The dead cat did only short rebound, but the real rally hasn’t come yesterday.

• DJIA – 1.54%
• SP500 -1.62%
• Nasdaq -1.94%

It is not clear what caused this massive sell off. There was no single reason that should warrant such a selloff, making the drop more difficult to explain. Traders and investors blamed high stock prices, the uncertain global economy and international conflicts around the globe. Investors remain concerned about the risk of recession in Europe and about the possibility that Chinese growth may be slower. They worry about Russia and about the new U.S. involvement in the Middle East, the strengthening dollar, which makes U.S. exports more expensive and foreign income to U.S. multinationals less valuable. The dollar Thursday was at its highest level against the euro since November 2012.

Technically the picture hasn’t changed in the last couple of days. The 17.220 is still the key resistance level on DJIA, until is not taken by the index we shouldn’t do anything, just wait and watch.

The BFM Assets Team.

DOES DEAD CROSS MEAN ANYTHING?

Yesterday finally US and European markets rallied, but technician showed a big red flag that Russell 200’s 50-day moving average crossed below its 200-day moving average this week, a development known as a “death cross”. They are warning for a great correction. Against this “death cross” pattern Wednesday especially DJIA was recording its best gain in more than 5 weeks. The benchmark indices broke the three losing streak pattern. Looks like this the “death cross.”

• DJIA +0.9%
• S&P 500 +0.8%
• Nasdaq +1%
• Russell +0.9%

The last couple of day’s correction increased the fear in investors, but the 2-3% drop is not a real correction. That is only a noise of the market and normal movement of the market. The correction starts from 6-7%. The Russell 2000 index has dropped 3.5% during the market’s last 3 days losing streak, more than double the S&P 500’s 1.4%. Everybody is concerned about the Russell because is down 7.4% from its 52-weeks high in March. S&P 500 and other major benchmarks which still near to record territory.

Technically the good news is that in the short view there is no resistance on S&P 500 or in DJIA. The bullish trend is still intact and has not been violated so the long side is the only side recently and close out all the concerns and fears and ignore the “death cross” concerns.

The BFM Assets Team.

DJIA CORRECTION

The Dow fell for a second straight day and all US indices closed in red; the DJIA 116 points: - 0.7%, to 17055. The S&P 500 index shed 11.52 points, or 0.6%, to 1982, S&P 500 down 1.4% in two sessions. Shares fell on the heels of a selloff in Europe.

Technically we are far from the top and we have to wait for some rebouncing confirmation on the buying side. Our key resistance level is still the previous top at 17,300.

The BFM Assets Team.

THE SCOTTISH “NO”

FTSE 100 gained already yesterday and today strengths further on the “no” vote majority in Scotland. The result from the referendum shows 55% of Scottish residents voted to reject independence for their country.

The London benchmark index opened with gap this morning around 0,5%. Now it is around 0,7% plus. We have been and we are very optimistic in the following weeks about UK index. We built up quite huge postions in the last two weeks and we are expecting more and more gain further.

In the big picture the FTSE is still lagging compared with other European indices and specially compared with US benchmarks. In September the consolidation was permanent in FTSE, I suppose it was due to this recent referendum which used to be a huge concern for investors. Now it has gone, so the optimism and buying momentum might come back and if it close above the 6,900 historical high level easily could come up to 7,000-7,200 territory.

The BFM Assets Team.

YES OR NO?

Today Scots go to the polls to vote on the future of their country. Voters in Scotland will be presented with a simple yes & no question: Do you agree that Scotland should be an independent country?

This is the question the people of Scotland will be asked on Thursday as the country holds a referendum that could ultimately set in motion the breakup of the United Kingdom as it exists today. More than 4.2 million voters have registered the largest electorate ever in Scotland. The vote for independence would mean Scotland, with its population of about 5.3 million, splits from the rest of the United Kingdom. Polls will be open from 7 a.m. until 10 p.m. local time. Results are expected to come in overnight into Friday morning local time.

