The markets closed down on Friday in bearish fashion although the indices may not look so. The market internals were convincingly bearish across the NYSE, hinting that any bullishness at the open was nothing more than short-covering. In fact, the whole week was dotted with rallies that were nothing more than short-covering (Dead Cat) bounces.
The spike on the Fed minutes on Wednesday was also nothing more than Wall Street’s automated systems that misread the report. The FOMC minutes suggested the global economy was slowing and that its ‘considerable time’ language is misunderstood. The market promptly sold down sharply on Thursday with the Dow falling 335 points for a -1.97% loss while the NASDAQ and S&P500 lost more than 2% each.
After another sharp selloff in U.S. stocks on Friday the main benchmarks recorded their deepest weekly declines in more than two years.
The tech-heavy Nasdaq Composite (-2.33%) dropped 102 points, or 2.3%, to 4,276.24 and suffered its worst weekly decline since May 2012. The index undercut a key support level, prompting fears of further declines.
The S&P 500 (-1.15%) fell 22 points, or 1.1%, to 1,906.13, losing 3.1% over the week, its biggest weekly drop since May 2012. The benchmark index is a hair’s breadth away from undercutting its key support level.
The Dow Jones Industrial Average (-0.69%) dropped 115 points, or 0.7%, to 16,544.10, and lost 2.7% over the week. The blue-chip index turned negative for the year and also fell below its key support level.
The Dow and the S&P500 are now below their 200DSMAs with the NASDAQ sitting less than a point above its own 200DSMA.
The widely watched VIX (+13.22%) a gauge of current fear in the market, surged 45% over the week and is at highest level since February.
Of the 10 sectors, the defensive Utilities (+0.51%) and Consumer Staples (+0.50%) were the only two that registered gains while Telecom (-0.62%) and Health Care (-0.72%) were the shallowest losers, indicating a flight to safety amidst all the fear that is apparently gripping the market.
The remaining sectors closed firmly in the red; Financials (-0.82%), Consumer Discretionary (-0.87%), Energy (-1.18%), Industrials (-1.48%), Materials (-1.52%), with Tech (-2.79%) suffering the worst.
THE WEEK AHEAD:
- The U.S. Treasury market is closed on Monday in observance of Columbus Day. Chicago’s Evans discusses economic conditions and monetary policy (12:30).
- There is no data on Tuesday.
- Data begins to flow on Wednesday as the weekly MBA Mortgage Index (7), retail sales, PPI, Empire Manufacturing (8:30), business inventories (10), and the Fed’s Beige Book (14) cross the wires.
- Data remains heavy on Thursday as initial and continuing claims (8:30), industrial production, capacity utilization (9:15), Philly Fed, NAHB Housing Market Index (10), and Net Long-Term TIC Flows (16) are due out. Fed speak is heavy as Philly’s Plosser gives his economic outlook; ATL’s Lockhart discusses “Strategic Workforce Development Policies for the 21st Century” (9); Minny’s Kocherlakota discusses “Clarifying Objective of Monetary Policy” (10); and STL’s Bullard appears at “Millennials Rising: a Cross-Cutting Policy Symposium” (13).
- Friday’s data includes housing starts, building permits (8:30), and Michigan Sentiment (9:55). Boston’s Rosengren makes opening remarks at the “Inequality of Economic Opportunity in the United States” conference (8:30).
I am not expecting any major moves this coming week but don’t expect the volatility to go away either. Be careful to not be lulled into complacency as the week lures the buyers back in. Expiration Friday and the week after October Expiration can be very treacherous.
This is, after all, October, infamous for some of the most notorious stock market crashes in history;
~ The Panic of 1907 (October 1907)
~ Black Tuesday, Thursday and Monday (October 1929)
~ Black Monday (October 1987)
Let’s also not forget that fateful October in 2008 that effectively ended the lives of Lehman Brothers and Bear Stearns.
- The first day of October Expiration week has been up on the DOW 27 of the last 33
- Expiration week is usually bullish
- October Expiration Friday has seen the DOW go down 8 of the last 10 (this is the anniversary of the Crash of 19 October 1987 – DOW went down 22.6% in one day, the single worst loss in a day.)
Got an email from a past graduate who found life becoming mundane and was afraid of becoming just another working “zombie” like those she sees on the train going to work everyday. She asked me what her life meant and how could she make her life more meaningful and fulfilling.
At last night’s class, I told the class that life is nothing more than the game of knowledge and information. He who knows more and is armed with more information holds advantage and dominion over those who lack the knowledge. This is the power game that is played everyday in business, within corporations, at your office, at home, amongst friends and almost everywhere else you can think of. It is even in the market – the power-players always know more than the retailers.
I may not have the answer to the meaning of life but I do believe that the purpose of life is to continue to educate ourselves and to keep ourselves informed.
I have found new purpose in life by arming myself with information and knowledge. It has made me successful, it has made my life meaningful as I educate others to improve their lot in life and it has made me a role model for my children to emulate as they pursue higher learning.
