Market view and possible direction

[Value Buy]

Well the market was up pretty nice today. All my stocks were in the green today.
Big caps were all strong for me.
Now we have to see if Bernanke will kill everything.

[safeharbor37]

I dropped a couple of stocks yesterday. One a small holding that I'd been sitting on and the other part of an investment which puts me in the "playing with other peoples money" category. Not a huge amount but I feel better. I'd have done better a couple of weeks ago but I'm trying not to be "greedy" and more than doubled my money on both ~ so I really shouldn't complain.
I've come to feel that "this is it" and the market is going lower [although the Dow was up 90 today. last time I looked]. I'm sitting on the stocks which pay a good dividend as I really don't have any place to do better should I cash in [and have to deal with the tax consequences ~ I have nothing that I could sell to produce a significant tax benefit].
Timing the market is dangerous so I'm still sitting on enough that a big jump in the market would only hit "opportunity" and I am sitting on some cash now which tends to "burn a hole in my pocket" as I'm inclined to jump back in too soon.
What I'm anticipating is that the market will go lower and open up some opportunities. I've thought about J&J for the dividend because it hasn't gone up that much and may be a good buy now, but particularly if it drops a little.
In any case ~ I just thought I'd share what I think and what I'm doing for whatever that's worth. Will check back in the future to see how prescient I was.

[Value Buy]

Safeharbor, stay involved over here. I know you have a lot to contribute here, just from what you used to post over at the old P&M board.

[safeharbor37]

I started posting on the board which has become Investing: Basics & Beyond [Start Investing] back in 2000 when Tim Middleton hosted it. I got in just in time for the "Dot-Com Bust," investing in a couple of Janus Funds March 11 2000, which turned out to be the day [+/- 1] that NASDAQ hit its all time high over 5,000. So much for my judgment [at least at that time].
We discussed the markets for the next couple of years as it went down, down, down and theorized about market trends and what to expect. One interesting theory which came up and which I've come to respect is the "Seventeen Year Cycle" theory. If it is valid, we're approximately eleven years into the current cycle which should turn around about 2017. Supporting this theory is the record from 1983 [the beginning of the previous cycle] as the Dow rose some thousand percent whereas the rise since 2000 [the beginning of the current cycle] has maxed out at +30% and is currently +20%. [Allowing of course that the NASDAQ has never recovered and is currently at half its maximum year 2000 value]
We theorized that if money was to be made between approximately 2000 and 2017, it would be in trading as we did not expect long term increases in the indices and whereas Index Funds had outperformed in 1983-2000 period, that individual stocks and shorter term trading rather than buy and hold would be the way to go 2001-2017. It seems to have worked that way for the last ten plus years so the theory appears to maybe have some validity. I wouldn't bet the farm, but it's foolish to ignore history.
I don't have time to fully discuss this at this moment, but may come back to it if there is any interest.

[ModE98]

SH ... it appears to be working reasonably well so far. I believe things have a way of running in cycles. Given the way the world is currently functioning, let's hope we see 2017 and a new bullish beginning of a new cycle. The other problem should the world keep intact, is that China may be the new industrial and monetary base and the US markets may not be functioning as predictably as "yesterday".

[safeharbor37]

One of the shortcomings of the 17 year cycle theory is that it didn't work well during the "Great Depression" suggesting that government policy can affect the normal business cycle. That reinforces too the idea that "New Deal" policies actually prolonged the depression, but then there's WWII to take into account. But, ignoring that period, the cycle tends to be pretty reliable.
Government policy [QE 1, 2, 3, ....] could affect the cycle [assuming that the cycle theory is correct] so, as I said, I wouldn't bet the farm on it.
On the other hand, volatility is a sign of the flat period, the market responding to short term indicators rather than long term growth expectations. Today, for example, should have been an opportunity for "day traders." Some of the "old hands" insist that short term trends are impossible to accurately predict and I think they are probably right ~ since everyone [except "inside traders"] are operating on the same information. So, I think it's a good idea to hedge ones bets.
I believe that the best approach is to "take profits" occasionally and wait for "buying opportunities. That's my position for the time being. I sat in on an investment club that a friend belongs to and it's a "growth" club, not interested in "value stocks" [that's what I look for], but they seem to be doing quite well and I may still join. The trick is to bail-out quickly when things go south.
Well, the world didn't come to an end ~ at least in this part of the country ~ so I'm looking forward to another day tomorrow.

