Guest Commentary this weekend comes courtesy of George Slezak, who used to trade the pits for his own book, and brings a well-developed set of experience to almost any market.
My view is a little different from George's on the macro level. However, the point is to listen to other fact based points of view, and take from them what makes sense for you, even if you may disagree on some of the basic assumptions.
Opinions without facts are almost worthless. Everyone gets on a streak now and then, and carve their hits into marble and write their misses on the sand. But opinions mean nothing, because if the normal trader's opinion is probably little better than a 50-50 coin flip, and if he knows a lot and is an insider, he's probably lying. So take the facts and make something you can estimate and follow with confidence, and try to search out people who have a better than average track record in following the markets.
George and I seem to both agree we have not yet made a major bottom. In fact another 8% down from here at least in a panic selloff looks about right. Its not clear where the bottom will come however, because this selling is being driven by a forced liquidation of the funds, who are getting some brutal treatment from the Gang of Nine Banks. We have an open mind to the continuation of the looting until Bush and Paulson leave town.
Let's allow the market to tell us. And in the meanwhile, here is some valuable information from George, who regularly takes the honors in the tallies of the forecasts of letter writers. His site can be visited here at Stock Index Timing.
Stock Index Timing
George Slezak
Commentary for Saturday, 10/18 9:30 am
A "real" bottom is safe.
Let me begin with a big picture review. I believe we are going into a market pattern like 1938 to 1942, or 1893 to 1897, or 1910 to 1914, or 1946 to 1950, or 1978 to 1982, or 1946 to 1950.
Now, 1938 to 1942 is the primary pattern I expect us to follow, but that pattern is not unique in history. As you can see there are a lot of 4 year market patterns of essentially market consolidation.
I started trading on the trading floor in 1978, so, even though it just looks like the markets were just in a channel, I know those years can be great trading years. Unfortunately, the buy and hold guys are going to feel more pain for another four years or so.
My closest friends that are buy and hold guys followed my advice and put their age in government bonds. So, if they were 60 years old, they have 60% in Ginnie Maes or other Government guaranteed bonds, and the other 40% in dividend stocks. Their 40% is down about 40%, or 16% of their total, and they will survive.
For those of us that want to "trade" the coming years I really think we can prosper! When I say trade, I don't mean we use our "can't lose" investment dollars. I would say maybe 5% of your investment dollars could be used for trading. If you make money, it grows. If you lose it, it needs to be money you won't miss.
The Next Phase of the Market
The next phase of the market we will NOW be facing is the "slide and bottom phase."
We might as well understand a little bit about bottoms because in the coming 4 or 5 years we are going to have a series of up and down markets, and all those "downs" are going to have bottoms.
When I look at the above charts, I see major bottoms and trading bottoms. Right now we are looking for a major bottom so let's talk about it. I am calling a major bottom a bottom after a major slide. I think our slide right now is a major slide and will have a major bottom pattern.
The major slide we are in right now is completely out of control. I think all major slides go completely out of control.
Obviously the 1929 crash was a market pattern that went completely out of control. So did the 1987 crash. But the major bottoms after a long slide in the charts above also went completely out of control, like the 1938 bottom.
In my commentary last week I said I thought we had a major bottom. We had huge volume on the day of the low, and reversed ON THAT HUGE VOLUME BOTTOM DAY to close nearly 9% off the low. The key thing I saw in that Friday trade to make me think it was a major low day was any stock bought by the street on that day had substantial built in profits at the end of the day and could be held through the weekend with the reasonable expectation of only taking risk of loss of profits, not capital.
See, broker dealers are Reg T exempt. They can borrow 100% of the money they need to carry a position. So if they bought stuff real good, they can borrow enough to carry the stock and as long as it stays a good trade they continue to pay just the daily interest on the margin.