It has made me the top in my profession as my competitors scramble to find an edge to beat me without realising that it is all about continued learning and improving what you already know. While they busy themselves finding ways to beat me, they join the many in that rat race while I go about learning and improving myself, not caring about what they do. I only concern myself about my continued learning because it is that knowledge that keeps me on top.
Change the way you think. Look for a new focus. If you’re a parent, then you have an obligation to raise your children right. Start by gaining knowledge that you can impart to them in the future. Adopt a skill that they can learn from you for their survival and growth. Do something meaningful for yourself so that they can emulate – continue your learning and education.
And always remember that is not about what you want but more importantly about what you NEED that matters more.
At the very least, you won’t be a zombie on the train because you have a purpose while they don’t.
In closing, let me quote Miyamoto Musashi from the final chapter of his “Book Of Five Rings“;
“I will describe the essence of the Ni To Ichi Way of strategy in this book of the Void. What I call the void is where nothing exists. It is about things outside man’s knowledge. Of course the void does not exist. By knowing what exist, you can know that which does not exist. That is the void.
People in this world look at things mistakenly, and think that what they do not understand must be the void. This is not the true void. It is confusion.
In the Way of strategy, also, those who study as warriors may think that whatever they cannot understand in their craft is the void. Someone like that will continue to be distracted by irrelevant things. This is not the true void.
To attain the Way of strategy as a warrior you must study fully other martial arts and not deviate even a little from the Way of the warrior. With your spirit settled on your duty, you must practice day by day, and hour by hour. Polish the twofold spirit of Shin [heart] and I [will], and sharpen the twofold gaze of ken [perception] and kan [intuition]. When your spirit is not in the least confused, when the clouds of bewilderment are cleared away, there is the true void.
Until you realize the true Way, whether in Buddhism or in worldly laws, you may think that your own way is the one correct and in order. However, if we look at things objectively, in the light of the Straight Way of the Heart or in accordance with the Great Square of the World, we see various doctrines departing from the true Way. What you believe in often proves to be contrary to the true way, distorted as it is by tendencies to favor your own thoughts and views. Know this well and act with forthrightness as the foundation and keep the true Heart as the Way. Enact strategy broadly, correctly and openly.
Then you will come to see things in an all-encompassing sense and, taking the void as the Way, you will see the Way as void.
In the void is virtue, and no evil. Wisdom exists, principle exists, the way exists. Spirit is Void.”
September 2014 was a time for reflecting and considering the future. Crossroads are never easy to navigate but there will always come a time that each and everyone of us will have to navigate these obstacles at least several times in our lives. Now I face my umpteenth crossroad but I will prevail.
Such things only serve to makes us stronger and wiser. They happen for a reason. We may not know the reason now but it will all make sense when the time is right. The pieces will fall into place and they will tell us which path to take at that crossroad.
I’ve been there many times and if there is one thing I’ve learnt, it is to never force the situation and never second guess the outcome … okay, that’s actually two things I’ve learnt.
SEPTEMBER 2014 IN REVIEW
On the 6th and 7th, I came back to the public stage and spoke at the Financial Mastery event on both days. It wasn’t as big a crowd as any of the Expos I had previously done. Nevertheless, I thoroughly enjoyed the experience but I doubt if I’ll ever do such an event like that again.
The following Sunday 14th, I did the presentation again in KL to a smaller crowd but the response there was unforgettable.
But the one event that stood out for me didn’t involve me – it featured my apprentice, Jason Lee.
He held court in front of his peers from SIM and pulled off a four hour session on Business Finance. It made me proud to sit there and watch him share with his Alum on business skills and finance, knowing how much he has evolved over the three years I have mentored him. I give him a lot of credit for this – the boy did much of this out of his own hunger, motivation and determination. He will be big one day.
I didn’t teach in September and that left me a lot of time to catch up with old friends like Gracie Yap, Ruben Koh, Calvin Lau and GM Teoh and a whole bunch of other long-time-no-sees. Its good to have company like these wonderful friends.
With that, we’ve come to the end of the worst quarter of the trading year and ended two of the most bearish months of the year. And what a wild ride it has been. September 2014 closed all three benchmark indices in the red for the month. The bad news is, in my opinion, the worst is yet to come.
As of the close of 30 September 2014, 391 of the 500 components on the S&P500 have PE Ratios above 15 while 23 of the 30 DOW components were also above 15. That works out to 78.2% of all the S&P500 companies and 76.7% of all the DOW components being overvalued. By comparison, both indices were approximately 75% overvalued in 2007 before the market collapsed in August that year.
The VIX is starting to show that maybe the big boys are starting to take this bubble seriously. In just six weeks, the Fear Indicator has risen from 11.50 to 16.30 for a 41% gain. By the first trading session of October, its 20DSMA will have completed a Death Cross over its 200DSMA. The ultimate 50/200 Death Cross should happen before the end of the week if this trend continues.
Although the CPI fell for the first time since March 2013, Core Consumer Prices reached an all time high of 238.34 Index Points in August of 2014. The Manufacturing PMI has stalled out at 57.9 while its Services PMI has contracted for its second straight month.
