The Trend is Your Fickle Friend
John Hussman of Hussman funds on trends, averages, technicians and much more.
One of the questions we often receive is why we don’t simply lift our hedges when the market advances above some moving average or another, and replace them when the market breaks below those moving averages. Certainly, when one looks a chart, extended market advances always break above various moving averages, and extended market declines always break below various moving averages, so simple trend-following strategies seem utterly self-evident. Unfortunately, if you actually take that strategy to historical data, the results typically aren’t nearly as compelling. Moreover, once any amount of slippage or transaction costs are taken into account, the most widely-followed strategies generally underperform a passive buy-and-hold strategy over time, and often don’t even manage downside risk particularly well.
The charts below feature a variety of moving-average crossover strategies using the S&P 500. The darker blue line tracks the total return of the S&P 500, and the others track a variety of strategies that are long when the S&P 500 index is above the given moving average, and in T-bills otherwise (the moving averages are exponential – giving a weight of 2/(N+1) to the most recent observation, and the rest to the prior value of the MA, where N is the length of the MA). The moving average lengths are Fibonacci numbers, which is a common practice among technicians.
Guide to the Confused: SP 500 Futures Intraday
Some market commentary, courtesy Jessie.
When I talk about the ‘technical trade,’ I mean that fairly literally.
The market, in the absence of a major exogenous event, is running on autopilot, with the algorithmic computers and trend following traders driving it back and forth within pre-programmed levels of support and resistance.
The SP 500 futures are just an example. This same thing takes place in many other markets including important world markets such as metals, energy, and foodstuffs.
In low volume environments with no important exterior factors in the short term, the technical game tends to have a bias higher, because in this type of paper market there is no upward limit, and one wishes to draw in the ‘suckers.’ The word goes out in the pit that the trading desks ‘want to try to take it up.’ This is how the ‘pools’ operated in the 1920′s.
The drops tend to come quickly and pass even faster, since that is the reaping, not the planting and growing of the scam.
Gold-what now?
When it comes to gold and big moves, just like we had on Friday, it is wise checking what Jessie has to say about it. By Jessie.
After the spectacular rally of last Friday it is natural for gold to pause and consolidate here.
However, I wanted to make sure you could see the position of the gold price with regard to the intermediate trend.
This is the key resistance which I referred to last week, clearly visible in the chart below.
The hedge funds were leaning very hard on the short side as we had shown in some of the indicators, and as several others had shown in the market structure through the Commitments of Traders Reports. And the bears had ‘gotten smoked’ by the commercials who hit them with a stiff short squeeze last week. As Ted Butler remarked, ‘manipulation goes both ways.’ Yes it does, but not in this case, because Ted does not understand even yet it appears the basic underlying reality of the long term gold market, perhaps because he is so focused on silver.
I think that the downward pressure, or bearish manipulation if you will, was greatly exaggerated by the trading desks because of the key market dates including option expiration. The ferocity of the rally was due to that pressure being relieved and turned back. It perhaps then could be better described as ‘the end to the manipulation’ than an active manipulation itself.
Trend following manifesto
Interview with one of our frequent readers, Larry Tentarelli.
Michael Covel talks to trader Larry Tentarelli. Tentarelli started trading his own account after leaving Merrill Lynch in 2003. Covel explores some of Tentarelli’s influences: from Napoleon Hill (taking accountability for your own actions), to Jesse Livermore (“The money isn’t made in the daily fluctuations; the money is made in the big swings”), to Ed Seykota (“everybody gets what they want”). You don’t have to be a computer engineer or rocket scientist to come up with a trading system, nor do you have to have all the time in the world: Tentarelli spends less than 15 minutes a day on average trading his own programs. He also relates several “light bulb” moments he had that led him into trend following: from an investment in Chinese oil to reading about Tom Basso’s experiments with coin flips to determine entry points. Further topics include the distinction between predictive and reactive technical analysis; the importance of connecting and asking questions to those who have more experience than you; and the idea of knowing what you want out of the market.
Full interview worth listening to here.
Why is nobody writing about the downside break out in gold?