[yclept]

I've been waiting what seems like forever to see news along this line:
Friday 7:07 AM Sources say the SEC may bring civil fraud charges against ratings agencies for their role in the financial crisis. Regulators are focusing on whether S&P (MHP) and Moody's (MCO) failed to adequately rate the subprime mortgages that underpinned mortgage-bond deals.

The above is from a Wall Street Journal article. I don't want to subscribe to get the whole thing as I have little more respect for the WSJ than I have for the ratings agencies. But all of these sellers of misinformation love to gore each other's bulls, so this blurb probably has some basis in fact.

Those scumbag ratings services need to be taken out for ineptitude if not outright fraud (the above blurb doesn't mention Fitch for some reason, but they should join the party). What I really can't believe is that their ratings are still being cited all over the web as if nothing ever happened. They were primary promoters (through either outright collusion or unimaginable ineptitude) of one of the biggest frauds in modern times and their "ratings" should be seen for the hogwash they are, not taken as some sort of objective analysis. My apologies to the Porcine race of animals!

Moody's, S&P and Fitch are plain and simple snake-oil charlatans (swindlers or mountebanks). It seems to me the SEC has taken its sweet time in getting around to prosecuting them. The harm they caused can never be recompensed to the people whom they hoodwinked. The only effective remedy I can see is to take them out of business and confiscate all their assets -- put the money against the national debt. Of course that won't happen, but allow me to dream of a more perfect world!

[Driftr]

I'm not a lawyer, but I wish they'd find a way to bring criminal as well as civil charges. Otherwise, IMO, these companies just consider the fine they'll pay as a cost of doing business.

[safeharbor37]

yclept & Driftr,
What you're forgetting is that the people being regulated are smarter than those doing the regulating. When the stuff almost hit the fan in '07-08 the Federal Government was so scared that they'd do whatever the financial wizards told them because they, although they knew the sector had been mishandled, had no idea what was going to happen or why.
It's kind of like arguing with your doctor; he may be a complete quack, but you aren't even a qualified quack ~ so you tend to do what he says until it is frequently too late. I got an e-mail from a friend whose [ex]doctor over medicated him to the point that he'll probably need a pacemaker to compensate for the damage ~ but who has the guts to ignore the doctor's "expertise," particularly that of a specialist.
In the case of our "financial sector," the amounts and complexity have left most ordinary mortals in over their heads. [That's not to say that there aren't many who claim to be qualified, but who really don't have a clue.]
Laws are such that they can be skirted so that smart lawyers can avoid consequences. The result is that there are too many laws and just about everything is over regulated ~ the typical attitude is too many laws is better than too few. The result is too many laws and too many overly complex laws ~ but everyone seems to think that more government interference is the solution rather than the problem.
I'll close with one idea: It is not the government's job to compensate for the stupidity of the public, but to protect the public from coercion, however current government policies tend to coerce rather than protect.

[yclept]

I don't agree. This isn't a case of adding regulations (there are no regulations regarding analysis of financial instruments, but it looks like there should be). Rather this is a case of prosecuting entities after the fact for what seems at the very least ineptitude, but is probably collusion and malfeasance. They were paid by the banks to rate mortgage-backed securities; they wanted the fees they could charge the banks, so the colluded in issuing false ratings.

The ratings agencies produce a product and advertise it as reliable. It clearly was not. They asserted they understood mortgage-backed securities and rated many of them triple A. In reality they were almost worthless paper. If they didn't understand them, they shouldn't have rated them at all.

I would compare it to manufacturing a car with no lug nuts holding the wheels on. The customer and everyone else in the car or on the road with the car have the right to rely on the car being suitable for its purpose (i.e. they have the right to presume the wheels won't fall off).

It is an altogether proper role for the SEC to prosecute securities fraud and the ratings agencies issued fraudulent ratings. Witness the "safe-harbor" statements that accompany so many prospecti, quarterly reports, etc. Those are saying the statement issuer is denying accountability for any errors or omissions -- they are saying "read this if you want, but if anything is wrong with it, don't blame us, it's the best we poor stupid company officers can produce".