Thus on the macro economic front, while on the surface things in America look to be “recovering”, certain numbers are telling us that this “recovery” is starting to falter more and more as the real threat of the end of cheap money nears.
With October in our faces, I can only get more cautious and shorter term on my positions. I intend to stay very liquid for the coming months and lighten up on my leverage.
October 2014 is the longest trading month for the year with 23 trading sessions and one Bond Market trading holiday, Columbus Day on Monday, 13 October (Bond markets will be closed). The month ends the “Worst Six Months” and begins the “Best Six Months” on the DOW and S&P500.
October is infamous for some of the most notorious stock market crashes in history;
- The Panic of 1907 (October 1907)
- Black Tuesday, Thursday and Monday (October 1929)
- Black Monday (October 1987)
Let’s also not forget that fateful October in 2008 that effectively ended the lives of Lehman Brothers and Bear Stearns.
Ironically, for all its bad rep and bearish tags, October has ended more bear markets than started it in history. Massive drops in 1987, 1990, 2001 and 2002 promptly and sharply reversed in October to start long-term rallies. If you had been a buyer during Black Monday of 1987 you would have been massively wealthy by the time the Asian Financial Crisis hit in 1997.
With so many being so fearful of this period, and moreso this year than last year, it would take an incredibly brave or stupendously dumb person to invest in anything now. Patience is advised and prudence should be wisely exercised.
- October starts poorly with the first week being bearish
- The first trading day of October has been down of the DOW 5 of the last 8
- The second week begins bearish but closes bullish (this was DOW’s worst week in history in 2008 losing 1,874 points or -18.2%)
- Monday 13 October is Columbus Day – Bond Markets are closed
- The first day of October Expiration week has been up on the DOW 27 of the last 33
- Expiration week is usually bullish
- October Expiration Friday has seen the DOW go down 8 of the last 10 (this is the anniversary of the Crash of 19 October 1987 – DOW went down 22.6% in one day, the single worst loss in a day.)
- The fourth week starts bullish but ends bearish or flat
- 28 and 29 October – FOMC Meeting. Minutes out at 2pm EST on 29 October.
- 29 October is the 85th anniversary of the 1929 Crash (DOW went down 23% in two days on October 28 and 29)
- October ends very well
- Daylight Saving Time ends on Sunday 2 November 2014.
- Crude tends to weaken and Nat Gas tops out
- Gold stays pressured and Silver weakens
- Copper continues its seasonal downtrend
- Soya makes its seasonal uptrend around the third week of October
- Corn bottoms
- Wheat consolidates
- Cocoa begins strengthening for a run into the next three months
- Coffee also strengthens into the year end
- Sugar continues its seasonal uptrend
Now we begin Q4 and we get it off with a bang – the most volatile earnings season of the trading calendar. It is going to be tricky to navigate this October given the scary numbers we’ve been getting on the macroeconomic front. Earnings are going to be key in telling us where the market will go between now and the end of the year. Guidace will be keenly watched especially amongst the benchmark stocks and index components.
Personally, I hold little faith in companies beating their revenue targets in spite of their lower guidance in Q3. The slow-down in most industries will undoubtedly have a hawkish effect over the broader market.
I will be extremely cautious and but I won’t be denying any trends that prevail.
So Trade Safe & Happy Hunting Always!
The best testimonials are the ones from those who have benefited from your contributions to them over the years. It is always very gratifying to hear that my students have grown, improved and become better over the years since they came to the Tutorial. I live to change people’s lives through what I teach and share with those who want to make a difference in their lives.
Within the span of half a day, two of my senior graduates made postings in Facebook regarding their various experiences as a result of the Pattern Trader Tutorial (PTT).
Leonard, from Malaysia who was formerly working in Singapore with a finance based institution, made this posting based on the lessons he took from his Trader’s Journey.
Ariane attended PTT almost 4 years ago …
… and was so convinced that she got her reluctant son, Brian, to attend within a year later.
Brian today, is one of my brighter sparks.
After I made this post, Jimmy, a graduate from early 2008 made this posting …
… and Irene, a former cabin crew and mother of three wrote this …
And Irene’s husband attended the tutorial about a year after Irene …
BECOME A MACROTRADER NOW!
Between Ariane, Jimmy, Irene, Leonard and Brian, who says age matters?
When you learn to trade, you will be focused on not losing money rather than focusing on that one lucky big win. You will be trading for a steady income. You will learn to be in control of the trade rather than to be under the control of a trading system. You will be trading in a style that suits your life, needs and wants. You will learn a skill that is sought after by financial institutions as many of my successful graduates are now working with such institutions as proprietary traders, advisors, account managers and portfolio managers.
The Pattern Trader Tutorial has transformed many lives in the last 8+ years. It has given the graduates a new outlook on finance and economics. Those who assumed that the Tutorial was “just another trading course” have been surprised at how much more value the education has been. It has stood them in good stead in their lives, their personal finances, their jobs, businesses, investments and trades.
