ITS THE YEAR OF THE DRAGON!

And so far, this Dragon has been getting his ass kicked! Five days before the new year, on Wednesday 18 January, I contract food poisoning and suffered liquid poop till Saturday. Then on Sunday, new year’s eve, at 4pm, my temperature suddenly soars to 38.3C. My wife gets me to the doctor (amazing that we could find one open on a Sunday, Chinese new year’s eve at 4:30pm and my fever is up to 38.9C. The doc decides that its rising too fast for normal medication so he jabs me in the butt. Then the rest becomes fuzzy, hazy and kinda fun!

A week later today, I am still sick. But I am slowly recovering with some medication. At least I was well enough to conduct the Booster for Batch 55 last night.

2012 started out pretty much on a low key. I took time off, chilled with the family and got some well deserved rest. My only engagements were a Booster session in K.L. on 7 Jan and the weekend class for Batch 55 in SG on Friday 13 January.

WAT55 graduated on Monday 16 January as the first batch of 2012. It was a compact weekend of finance and economics with a slightly different but significant approach – the coaches made the difference. And this Review will not be justified if I don’t thank them for their invaluable contributions. They are a precious commodity to the entire educational experience of what we do.

Thank you very much, Coaches!

MARKET MATTERS

After such a dour close to 2011, January 2012 was such a welcome contrast! In the December Sector report, I wrote;

If history repeats itself, we’re in for an extremely volatile time with the huge swings from 2011 carrying on into 2012. How the year finishes will depend on how January behaves and what the Bond yield curve does.

This has been the best January since, believe it or not, 1997!! This puts to bed, the January Barometer question. Together with the First Five Days of January, indications are for a bullish year or at worst, a year that shouldn’t go negative.

The First Five Days closed to the upside giving the market a hint of the direction for the rest of the month of January. Now that the January Barometer has closed to the upside, this should give the market some sort of direction for the rest of the year. But before we get carried away with the statistics, let’s not forget that last year’s bullish January Barometer did not equate to a bullish year as most of the year was volatile and sideways with nary a gain on the DOW by the end of the year and the S&P closed flat. NASDAQ was negative. Then again, the January Barometer is not known to fail miserably unless there was government intervention in terms of stimulus or fund injections.

As of Tuesday’s close, the DOW closed 411.72 points (+3.37%) clear of the year’s open. NASDAQ closed 156.45 (+5.89%) points above its January open and SPX closed 53.55 points (4.25%) up.

With that, we can now look forward to more indicators for more confidence starting with the Valentine’s Day indicator and the December Low indicator at the end of Q1.

The VIX (above) fell in January from 22.95, dropping three and a half points to settle at 19.44 at the close of Tuesday (chart above). This would suggest a low level of fear that almost invites complacency. And if you look at monthly candles, it paints a scary picture that started with a Bearish Engulfing pattern (Sep and Oct) that brought the VIX down in four consecutive bearish candles. This gives birth to the possibility of a fifth candle reversal in February. Support for the VIX has been good at 18.25 in the past week and if it holds firm, the market could be in for a new round of fear in February.

Having completed half the earnings season, the market seems to be unconvinced about rallying any further. To add to the worry, Friday’s GDP numbers came in under expectations in spite of showing an expansion in growth with a 2.8%. Expectations had been for 3.2%. By and large, the various economic data had been pointing to an American recovery, albeit a really slow one – employment is picking up, manufacturing and production is better than a year ago, inflation is not going up anymore, housing is still weak and earnings haven’t been all that bad.

But yesterday, Consumer Confidence, Chicago PMI and the Federal Budget threw a huge spanner into that recovery spirit. Now we have new worries to bother the American economic recovery. Plus, we have the all-important Non-Farm Payrolls this coming Friday. This is going to be a rocky start to February … and February is famous for being the weakest month of Q1.

Global circumstances will continue to plague the biggest economy in the world. As Europe grinds to a crawl, China slows. As China slows, it drags Asia along with it. As Asia trudges along, America shoulders the weight.

Depressing, isn’t it? That’s why it’s called a Depression.

FEBRUARY TRIVIA

February has 20 trading days and one holiday. There is no FOMC Policy meeting in February. February is the weakest of the three months of quarter one and the “weakest link” in the best six months on the DOW and S&P from November to April.

• The first week of February is rather volatile
• The first trading session is typically bullish – S&P up 8 of the last 9, NASDAQ up 7 straight
• The second trading day is also typically bullish
• The second week of February is bearish – NASDAQ down 8 of the last 11
• Monday before Expiration Friday, DOW down 5 of the last 7
• 14th February is Valentines Day – see stats below
• Expiration Friday (17 Feb) is rather bearish – DOW down 7 of the last 12
• Last trading day before President’s Day (17 Feb) is bearish – S&P down 16 of the last 20
• Monday 20 February is President’s Day – markets are closed
• Day after President’s Day is bearish – S&P down 7 of the last 11
• The week after Expiration Week is very bearish – DOW down 10 of the last 13
• February ends poorly

The Valentines Day Indicator has been 100% accurate over the last 25 years;

• If Valentine’s Day was bullish, the year ended up.
• If Valentine’s Day was bearish, the year ended down.
• If Valentine’s Day was on a weekend or public holiday, the year ended up

Commodities

• Oil and Gas usually bottom in February
• Gold and Silver peaks by early February and declines
• Copper tops out by week three of February
• Soya bottoms in February and runs up till May
• Wheat continues declining while Corn rallies
• Cocoa stalls in February and tops out in March
• Sugar tends to peak by mid February
• Coffee tends to be unreliable till May

SUMMARY

It’s the year of the Dragon and it is one of the most unpredictable years on trading record.

Before WWII, the Dragon years alternated on the DOW – 1904 was bullish, 1916 was bearish, 1928 was an extremely bullish year and 1940 was a bearish year.

Since after WWII, 1952 (+8%), 1964 (+14%), 1976 (+17%) and 1988 (+7.6%) were all bullish years. Then in 2000 (-6%), the market came down.

Fifth Dragon Year Reversal? Practitioners of Fibonacci will probably have a good laugh at that one.

In 1952, the last time we had a Water Dragon as we do this year, the market gained 8% in a very volatile year that only ticked up for that gain in the last two months of the year.

Numerogically, 2012 is supposed to be risky and volatile but should end the year on a higher note. Sounds very much like the Water Dragon year of 1952, doesn’t it?

In Fengshui, within the Chinese zodiac, the year of the dragon ranks as the sixth strongest year for the DOW and fifth best for the S&P 500. ??Historically, U.S. markets appear to perform the best in the Years of the Pig –  most recently celebrated in 2007, when the S&P 500 reached an all-time high – and fare the worst in the Year of the Snake, last observed in 2001.

I don’t know how much all this information will help you in your investments and/or trades but I will definitely be taking it easy this year and won’t be committing into anything significant like properties or large investment layouts.

Yup, that was the advice given to me for 2012.

And I am not messing with it.

December came and went like a whirlwind and before I knew it, I was celebrating the new year. In fact, the whole year came and went like a light! Life just zoomed by and just like that, we’re doing it all over again in a new year.

Nine WAT batches in Singapore, five in K.L. and one in Penang plus I lost count on how may WA batches Adam and I did and between all that, countless public sessions, seminars, events and two surgeries made sure that my 2011 whizzed by in a flash. And as a result of the surgeries, my year-end schedule became so congested that December 2011 hardly existed for me.

WATMY17 graduated on Monday 5 December after an intensive weekend of mind-stuffing finance and economics in Kuala Lumpur. They still have another 10 hours to go over another 2 boosters in the coming months.

The following weekend of 8 to 11 December, Adam and I completed the 31st and final batch of WA for the year.

(Sorry, no picture yet)

WAT54 then graduated in the wee hours of Wednesday 14 morning after completing the eight week tutorial in Singapore.

And to close out the year with a bang, we had the biggest gathering of the year with more than 350 attendees at the Rock auditorium at Suntec on Friday 16 December for our annual Christmas Gathering. The event was kindly sponsored by CMC Markets and featured my good buddy, G.M. Teoh.

It was a very busy year but I have enjoyed every moment of it. Looking at my 2012 schedule, it looks very much like more of the same.

MARKET MATTERS

What an anti-climatic end to an otherwise flat but extremely volatile year. Really, this was the flattest year since 2005 but the ranges were amazing! We even had the most bullish October in 72 years when everyone was expecting a tanker – 1,200 points in five sessions … unbelievable. I think we also had the most 200 point sessions on the DOW in the past decade. At the end of it all, the DOW closed up, the S&P closed very flat and the NASDAQ was down. Talk about divergence

And the clincher is that it is not over just because the year ended. I reckon we’re in for more in 2012.

The DOW close to the upside by +640.13 (+5.53%) points and stayed well above all its major moving averages. On Friday, DOW closed to the downside creating the possibility of another DFDM (although the market opens on Tuesday). That will make it two DFDMs in three weeks.