I also don't agree that the regulators are necessarily more ignorant than the entities they regulate (though, again, S&P, Moody's and Fitch are not regulated with respect to their ratings). You are neglecting greed in your analysis. Once the ratings agencies collected their fees from the banks, they didn't give a damn what happened to the owners of the instruments they rated.

Lieutenant, please advise General Longstreet to bring his corps up on the enemy's left flank, adjacent to Jackson's right, and commence his attack; Jackson's men have admirably held Pope's forces at the railroad grade -- I'm told resorting to throwing rocks when their ammunition ran out. When next he comes at Jackson, I want you to open with your artillery and then send your men. Our flanking attack should rout them completely. I suspect, since he has made no provision to protect his left, that General Pope is unaware of General Longstreet's presence on the field and that fact is to our great advantage. I believe we can teach those people quite a lesson today.
-- 2nd Manassass; Aug 30, 1862

[safeharbor37]

The first new pickup I bought I found did not come equipped with a rear bumper. I had wondered about those I'd seen on the road with a "make-shift" bumper of tubular steel [which could be filled with water to add weight to the rear wheels] and those made of lumber [with some shock absorbing capability]. At any rate, I choked up and got a "step" bumper [rather than the flimsy chrome job]. I wondered why hub caps were listed as equipment, but they too did not always come as "standard equipment."
We've come to assume that the government will protect us from just about anything. I recall driving a Dodge from Evansville, In. got a dealer. We drove a new Dodge up there and, along the way, at night, in rural Ky, the battery went dead and we were stranded near Carter's High Hat near Ft. Campbell Ky [101st Airborne]. Turns out that the fan belt hadn't been tightened properly and since there were no mechanics along [just me, the dealer's son and some salesmen] it constituted quite an experience. The problem is that everyone assumed that the car being a brand new car, that everything would be working properly. Wrong! I recall my boss taking a brand new Pontiac on vacation and having the transmission fail half way to his destination. The point is that we are expected [or have been] to do "due diligence rather than assuming that the nanny state would guarantee that "everything will be OK."

This isn't a case of adding regulations (there are no regulations regarding analysis of financial instruments, but it looks like there should be).

Make up your mind.
If laws were violated, of course the violators should be prosecuted, but do we really need more laws [most of which only provide gainful employment for lawyers] or do we need to take more responsibility for ourselves?

[yclept]

"Make up your mind.
If laws were violated, of course the violators should be prosecuted, but do we really need more laws [most of which only provide gainful employment for lawyers] or do we need to take more responsibility for ourselves?"

There was no inconsistency in my statements. Fraud is against existing law. The ratings agencies issued fraudulent ratings on mortgage-backed securities. Simple.

I'm sorry I brought up the car analogy. Your arguments for "self reliance" and "due diligence" do not negate a manufacturer's duty under contract law to provide goods and services "suitable for the intended use".

[safeharbor37]

"This isn't a case of adding regulations (there are no regulations regarding analysis of financial instruments, but it looks like there should be)." is what I consider internal inconsistency.
However, the question,imho, is whether more government than we now have contributes to more freedom or less. There probably are laws which should be passed, but I was just watching Stossel who stated that 80,000 pages of Federal rules were added in one year alone [that probably included the 2700 page Obamacare bill]. It is my position that we need fewer, simpler laws and to take some personal responsibility. A fool and his money are soon parted and no amount of law passing and litigation will change that.

[yclept]

I would never argue that there aren't a whole bunch of laws and agencies that do as much harm as good. For example the whole homeland security thing is a massive waste of money and infringement of rights left to the states and the people in the Constitution. If the tea party wants to save money my first suggestion would be to rid the country of the TSA -- they offer nothing by way of real deterrent or detection capabilities; they infringe upon the Fourth Amendment right of citizens; they cost a lot of money -- what a beautiful place to get rid of waste and save money.

But going back to the original topic about which I posted. The ratings agencies committed fraud. Wikipedia describes fraud as follows:

In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud, but there have also been fraudulent "discoveries", e.g. in science, to gain prestige rather than immediate monetary gain.