The Tutorial arms you with the financial knowledge and knowhow necessary to fight and win in any aspect of today’s economy. It makes you savvier about your money. You’ll be smarter about running your business by knowing the state of the economy. You’ll be wiser about your next property investment. You’ll find out that you don’t need to trade on-line to make money – there are other safer ways to make your money work smarter without the risk of taking on an on-line trade.
If you’re sick and tired of attending workshops that don’t work, then attend a tutorial that will change your life. Check out the blogs of some of my graduates years after they attended WAT.
That’s just the tip of the iceberg.
Meet many more on my Facebook account; https://www.facebook.com/conradalvinlim
Spammers: Take your spams elsewhere. If you haven’t learnt by now, you’re only wasting your time spamming here.
It always makes my day when someone takes the effort to make an acknowledgement to help me inspire other to do the same …
Success comes to those who
work at it the hardest and
believe in it the longest.
Meanwhile, in Kuala Lumpur at about the same time …
Rock on MY27! Keep up the good fight and always stay in touch. Your real Trader’s Journey begins now. Happy Hunting!
I have been accused of being bearish. People have told me that I publish nothing but bad news and bearish outlooks. Some even berate me for being too bearish and scary.
But I am a Bear!
Its like accusing me of being male and publishing male-related things and being too manly.
Well that’s because I am a man!
Being a Bear is something I chose to be because it is my style of trading. That does not mean that I only trade downwards and can’t be bullish. I guess most people don’t understand the concept because most players in the local markets are Bulls. They’re Bulls because they have little idea or any concept of what being a Bear is about. Most local players are actually investors who only want the market to keep rising. The so-called traders here are actually investors who don’t know the difference and mostly maintain bullish mentalities. Some can’t even grasp the concept of Short Selling or Puts because it is such an alien or unnatural thing to do.
There is nothing wrong with being a Bull or having a confused bullish mentality. Just like there is nothing wrong with being a Bear with a multi-directional mentality in a multi-dimensional market that is too dynamic to be so bullishly biased. After all, when you look at the market since 1999, out of the 15 years, 70% of the time (over one-year periods) the market was sideways, volatile or bearish. So why would I want to have a bullish bias when the odds don’t favour the Bulls?
Being a Bear not about being negative or pessimistic. Its not about being a doom and gloom soothsayer. I don’t live in a cave and my life is certainly not dark and foreboding.
Being a Bear in a market full of Bulls (with tons of bullish shit and bull-shit) keeps me defensive. Its a common-sense thing. If there are so many Bulls scrambling to make the same buck, doesn’t it make sense for me to be a Bear to make the Bulls’ monies when things go against them? With far fewer Bears, that same buck is multiplied when the many Bulls lose it. In other words, there more bucks to be made by the few Bears from the many Bulls than the many Bulls could possibly make from the few Bears.
And because the Bulls outnumber the Bears, it is only right and meet that I take on a defensive attitude. The other advantage of being a Bear in a Bull-ladened market is that when the many Bulls panic, it is the most beautiful thing for a Bear like me. I don’t need a Bear market for that – all it takes is a scare, a rumour, an irrational trigger and the market tanks like a brick in water. If you’ve never seen a herd of Bulls stampede, you won’t appreciate how beautifully scary it is.
It takes approximately four times longer for a Bull to make a buck than a Bear. This is because when the market tanks, it tanks much faster than it rallies. Thus the saying;
The Bull walks up the stairs while
the Bear jumps out the window
Take a look at a typical sell-off. In May 2012, the DOW erased four months of bullish profits in a single month! In Singapore that same year, the Bears wiped out five months of profits (January to May) in 12 trading sessions (2.5 weeks) the following June.
I don’t need to convince you to become a Bear so I will not preach about the advantages and wonderful things that Bears achieve in the market. At the same time, don’t hate me for being a Bear. Don’t berate me just because you prefer to be a Bull and only choose to see bullish shit and bull-shit.
At the recently concluded Financial Mastery Workshops in Singapore and Kuala Lumpur, I had a flood of queries about why I had such a bearish outlook for the rest of the year when the S&P500’s PE was deemed “affordable” and “fair-valued” by bankers and analysts. Thanks to a good friend whom I will only name as Rich-M, I am able to break it down into simple terms for you to understand …
Table A shows the PEs of an imaginary index of 5 stocks having an average PE of 26.6 (grossly over-valued) when it is obvious that only one of the five stocks (MSFT) is grossly over-valued. Its high value has raised the average PE of the whole index to make it look unattractive to buy. In truth, KO, PG and JNJ are still buyable at 14, 15 and 16 respectively.
Table B on the other hand shows that all the components are over-valued but the average on the index is lower than Table A, giving the impression that Table B is less risky to buy than Table A.
So how relevant is the index’s PE in relation to the broader market? Very often, market mavens will use such statistical manipulation to hype up the situation and ease the fear so that the market gets another leg up. If you have no idea what their game is, you will be in for a shocker. That’s when the Bulls always repeat the same rhetoric; “If I only knew …“
Furthermore, when most of the broader market is correcting by 10% or more, how can anyone claim to be in a Bull Market? If you didn’t know, the S&P500 is NOT the market. In fact, it only represents the better 500 of the over-8,000 issues on the NYSE.