The S&P also closed to the downside but barely though. At 1,257.60 -0.02% (-0.0016%), it closed above all its major moving averages and barely maintained some headroom above its critical 200DSMA. On yearly candles, SPX is wearing a perfect Doji which suggests that 2012 could either reverse or consolidate in volatile fashion.

The NASDAQ was pathetic. It started the year out with a bang and led everyone on to believe that strength in 2011 would be in tech. By mid year, it was evident that this was not going to be the case. By the last quarter, tech was a major drag on the market. NASDAQ closed out the year with a loss of -71.50 points (-2.67%) for the year. On yearly candles, NASDAQ is wearing a Spinning Top Doji just under the 5-year old 2,700 resistance. Like SPX, this suggests that 2012 could reverse to the downside or consolidate violently. NASDAQ is still below its 50 and 200 DSMAs.

Although 2011 was a flat year, less than 50% of the approximately 8,000 stocks actually registered gains for the year.

But all things considered, with the triple catastrophe in Japan, Europe’s on-going saga with debt and Pan-Asia’s two-year decline, I am actually surprised we haven’t crashed! Resilience or delaying the inevitable?

JANUARY TRIVIA

2012 is an election year which typically ends well. According to the Stock Trader’s Almanac, since 1952, the first four months suffered losses eight out of the fifteen of these election years. To make matter more bearish, of the seven bullish years, four of them were followed by bearish years in 1956, 1968, 1973 and 1976.

January’s first five days are also a very good indicator of the market’s direction for the whole year. In the last 38 up First Five Days, 33 of those years finished with full year gains.

The January Barometer is another indicator to watch for. As the saying goes, “As January goes, so goes the year.” This means that if January is bullish, so will be the year. Since 1950, the January Barometer has had major failures only seven times. In the last 20 years, it failed only three major times and two minor times. Each failure was a result of central bank intervention. In 2003 and 2009, stimulus rallied the market into a bullish close against a bearish January and in 2010, QE2 gave the year a bullish reprieve after spending more than nine months in the red.

Another interesting statistic to note; 11 of the last 15 presidential election years followed January’s direction.

January 2012 has a total of 20 trading days and two trading holidays. It starts out poorly but ends very well. January is also the last month of the best three consecutive months in the trading year.

• Monday 2 January 2012 is a trading holiday
• The first week of January is weak
• The first trading session of the year is typically bearish
• The second trading day of the year is very bullish with the DOW up 13 of the last 18
• 4th January marks the end of the Santa Claus Rally
• The second week of January is typically bullish
• Expiration week is horribly bearish with the DOW down 9 of the last 13
• Monday 16 January is Martin Luther King Day – Markets are closed
• First trading day of expiration week, DOW up 14 of the last 19
• Expiration Friday of January is bearish with the DOW down 10 of the last 13 with big losses
• The last Monday of the (economic) month is typically bearish ahead of the FOMC meeting
• FOMC minutes due at 14:15 EST on Wednesday 25 January
• January ends well with the last three session often rallying into the close of the month

For traders in SIngapore and Malaysia, Monday 23 and Tuesday 24 January is Chinese New Year – SG and MY markets are closed.

SUMMARY

So much happened in 2011. But what left the deepest impression on you? Which event will burn into your memory as the icon of 2011?

• The March 11 Earthquake/Tsunami/Meldown,
• Greece Defaulting,
• Euro Debt Crisis,
• Downgrade of U.S. from AAA,
• the slaying of Osama,
• the North African, Mid East and Yemeni uprisings,
• the ousting of Mubarak,
• the slaying of Gaddafi,
• MF Global’s demise,
• Kim Jong Il’s passing,
• Occupy Wall Street,
• the loss of Steve Jobs,
• Amy Winehouse’s untimely passing,
• flooding in Thailand,
• Chinese kid getting run over and no one gave a f**k,
• Worker’s Party winning in Aljunied,
• Suicides in Bedok Reservoir,
• the end of the Tg Pagar railroad,
• the MRT breakdowns,
• Orchard Road flooding again after “50 years”,

… what a year!

For me, 2011 will always be the year I came of age as an oil trader. It also represented my fifth year as a teacher and the year I took on two surgeries in two months. I have a lot to be thankful for this year more than any other year.

But most of all, 2011 was the year I was vindicated and recognized as a serious analyst and economist. Everything came full circle with almost all of my major forecasts over the last 4 years coming to fruition.

Originally Posted by Conrad on Monday 21 January, 2008

(In late 2006 and early 2007) I mentioned that the end of 2007 was going to be soft and this softness would carry into the middle of 2008. The longer term future, if you think all this is bad news, is that we are going to be soft for the long term … how long? I suspect till 2010. Any sort of recovery will probably be around mid to late 2011 to mid 2012.

Given the state of the global economy, I am going to hold firm to that four-year old analysis. I am expecting the first half of 2012 to be really rough and we should be revisiting some scary depths in the market till mid 2012. Its happened in each of the past two times that the market was in a decade long consolidation …

After the 10-year low (red area) of 1914, DOW lost 40% between the high of Nov ‘16 and the low of Dec ‘17 (blue area).

After rallying from the decade long 1974 low, DOW lost 28% between the high of Sep ‘76 and the low of Feb ‘78.

Now that DOW seems to have found its 10 year low in March 2009, the pattern looks set to repeat itself yet again after attaining 12,537 in May 2011. A 28% drop as a repeat of the ’70s will see the DOW get down to 9,026 while a 1917 style 40% drop will get it down to 7,522.

What is scary is the duration of the drops. It took 13 months to drop 40% between Nov ‘16 and Dec ‘17. It took 18 months to lose 28% from Sep ‘76 to Feb ‘78. If the current drop started in May 2011, then this drop would be 7 months old with anything between 6 to 11 months left to go.

But why should that worry me? In fact, I have been looking forward to it not just because of an opportunity to short the market but because every time the market bottomed on a year ending with “2”, it was followed by a four year rally!

From the bottom of 1932 to the top of 1937, DOW made a 350% profit …

From the bottom of 1942 to 1946, DOW gained more than 250% …

From the bottom of 1962 to 1966, it fell just shy of making 100% …

From the bottom of 1982 to 1987, there was more than 160% to be made …

From the bottom of 2002 to 2007, DOW managed to eke out 88%.

So if history were to repeat itself, it may not be such a bad thing after all! And with that silver lining to look forward to, I bid “Adieu” to 2011 and thanks for the memories, the new friends and thanks for a profitable year.

Hello 2012 … I’ve been waiting for this for a long time so bring it on!!

My only surprise is that in 2007 and 2008, I never imagined that the Depressionary threat would come from Europe. Just imagine that the Great Depression was about a much smaller American economy going bust and pulling the whole world down with it for a long time (1929 to 1945). The only thing that saved it was the greatest bail out of all time – WWII.

Thus, the depth of this modern Depression, when it happens, will be unprecedented and there is no way to know how deep and long it will run. And make no mistake about it – this is way bigger and more implicative than 1929. It doesn’t help that the EU is insolvent and that nobody wants to buy their debts. It doesn’t help that Belgium just joined the list of sovereign debt threats like the contagion we expected it to be. It doesn’t help that rating agencies like Moodys downgrades Hungary who don’t pose as big a threat as its western neighbors. Most of all, it doesn’t help that Germany’s bonds are also unwanted now. The core and backbone of the EU is about to get into trouble themselves as they shoulder the burden of the entire Union.

It doesn’t help that commodity prices stay elevated and that inflation is still relatively high in most countries. It doesn’t help to fight those inflationary pressures when most countries are lowering their monetary policies to level the playing field against the American dollar. It further doesn’t help that weather cycles have been insane lately with rains and floods threatening and even wiping out most East Asian crops and staples. And it surely won’t help if China continues to sit on their hands and do nothing about anything whether it be their own domestics threats or the global threat to their continued economic conquests.

The cost of living everywhere in the world will go up as food shortages catch up with us next year. The shortages from last year’s drought plus this year’s floods are going to dawn on us very soon and inflation will be impossible. Already, inflation in Singapore is out of control. In a recent report, the official CPI number for Singapore hit 5.4%, higher than the expected 5.2% compared to a year ago, reflecting mainly higher costs of accommodation, private road transport and food. Excluding accommodation costs, the CPI was 0.2 per cent higher in Oct 2011. The Monetary Authority of Singapore (MAS) core inflation measure (which excludes the costs of accommodation and private road transport) was 0.3 per cent in Oct 2011 on a month-on-month basis.

Its getting pretty uncomfortable living on the Little Red Dot and its going to get worse. We didn’t need a CPI to tell us that. In the last two years, HDB prices have risen more than 25%, Condos have risen 35%, staples like bread are up more than 50% and cars are selling at 90% above what they were in 2009.

