Today's Market
by Dr. Invest


Aunque la mona se vista de seda, mona queda. Let me interpret, "A monkey dressed in silk, remains a monkey still." I don't care how good the market seems, "DO NOT BUY STOCKS!".

The global economy is slowing, "smart money" in corporations is buying back their stocks; "dumb money" is selling their stocks. It is the traders who are buying stocks and there is only a "low volume" in buying. Let me explain, institutional investors are holding-on to cash.

This market could change, but September is typically negative in stock returns. Oh, yes, there is a whole group of analysts dressing-up the market in silk, so people will buy back into the market. This is the "great hope", that people will separate with their money, putting all their cash back into equities. This just isn't going to happen yet. The market still remains a monkey.

Not only are stocks rocketing up and dropping like a ton of bricks, gold too, is remarkably volatile. Oh, did I mention treasuries? Wisdom tells you to stay clear and don't invest. Bernake will not SAVE YOU with a QE-3 this Friday. This "market uncertainty" will continue for a while. Wait until October and then re-assess the market. And most importantly, STAY AWAY FROM THE MARKET!

(Note: The above article is not for investment purposes, but solely for entertainment purposes.)

Bringing Home the Bacon
Understanding Volatile Markets
by Dr. Invest

Many of you who have followed this blog understand that my approach is to identify the best time to invest into the market and the optimal time to get out of the market. This strategy frowned on by traditional finanical advisors and called "timing the market".

There is nothing wrong with long-term investments and your portfolio should contain them, but if you are going to invest in securities, you will need to understand some basic ideas. "Timing the Market" is generally directed at the effort of judging market lows and highs and buying and selling at the right time. This is done by "day traders", by "swing traders", and by "financial advisors". Financial advisors call this "balancing one's portfolio". Are you seeing the humor in the symantics of "timing the market"? The financial advisor recommends the instruments for you to invest in and get's his fee for managing your funds, his fee for selling you the product, likely he gets a percentage of the management fees for the product he sold you, and a fee when you sell the product he recommended. (see front load and end load) So whether you use "portfolio balancing" or "timing the market" really doesn't matter much. If a financial advisor is going to recommend "rebalancing your portfolio" you need to understand that "rebalancing a portfolio" shouldn't take place after your portfolio has lost 30%.

FOLLOWING THE VIX

So here is the tool you need to better judge the trend of the market. It is called the VIX. Here are some important points as shared by Greg Forsythe at the Schwab Research Center.

Key Points

• Based on S&P 500 option prices, the VIX is a measure of expected market volatility.
• Learn about distinct patterns among various market indexes, depending on whether the VIX was high or low.
• Action steps: Using VIX in your stock strategy.

While patience is generally a virtue for investors, Schwab research suggests that, indeed, stock investors who like to make tactical shifts in their portfolios can utilize market volatility to help boost returns and manage risk.

Measuring Stock Market Volatility

Market volatility measures recent price changes for broad indexes like the S&P 500®. But while actual volatility tells you what's already happened, investors must look ahead, so what they need is a way to gauge potential future volatility.

Fortunately, the Chicago Board Options Exchange (CBOE) provides a convenient tool: the Volatility Index, or VIX. Based on S&P 500 option prices, the VIX is a measure of expected market volatility.

VIX History

First, let's take a look at how the VIX has behaved in the past. The chart below shows that it's generally ranged between 10 and 30 during the past 20 years, occasionally surging higher.

Because the VIX usually rises when the market falls and spikes during times of market distress, it's often called the "fear index." However, the VIX is really an uncertainty index, reflecting actual prices paid and demanded by bullish and bearish options traders.



Volatility Tends to Persist

Wouldn't it be great to know when the stock market was in a high- or low-volatility period, and adjust your equity strategy accordingly? The challenge comes in predicting volatilty persistence or shifts with enough accuracy to profitably act upon your forecast.

The chart shows two periods when the VIX was generally below its long-term average and two where it was generally above the average.