But having said that, there is a way to use the S&P500 to determine if the market is truly over-valued. Its a simple common-sense method that only requires a watch list of all 500 components.
Put up the watch list and list the companies by their PEs – highest at the top, lowest at the bottom. Then scroll down to the company with a PE closest to 15 and place it in the middle of the watch list.
As you can see, The scroll bar is pretty low down on the list. As of yesterday’s close on Wednesday 17 September 2014, 403 of the 500 components on the S&P500 have PEs above 15 – that’s a staggering 80% of all the S&P500 companies! A little more than 260 (more than half the S&P500) have PEs above 20 (below).
So now, what do you think about the relevance of the index’s PE ratio?
That’s how a Bear thinks and works. Bulls only want to hear bullish stuff and will live in denial about the really bearish stuff. I love being a Bear. I never was that profitable as a Bull but when I became a Bear, my whole world changed and I have never looked back since. Give me a Bull Market anytime – its easy to make money in one. But I prefer a Bear Market anytime because I am always ready for the quick bucks!
One more thing … if you can bear with me for a bit more …
In real life, there are more bulls being killed everyday as cattle and such. Other bulls are put to work in farms and breeding stables. Others yet are bred for slaughter in the bull pens of South America and Spain.
There are far fewer bears in the world today and most are protected species. And best of all, most of the bears in the world roam free.
With the market looking extremely toppy, you might want to consider some safety in defensive stocks. And there is none more defensive than Big Pharma.
Its been three years since we last featured this sector and given the current market, macroeconomics and geopolitical environments, it is timely that we revisit this recession-proof sector.
Get your report from www.patterntrader.com: Monthly Sector Report: Pharmaceuticals
August was a slow and easy month for me. Took time off to chill, reflect and plan for the rest of the year and into next year. The time off also allowed me to get back to trading and spend more time with the family. I guess it was timely too because AKLTG is in another transition – the landlords at Alexander Road can’t make up their minds if their want us out or not – and it has been a frustrating fight to plan ahead. For as long as the training centre remains in limbo, I can only plan for weekend batches in Singapore for October and November. So rather than fight an impossible situation, I decided to take time off and chill.
I did do a little spot for Popular Bookstore in K.L. on 27 July for which they later sent me this great piece of appreciation and a thank you note;
Now that August has come to an end, so does my slow-down period. Its back to the grind in September and for the rest of 2014. And there’s no better way to get back into action than with a re-emergence into the public speaking arena. After staying out of the public arena for almost two years, I will be doing my first major event at this year’s Financial Mastery at Singapore Expo on 6 and 7 September. As I have done at previous events like this, I will be presenting two mind-blowing topics (rather than hard-selling) that I am sure you will treasure. I hope to see a huge turn out that’ll make my hair stand!!
Date: 6th – 7th Sep 2014 (Sat – Sun) 9.00am – 7.00pm Daily
Venue: Singapore Expo, Hall 2B, 1 Expo Drive S’pore 486150
First Session 6th September – 1 to 2:30pm (Singapore):
Synopsis: With markets at a high and threatening to break down, where do the real traders put their money to work? The commodity trade is the oldest trade in the business preceding any other instrument or derivative trade. It is also the most reliable in terms of this cycles and seasonalities. While most deem it as the riskiest and costliest trade in the market, many have made a living out of it. I will reveal the What, When, Why and How the commodity market can be your lowest risk trade if you’ve never considered it.
Second Session 7th September – 2 to 3:30pm (Singapore):
CYCLES, CYCLICALS AND THE CYNICALS
Synopsis: All through market history, one constant has prevailed that few know about and many don’t teach or write about. It has been the constant that has been the difference between those who make it and those who don’t because those who don’t never knew about it even when it was right in front of their eyes. By blending Macroeconomics and Cycles, with my research on Sector Rotation and Cyclical Trading, I will show you the most reliable source of my success by using Cycles to anticipate the markets’ and economies’ next move.
Don’t forget to book your seats early: http://financialmastery.sg/fm14fb/
Then the circus goes to Kuala Lumpur on Sunday 14th September. I will be speaking at 2pm on Cycles, Cyclicals and the Cynicals.
Book your seat here: http://financialmasteryasia.com
On Sunday, 28 September in KL, I will be having the Candlestick and Breakout Patterns Workshop in Kuala Lumpur. (Details Here) Don’t forget to make a booking before attending and BRING A FRIEND! Its seven hours of pure edutainment that I am sure won’t disappoint you given the low, low entry fee for so much education.
The market was rocked in August by boat-loads of geopolitical issues ranging from the Ukraine-Russia conflict to Israel-Hamas to Iraq to the Icelandic volcano … and of course by a whole bunch of divergent macroeconomic numbers that don’t tell us if America is truly on the mend or if China is really in trouble or if Europe is on the verge of another major crisis.
The last week of August saw Europe deliver very hawkish numbers which suggested that the European growth engine is beginning to falter.
In spite of all the macroeconomic fits and starts, against its reliably bearish nature, the month of August 2014 made its best gain since August 2000. But having said that, it was a bumpy ride with all sorts of intraday gyrations and reversals.