Why is that significant to the market? It really effects on the UK economy and stock markets, and further on other separatism movements in Europe like the Catalan one.

This new fear is temporary only and affect shortly for European indices. My bet is nothing special will happen whether the result is yes or no. Mr. Market will do what it wants.

The question mark over Scotland's future is already having an impact on domestic and international business. Some worry that the breakup of the United Kingdom could undermine London's standing as an international financial capital. Last month, 130 business leaders published an open letter in which they warned of the impact of uncertainty over issues including currency, regulation, tax, pensions, EU membership and support for Scottish exports. A day later, more than 200 other business leaders signed an open letter backing an independent Scotland.

Let’s see today the movements of the FTSE:

The BFM Assets Team.

CNBC SENTIMENT

I am not sure that CNBC popularity really means anything for the future, but I find interesting the exodus of CNBC watchers and how unpopular the channel nowadays. The typical American investor seems is not interested at stock market news.

This chart shows CNBC rating in August 2014 (Zerohedge):

The CNBC’s watching rate is at the lowest level since 1993! I guess it might mean the vast majority of American investors turn to internet to get information and they are not holding any stocks recently. If they are out of the market, they don’t really watch the CNBC either.

If you look at the chart above the highest points were always at the euphoric periods of stock markets, like in 1999 at .com bubble or right before the 2008 mortgage crisis. When the market is not popular between the housewives they usually ignore the CNBC. The average investor only watch the CNBC if he owns any stock, in other case he is not interested at CNBC.

This data could mean one thing, namely much retail buying power is still out of the market and when they get to start buying the CNBC rate will be increased at the same time.

The BFM Assets Team.

ARE YOU A KNIFE CATCHER?

If yes trade in this ranging, up & down market and burn your money. If you don’t want to be a knife catcher you should wait and watch until the knife hits the ground and react on that event only. Recently the market is coming off smoothly and doing nothing at all, stocks are down moderately for this week after a great five weeks rally. So, in this ranging and consolidation period we have to be more suspicious.

The point is that, periods like this without a clear trend just green bar, red bar pattern only good to burn your money like the paper tissue in the fire. Don’t try to figure that out what is going to happen, we can’t predict the future. Wait until the knife is stopped and occurs some confirmation about the uptrend again. Let’s be fair being patience is one the hardest effort in trading, I know.

What is the consistent and proper strategy now?

Watching and waiting for this pattern on S&P500 chart: the daily price should close above 1,999, until that day do nothing because the knife is still falling. If you do nothing you will much more profitable than doing something.

The BFM Assets Team.

THE TIME COVER INDICATOR

These days we have to remember the great thinker and investor. The originator of Time Magazine Cover Indicator Paul Macrae Montgomery died this week, he was 72. Paul is best known as the publisher of Universal Economics and CEO of Montgomery Capital Management.

Decades before the Behavioural Economics he became popular, arguing with the mainstream, stated the market is ruled more by the human factors not fundamentals. His great invention was the Time Magazine Cover Indicator. He used first as a perfect indicator of the conventional sentiment. The cover story on the market trend is a good marker to bet that trend is nearly exhausted. He was convinced that the cover of Time and any other general-interest magazines are great contrarian indicators for a sophisticated investor. He said the image that really matters since it is able to message to everyday Americans. If any week the Time will issue the cover with a bull that would be kiss of death” for the stock market for sure.

Some Time Magazine covers:

• In 1986 Paul Volcker the FED Chairman was on the cover of Time with this headline, "The Second Most Powerful Man in America". Bonds soon plunged into a bear market shortly after. 
• In 1999 Jeff Bezos from Amazon was welcomed by Time as "Person of the Year". Remember, the .com bubble shortly after burst. 
• In 2013 December this cover was on Time. And, just look back and you will see the market dropped more than 7% this January.