Lately however, attitudes amongst local consumers have shifted as they have become more conservative and have begun holding back on discretionary spending. In the last two years, salaries in general have not risen by more than 5% to 10%, banks continue to pay out 0.bs% on interest and stocks haven’t made any gains and all this is starting to take a toll on the residents on the Little Red Dot …

Around the world, manufacturing PMIs have fallen, in some countries for the second and even third consecutive month, into the red (below 50.0) signaling a major and continued contraction in businesses amongst the biggest economies in the world;

• China 48.0 in Nov vs 51.0 in Oct vs 59.9 in Sep
• France 47.6 in Nov vs 48.5 in Oct vs 48.2 in Sep
• Eurozone 46.4 in Nov vs 46.5 in Oct vs 49.1 in Sep
• Germany 47.9 in Nov vs 49.1 in Oct vs 50.3 in Sep

China’s and Germany’s drop were the most drastic with China losing 8.9 percentage points between September and October then contracting another 3 percentage points in November. Germany’s drop between September and October was 1.2 percentage points and it repeated the decline in November with another 1.2 percentage point drop to register consecutive months of contraction. The Eurozone, not surprisingly, has had more than three consecutive months of contraction. Anyone thinking that the contagion will be confined to Europe only had better think twice as this is a global event and no one will be spared.

In a global summary from news this week alone …

• Japan’s core consumer price index fell in October, signaling the return of deflation after four months of price gains. Their 6% hike in GDP this week was followed by a 0.1% drop in their core CPI. This raises fresh doubts about the Bank of Japan’s claim of a trend change in the price environment …
• Investors have turned bearish on Hong Kong’s property market, shorting stocks of real estate developers with fortunes closely linked to demand from mainland China …
• For only the second time in more than a decade, China has posted a net outflow of foreign currency, a fact that may signal an impending end of days for the Chinese yuan’s gradual appreciation, according to analysts …
• Still in China, the number of property transactions in China’s largest cities has fallen to dangerously low levels, according to regulatory documents obtained by the Financial Times, and this could have a significant ripple effect …
• China’s biggest commercial banks face systemic risks if a combination of credit, property, currency and yield curve shocks that could be withstood in isolation were to occur together, the International Monetary Fund warned …
• Though the daily market gyrations might indicate otherwise, realization is beginning to creep in that the European debt crisis and its effect on the U.S. will not take days, weeks or months to unwind—but years …
• The European debt contagion has now extended its infectious reach from Greece to include Italy, Spain, Portugal, Belgium, Hungary and the French banking system. Germany’s bonds a now unwanted too.

And if you didn’t think the markets weren’t that bad, then take a good look at the region’s top bourses over the last two years …

Not a Depression? I don’t know about that. If the EU goes down, the US is not going to stay up. This will bring most of the other nations down and China will not be spared especially when they don’t regulate their economy relative to its neighbors or anyone else for that matter. I fear the worse for the most selfish nation on the planet. If there were any doubts about China’s property, I am sure that everyone is now convinced that their 10 year bubble is deflating … and rapidly at that. I have been ranting about this possibility and reality on my blog since 2008. Now that some acknowledgement is being thrown into public view, let me now say that this is going to be much worse than some reports are making things out to be. Much much worse.

The U.S. was starting to look like they were finding their feet but as soon as things started looking optimistic, the confirmation of the Bear Rally took grip and now its looking exactly like Q1 and Q2 of 2008 all over again …

If this persists, we’re going to punch our way down to 10,500 before Christmas. If it comes to that, it wouldn’t be far fetched to see DOW get down to 9,500 by year’s end. Deja Vu? That’s because I’ve said it before and now I am saying it again. I was spot on the last time and I haven’t missed the mark since 2005. I don’t think I am going to start doubting myself now.

If this is Thanksgiving, I don’t want to know what Santa has in store for Christmas this year.

It is extremely obvious at this time that events around the world now do not support any sort of bullish appetite. Prices of staples are ridiculously high and getting further out of control all over the world. This coming Wednesday’s USDA crop report is likely to show up a shortage across most grains and softs. The last report on 12 October reported a build on inventories but this build was never going to be enough to sustain the growing demand for such commodities. Weather conditions have made things in Asia worse by flooding Thailand. Rice has risen in a sharp spike and the longer term future for this Asian staple looks bleak as prices are expected to rise further as shortages in the coming months will take its toll on all the major rice-consuming economies, Singapore included.

As a matter of fact, the high prices of commodities traded in the last twelve months are taking its toll on our pockets today. While prices of live cattle and cattle feeder continue to break to new all time highs., prices of oats, corn, wheat, soy, sugar, coffee and FCOJ remain at their highs from a year ago. Copper, cotton and cocoa prices have dipped but that is all that has come down. Although off their highs, gold and silver remain at elevated levels from a year ago as with WTI, RBOB gasoline and heating oil.

In the meantime, Asian economies trudge along like there is nothing to worry about. Inflation is rampant everywhere in the East but the higher income earners have taken on a blase attitude toward it and continue to support these high prices with their ceaseless buying. This is slowly but surely putting pressure on the lower income earners who can’t afford these sky high prices.  And while all this is happening, there are those who pretend they can afford it by leveraging on debt which in itself, is going to be a major issue when this bubble pops.

Singapore’s growth rate expanded in Q3 albeit at a very modest pace. This was a convenient side-step away from a Technical Recession but it does not take away the fact that growth has slowed and is expected to slow further in the next two to three quarters.

So here are the stats; growth is slowing and is expected to continue slowing … inflation continues to rise and is almost surely going to rise some more … the central bank is lowering the currency rate in a bid to encourage growth (instead of raising the rate to fight inflation) … the banks continue to keep the borrowing rate low to further encourage spending and support inflation … the markets are flat for more than two years and lower from a year ago … doesn’t all this spell “Stagflation“?

The only saving grace is that unemployment is at 2.1%, slightly down from the 18-year average of 2.48% (Historical low was 1.3% in 1997, historical high was 4.8% in 2003). Having said that, the last few weeks have seen as many as 6,600 people lose their jobs from various industries of the financial and manufacturing sectors on the Little Red Dot.

The Singapore economy is on the verge of a major slow down. Jobs are becoming a premium. Property prices are stalling again. Manufacturing has been slowing and car prices continue to soar.

Times are getting tougher but we don’t feel it. And the reason we don’t feel it is because this is a Slow Bleed. In a slow bleeding situation, you don’t know you’re dying because life seeps out of you so slowly and before you know it, you’re on the edge of death. Some are already feeling the pain … six bodies in a reservoir in four months says a lot.

I am still maintaining the same sentiment that I have held over the past year and a half when I wrote, Balloon, Not A Bubble, Inflation – The Shit Hits the Fan, Singapore Beware and The Little Red Dot Gets More Expensive.

Over in the U.S., economic data would have us believe that the economy is on the mend having bottomed out over the last quarter. Overall earnings in the current Q4 earnings season have been impressive and guidance hasn’t been too disappointing. However, within the S&P 500, there have been 65 negative fourth-quarter earnings preannouncements against 19 positives so far. This makes it a negative-to-positive ratio of 3.4 which is the highest negative ratio since the 3.7 ratio in the second quarter of 2001, just after the start of a recession. The S&P500’s YonY fourth-quarter earnings growth estimate is now 10.8%, down from 15% on Oct. 3. This means that even as the market has rallied, the outlook for earnings has gotten worse. And lest my graduates forget, earnings has a quarterly effect on the market going forward

Employment too, it would seem, is improving … or is it?

The more important data that seemed to be lost was that the Fed slashed growth estimates significantly for 2011, 2012 and 2013 while making steep upward revisions in the unemployment rate for all three years.

It is notable that the FOMC Central Tendency Forecasts slashed GDP growth by 1.1% in 2011, 0.8% in 2012 and 0.6% in 2013.  It also raised its estimates for the unemployment rate by 0.3% in 2011, 0.6% in 2012 and 0.7% for 2013.  These are highly significant revisions from the previous forecast.  Even as late as 2014 the Fed estimated the unemployment rate at 6.8%-to-7.7%.

In its most recent policy statement on Wednesday 2 November 2011, the FOMC kept its target interest rate at 0.00% to 0.25% for “an extended period of time“. This, after Ben Bernanke had broadly hinted that rates may have to be hiked sooner rather than his mid-2013 deadline. The day after that policy statement on Thursday 3 November 2011, at the European Central Bank’s latest meeting, members decided to become more accommodative by trimming the key lending rate by 25 basis points to 1.25%. The day after that, the Eurozone reported another month of contraction in their October Services PMI at 44.6 vs 46,0. This adds to other major economies’ manufacturing and services PMIs all falling across the globe in October; Chicago’s PMI fell to 58.4 vs 58.9 from September’s 60.4 … Britain’s Services PMI 51.3 vs 51.9 expected (52.9 previous), Britain’s Manufacturing PMI disappointed 47.4 v. 50.0 … China October Non-manufacturing PMI dipped 57.7 vs 59.3 in Sep … Eurozone October Manufacturing PMI slipped to 47.1 vs 47.3,

FYI, a PMI read below 50.0 reflects a contraction while a read above 50.0 shows an expansion.