As of the close of Friday 29 August, the DOW is up for the year at +3.1% while the NASDAQ has the best YTD gains at +9.7%. The S&P500 is +8.4% and closed out the month above its psychological 2,000.
Bond yields flattened and narrowed the 2/10 yr spread to 186bps from 205bps at the start of the month. This has been the sharpest one-month drop on the 2/10 in over two years.
As the cheap US money dries up and the buy-backs slow to a stop, with Yellen’s back to the wall and Europe on the verge of a QE-styled program that could flood markets with cheap EU money, who is to say this rally won’t continue. As long as you keep adding air into a bubble, that bubble will grow.
This third biggest stock bubble in history is about to become the second biggest by surpassing the 2000 bubble. Only 93 of the 500 S&P500 companies have PE ratios below 15.00. In other words, 81.5% of the S&P500 companies are overvalued. That means that this market is now officially more overvalued than it was in 2007 on volumes that are less than 40% of what it was in 2007.
September is the last and worst month of quarter three which is traditionally the worst quarter of the year. September 2014 has twenty-one trading days and one public holiday. In the last 63 years since 1950, September has been the most bearish month of the trading year for the DOW and S&P. It is also the worst month of the worst four months (July to October) on NASDAQ.
- Monday, September 01 is Labor Day – Markets are closed
- The day after Labor Day or the first trading day of September has been up on S&P 12 of the last 18 and up on the DOW 13 of the last 19
- However, 4 of the last 5 first trading days of September have been down on the DOW and S&P, including last year
- The next three sessions after the first trading session tends to be bearish
- The second week of September is the month’s most bullish week
- Market remembers 9/11 (Tuesday) of 2001
- Monday of Expiration Week is usually bearish
- Expiration Week of September tends to favor the bears
- Wednesday 17 September – FOMC Meeting
- September 19 is Triple Witching Friday with the DOW up 9 of the last 11 (last year down)
- The fourth week is bearish, going down on the DOW 18 of the last 23
- Watch out for Portfolio Dumping/Window Dressing in the last week of the month/quarter.
- The last day of Quarter Three has been down on the DOW 12 of the last 16
- The first trading day of October has been down on the DOW 5 of the last 8
- Crude usually tops out in September and reverses mid-month
- Nat Gas continues its strength till October
- Gold and Silver tops out in September
- Copper consolidates and turns down
- Soya stays weak and Corn continues to slide down
- Wheat stays strong but can weaken depending on weather
- Cocoa weakens mid month till end October
- Coffee normally tops out in the first week of September
- Sugar bottoms and consolidates
Its going to be very interesting to see what this year’s September will bear (pun intended). September, after all, its reputed to be the most bearish month of the calendar year over the last 80-plus years with the worst volumes of the year. The weak volumes make it easy for volatility to dominate proceedings as investors and institutions normally consolidate their positions ahead of a threatening October, famous for market crashes when the market has been at a top – and the market has been very toppy for many months now.
Original article from Shareinvestor.com published on April 27, 2012
This article “Why more ignorant money is lost to less smart money.” by Conrad Alvin Lim was first published in the Apr 2011 – May 2011 Issue of INVEST magazine and is reproduced in this blog in its entirety. The author fills you in on the invisible hands at play that drives stock market action. An insight to the mindset vital to a successful trader in a marketplace where sentiments rule the day …
Through the years, trading has always been a pipe dream for most who wanted to get filthy rich. With the advancements in technology over the last decade, this pipe dream has been brought closer to home than ever before. Today, it is a very accessible dream to anyone and everyone. All you need is a computer and an Internet connection.
And of course, you need the right kind of market.
This is where the hype starts. We have been over-exposed to all sorts of advertising and promotional rah-rah that makes us believe that it is actually possible to make that fortune a reality. We see ads with winners making really fantastic profits from a single trade and we hear of friends who make a living from trading and living the good life. We see the rich and famous on TV that have made fortunes in the market. We read about people making fortunes from the comfort of their homes.
We believe we can be one of them. Worse, we believe it is really that easy.
What we don’t see in most cases is the real ugly truth. We don’t get to see losers, we never see the many hundreds or thousands that get wiped out and we definitely never hear what happens to the few winners when the market turns.
We never get to see how difficult it is for those successful few to make that living. We don’t see how much studying, hard work and endless hours of practice it takes to achieve that “easy” life. We definitely don’t hear about how much losses were accrued before the wealth accumulation started.
When the market is rallying at full steam, you always get to see new gurus hyping up their courses, authors of all sorts publishing their version of making a fortune from the market and everyone rushing to brokerages to get an account open. Workshops of all kinds will be touting their software that makes profits without the trader having to put in much effort. Some gurus will adapt their classes to ride the trend of the market – if Options is the way to go, you’ll get Options teachers by the dozens … if Forex is the flavor of the trend, then that’s what you’ll get lots of.