We found that when the VIX was above 20, 78% of the time it remained above 20 three months later. When it was below 20, 85% of the time it remained below 20 three months later. So the VIX has historically tended to remain high or low for extended periods.

Stock Performance During High or Low Volatility

So if the VIX tends to rise as the stock market falls, what happens to the market after the VIX moves above or below its long-term average? Our research found distinct patterns among various market indexes, depending on whether the VIX was high or low.

• Large- and small-cap stocks¹ generally provided higher returns (about 2.6% each) the quarter after the VIX fell below 20 versus the quarter after it rose above 20 (1.5% and 2.4%, respectively).
• Large- and small-cap returns were almost 50% less volatile in periods after the VIX fell below 20 compared to after it rose above 20. In other words, the VIX has predicted market volatility well.
• Value stocks significantly outperformed growth stocks (3.1% large-cap value versus 2.1% large-cap growth and 3.3% small-cap value versus 1.9% small-cap growth) in periods after the VIX slipped below 20. Large-cap growth outperformed large-cap value (1.7% versus 1.1%) in periods after the VIX rose above 20.

Action steps: Using VIX in your stock strategy

Our findings suggest that investors can benefit from keeping an eye on the VIX (keeping in mind there's no guarantee future patterns will duplicate the past).

For example:

• If you're a buy-and-hold investor, you can use the VIX to help decide when to rebalance. For example, if your portfolio is overweighted in stocks and the VIX is above 20, consider selling back to your target stock allocation. When the VIX is high, the market is usually riskier and provides below-average returns.
• When the VIX is low, you may want to overweight large-cap and/or value stocks within your equity allocation. When the VIX is high, you may wish to underweight stocks overall, but overweight small-cap or growth stocks within your equity allocation.
• If you buy individual stocks, you don't need to vary your strategy as much in response to VIX levels, but you should expect less consistent performance when the VIX is high. When it's low, using value and momentum selection criteria may help performance. Schwab Equity Ratings, our tool to help you find individual stocks, has historically performed similarly when the VIX is low or high.

History suggests that market returns will remain volatile in the near future and that small-caps may continue to outperform large-caps.
CONCLUSION

As of August 21st of 2011, the VIX sets at 42.67, not a good number for stocks. The market is not static but dynamic. Securities must be managed, even your long term investments. By using the VIX you can estimate the coming trends in the market. Using the VIX in combination with seasonal cyclical trends can give you advantages when purchasing or selling stocks.

(Note: The above information is not for investment purposes, but solely for entertainment purposes only.)

Today's Market
by Dr. Invest


Someone asked, "Well what do you think about the market today!". The past three or four days of stock returns have been spectacular. For the amateur, it seems that it is time to buy. Today proves that whatever bearmarket gains we see, it is likely to be only a "sucker's market" or a "dead cat bounce" in the end.

I am not keen on most of the analysts seen on CNBC or other news programs, but Louise Yamada seems incredibly honest about the present market. See her at Yahoo by clicking on the link below:

http://finance.yahoo.com/blogs/breakout/market-death-cross-mode-stay-sidelines-says-louise-152153683.html

She reflects what I have already been saying and one would be wise to put her ideas into practice. My opinion has not changed. STAY OUT OF THE MARKET! Your chances for success are minimal until October, and even then you will need to retest the market for its trend.

Listen carefully to Louise Yamada and take your own personal notes. She uses the idea, "the weight of the evidence". Volatility, the death cross, the poor historical stock returns in August and September, and a weakening in the economy points to what Louise Yamada calls, "Staying on the sidelines" because their are only two losses you take, the loss of OPPORTUNITY and the loss of CAPITAL. We would rather be out of the market, wishing we were in; than to be in the market, wishing we were out.

(note: the above article is not for investment purposes and is soley for entertainment.)

Today's Market
by Dr. Invest

We have just seen what is commonly called, THE DEATH CROSS. This is where the 50 day moving average falls below the 200 day moving average. Typically, this marks a downward trend in the market. Eventhough we are seeing a rebound in the market, this coming week we will be getting reports on home sales and the continued reports on the PIIGS, with continued concern on Greece, Spain, and Italy. France has just come under the scrutiny of the S & P and is in danger of a credit downgrade.