By its very nature, fraud is deception. Deception implies that the person defrauded did not have access to the information necessary to make an informed assessment -- the facts were obscured intentionally by the swindlers. Furthermore, the ratings agencies represented themselves as being knowledgeable entities upon whom investors could rely for unbiased analysis. This representation was obviously also fraudulent, and yet it continues to this day -- these sleazy bastards continue to issue ratings on all kinds of financial instruments, all of which ratings are still paid for by the entity being rated. It is a clear conflict of interest, and led directly to the fraudulent ratings that were assigned to mortgage-backed securities.

I'm all for self-reliance. But if someone sneaks up behind me and puts a gun to my head, I'm going to give him my wallet. And I'll be hoping that the cops eventually catch him or that I'll later run across him in circumstances more favorable to me. In this case, the SEC is the cop and/or district attorney. They are not trying to initiate new regulations, they are starting to prosecute for crimes already committed.

[safeharbor37]

I'm not defending the miscreants, but the ones who, in your opinion violated the law, actually benefited by government bail-outs. Many of the government officials who control the pay-offs are actually connected to the companies who not only caused the "crisis," but have benefited from the "crisis." I just think we ought to stop rewarding scofflaws before we charge them with crimes.

[yclept]

Well the thing I'm addressing is specifically the ratings agencies all of whom placed fraudulent ratings on mortgage-backed securities. They were not part of any bail-out. They didn't need to be bailed out because they had no skin in the game. They had received their fees from the parties who issued these bogus instruments long before they blew up.

Hopefully prosecution and heavy fining of Moody's, S&P, and Fitch will at least awaken the general public to the fact that their ratings are meaningless, and therefore should form no part of analysis of an investment's quality. I'm sure foreign banks have already absorbed that lesson fully. If that becomes general knowledge, perhaps the issuing banks, insurance companies, etc. will stop paying them to produce this garbage and they will simply go out of business. That would be a good thing. No information is better than misinformation or outright lies.

[yclept]

This message has been deleted.

The last one posted twice -- been having problems posting today.

[yclept]

I wonder where Will has been.

Anyway, next week options expire. The June options expiration week and the week after have a pretty sorry record:
blog.stocktradersalmanac.com/post/June-Option-Expiration-Week-Soft-and-Week-After-Terrible

Probably doesn't mean anything, but I stumbled across it and thought I would link.

[safeharbor37]

Back to the "Possible Direction" aspect of the market: Looks like my expectation is holding up. Looks like a slow down for the summer. I'm still counting on a recovery [in the market] in the fall and expect stocks to end higher than they began. We'll see.
Looking back to the market peak late 1999 -early 2000, only the DOW is higher today than then. S&P down marginally [-10%], NASDAQ down 30-40%. That's a little over ten years. So, ModE, it does look like the 17 year cycle is holding up for the time being. We hit a high [DOW] of about 14,000 in October '07 and recently was 12.5-6K but is at the moment back below 12k [just marginally above it's December '99 peak].
Maybe a buying opportunity in our future?

[safeharbor37]

Well. This week came as a surprise. The market is on a roll, but I still don't trust it. In the late 1990's I made the mistake of thinking the market was over priced and stayed out mostly, eventually jumping in in 2000 when the bottom fell out. I don't think that I or anyone else can accurately predict the market, but I still think it's a good idea to "buy on the dips." My biggest problem [ignoring lost opportunity] is selling. I generally hold too long, but in this case I suppose I jumped out a little early. As I posted before, it isn't traumatic, but things I sold a few weeks ago are up considerably, but I'll hold that getting a fair profit is what counts since I've usually lost out when I tried to too accurately predict tops and bottoms and have done OK when I "got out [or in] in time."
I just bring this up to remind myself to stick to my principles, still it stings when I sell [or defer buying] and then see the shares take off. It's a lot like buying something and then seeing it on sale a week later at half the price. Still, my principle which has served me well is to pay what I think something is worth to me and then go about my business.
I do think that the market gains are suspect, but can't say why.

[ModE98]

Safe....."So, ModE, it does look like the 17 year cycle is holding up for the time being. We hit a high [DOW] of about 14,000 in October '07 and recently was 12.5-6K but is at the moment back below 12k [just marginally above it's December '99 peak].
Maybe a buying opportunity in our future?"