That lead us to Europe, whose problems are never going to go away and will only get worse and worse. After Greece, if Greece ever gets done, we have a REAL problem … Italy. And we still haven’t addressed the Spanish and Portuguese issues. There is much more debt than cash floating around in Europe now and we haven’t even considered the “smaller” threats like Belgium, Finland and Ireland.

I don’t want to revisit this region because enough of it can be found all over the internet and frankly, having been bankrupt myself, there is no way out for a region that is already deep in insolvency. It is a simple equation in life -

• You don’t work, you don’t make money. Companies that don’t make money have a high debt/equity ratio. Countries that don’t produce, will run up a debt.
• You don’t pay your bills, you get into trouble. Companies that don’t pay their debts file for Chapter 11. Countries that don’t honor their obligations, get a bail out.
• You don’t balance your cheque book, the taxman will get you. Companies that cook their books get their bosses incarcerated. Countries that don’t balance their economics default on their debts and conveniently ignore their obligations.

So why are countries any different from people or companies? If banks are allowed to fail now, shouldn’t countries be allowed to fail too?

• When you go bust, the Court moves in, assumes ownership of your assets and sells them off to help off-set the debt you incurred. When that is not enough, you become Bankrupt and stay bankrupt till your debt is paid up in full no matter how long it takes.
• When a company goes bust, Corporate Raiders move in, break up the company and sell it off in smaller, more profitable pieces. The company, whatever is left of it, is then listed as “Junk” and stays junked until it works itself out of bankruptcy or until a White Knight appears.

Now shouldn’t Germany be allowed to raid Greece to break the country up for all its assets then sell the little pieces off to help recoup the monies that are owed? You can’t say that it is merciless and the people shouldn’t be griping about it because it was the people that got the country into that mess in the first place. What Greece really needs now is Zeus letting loose the Kraken and Medusa on Greek ass for being idiots. Now their ignorance is costing the whole world a lot of pain. And it’s not fair.

Here’s the best part … we’re going to have to play out the whole scene again for Italy, Spain, Portugal, etc, etc, etc … this is the beginning of the end of the European Union and the Euro.

Technically speaking, the U.S. equity market is looking shaky again after an amazing and record breaking October run. DOW at 12,250 is looking daunting especially if Q1 and Q2 of 2008 replays itself now …

The VIX is back up above 30.00 and the TRIN has been ticking higher on average in the past week.

Bond yields are once again down at near their 52w lows with the 5yr yield twice under-par again and the 10 and 30 year yields not far behind from also dropping 2X under par as well.

The technical indications are there to support another possible correction/sell-off. It won’t take much to set the market spiraling into another major sell-off. The question is whether it will crash. The economic circumstances are there to support a crash – they have been there since 2009 – and if it happens, it will be long overdue anyway.

I mentioned in my Facebook account on Thursday 3 November 2011;

I can’t explain it and I don’t know why I did it but I liquidated ALL my Option positions yesterday except for LMT. I suddenly felt odd seeing the market rally and something about what I was seeing on CNBC (words like slowdown, downturn, pullbacks, shrinks, etc) and what I saw on my charts (optimism).

We rallied because the ECB dropped their Policy Rate – isn’t that a confirmation that the ECB is addressing a very serious problem? Then why are we rallying on the confirmation of bad news?

My portfolio is now hedged again. Like I said in Facebook, I can’t explain it. It’s not the technicals, it’s not the macros … something in my bones is telling me that something is not right. If I am wrong, so be it. But I would hate to be right and be on the wrong side of the trade.

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Note to Spammers: Forget about it. You’ll just be wasting your time.

OCTOBER 2011 IN REVIEW

Mayhem. That’s what my schedule in October 2011 will be remembered for. Poor Queenie and Annie were scrambling to fix my topsy-turvy schedule after my September surgery put everything on hold for three weeks. As expected, I went on a marathon talking spree to catch up on all the postponements and ended up with only four off days and a public holiday to rest in the month.

But honestly, I can’t complain. I am truly thankful for the opportunities I have been given to share what I know. The demand has been overwhelming and I honestly don’t know where its coming from especially since I haven’t been in the press for more than three months now. It would seem that the lower I keep my profile, the higher the demand gets. It simply amazes me that I continue to do what I love to do and the students just keep coming in spite of my efforts to slow down. It is really a blessing and I am thankful that I can continue my educational crusade.

TUTORIAL & WORKSHOP HIGHLIGHTS

On 3 October, after a mind-crunching weekend, WATMY16 graduated in Kuala Lumpur. This was a tough gig as my ass was still not fully recovered and the plane ride was a killer on my gluteus maximus … and so was every car ride!

Then on Saturday 8 October, I did another gig at SIM to more than 70 enthusiastic investors-to-be and shattered their illusions about the market … well, its more like I put the reality of the business into their hearts. It was a wonderful session and I always enjoy educating the young.

On Friday 14 October, the Malaysians had their Mega Gathering at the Tropica Golf Resort. My guest speaker was none other than G.M. Teoh. So many of the old dawgs returned from four years ago and it was good to catch up with all of them again.

We had a really great Gathering at Klapson’s on Friday 21 October with many old faces returning and some leaving for good (All the best Hashok!) and one who came back to present his views on the market. Chris “The Mad Scientist” Yang totally blew us away with his market analyses which included reviewing sovereign debts, bonds, currencies, commodities, indices, floods and even solar flares! More than four years after coming to WAT, Chris and his trading group are still going strong including Mama (Eileen), Jimmy (in the U.K.) and Hashok (who has since left for New York). More power to you chaps!

Wealth Academy graduated another 80+ Investors from batch 29 on Sunday 23 October 2011.

Finally, on 31 October 2011, in celebration of the Pattern Trader Tutorial’s 5th Anniversary, we kicked off the Pattern Trader’s 30 Day Portfolio Challenge!

This Challenge is open to all Pattern Trader Tutorial (WAT) Graduates from Singapore and is organized by the graduates themselves. It’s strictly just for fun and traders will have no control over their portfolios at all except to pray that it ends up with the biggest percentage gain by 9 December 2011.

Naturally, they’ve banned me from this Challenge. I must protest.

MARKET MATTERS

Last month, I wrote;

Does the DOW look like its forming a Double Bottom? Could it be true that a rally back up to 12,800 may be on the cards by December? I’ll be happy if it just gets back up above 11,577.43, the opening price for the year, and not finish the year in the red.

But the truth of the matter is that it is more likely to finish the year on a sad note if there is no QE3. Even as I write this on Tuesday 4 October at 01:03am in Kuala Lumpur, the DOW is breaking below 10,800 and looking like it is destined for lower targets in the month to come. Here we go … 10,700 will be the key interest this coming week. A break below that is going to make for an excellent sell-down that should rival some of the tankers of October 2008. If the August and September ranges were any indication, we’re in for major volatility.

It is, after all, October – the anniversary month of all the major market crashes in history.

Immediately after I wrote that, the DOW made 1,200 points in less than two trading weeks and racked up more than 1,500 points for the month to close out at 11,900. What a comeback! As I write this, the market is now positive for the year after spending two and a half months in the red. Turns out that this has become one of those Octobers that becomes a Bear Killer rather than a Crash – a phenomenon where October pulls the market out of a bearish state and starts a bull run as it did 11 times before in the last 70 years in 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001 and 2002 when those Octobers turn a bear market around.

Now, on the back of a dilly-dallying EU solution, we go into a November that traditionally starts the best six months on the DOW and S&P500. Q4’s earnings have so far impressed and look promising for a bright finish to the year. Economic data in the US looks to have found some sort of bottom and looks likely to pull itself out of this four-year funk. The worry and main threats continue to be Europe and China – while one looks to avoid a recession as a result of a massive slow down, the other looks to avoid a crash as a result of a massive bubble.

What a mess.

Now with this amazing comeback, Q1 of 2008’s pattern comes into play …

… rather than the earlier possibility that I posted last month which is now obviously no longer on track.

Trivia For November

November has 20 full trading days and one half day and is known to be very bullish. November traditionally starts the best six months on the Dow Jones and S&P500 and the best eight months on the NASDAQ.

October Trivia
• The first trading day of November has been up only once out of the last 6
• Sunday 06 November Daylight Saving Time ends
• The first week of November is very bullish
• Monday 07 November, the market opens at 22:30 SG time.
• Tuesday 08 November is Election Day
• Friday 11 November is Veteran’s Day
• The second week is typically bullish with the occasional correction
• The Monday before Expiration Friday has been down on the DOW 7 of the last 12
• The week before Thanksgiving has been up 15 of the last 18
• November Expiration Friday has been bullish 7 of the last 9
• 24 November is Thankgiving Day (Markets Closed)
• 25 November is a Shortened Trading Day
• November’s last week usually ends well and is the most bullish week of the month
• November’s last day normally corrects

Commodities
• Oil remains weak but recovers mid month
• Natural Gas is flat depending on weather patterns
• Long Gold and Silver till end April/early May
• Copper stays bearish
• Corn starts its run, Wheat and Soyabeans end their run by month’s end
• Sugar tops out before the last week of November
• Cocoa and Coffee prices usually rally in November

SUMMARY

I am going to get November started with another round of surgery. This time, its for my gouty right foot. After the September surgery, the gout ballooned to record size and never subsided. Since then, the fluid in the swelling has been turning into soft tissue which is now starting to harden. The operation to remove it is necessary as it will have a long term effect on the foot’s skeletal structure. And I don’t want to be crippled for the rest of my life because of some damn gout. The surgery shouldn’t be as dramatic as the one in September but I am expected to be laid up for two weeks.