Those in a rush to get back into the market, may well find themselves subjected to major losses in a market that declines 600 points on a whim. Look at the the table below and you will see the statistics pointing to index performance after a DEATH CROSS.



What we can gather from the above chart is that after a DEATH CROSS, the market performs poorly. There is a higher likelyhood that the DOW index will lose value over the next month, than gain. And even after the first month, the following months for the DOW is less than stellar. A bear market does not always occur after a DEATH CROSS and the further you move away from the Death Cross, the more likely you will have a better performance. Inspite of the dramatic ups and downs of the past week, we are still down 200 points.

A knowlegeable trader can find opportunities whether the market goes up or down, but trades cost money and with each trade are opportunities for failure, as well as success. My goal is not to take risks, but find the optimum season for success. Considering the above chart showing returns the month after a DEATH CROSS, the unpredictability of the present market, and the fact that the months of August and September show poor performance for stocks, it would be best to stay out of the market for now. If you have a cash position, hold it! If you have a long-term buy and hold position, then you shouldn't be terribly concerned about these temporary market fluctuations.

Today's Market
by Dr. Invest

Well, no comment was needed for Monday. My estimate of a decline of 1+% was far exceeded. Today we enjoyed the "Dead Cat Bounce", no offense to animal lovers. Just when the decline in the market was so painful it brought tears to your eyes, the sudden rise in the market could only bring a small feeling of relief.

If you didn't have the chance to exit the market and move to cash, it would be safest if you REMAIN SEATED at this time. This roller coaster market will continue for the next few weeks with breath taking ups and downs; and typical of roller coasters, the ride will eventually end at the same location. A good financial advisor will remind you that this one little jostle in the market will soon be forgotten and you will recover from your loss.

You may ask, what should I do now? I want to encourage you to read the previous blogs on The Market Today. There is a DIRECTION that the market is taking and it seems that the OVERALL MARKET is moving downward. We already know that in the months of September and August the historical market returns are poor. This means that the winds are unfavorable for equity investments until October, and even then the winds will need to be re-tested again to see if overall market is advancing.

There are gains to be reaped right now, but the risks are too high. You don't want to learn the hard way, that your favorite stock that went up 8%, 12%, or 14% yesterday when you were not in the market, will drop 4%, 8% or 10% once you buy them tomorrow. No one can know what the market will do when it is swinging wildly. Wait until there are a number of days that show regular and predictable rising returns from the market.

Here is a diagram for the trajectory of a bouncing ball. Notice how the ball, as energy is dissapated, bounces lower and lower.
 
The market moves in the same way. This stock graph shows what looks like a W at the begining, with the market moving from higher highs until it reaches its maximum peak, then a series of lower lows in the market as the energy in the market dissapates. If you look at the very end of this chart on the right, you see a sideways motion called, CONSOLIDATION. What is important here is that without something to ENERGIZE the ball, it will bounce lower and lower, just like the market will move lower and lower unless something is there to energize the market. The market is far more complicated than a bouncing ball, but if there are fundamentals in the market like "demand for goods" and "profits", the ball becomes energized and bounces higher and higher.

The question that you must ask yourself, "Is do we have something energizing this market?".  Even the most bullish analysts acknowledge that growth and unemployemnt is at best, tepid and at worst, entering a recession. There is really NOTHING that can energize the market at this time, so the ball must move downward.

Closing Thoughts

What can energize the market are three holidays where large sums of money is spent. This means people buying and companies making money. These holidays are: HALLOWEEN, THANKSGIVING, and CHRISTMAS. If my speculation is right, we are still set for market improvement in October. So hold on, it will get better.

(Note: The above article is not for financial advice, but soley for entertainment purposes.)