The Gold bugs have been feeling the heat lately. Gold as a safe heaven trade seems rather dead. The big almost parabolic move has attracted many clueless investors, all waiting for Gold to print 2k, minimum. Well, it sure looked so, but with the 1600 level broken to the downside, many are sweating again. The Trader wrote about the big formation in the charts a few weeks ago. Gold is at cross roads here, let’s see if people start puking, or if we will get the last bounce up? Special thanks to one of our readers, Erik, for reminding us about this update.
Gold and Silver charts update below.
Accumulation/Distribution Trends in Gold and Silver
Guest post by Jessie.
The accumulation trends seem rather steady despite the recent volatility in price and protracted sawtooth downtrend.
I have included GLD and SLV in case the futures calculations had induced some distortions.
On the last chart I include the Chalkin Money Flows for GLD which are remarkably positive except for the year end selling we saw at the end of 2011.
Someone had mentioned this phenomenon to me earlier today, but I did not think about it until I read Harvey Organ’s futures analysis in which he noted his surprise that in the recent price smackdown’s the Open Interest of gold and silver were steady or even went UP.
That seems to imply short selling into demand, rather than long liquidation as the cause of the price declines. From this evening’s commentary by Harvey:
“The total gold comex open interest baffled everyone as instead of falling badly surprisingly it rose by 3906 contracts. The raid orchestrated by the bankers somehow did not cause any gold leaves to fall from the gold tree. The May delivery month surprisingly saw its OI rise from 64 contracts to 173. How on earth will the regulators explain this as we witnessed no liquidation of metal of any kind in a huge price downfall and yet more stood for delivery?
…The total OI for silver was even more baffling to our bankers. With silver falling on its sword to finish in the low 29′s one would have thought that many silver longs would throw in the towel. Nope!! The total OI actually rose by 1410 contractions from 112,139 to 113,549. Both Ted Butler and I agree that some strong entity is after physical silver. There is no other explanation for this. The front delivery month of May also shocked our bankers. The OI actually rose by 3 contracts (from 406 to 409 contracts) despite the huge downfall in the silver price. Nobody liquidated. I wish the regulators can explain this phenomena to us.”
What’s up with Gold?
“Since the early autumn here in the Northern Hemisphere gold has failed to make a new high. Each high has been progressively lower than the previous high, and now we’ve confirmation that the new interim low is lower than the previous low. We have the beginnings of a real bear market, and the death of a bull.” (Gartman)
Gold is certainly a crowded trade, although the trend is intact. With so many bulls, and Paulson still big long Gold, things could get interesting….
Charts with perspective below;
Long Term Charting suggests fair value S&P 500
Long term markets should be judged by fundamental analysis is the dogma, but what about long term charts? Are there “reliable” charting techniques looking at very long trends, and what are those suggesting? Below is some interesting research based on long term charts. According, purely statistically, the below model suggests S&P should go down to around 500, give or take a few points. Guest post by Carlucci via D Short.
Based on that data, one could make a reasonable statistical assumption that the slope for the current secular bear market beginning in 2000 would also follow the same 34 degree angle as the previous three bears. Overlaying that slope on the 2000 bull top would suggest that we are not yet half way through the present bear cycle.
But how much more “bear”is left?
To answer that question, we add an additional green line to the S&P chart corresponding to -50% variance from the trend (Figure 3). All three bears in 1920, 1949 and 1982 have touched that line before rebounding. In fact, all three have actually exceeded -50%: 1920 at -59%, 1949 at -57%, 1982 at -55%.
If we follow the 34 degree bear slope line to the -50% green variance line, we arrive at a very conservative end point for the current bear in 2022 – 2023 with the S&P at approximately 540. That, I wish to emphasize, is the conservative scenario.
Market Update
The outlined Trend Channel we have been posting over the last couple of weeks is still intact. The circle marks the shake out before we got the final short capitulation today. There are many big “smart” guys getting run over today, especially in Europe. In this complex world, it’s best to keep it simple. Stay tuned for our full chart review later.
Quick SPX Update before Europe Closes
SPX is still trading within the trend channel we outlined weeks ago. We are getting some “disturbing” first signs of fatigue though. Note how the recent tops lack the conviction we saw earlier in the trend channel.
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