The market in itself is hyped. When everything is running up the charts, it is so easy to make money from the market. Everyone seems to be getting in on the action when a bull run is in full steam. The hype worsens as these bull-run winners put more money into the market to help the rally climb even higher. Pretty much like what is happening in our property market today. The “Aunties” and “Uncles” at the coffee shop also seem to have the best tips and everyone in the neighborhood is an expert at stock picking.
Scandals also abound when the market is in full hype. Hedge funds and pillion-trading are two of the many ways these scandals begin. In some recent cases, the owner of the fund starts living lavishly on his clients’ monies even before the fund is profitable. This adds to the hype. We see fund managers driving fancy sports cars and living it up in penthouse condos and sprawling landed properties. Everyone wants that life and the market can give it to you.
So the average Joe, or in our case, Ah Seng, joins the hype bandwagon and puts his hard earned money into a few bets in the market. It makes money for sure. The bull-run continues. So Ah Seng buys more and grows his wealth. He tells his friend, Ah Huat, about it and he joins the bandwagon. Soon, the market is flooded with Ah Sengs and Ah Huats who know little about the danger they just got themselves into.
The fact is the market had already been running up like mad which is where all the hype came from. By the time the new gurus, workshops and books emerge, the rally is almost always halfway there. This is when the aunties and uncles get wind of the easy money and this brings on the Sengs and Huats. Next thing you know, the market is over-cooked. Yet it continues to rally, albeit on suspiciously lower volumes.
The lower volumes are an indication that the smart money is already sidelined and waiting for the inevitable. The smart money knows when to get out and stay out. They know because the ignorant money has started to flood the market.
“When the market is greedy, you should be fearful.” ~ Warren Buffet
Then the inevitable happens – the market stutters and falters … the easy money slows down … volatility begins to rule the market … the ignorant money slowly realize that they have left their asses hanging in the wind without protection. But they’ll continue to live in denial because of the hype.
The market slides south. But not in a hyped-up crash, mind you. The market is a sneaky place that gives you more rope than you need to hang yourself repeatedly. It takes a slow and steady slide with the occasional bull-trap to keep the ignorant money believing that the correction is a “normal” thing in this business. After a brief reprieve to bring hope to those living in denial, and possibly bring in more ignorant money, the market continues its sneaky slide south. This goes on for a while and before the ignorant money realizes it, more than half the investment is down the toilet.
By this time, some of the gurus quietly “disappear” from the press, some workshops cease to exist, software traders start complaining that the systems are not working as promised, fund managers appear in the news for the wrong reasons and my class starts filling out with dozens of traders looking for a fix and a more realistic way to survive the market.
The market gets down to an impossible low. Gone is the hype and all that came with it. In its wake, it leaves a massive trail of destroyed lives and emptied bank accounts. The market is now “a dangerous place” when it was once a dream maker. The market is a “casino” when it was once an ATM. When the hype is all gone along with the money, people get serious and stay away from the market.
This is when the smart money returns.
And this starts a new hype cycle that brings in the new ignorant money.
The question you should be asking is not; “When will the ignorant money start to suffer?” If you thought of asking that question, YOU are the ignorant money.
The only question you should be asking is; “How do I become the Smart Money?”
To get the answer to that question, we commit to the next big mistake – The Education.
Most people know that trading is a stressful and dangerous job. Most also know that it isn’t easy and takes a lot of work and learning. Of course, there are the few who believe that the market can be beaten with a system or with some high-tech software. Then there are those who cling on to the ignorant belief that the market is a place that can get them rich quick.
Let’s not waste time discussing the dreamers and ignoramuses. Rather, lets look at the fellow who knows what it takes and is ready to work for it. Let’s look at the fellow who sincerely wants to learn all there is to know about this business but is unable or unwilling to get a formal education for it. It has been argued that one is able to learn about trading by reading books and obtaining information through the Internet.
So if it is that simple, why do so many still fail? The answer is just as simple; Learning the wrong thing without realizing it.
Most of the books available, either at bookshops or at the library are about INVESTING and very few are actually about TRADING. So what happens is that most people don’t realize the real difference between investing and trading and will assume the two to be the same with slight variances. That could not be farther from the truth.
Investing is much easier to learn – like learning to drive a Honda Jazz. It doesn’t take much to learn it and it is easily understood and put into practice without much difficulty. The trick thereafter is not to crash.
Trading, on the other hand, is a very different skill and mind set. It is akin to driving a Formula 1 car. Unlike the Honda where the manual version has the clutch on the left foot, the F1 car’s clutch is a very different mechanism and is controlled by the right hand. Unlike the Honda which packs less than 80bhp, the F1 car stacks up an earth-shattering 900+bhp which, in untrained and inexperienced hands, could end up killing the driver.
There is so much more to trading than investing. The skills involved are very different, the psychology is worlds apart, the knowledge needed requires way more weeks and even months to acquire and the amount of research needed to be a good investor is nothing compared to the daily research and monitoring the trader is required to do to survive the market day in and day out. Where investing requires little or no practice, trading demands hours and hours of practice time to hone the skill. The financial management skills are also extremely different in that the investor protects his capital by how much he invests while the trader requires a different skill set to manage his finances – its called “cutting loss” – something easier said than done.