UPDATE ON MONDAY'S MARKET
by Dr. Invest

The news is out... don't worry about tomorrow, everything is fine. I warned about the S & P downgrade, and it will affect the market tomorrow. It is 12:00 and I am looking at the Asian Markets. NIKKEI down 2.13%, HANG SENG down 4.04%. These are reasons for you to not enter the market on Monday.

Chicken Little is saying, "the sky is falling" and Mother Hen is saying, "It's a beautiful day". I wouldn't listen to either one. The statistics are not in your favor over the next two months, as August and September typically do not show high returns for stocks. The market will react to the downgrade by the S & P and you should expect to see the market drop 1+% tomorrow. Regardless of Geitner's projections, the VIX or negative feelings about the market will rule the day.

Some economists believe we will see a 17% rise in the market before the year's end and that is very possible, it just doesn't seem like tomorrow is the right day. Oil has fell to a low of $87 per barrel and oil stocks look attractive, but I would wait until it looks like we have hit a bottom and have seen a rebound. Even then, be warned that what seems the bottom could be a series of bottoms with LOWER LOWS. Wait for a while, until October, then see where the direction of the market is going. There will be plenty of time to make money.

Until October, I suggest that you DO NOT ENTER!

(Note: the above article does not constitue financial advice and is soley for entertainment purposes only.)

Today's Market 
by Dr. Invest

It looks like it's good to go, or maybe not. Some of my favorite stocks lurched foward with gains of 2 to 4%. I asked myself, "Now why didn't you have the courage to get back into the market?"

I want you to think of this like seeing a $100 bill in a busy street. You already know that when people leave their work, the street is going to be filled with cars. You also know that at mid-afternoon, everybody will be in their offices and few cars will be on the street. Your chances getting that $100 bill without injury is far better at 2:00 in the afternoon, than at 5:00, when everyone is in a rush to drive home. The same is true of the stock market. When someone sees an opportunity to get an easy $100 bill, they may take that chance when the risks are high. Yes, they might get hit by on-coming traffic and it may cost them thousands in medical bills, but to them the reward is greater than the risk.

There are great opportunities to make some real money because the market had dropped 10%, but to make that money is just too risky because we don't know what will happen next week. If you invest $10,000 and make 10%, you will have $11,000, but if you lose 10%, you will have $9,000. To regain your original investment of $10,000, you have to make $1,000 which requires a return of 11.5% off of $9,000. What I am saying is "Don't get back into the market now!". The odds are not in your favor.

Look, the DOW was all over the charts today. This is the sign of turbulent water, get out! As I said in the past blog, August and September have traditionally been low performing for stocks. Using the forumula GNP -(minus) NATIONAL DEBT = GROWTH, the U.S. is floundering. Businesses typcially reflect the national formula in stock price. (The exception are business positioned in other countries.) The dilemma is that both the U.S. and the INTERNATIONAL GOVERNMENTS are floundering economically. None of these government have declared bankruptcy, but all are under REORGANIZATION. The E.U. has promised to LEND MONEY so the international governments can pay their debts (like Greece, Italy, and Spain). The S&P has not lowered the U.S. bond rating at this time, but threatens that unless the U.S. gets their debt under control, they will reduce the rating for the U.S. And the U.S. continues borrowing money from China to prop up the U.S. failing economy. Businesses want to see how all of this RE-ORGANIZATION is going to work out before investing more money in a failed economic system.

The Bank of New York Mellon, slaped large clients with charges for holding cash, said the Wall Street Journal. These "large clients" are waiting for a turn-around in the market. Investors are unsure whether we will turn-around or turn-down.

Let me repeat myself, "As we go into this weekend, with a mixed result in stock returns, it would be best if you remained out of the market." As the market begins next week there could be a short rally, but I am expecting the market to swing wildly for the next two months and then settle back down. Early to mid October will be your target for investing.

If you have plenty money to loose, there are some real buys out there; but be warned, the traffic is heavy and it is not yet time to push the GO BUTTON.

(Note: The above article is not to be considered financial advice and is soley for entertainment purposes)