Being a market of stocks, believe there is always "opportunity". But former market cycles also remind us that better (best) opportunities lie begging at cycle lows following major corrections.
It is very difficult to recognize how great an opportunity may exist when we are so skeptical of a true bottom, fearing there may be worse to come.

So, my question is, are we about to undergo a financial relapse before things become better (like a test of 9500-10000 DOW), or is the market going to continue to climb the wall of worry, and then perhaps in a year or two, suddenly take off on a new bull cycle?

To me, the American and European economies look "shaky" and there are musings among economists that China is building up to a "bust". If that bubble bursts, and we are still struggling, the consequences could be dire. Guess we just have to roll the dice... no sure thing.

[safeharbor37]

Thanks all. I don't know the answers so I ask. I tend to agree with DI in general. Problem is that I never got into technical analysis. I know what it is but have never found the time to become proficient ~ so I ask others who may know something.
I know what's going to happen. The market will eventually go up and stay higher than it is today. Along the way, we'll have dips and peaks. Some will be trivial, some drastic. The problem is determining whether the top [or bottom] has been reached and if the peak or dip is a major one or a trivial one which will soon be swamped on the way in the same or opposite direction. I think the Elliot Wave idea is essentially correct.
Like the seventeen year theory, the Elliot Wave is no doubt subject to outside influences such as economic instability, but I think that eventually they work. It's a lot like the economic cycle. I think that excesses have to be worked off in recessions and recessions can be delayed, but not entirely prevented. Same with waves in investing. Prices go [relatively] up and they come [relatively] down, but like inflation, the final result will be higher prices, if only to reflect the discounting of the currency.
I still believe that we're due a pull back before the end of the year which will be higher than now, but I'm concerned with the apparent disconnect between the overall economy and the market. I'm afraid that much of the strength of the stock market is due to the lack of alternatives and when alternatives appear we may find that the current level is artificial.
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Moving the Market
Broad buying on thin volume help stocks extend rally to fifth straight session money.msn.com/business-news/news.aspx?briefing=stockticker

[tyfighter3]

At the end of 2008 I would agree that we have had one of the best buying opportunities we have seen in the last 50 years but Large Caps really didn't participate the way you would have thought they would have. They have only just started to catch up the last 6 months but don't forget where the money is to be made at. Just look at last weeks stock pick of the week winner. Your small and mid-caps is where it's at. Risk on for the rest of the year. I know us old timers need to keep our money safe and even young investors need a safe place for a portion of your port to keep risk in check but we shouldn't over look the prize to one extreme to the other. JMO

[tyfighter3]

There are a lot of small and mid cap stocks that run like a large cap and they have growth left in them, that being the prize I'm talking about. The older you get, you want to conserve wealth and have Income coming in. If you have years to go before you retire, corrections can be very good to your port by being able to pick up some of these stocks at a very good price. Do your DD, because they are out there to be had and in a few years you will be able to see the prize I'm talking about. JMO

[safeharbor37]

I received a Private Message which responded to my comment about the "apparent disconnect" between the overall economy and the market. The message indicated that the "apparent disconnect" was due to business hoarding money and seeking profits based on "greed." It did a pretty good job of explaining the "apparent disconnect" which I'll assume is more or less accurate, but it reminds me of the initial response to Reagan's initial tax reduction, etc. which were intended to stimulate the economy, but which the likes of T. Boone Pickens used to fund "hostile takeovers" in which businesses were purchased, then dismantled, the employees fired, and the businessmen like Pickens walked away with a bundle as a result of destroying sometimes, thousands of jobs. The result of course was a change in course by the Reagan Administration which had better results.
I think it's the job of government to provide a business climate in which expansion of employment is beneficial to the businesses which provide employment. My investments are rarely influenced by whether I think someone will gain or lose employment. I don't expect business to be any more altruistic than I am [as regards my assets and income].
In the meantime, I'm just trying to figure out what's happening and is likely to happen, since I have no influence on it one way or the other.