Some of my students and friends believe I am looking forward to more down-time so that I can trade. Truth is, full time trading isn’t all that its made out to be – it drove me crazy in September when laying in bed for two weeks doing nothing but trading made me want to bust out of the house and talk to someone! And that’s why I forced myself to hobble with a gouty foot and sore ass to the Gathering. That was a relief!

No, full time trading is not all that great. One needs to get out. Socializing, networking, fresh air, health and friends are an integral part of a Trader’s life. Making money is a by-product of what we love to do but all that money is useless if you don’t use it to enjoy life and spread that joy around.

So while I am looking forward to the down time, I am not looking forward to the confinement. And this time, I have no choice and will not be able to bust out again. I need to let the foot heal properly and there is only one way to achieve that – stay off my feet.

Damn!

Trade Safe & Happy Hunting Always!

With the benchmarks breaking out of their respective downside flags, this could be another serious spike for new highs. The only problem will be the volumes that get weaker with each up tick. Also, DOW seldom makes a bullish 1,000 range in five days and whenever it did, it gave it all back in a hurry.

In the last five years, DOW has made only three bullish 1,000 ranges in a week including the current one. The other two times were in October and November 2008 and the resultant trends were obvious …

Another uncanny similarity from the 2008 1,000 point weeks is the dip in volumes every time the market made gains. This is called Price-to-Volumes Divergence. This translates to a rally that is unsustainable or as some would call it, a False Break-out. This phenomenon almost always ends up breaking down to newer lows as was the case in October and November 2008.

Now take a close look at the last five sessions leading up to the Monday 10 October 2011 close in the chart below … from the low of 10,404 on Tuesday 4 October to Monday 10 October’s close at 11,433, the DOW has gained made more than 1,000 points in five sessions on consistently lower volumes. You will also notice that volumes today are half of what they were in 2008 which makes this market more susceptible t0 major gyrations. Thus it won’t take much to tank this market when volumes are so weak.

If you didn’t know Price-to-Volumes Divergence, now you do. You’ve seen the results of this from October and November 2008 and that is why I will not be convinced to reduce my hedge, let alone turn Bull as long as volumes stay unconvincing and sector leadership stays inconsistent. The VIX is still at heightened fear levels (above 30 points) and it didn’t help matters that the bond market was closed Monday. With no bond trades to counter-check the “buying” in the risk market, investors stayed sidelined as evidenced by the drop in volumes.

A few readers have asked what would be the likely catalyst for the tanker if we do get another crash.

There is no way to know what it will be but here is a timely reminder;

In the Crash of 1929, the morning of Monday, October 28, 1929 started out like a normal day. The market had already been showing signs of a top since September 4, 1929 but the general public continued to live like the problem wasn’t serious. But the structural weaknesses within the economy were very obvious and the financial system was over-stretched with leveraged debt.

Wall Street, 29 Oct 1929.

Then in the middle of the trading session, with no reason, no catalyst and no warning whatsoever, the market started tanking after lunch. By the close of Monday, October 28, 1929, the market had lost 13.5% in a single afternoon. The following day, October 29, 1929, the market crashed in what became known as Black Tuesday. The market and economy had started a -91% downtrend and it never looked like recovering till WWII provided the greatest bail out of all time.

Many of such major crashes happen this way. The market doesn’t need a catalyst to crash when the reasons have already been there for a long time but the public ignorantly denies the gravity of the problem and governments behave like they have a fix for any such circumstance. All it takes is a sell off to get out of control as in 15 to 19 October 1987, 23 to 27 October 1997, 27 August 1998, 6 to 17 Sep 2001 and most recently on 2 October 2008.

Will history repeat itself? Or will this October turn out to be a Bear Killer as it has happened 11 times before in the last 70 years in 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001 and 2002 when those Octobers turn a bear market around?

I remained hedged and under-committed till the market tells me otherwise. I am not that brave to risk good money on a fickle market now.

In early 2008, six months after the market started falling as a result of the Sub-Prime debacle, our then new forum (www.wealthacademyinvestor.com/forum) crashed and much of the data was lost forever. But thanks to our dedicated and selfless community, many traders re-posted whatever they had saved to revive the forum again. Many had backed-up certain parts of the forum for personal reasons and were able to restore up to 70% of what was lost. I was also able to retrieve some of the data from the old proboards forum and all these combined efforts brought our forum back online in no time at all. It was like it never crashed.

The forum has since migrated and it is almost one year to the day that this PatternTraderTools forum was born. This was to facilitate the ever-growing number of graduates from the Pattern Trader Tutorial and to make it absolutely private and exclusive. Looking back through all those forums is like a going back in a time machine to see its evolution and the growth of the success of what we’ve built. It also reveals how each and everyone of us has evolved from amateur traders to savvy financiers in the way we asked and answered questions.

And one truly amazing fact is that it has captured our outlooks on the market to vindicate the accuracy of our analyses since 2006 through to the current situation. It sends a chill down my spine that we could have been this accurate during a time when we were simple, unsophisticated and used simple common sense analysis to prepare us for the worst to come.

In October of 2007, before the market started sliding, I mentioned in the WA forum that the market was going to take a huge slide and that it wouldn’t be far-fetched to imagine getting from from 14,000 to 9,500 within the coming year. Of course I was slammed and ridiculed. But I kept my focus regardless if that analysis turned out right or wrong.

Then the forum crashed before the market tanked in January of 2008.

Upon restoration, after the market made its spectacular drop from 14,000 to 12,000, I made this first posting …

Originally Posted by Conrad on Monday 21 January, 2008

Its a pity the forum got slammed because at the start of October last year, this is exactly what I said was going to happen. Going back further (in my old forum) I mentioned that the end of 2007 was going to be soft and this softness would carry into the middle of 2008. The longer term future, if you think all this is bad news, is that we are going to be soft for the long term … how long? I suspect till 2010. Any sort of recovery will probably be around mid to late 2011 to mid 2012.

Visionary or smart analysis? … Or blind luck?

Either way, every one of my analyses have panned out accurately in the last five years. My only regret is that I wish I wasn’t so damn accurate.

Going forward, I am still keeping the view that this pain is going to get worse before it gets better. This will drag into next year and will probably find a bottom by the middle of 2012, give or take a quarter. And the low? … well, its a long shot but the call in 2007 was also a long shot – 9,500 on the DOW. And if the world doesn’t end by 21 December 2012, we should get into a massive rally that will go all the way into 2016.

I am not a fortune teller and there is no way I can guarantee that this will be the actual outcome. This analysis, as with all my analysis, is based on macroeconomics, technical analysis, historical patterns and economic models, market time-lines and plain ol’ common sense.

And just to scare the living shit out of everyone, I will leave you with these two charts from 2008 and the current one.

Sweet Dreams, Have a lovely weekend and Happy Hunting!

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The main event for me in September was my three-in-one colorectal surgery to remove a fistula, piles and hemorrhoid on Friday 02 September. I was then laid up at home for two solid weeks, unable to move much or do much else except pound out the day-by-day experience on Facebook. The medication was numbing and slowed me down terribly. But it was better than suffering the pain. My history is a well documented record of poor physical pain tolerance in spite of my mental determination and resilience … an irony.

I was reviewed on Friday 16 September and my Doc passed me as having recovered quickly and recovered well. The wounds had healed properly and would take a month or two more before everything returned to normal. This was really good and relieving news as the ‘roid and fistula, I was told, were rather sizable and more work was necessary in order to achieve a total clean up. I had lost a lot of blood on the day of surgery which explained why I felt so weak in the first two days of recovery.

But while I was into my 5th or 6th day of healing, my gout blew up in the worst attack I have ever experienced. To add to my woes, the only medication that can help bring down the swelling has a side effect – diarrhea. Now that’s what you don’t want to do when you are recovering from colorectal wounds. So more pain killers and steroids and more slow and hazy numbness.

The worst part about all this was that my schedules were all in a mess. I had to push back the Mega Gathering in K.L. from Friday 9 September to Friday 14 October and Batch 52 in Singapore had to push their two Boosters back by two weeks and hope to recover in that time.

The good news was that by Sunday 18 September, the gout relented and my whole body was recovering. The other good news – I lost weight! Yay!