He loved to use the fascinating Hemline indicator too, this index theory presented in the 1920s by George Taylor. The theory says that hemlines on woman’s dresses rise along with stock prices. In good times we see more miniskirts. In shorter way, the fashion predicts the stocks.

The BFM Assets Team.

UGLY DAY

Yesterday was the worst day of SP500, it suffered its biggest percentage drop since August 5th. US indices fell Tuesday, ending at their lowest levels since August. All three US benchmarks closed at their lowest levels since August 22. The whole day the US and European stock markets were in negative territory, the pressure on the sell side dominated the trading sessions. Seemed that at all intraday tops the sellers jumped in and pushed lower and lower again the prices. The buyers were only able to hold prices for short periods like at the beginning of Apple new gadgets presentation, but finally the market voted „No” for Apple and pushed lower that stock too.

• DJIA: - 0.6%
• S&P 500: -0.65%
• NASDAQ: -0.9% 

The reason of that red day? We don’t know, there is not any special thing. Maybe the optimism is stronger than necessary or after a 4% gain in S&P Mr. Market wants to take some rest. The market is just catching its breath and consolidating that is business as usual.

Technically still valid the resistance level at 2.007 until that level just stay away and wait for that breakout. As an investor most cases we don’t need to do anything, just doing nothing. Don’t forget and be patient.

The BFM Assets Team.

ARE YOU BORED? THAT IS GOOD.

If you have the feeling the market is so boring you are right. The S&P 500 has done 13 consecutive trading days without closing up or down by more than 0.5%. That is good sign of bullish market because after five weeks gaining the index couldn’t go down significantly. The history indicates that is a good marker for more bulls. When happened earlier this same pattern within a week usually the index jumped couple of percentage higher. This pattern might be a silence before the storm.

Without any significant moves, this narrow trading range and low volatility was the same again Monday. Only the Nasdaq was green at closure thanks to Yahoo, Tesla and Microsoft, those three tech stocks helped Nasdaq to gain for another day.

S&P 500:  -0.3%
DJIA:         -0.2%
NASDAQ: +0.2%

The European markets after four weeks of gain pulled back Monday thanks to the Scottish independence issue, which seems more serious now.

The slight correction and consolidation in US and Europe meaning the investors after few weeks of rally take a breath. The S&P 500 is up 8.3% this year, which is nice, so Mr. Market deserves some rest. Technically on S&P 500 we should wait of confirmation of bullish momentum. The index needs close above the 2,008 level. If that will happen the bulls will lift up the index much higher further.

The BFM Assets Team.

FORGET THE GOLD?

My short answer is yes. The gold has a PhD from fear and geopolitics, so if is there any fear or turmoil in the world the gold usually jumps higher. If you look at the scary headlines in the couple of last months you could find easily many concerns and fears, but the gold is performing poorly and doesn’t show any bullish momentum. We are at the same level as in 2010 September. The price has come down from the record of 1,920 to 1,200 that is more than 30% drop so far.

There are still many gold advocates who forecast a new rally in each month and they recommended building up a longer term gold portfolio. I doubt that, I don’t see any long side strength in gold and we are expecting more loss. The new mantra now that is that September is the best month historically for gold or the demand rises in India ahead of wedding season in October. They say India loves gold. But that fact is that demand for gold in India fell 39% only in last year. Some pundits, forecasters see 1,400$ price in the short-term, maybe they are right, might happen easily some rebounce, but the trend is bearish for gold that is obvious. After the bigger than 35% drop the investors not panicing yet, but they will below 1,000$, I am sure about that.

Why we are sceptical about any gold rally? Here are some arguments below. 

The recent weakness of gold is fundamental. Historically and statistically proven that there is a negative correlation between stock markets and gold performance. The stock markets are symbols of euphoria and gold is symbol of fear. When the indices are performing well the gold needs to go down. The lost decade of 2000-2010 when the stock markets were basically only were ranging was a great period of gold, but in 2013 the DJIA and S&P 500 broke out from the huge range and started a rally, which is negative sign for gold. 