It's like day trading stock index futures with day trade margins. Overnight markets on E-Mini S&P futures is around $5,000, and day trade margins are about $1,000. So if you day trade a 20 lot and catch the bottom real good and hold it you have a $5,000 profit in each position. You "earned" enough to cover the overnight margin, so you might carry the position, or at least some of the position, over the weekend.
But if the market stutters and starts to slide back towards the lows, you will take off some or all of the positions because you no longer have that great cushion. See, your just a trader and "you know you don't know." If the trade were good, you wouldn't get squeezed.
That is the reason I moved from a buy signal to a sell signal on Thursday. The market was returning to the lows. The NASDAQ 100 actually traded to a new low. The bottom I thought was a "safe" bottom was retesting and as a trader for many years I KNOW a test can pass or fail! So I know anyone that had great buys on the big volume low day the week before was out of those buys. Why would you hang on for a test?
I know, many of you guys would hold onto those buys until they turned into 5% losses. Those of you that do that, are you doing well? Have you been trading long? Do you view yourself as successful?
I know, sometimes those that buy down are successful. Scale down trading is a valid trading plan only when you budget your capital, ie committing 5% of your capital on each scale.
But the street guys that bought bunches on the 16 billion share trading day were using 10 times their capital and were holding only because they had a lead. If they want to stay around, they took profits on the way back down and were completely out well before the slide back towards the low got close to the lows.
You know, these are some of the most basic concepts of trading and also the most misunderstood. It is like applying "modern portfolio theory" to your individual investments. A broker might tell you a "diversified portfolio of International, value, growth, commodities, etc" will give your portfolio a balanced return over time with less overall portfolio risk. Then you come into a time like know and every one of your market classes is down 40%! And you need your money now!
See, if you are the California Retirement system, the idea of a balanced portfolio over time - ie the next 100 years - works just fine because you do not have any current need on the majority of the funds. If you don't have a 50 year or endless time horizon your screwed if you follow that investment theory.
The same goes for scale buying. Scale buying takes large capital where small pieces are committed a little at a time. Often when you start your scale you only get one buy entry and then when you take your profit at 10% you didn't make a lot of money because you only had a small position. But that is how that trading approach works. If you do it a different way, it won't work.
(If you want some information on scale trading see American Scale Trading .com http://www.americanscaletrader.com/ )
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Here is a comparison of the current market bottom to the 1938 market bottom. Do you see at the bottom the two up gaps and then the market holding above those up gaps? That is what I was hoping for last week. Instead, we fell back down and are back near the lows, did lower lows on the NDX and other indicators. Now it looks more like an area a week or two before the low than the low.
Here is the 1929 bottom. Do you see the same reasoning as I explained in the 1938 bottom? We moved too far back down already. I expect another slide to another panic low.
Here is the 1987 bottom and there the market held on the retest. Since, however it wasn't a clean "leave it in the dust" bottom, so it was sloppy for weeks and retested later.
My point is a good bottom gives the buyers a a free pass and never gives them any pressure. Right now we have pressure on the bottom and reasonable trading buyers are already out of the market.
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Please understand this is the way to works at MAJOR BOTTOMS, not intermediate bottoms. Intermediate bottoms in a trend are different because it is not threatening the major multiyear lows on a new trading low and forcing panic selling from long term positions.
We are now looking for a MAJOR BOTTOM, and since we are retesting I expect us to slide through to lower lows.
Unfortunately, the slide through may look real bad. I expect we will have a week of downtrend days and then a combined 20 billion share day climax, maybe before the end of the month!
BOTTOM LINE?
Strap yourself in and get ready for the ride of the century! It's gonna look so bad that the dismal forecast above of the next four years of a chop between Dow 6,000 and Dow 10,000 isn't going to look so bad after all.
Did I say 6,000! Yeah, that's 62% back to the 1974 low. I HOPE we hold the 50% back level of the 7,200 year 2002 low. But if that doesn't hold we could go further. We will see if it happens, maybe in the next few weeks.