TUTORIAL & WORKSHOP HIGHLIGHTS

Batch 53 started their tutorial on 20 September and Batch 52, the weekend batch finally got their two boosters after a two week postponement. It was quite a struggle to get myself to start Batch 53 as the ass was still sore and the gout was fully blown out. But the show went on. If anything, teaching distracted me from my pains and it was truly good to be back and teaching in spite of my struggles. By the weekend of that week, Wealth Academy started. I struggled on my first session as the foot was still slightly swollen and I still wasn’t able to sit properly. I did manage to get my foot into my leather shoes for the last day.

WA28 graduated on Sunday 25 September.  Thank God! This was another great batch with great energy and I am looking forward to their Booster in a couple of weeks.

MARKET MATTERS

Now we can look forward and leave that awful quarter 3 behind us. Not that it was that awful, really. The trading was good but I can’t say the long term positions benefited from all those massive gyrations. Now we face the most potentially tragic month of the trading year – October – famous for all the worst market crashes in history … and there have been a lot of them lately. Ominous? Definitely. But it is still a money making opportunity if you know how. And it is a good, a very good opportunity. I’ll be gagging for it!

BUT …

Does the DOW look like its forming a Double Bottom? Could it be true that a rally back up to 12,800 may be on the cards by December? I’ll be happy if it just gets back up above 11,577.43, the opening price for the year, and not finish the year in the red.

But the truth of the matter is that it is more likely to finish the year on a sad note if there is no QE3. Even as I write this on Tuesday 4 October at 01:03am in Kuala Lumpur, the DOW is breaking below 10,800 and looking like it is destined for lower targets in the month to come. Here we go … 10,700 will be the key interest this coming week. A break below that is going to make for an excellent sell-down that should rival some of the tankers of October 2008. If the August and September ranges were any indication, we’re in for major volatility.

Looks like the VIX wants to find higher ground having broken out of its Bear Flag. That is enough to convince me to be extremely cautious and even deter me from being long. The internals have been hinting at a major sell-off in the making and with volumes getting weaker with each session in September, it won’t take much to bring this edgy market down. Leadership has been favoring the defensive plays and even they are copping losses while the usual bullish leaders maintained their leadership to the downside. The “rallies” in the last two weeks of September were nothing more than short covering. So with the bears rather empty handed and foolish bulls slightly stocked up, expect the market to turn down sharply as the bulls force-sell and the bears short the market again.

It is, after all, October – the anniversary month of all the major market crashes in history.

Trivia For October

October starts Quarter 4 and the final earnings season of the year. It is also the worst of the three months of the quarter. October is infamous for the worst market crashes in history; 1929, 1978, 1979, 1987, 1989 1997, and 2008.

Having said that, October is also known as a “Bear Killer” as the market turned up in a big way in 1946, 57, 60, 62, 66, 74, 87, 90, 98, 2001 and 02 to reverse some of the most bearish markets in history. Will October 2011 be a Bear Killer and “bail” the market out of this rut? I certainly hope so.

Statistically, October ends the worst six months on the DOW and S&P500. The really good news is that October is a great time to buy if the preceding September sold down big time – and we sold down big time in September 2011.

October Trivia
• There are 21 trading days in October 2011
• The first trading day of October has been down 4 of the last 6
• October traditionally starts out poorly in the first week
• The first week of October holds the record for the worst historical week on Wall Street in 2008
• Saturday 07 October is Yom Kippur
• Monday 10 October is a Bond trading holiday in observance of Columbus Day
• The second week is typically bearish
• The second week ends bullishly and carries into the third week
• The Monday before Expiration Friday has been up on the DOW 25 of the last 40
• October 19 is the anniversary of the Crash of 1987 (DOW went down 22.6% in a single session)
• October Expiration Friday has been bearish 7 of the last 8
• 28 October is the anniversary of the 1929 Crash (DOW went down 23% in two days)
• The last three days of October are traditionally bullish
• Halloween on 31 October is traditionally bullish

Commodities
• Oil remains weak (Hold)
• Natural Gas tops out
• Short Gold and Silver till end October/early November
• Copper stays bearish
• Start accumulating Corn, Wheat and Soyabeans from mid October
• Corn is a good bet for a run till end April
• Sugar is another good bet and stays bullish in October
• Cocoa and Coffee prices usually stabilize in October

SUMMARY

Well, its back to the grind and back to busy schedules. Apart from the usual Tutorials, on the weekend of 30th September to 3rd October, K.L. gets its 16th Batch … the Pattern Trader Mega Gathering in K.L. will be on Friday 14th October … Wealth Academy gets yet another batch on the weekend of 20th to 23rd, … Previews in Penang and K.L. … leaving me only five off days in October and one Public holiday, Deepavali on 26 October. I am not complaining … yet … because November gets worse with only three off days and every weekend burned!

Trade Safe & Happy Hunting Always!

This could turn out to be a great lesson in technical analysis for one and egg in the face for the other. Both technicians wrote a report each on 6 September 2011 in which they analyzed the Dow Jones Industrial Average. On CNBC.com, Guppy is rooting for Dow to get up to 12,400 while on MarketWatch, Kahn says Dow is headed below 10,000. I want to put both men on record on my blog and watch as the drama plays itself out over the next few months.

From Guppy’s report (read the original here) …

We’ve been hearing all about the possibility of a Double Dip Recession and all the rhetoric about what governments are doing to navigate their way to a soft landing.

Now how about the truth … how about acknowledging that most countries are already in Recession and that we’re only a few steps away from Depression. After all, back in 2008, most governments delayed their official acknowledgement of a Recession until 6 months after the fact and America delayed theirs by a whole year.

We’re, and I mean the whole global community, already in a global recession and several countries are on the verge of a Depression. This is the beginning of one of the worst financial failures in post-war history.

Consider the facts – according to Wikipedia …

In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way. Production, as measured by gross domestic product (GDP), employment, investment spending, capacity utilization, household incomes, business profits, and inflation all fall, while bankruptcies and the unemployment rate rise.

Recessions generally occur when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

Now there is no doubt that over the last four years dating back to August 2007, the situation described above has not been out of place. Unemployment has stayed high and intolerable all over the world especially in the developed countries and key developing economies (emerging markets). We did have a bubble of sorts and some countries are still living in those bubbles as we speak – an Asset Bubble – and they’ve been popping and deflating over the last year as expected.

Money supply is out of control with the US clearly out of options and the European economy clearly out of cash as both sides of the pond increase spending and keep taxation down. Macroeconomic indicators have been supportive of an ongoing recession for the longest time – we’ve just been distracted by no-so-bad data that we think its all good. Now that GDPs have been contracting all over the world, we cannot continue living in denial that all is well and that this correction is short-lived and irrational.

Consider another fact – according to Wikipedia …

In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle.

Considered, by some economists, a rare and extreme form of recession, a depression is characterized by its length, by abnormally large increases in unemployment, falls in the availability of credit— often due to some kind of banking or financial crisis, shrinking output—as buyers dry up and suppliers cut back on production, and investment, large number of bankruptcies—including sovereign debt defaults, significantly reduced amounts of trade and commerce—especially international, as well as highly volatile relative currency value fluctuations—most often due to devaluations. Price deflation, financial crises and bank failures are also common elements of a depression that are not normally a part of a recession.

Read that again and tell me we’re not in a Depression. Remember that we don’t have to be in a Recession to get promoted to a Depression.

Rather than categorically classify the current situation as a Depression too soon, I would rather call it a period of Economic Failure. I mentioned this in the previous posting when I illustrated the 4-year Rececession Cycle, the Market’s 20-year Cycle and the 40-year Economic Failure Cycle. And if you consider that the market has been generally sideways since 2000, there is little to deny that we are right in the middle of an economic failure with the last period of failure being the 1970s, 40 years ago.

The Dow Jones Industrial Average over the last 11 years.

Now here’s something else to consider. Take a look at the two previous periods of failure and take note of the yellow highlighted period …

Dow 1905 to 1925

Dow 1965 to 1985

Those major dips happened right in the middle of the 20-year consolidation. Now take a look at this …

If you consider that the current consolidation started in 1999, then that would put the Sub-Prime crash right in the middle of this 20-year cycle. Or did the consolidation start in 2002 with the Dot.com debacle? Depending on how you look at it, we’re either done with the “big one” or the “big one” is due soon. Either way, we’re going to be volatile and sideways for a long time to come. And given the state of affairs around the world, I reckon this sideways and volatile mess is justified.

Here are some of the scary facts from Europe after Monday 5 September 2011;

• The stock market in Germany was down more than 5%.
• The stock markets in France and Italy were down more than 4%.
• Royal Bank of Scotland was down more than 12%.
• Deutsche Bank was down more than 6%.
• Societe Generale was down more than 8%.
• Italy’s UniCredit was down more than 7%.
• Barclays was down more than 6%
• Credit Suisse was down more than 4%.
• The yield on 2 year Greek bonds was up to 50.38%.
• The yield on 1 year Greek bonds was up to 82.14%.  A year ago it was under 10%.