Gold is trading now close to 1,200$ levels far from the 1,920$ top and there is a high chance to test 1,000$ shortly. Gold tends to move in long multi-year trends and now we see a clear bearish trend since 2010. Plus when the FED will start to raise the interest rate, then gold will come under more and more pressure. So, we see the only option is to stay away from gold.

The BFM Assets Team.

SURPRISE!

The main indexes have been strengthening in Europe yesterday after the big surprise by ECB. Unexpectedly the central bank cut its key interest rate and moves to buy bonds and asset-backed securities from October. The ECB shocked the markets by announcing the interest rate cut and indicating that its own QE program is set to begin next month. European benchmark indices were traded massively higher on the news, but gains finally have been more modest.

FTSE +0,06% - DAX +1,02% - CAC40 +1,65% - MIB +2,82% - IBEX +1,96% 

 

In US the optimism from Europe sent indexes to new intraday highs, but later indices dipped into the red territory. At the beginning of the session S&P 500 and DJIA touched intraday record levels. Finally, they plunged and closed all US indices in red.

DJIA – 0,05% - Nasdaq -0,22% - S&P -0,15% - Russell -0,43%

Seems now the US markets are just tired after a great four weeks rally and the S&P 500 closed below 2,000 and closed its third day decline in a row. This is not a surprise since DJIA, S&P and Nasdaq gained in the last month more than 4%, and Mr. Market needs some days of consolidation. That is the reason behind the pullback and modest losses. In a closer technical look of DJIA, we found a huge reversal head&shoulder pattern, which might mean for the future a target price of 17,800 for the Dow, if the neckline is taken. When is going to happen? Nobody knows only the Crystal Ball owners.

The BFM Assets Team.

EUROPEAN AND U.S. GAP

Yesterday US indices closed mostly lower, but the European stock markets performed really well.

• Dow: +0,06% - NASDAQ -0,55% - S&P 500 - 0,06%
• FTSE +0,66% - DAX +1,25% - CAC40 +1% - MIB +1,89% - IBEX +1,23%

As we anticipated Wednesday in our blog we are expecting more gains in European markets in the following weeks than in US. The news from Ukraine lifted up higher the European markets across the board. The European benchmarks rallied Wednesday after Russian President Vladimir Putin and Ukrainian President Petro Poroshenko had agreed to the outlines of a cease-fire between Ukrainian forces and pro-Russian rebels fighting in eastern Ukraine.

The German DAX is up for four straight day, but there is still room for more gains to reach first the previous July top, now is off its record by 4%. If you get rid of this day-to-day noise, you're looking at a pretty decent outlook for the stock markets in Europe generally. Maybe today more good news will come in Europe, at the ECB meeting Mr. Draghi would take steps to stimulate the economy in the euro region.

Just to pick up one index from Europe, the CAC40 has a great upside rally opportunity. Yesterday CAC40 crossed and closed above the 4,400 key resistance level, so now the way is clear up to the previous record of 4,600, which might be reached in September.

The BFM Assets Team.

PANCAKE PATTERN

US indices closed in mix Tuesday and doing almost nothing after one day break of Labor Day in U.S. Market was flat like a pancake.

• DJIA: -0.18%
• NASDAQ: +0,39%
• S&P 500: -0,07%

The day was kind of consolidation after achieving record price the S&P on Friday and it is still staying above the 2,000 key level. The index during the session hit an intraday record at 2,006 then turned into red later. Pulling back slightly after a great rally of August, the previous month had the largest monthly increase since February.

What is the outlook for September? Historically is not the best performing month.