So without realizing it, most beginners will pick up an investment book or visit sites hosted by investors or have contributing members who are investors and assume that all that knowledge gained will stand him in good stead as a trader.
And when things don’t work out, it gets confusing. The common query that follows is always, “Why is it others can make it but I can’t?”
You can’t blame the poor fellow because there isn’t much literature on this subject and even some so-called gurus don’t know the difference. But all you have to do to know that this is true is to just look at Wall Street – how come the investors don’t have to be on the floor of the exchange everyday while the ones on the floor everyday are known as traders?
Knowledge … a little of it can kill you quickly while the wrong kind will slowly bleed you to death.
Finally we look at a controversial reason why most traders fail – The Attitude
It starts right at the start where most newcomers think that the market can be a get-rich-quick plan. This is akin to thinking that the market is like a casino. Consider this fact – the house ALWAYS wins. So if you treat the market like a casino, it will make you feel like most gamblers do. Gamblers always win a few but lose a lot.
Some trade like the market is a system to be beaten. Such traders ought to give themselves more credit. You’re insulting yourself if you have this attitude. To think that the market is a system is to include yourself in that system. Therefore, the system you are looking to beat includes you. Give yourself some respect and while you’re doing that, give the market the same respect – we’re not robots in the market and we’re definitely not part of a system. We’re humans that are driven by emotions. The market is an emotional place, not mathematical. You cannot have a system to beat an emotion because there is no math that can factor emotional irrationality.
Then we have those that don’t realize how unscrupulous the market is. Their ignorance is evident when they correctly assume the market is not that clear cut but will still buy into the hype. What is obvious is that the market is made up of all kinds of people especially those who will do anything to get an edge, even through illegal and criminal means. It is also full of experts who have spent years in Harvard and Princeton and then more years with established institutions such as Goldman Sachs, Morgan Stanley and the like. They have hugely experienced mentors to guide them to become the next generation of world class traders. These people have so much leverage and influence on market sentiment and to make their advantage more unfair, they collude with their competitive counterparts in order to corner the larger market for their own gains. With such power, how is a three-day workshop graduate expected to beat the odds? Yet more and more look past the obvious and end up throwing their hard earned money to the power-brokers.
These are also those who buy into the idea that the market can be analyzed fundamentally with valuations. Such valuations do help to reduce risk. But that is an investment-styled strategy and not suited for trading. Trading is way faster and seldom allows the security time to flex its fundamental muscles before the next gyration takes out the profits. Read the previous lesson to know the difference between the investor and the trader and you’ll have a clearer understanding of this.
Others rely purely on technical analysis. I can’t deny that I base a lot of my analysis on technicals. But that is not the end all. All it takes is one bit of macroeconomic news and all that technical analysis is out the window faster than you can say “Cut loss!” Technical Analysis is great as long as there is no news to upset the prevailing sentiment and as long as volumes don’t dip. But the market is never so generous. So in the end, Technical Analysis is only a “best guess” … and contrary to common belief, Technical Analysis is not the best guess of when to buy or sell – rather it is most reliable when used to guess the best potential against the least risk or the most risk against unfavorable potential.
Then there are those who believe that a good tip from a trader is the key to easy money without putting in any effort. For this, I have only one analogy; will you take a heap of hard-earned money out of your wallet and give it to someone you hardly know and expect to get it all back after a few weeks? And if that person was trustworthy, would you still do it? And do you really believe that it will come back with more than you gave him? If in life we don’t make such practices, then the same principles should be applied in the financial world and most of all, in the market. The desire to get-rich-quick-and-easy makes simple people do really silly things with their money. And it is always only after getting burned that you hear those famous last words,” … if only I knew …”. Yes, you’ve heard the horror stories time and again and so has everyone else. Yet people continue to write new chapters into this horror story ever so frequently … all in the name of greed, gluttony and sloth.
The financial markets are like an office block in a busy business district. The people who go to work there are serious professionals who take what they do very seriously. They are highly experienced, very influential and extremely powerful. It is also like a hospital where the surgeons, doctors and nurses are highly qualified and trained professionals. People put their life in their hands everyday.
Then one day, some over-zealous graduate with three days of workshop knowledge comes into this office block and expects to beat everyone out of their jobs. Or this hyped-up graduate with only three days of experience comes into the hospital and expects everyone to trust him with their lives.
Okay, maybe that is a bit of a stretch but the implications are no different. Every professional takes years to study his craft and then spends more years honing the skills with hours and hours of practice and hard work. They also have a mentor to constantly guide them till the day they are ready to go solo. There is no easy path to success and there will be failures along the way. The financial market is to be respected and feared. There is no other attitude except humility that will help a trader survive it.
It is said that more than 80% of the market is made up of those who lose and less than 20% are winners. The truth is that those statistics apply to any profession – how many top rated lawyers, engineers, surgeons, etc are there compared to the many also-rans?
The big money is always at the top where there are few who have it while the small money is at the bottom where most have to fight for it. And there are only two ways to be at the top – either you are already there or work hard to get there.