With the US government crucifying 17 of the major banks this week, this could be the catalyst for a financial meltdown. The bond trade seems to be supporting this theory as is the rise of gold to a new record high today at $1,923.70. Yields across the US treasuries have all fallen below par and the yield curve is quickly flattening to the downside – something that has not happened in history.

Based on my Rotation Models, we should be “officially” in Recession by October or November this year and the market will become an officially bearish one by the end of this month. I made a similar call in August 2007 and no one took me seriously. I am making that call again now. The only difference is that this time, it is more obvious that it will inevitably happen.

So now the question begs – is anyone taking my call for a Depression seriously?

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The report features one particular sector or industry every month with break-downs of individual stocks and ETFs relative to the sector. Occasionally, there is even a surprise BONUS! ticker to boot.

If you have no idea of how to start your trading from a Sectorial approach, this report will surely get you started on the right foot. Learn how to research and plan your trades by getting the back-dated reports and start collecting your monthly editions now.

This month’s report features the Truckers & Freighters ahead of the year-end surge of orders for the holiday season.

Get over to www.patterntradertools.com and get your copy today!

Inflation is running high unabated as is unemployment as more and more companies hand out thousands of pink slips. Flight-To-Safety dominates all the trading spaces with gold running to record highs above $1,800 per Troy ounce and bond yields fall to record lows everywhere. PMI numbers around the world especially amongst producing countries have contracted with more than half of them reporting numbers below 50.00. (A PMI read above 50 implies expansion while a read below 50 implies contraction.)

In last month’s Sector Report report, I mentioned …

With debt threats, slowing growth in most of the major economies, rising inflation and job cuts coming from all over the world in all sectors, there might be little to cheer about in August and in the worst month of the trading year – September.

I am still holding on to that opinion. As it stands now, my calls on the market haven’t been wrong at all this year.

Now I wish I wasn’t so damn correct about it.

AUGUST 2011 IN REVIEW

On the weekend of 13 and 14 August, the Pattern Trader was at InvestFair 2011 at Suntec City. This was the first year I decided not to have a speaking session and instead did impromptu presentations from my booth.

I burned another weekend at Wealth Academy Expo 2011 on 20 and 21 August

Now, that’s a crowd!!

That’s me on Day 1, all smiles and everything nice …

… and that’s me on Day 2, doing my Dr Doom thing.

On Monday 22 August, I did a talk to a group of budding investors at the Singapore Institute of Management. How nice to be able to get young people into the right mindset for this business.

Batch 51 graduated after nine amazing sessions on 25 August. I am going to miss teaching this batch for all their energy, participation and great fun throughout the entire nine sessions. Happy Hunting fellas!!

Batch 52 was one heck of a weekend class in Singapore and by far, the most active one too! Boy did the questions keep coming … felt like I was in K.L. for the weekend! Well done Batch 52 – thank you for proving to me that Singaporeans can be engaging and energetic!! Oh, and that was the weekend that we voted in the new Prez and Man Utd smacked Arsenal 8-2.

Its been a very hectic month with every weekend burned but I ain’t complaining. It has been extremely fulfilling and I would do it again in a heartbeat!

MARKET MATTERS

Dow Jones (AMC) YTD on 31 August 2011

August has been terribly volatile with daily swings of between 2% to 4% averagely. Such ranges are usually exclusively for earnings season or during periods of uncertainty and/or during market crashes. The whole month of August has seen the DOW range no less than 195 points or 0.65% (16 Aug) with every other day ranging more than 200 points for an average of 348 points over 22 days. The only other time in recent years that saw a worse level of volatility was in October/November 2008.

In the 29 July 2001 Monthly Sector Report, I wrote …

The whole world is on the brink of a terrifying financial meltdown … without exaggerating … a meltdown that could rival and possibly surpass the 1929 mess. All the bricks are in the right places for a perfect domino effect that is likely to turn into an unprecedented global phenomenon.

When? … give or take, six months.

Since then, America raised their debt ceiling by $2.4 trillion and got downgraded from AAA to AA+, Singapore got reaffirmed with a AAA/-A+, the S&P went down 5.7%, the Dow fell off 4.4% and the Nasdaq is lower by 7.6% with all three benchmarks down four months in a row, in the red for the year and below their 20, 50, 100 and 200 DSMAs.

The Fed also extended their period of exceptionally low and ridiculous interest rates till mid 2013 telling us that they either need that much time to fix the economy or that the date is the day they run out of ideas … I think the latter. Talk of a QE3 is only that – talk – without any basis or resources to back it up. Gold hit an all time high of $1,842.70 and the 10yr hit a historical low as the whole treasury yield curve fell below par for the first time in history. Inflation has hit multi-year highs in almost every developed country and manufacturing PMIs have contracted with most falling below 50.

Then in the last week of the month, the market bounces mostly on short covering that has turned into bargain hunting.

I have to admit that this turnaround is starting to look very tempting indeed. But I will be staying out of the market for the next few weeks for several reasons … one being that I will be medically laid up after this Friday and the other is the oncoming October Effect which has proven to be very unprofitable for me in recent years. I have never been profitable in September since 2007 so rather than tempt fate, I’ll paper trade it. Plus, September’s divergence has never been easy to read.

If we do survive September’s threat, then October will present a whole new level of deadliness given that all the famous crashes in history occurred in that month.

But that a topic for next month’s report.

Trivia For September

September 2011 has a total of 21 trading sessions and 1 trading holiday.

• September marks the last month of Quarter Three
• It is the worst trading month of the calendar year in percentage losses.
• The first trading day of September is the most bullish of the month – SPX up 11 of the last 15
• The days following the first day is usually bearish for about a week
• Monday 5 September – Markets closed in observance of Labor Day
• The day after Labor Day has been up on the DOW, 13 of the last 16
• The Monday of Expiration Week is traditionally bearish
• September Expiration Week is one of the most bearish weeks in the trading calendar
• September Expiration Friday has been up 6 straight and 8 out of the last 9
• The week after September Expiration Friday is bearish with DOW down 16 of the last 20
• Tuesday September 20 is FOMC Rate Policy Day – Caution is advised
• The Friday after September Expiration Friday is traditionally bearish
• The end of Quarter 3 is weak
• Window Dressing in the last days of September gives the month some bullish respite
• The last day of Q3 has seen the DOW down 10 of the last 14.

Commodities

• WTI tops out in September as hurricane season ends
• Natural Gas usually has continued strength till October
• Gold ends its run from August at the end of September
• Silver usually makes better gains than Gold
• Copper stabilizes and starts trending down
• Soyabeans are weak going into October
• Wheat is very strong but can correct wildly mid month
• Corn declines
• Cocoa becomes weak in week 3
• Coffee also weakens mid month
• Sugar sees strength till early October

SUMMARY

The highlight of September for me will be the Mega Gathering in K.L. on Friday 9 September. We’re already expecting no less than 150 people at Boulevard Hotel at 19:30 hours. My co-speaker for the night will be none other than my good buddy and trading-partner-in-crime, G.M. Teoh. I am so looking forward to that.

So as we venture into the most horrible month of the trading calendar, stay hedged and play it safe. The safest bet is not to trade if you can help it. If you have to, Scalping or Day Trading would be your best chance of not getting caught out in a sudden shift of sentiment.

Personally, I’m staying out and sticking to scalping oil … September has never been nice to me when I hold positions.

Trade Safe & Happy Hunting Always!

The first week of August 2011 has been the most tragic week in the market since the drop in 2008. In the crash of 6 to 10 October 2008, the DOW lost 22.14% in that single week.

Not since the January 2009 tanker at the end of that fateful Financial Crisis have we had worse … until the past two weeks – it has been the most drastic two week drop with the DOW losing 10.79% in ten sessions.

Confirmation of more pain to come is evidenced in Friday’s leading sectors; Consumer Staples +1.6%, Utilities +0.9%, Health Care +0.8%, Telecom +0.4% – all defensive plays in proper order of fear … and the lagging sectors were the ones that usually provide good leadership in a bull market, also in proper (inverse) order: Energy -0.1%, Materials -0.2%, Tech -0.6%, Financials -1.7%.

Friday’s session left the U.S. markets in negative territory for the year with the DOW down by -1.1%, NASDAQ at -4.5% and S&P500 at -4.6%. And this was BEFORE the bad news …

Marketwatch on Friday 05 August, 2011 After the Close

U.S.’s AAA stripped: S&P yanks coveted rating for first time
Standard & Poor’s downgrades U.S. debt to AA+ from AAA and, while removing world’s No. 1 economy from “CreditWatch,” says the outlook is negative. It cites unpredictability and insufficient deficit cutting.

I did mention in my Daily Market Analysis on Monday 1 August 2011 after the Debt Talks came to a pass that the real worry would be the threat of a downgrade on U.S. ratings.

Originally Posted by Conrad on Monday 01 August, 2011

Let’s not forget that it won’t be the vote that moves the market in the long term but the rating agencies’ view of the deal that will. If the agencies don’t agree with the deal, the U.S. could lose its AAA rating and that will surely move the market down.