In terms of techinal analysis the S&P 500 is on historical record so we couldn’t say really nothing. But the DAX is so interesting, on the chart there is a "Cup and Handle" pattern and if the neckline is taken at 9,600 easily might rally up to 10,000 within a week easily. For sure we don’t have any clue when will happen the breakout, to be honest we are horrible market predictor and timer, but for sure will happen.

The BFM Assets Team.

BULL AND BEAR?

Due to the Labor Day yesterday the markets did nothing; they are pretty flat and stayed at the same level more or less. So, we have time now to look at the bigger picture.

We collected below some argument for bulls and some argument for bears. Bulls think that the markets are ready for more gain and still there is a huge room on the long side. Bears think stocks area about to tumble. All in all that is good if we see many concerns around us and the sentiment is not euphoric. The investors always need something to be scared of. Will the bulls or bears be stronger? We bet on bulls. There are many fundamental and technical reason for that, but it is good to know always what are the weaknesses and what is the interpretation of the other group.

Bull’s arguments:

• Strengthening the US economy. The companies are performing well and hiring more and more people. The U.S. GDP growth might be 1,5% in 2014. 
• Stock buying back programs by companies. They are buying back their own stocks. It creates more demands on the buying side. 
• Future profit gains are good in the main street. 
• Low interest rates. Historically low and it makes stocks more attractive. 

Bear’s arguments:

• US interest rate could rise soon by FED, realistically in 2015. 
• Stock rallied a lot and they are pricey by now. 
• P/E ratio is around 20, which is relatively high. The 10 year average is 14,1. 
• US and European economy will shrink thanks to the Ukranien conflict and the embargo on Russians. 
• China will slow down shortly.
• Many geopolitical turmoils around the planet. 

The BFM Assets Team.

YOU CAN'T SERVE TWO MASTERS

In other words you can have comfort and you can have profit at the same time in investment. It seems very comfortable and convenient own the same instrument everybody loves around you. But you have to pay a big price for the comfort feeling. Buy those assets are ignored or disliked by investors. The pricey stock statistically underperform usually the cheap and heated stocks. The reason is obvious the love and popularity are already built in the price.

It always feels better buying something that everyone else is buying too. That is why John Maynard Keynes said most of us would rather fail conventionally than succeed unconventionally. If you accept the fact that the biggest return always starts with pain and all loosening investments are comfortable you will be a much better investor.



Just think about that the best things in your life too happened slowly and begun painfully that is not different in the investment. No pain, no gain. But whoever said being a contrarian was easy?

Investors and traders are tend to listen those people who share their view. It is so comfortable just to listen to the consensus and don’t argue with that. We tend to ignore all informations which against our ideas. You look for only investors who share your view and you try to stay away from the contrary views. That is mentally logical, because is more comfortable, but not profitable in investing. You should do the opposite. You have to try to be the "advocatus diaboli" or find a mentor or coach who helps you to destroy this mental obstacle.

You can’t do better than a mob if you are part of the mob. Be contrarian and do sceptical buys on the fear, sell on the greed because if you close out the herd noise you will realize the public buys the most at the top and the least at the bottom. For instance when all the words you hear about the economy are bullish, you may want to run in the other direction.

Basic investor behaviors aren’t changing, they buy after a period of good performance. In short, they buy high and sell low and repeat the process multiple times. This is a part of human nature to buy at wrong time and follow the mass. Over the past two decades the S&P 500 returned 9.22% a year, on average. The average investor got just 5.02% a year. That's a huge gap, 45.6% lower.

They love to act in herd, meaning all investors rush to purchase or sell stock just because others around them are. "I see someone investing, I suppose that they probably have more information than me." Most people are just terrible at investing because they love the comfort feeling. But if you want to be profitable you have to feel the pain and you have to hear the bad words by your colleagues, friend, wife that you are a complete idiot and you are wrong. But by the end of the day you will make money, and that counts only. As Gordon Gekko said: "Everything about money, the rest is only conversation." Just try to serve one master, profit one.

The BFM Assets Team.