[safeharbor37]

The market is down again today. Do you think that it will resume its upward climb once the Federal budget crisis is resolved? Or, do you think that the market was overpriced [overbought] anyway?
I still feel that a lot of the upward pressure on the market has to do with the fact that there aren't that may desirable alternatives. We're facing inflation eventually and, in fact, we're already in a defacto inflation in that prices for living essentials are rapidly going up. So, as the dollar deflates in value, property may inflate in value so that not just the holders of gold, etc., but owners of stocks and other property may be better positioned than those in cash [I've let my cash build up, so I'm interested].

[yclept]

I don't think the debt limit crisis will be solved -- at best, it will be kicked down the road a short way. This will not avert a market crash. It is hard to figure out what may be a safe haven as the dollar is probably also due for a big drop. I moved some assets to non-dollar denominated cash via FXF (Swiss Franc); took a position against the dollar with UDN this morning, and bought some EWZ awhile ago hoping Brazil will do better than the US. I'm a day late and a dollar short on all these moves as they have already run up. I still have shorts on silver via ZSL and on the T-bill via TBT -- maybe one of these days will be time for these dogs to howl!
That still leaves me with a few long positions (sucking pond water) that are counter-balanced as of this morning with a position in SDS, and a bunch of cash (USD) -- none of which I'm very comfortable holding, but I don't know what else to do with it.

[burger]

I've pulled almost everything out of the market for the time being (did so yesterday) because I'm not real big on shorting. I figure the downside is much larger than the upside right now, so I'm going to sit on the sideline until things get straightened out.

[safeharbor37]

I can't understand why the market hasn't taken a bigger hit. I think there is the possibility that, instead of being overbought, the market may be ready for a big growth spurt based on debased currency. So the questions is: Which is more endangered, Equities or Currency?
It is possible that the huge government expenditures will not result in hyperinflation ~ but that's not for sure.
We had peaks [DOW] in 2000 [11,000] 2007 [14,000], one in 2011 [12,800], followed by dual peaks of [12,700 & 12,700] and the 50dma is beginning to decline. So, it could be the beginning of a big decline or not. The 2007 peak was based on inflated RE values, 2000 on the dot.com boom and 2011 presumably on the "stimulus" [lots of imaginary money circulating]. If we assume that the 2000 peak was artificial then it follows that the real value at that time was actually less than 10,000 ~ but how much less. The [7,500 in 2002 and 7,000 in 2009] bottoms were similar to the pull back market in 1998 so if you draw a line from 1998 to 2011 you get a flat line with a range of 14k - 7000 = 7,000. But I don't think it's reasonable to believe the oversold markets in the 7,000 range represented real value so the question becomes: What is the real value of the market ~not what is the price of the market.
I don't think there is much chance of the markets [as represented here by the DOW] are likely to fall much below these previous lows, but bad news could drive it down to those levels ~ leading to the question: Why are the markets not lower now?
I'm ready bad at predicting highs, but sense lows pretty well ~ although that doesn't mean the market can't go lower when I start "bottom feeding." I sold some stuff earlier and their prices are still higher than my sell price despite the pull back, but I made money and wouldn't feel comfortable buying them back even if their price was lower [A-B rated stocks].
Anyway ~ the current situation seems to be uncharted territory, but I'm open to suggestions as to how to interpret it and any similarities to past markets.
I still feel that the market will be OK for a while unless something significant happens and am curious as to why the market hasn't reacted more to the current situation in Congress ~ maybe there's something we don't know about or maybe we're being fed information to obscure what's actually going on.

[yclept]

The debt ceiling is an artificial crisis -- it should have been a non-event. The debt ceiling concept is stupid -- purely and simply a matter of shutting the barn door long after the horse has left. I think a lot of folks are just sure that the Republicans won't actually drive the car off the cliff. I'm betting strongly that they will -- the steering wheel is lashed straight ahead and there's a pee-party brick on the accelerator. I don't think they can avoid going over the cliff.

The solution to the debt crisis is going to be massive devaluation of the dollar in order to screw the overseas investors (Chinese, English, Japanese, oil exporters, etc.) who were stupid enough to ignore the elephant in the room for so long. www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

It's not all bad news from a trader's point of view. Using negatively-biased ETFs, it's much easier to take positions counter to the market now than it was when the only way to do so was to short individual stocks.