And it has happened. And it will get worse in the next 12 to 18 months as other agency’s lower their expectations on America’s viability.

This has resulted in Asian markets falling today, Monday 8 August, by 2% to 4%. (DOW futures are down -300 points -2.5% at the time of this post) China’s inflationary woes will only heighten as a result of this downgrade. The downgrade will also reduce the value of its reserves. China has lashed out at America’s “disgusting politics that is hurting the rest of the world. American Congress has become so irresponsible with all its bickering. America has essentially abdicated its responsibility as financial leader. The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone. America needs to end its addiction to debt by curtailing its military expenditures and social welfare programs.“

Yeah, right … cut back on military spending so that China has the biggest gun … I don’t think so.

As far as all this goes, it falls in line with my 4 Year Recession Cycle … and one more very frightening pattern …

In 1925, Wall Street got greedy and introduced leverage to drive the markets up. This drive was not sustainable and subsequently capitulated in 1929 into what became The Great Depression. The Depression “ended” after a 91% decline in 1932 and the government helped the market up in a steady recovery. FDR then pulled the plug on the recovery by cutting spending and that killed the market again.

In 1942, America got the biggest bail out in history – WWII.

Fast forward to 2005 … Wall Street gets greedy and impatient coming out of the Dot.com crash, the scandals of Enron and World.com and the LTCM farce. It introduces leverage in the form of toxic assets like CDOs, Credit Default Swaps and Sub-Prime Mortgages to drive the market up. The drive up is not sustainable as Wall Street shoots itself in the foot and the market capitulates from October 2007 to March 2009 in a 54% decline. The government then introduces TARP, lowers interest rates to 0% to 0.25% and pumps more than 11 trillion dollar at the problem. The hot money drives the market up in an artificial recovery and in 2010, the government takes back its TARP and almost sends the market into a Double Dip so the Fed throws another 600 billion dollars at the problem to drive up the market in another artificial rally.

On 2 August 2011, the Obama administration cuts spending …

… and China wants America to cut its military spending? HAH! Methinks it more likely that America looks for the next big bail out!

The circumstances today are far worse than any other time in history, including 1929. Today’s problems are global and systemic with each region suffering from their own financial fall-outs;

• Japan in Recession
• Greece Defaulting
• Portugal, Italy, Spain and Northern Europe’s Debt
• ECB’s Insolvency Problem
• U.S. Debt Threat and Ratings Downgrade
• China’s Inflationary Threat
• Australia’s Massive Slowdown
• Global Manufacturing PMI Contractions

I wrote that Singapore’s Ballooning Economy (July 26, 2011) was ready for an implosion … now sit back, kick your shoes off, put your feet up, let your hair down and get ready for the show of your life.

Check out this posting for your remedy.

So, if the market’s recession cycle is four years, and the market’s trend cycle is 20 years, and economic failures happen every 40 years … then is it possible that depressions happen every 80 years? Think about it – 1929 – 1932 Great Depression … 2009 – 2012 GDII?

Have a nice day!

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SPAMMERS: Get a life and don’t bother with my site. Comments are moderated and deleted immediately when you leave a link. You shitheads really need to find some other way to make a living.

This is about the time your Black Box system fails and you start copping intolerable losses. Your sell signals start popping up all over the place in conflict with buy signals. Your MACD or RSI starts looking funky and you start doubting your indicators.

Those who don’t believe in stops are now regretting not putting one on sooner. Your guru will be at a lost for words to explain why his system is not working. Some gurus will also start advocating “SELL!” now … when it’s too late. Worse still, others will tell you to buy dips.

If your portfolio is awash with red, it is because you were directional in a market that was not favorable for directional trading or investing. It is all red because you were not hedged. You were not hedged because no one taught you how to hedge.

If you are staring at losses, that is because you still haven’t cut your losses when you should have done it at the start of the week. You were living in denial. You were hoping. Now you’re praying.

If you are all of the above, you are obviously not my student or graduate. You ought to be. But it’s too late now … or is it?

That was the good news … now for the really bad news ….

It will get worse. And what will make it worse are the fools who buy dips. We will get the occasional bounce from hereon in and every bounce will bring in the bargain hunters who are ignoring the macroeconomic circumstances for this drop. Their buying is going to bring in the short sellers and force the market down further as naturally long investors are forced to sell. The market makers are going to have a field day popping stocks up at the open and scalping stops with a limit down at the close.

The shit hasn’t hit the fan yet … its only on the way up.

I got hit by two different viruses in three weeks and was on medication for all those weeks. That made me groggy and high most of the time while hacking and gagging all the way. The highs and lows were also evident in my classes as some days I was at the top of my form and other days I was lower than shark-shit but still pulling off the kind of performances expected of me. It’s tough when you can’t take an MC.

Needless to say, the highs and lows also prevailed on my trading account … one day up, one day down … I got sick of the gyrations that I went omni-directional on all my positions! Omni-Directional Trading … hmm … mebbe I should patent that strategy!  :)

JULY 2011 REVIEW

WATMY15 completed the mind-crunching weekend edition of the Tutorial in K.L. on 4th of July and have a long way to go with the hand-holding and follow-up sessions coming up over the next weeks and months.

On the 10th of July, after 4 intensive days, WA27 graduated as one of the most active batches we’ve had in a long time.

Then on 19th July, WA50 graduated from the eight week tutorial in Singapore.

On the weekend of 23rd and 24th July, Adam and I were busy at K.L.’s Investfair 2011 at KLCC and the AICE 2011 at Suntec.

Then on 30th July, Singapore got its second Breakout and Candlestick Patterns workshop of 2011 with one of the most active crowds in the workshop’s history. Thanks to all who attended and made it fun and memorable.

Busy month … and it is going to get worse in August as all my weekends will be burnt. But that’s a good problem, isn’t it? I think it is. Since my media days, I have always had the mindset that if you are not working, you’re not making money. So I guess busy is good and busier is better. But I’ll tell you something – it is getting tougher as I grow older. My only joy is that I still love what I do and nothing short of dropping dead is going to stop me.

MARKET MATTERS

It’s been a rough week and a rough month in general. Now July has left us in an uncertain wake of debt talks, slowing growth worldwide and contracting production, manufacturing and employment data. The world is slowly and almost surely sliding into recession but most would prefer to live in denial or bank on hope.

Singapore’s financial system is teetering on the brink of bursting with over-leveraged debt as it racks up the numbers on loans, credit and borrowings. On August 02, if America reveals that it won’t be raising the debt ceiling, the country will spill down and that will put a lot of pressure on its financial system. This in turn will turn the tide against our banks on the Little Red Dot as their over-exposure on anything and everything American goes against them. Now what will that do to your loans and incurred debts?

The whole world is on the brink of a terrifying financial meltdown … without exaggerating … a meltdown that could rival and possibly surpass the 1929 mess. All the bricks are in the right places for a perfect domino effect that is likely to turn into an unprecedented global phenomenon.

When? … give or take, six months.

I will be more than happy to eat my words on Tuesday if the US is able to pull off an escape act that Houdini would be proud of … but I ain’t holding my breath.

AUGUST MARKET TRIVIA

• Since 1987, August has been the second-worst month on the Dow and S&P500, but …
• It has been up in the last four years
• August is one of the two longest trading months in 2011 with 23 trading days in total with no trading holidays
• The first trading day of August has been down 9 of the last 14 on the Dow, last year was up 1.7%
• The first and second week of August is traditionally very weak
• The middle of August (week 3) tends to be rather bullish
• Monday before Expiration has seen the Dow up 11 of the last 16 with modest gains, last year was unchanged
• August Expiration has been up 7 of the last 8, last year was down 0.5%
• The week after Expiration is usually volatile and uncertain
• The second last day is notorious – it has only been up twice in the last 15 years, last year down 1.4%

Commodities

• Oil is usually strong in August but tends to dip at the end of the month
• Nat Gas is usually bullish from late July into December with August being the best month
• Gold stays strong with Silver following suit as a seasonal behavior
• Copper continues to be weak as construction slows
• Soyabeans stay weak, Wheat stays strong and Corn should stay strong
• Cocoa is erratic, close out Sugar longs from June, Cover Coffee shorts from May

AUGUST IN PREVIEW

As previously mentioned, busy, busy, busy with every weekend burned.

• Saturday, August 6, 2011 – Candlestick/Breakout Patterns Workshop in K.L. Malaysia
• 13 to 14 August 2011 – Investfair 2011 Singapore
• 20 to 21 August 2011 – Wealth Academy Expo 2011
• 26 to 29 August 2011 – WAT52 Weekend Edition

Well, I guess busy is better than not. So I shouldn’t complain. At least I get to rest on our National Day (9th) and Hari Raya Puasa (30th).

After that Hari Raya rest, we can look forward to the worst month of the trading year – September. But that is a subject for next month’s posting!

Happy Hunting!!