Why the Market Won't Crash Anytime Soon

[PristineTrading 10]

Over the more than 20 years that I have studied and traded the markets there have always been advisors with an opinion that the market is close to a crash or a severe drop. While these opinions often come with relatively convincing reasons, the majority of times it has not happened. Wouldn't you like to know when the risk in the market is high based on historical facts, rather than another's opinion? I did and I'm going to show you what to use.

 

 

As the markets approached the recent prior highs it was a reasonable assumption that selling would increase - and it did. However, it wasn't reasonable to assume that selling was going to produce a severe decline.

 

Before we get to why, if you didn't read the prior Chart of the Week (COTW) please do that. In it I explained how Pristine students learn to recognize when support and resistance reference points are created and how to use them. If you used this simple, but powerful concept you would have known when and where bullish traders were taking a stand. You would have also known that the odds of the market moving higher after the retest had increased. Thursday's big move up tells me that those short had no idea or were in denial of the growing strength.

 

Okay, let's get to the big picture.

 

 

As we know, the market has a strong tendency to do the opposite of what the majority believe will happen. The question is, how to know when the opinion of most investors has become too bullish or to bearish? That's easy to know, if you know where to look.

 

Each week at the website www.AAII.com individual investors vote their opinion as to whether they are bullish, bearish or neutral on the market. In the chart above, the green line displays the percentage of those that are bullish; the red line displays the percentage of those that are bearish and the blue line is a moving average of those bullish divided by those that are bullish plus those that are bearish. This provides us with a ratio that when at historical extremes it warns us when too many investors are bullish or bearish. As you can see from the chart, the blue line still has a ways to go before too many investors become bullish.

 

The historical data for this and many other market internals, which are automatically updated on a daily and weekly basis, are available from www.pinnacledata.com.

 

 

The next chart shows the spread or difference between 30-year long-term interest rates and 3-month short-term interest rates is at the top. In the lower half, it shows the weekly closing price of the S&P 500. As you can see, when the difference nears zero and below the risk of a severe market correction is very high.

 

There are other factors to consider for market timing, especially short-term timing, but these two gauges will serve you well as a long-term guide for market risk. When both are at extremes, too many bullish and the difference between long and short-term interests below zero history tells us big trouble is not that far off.

 

 

The above chart is a bull market (choppy at times) and until our long-term guides turn bearish history tells us that it makes no sense at all to even remotely think crash or severe correction. Short-term, the odds are that a minor correction is not that far off since we are coming into what is historically the most bearish time of the year. After that comes a bullish period, and assuming our internal guides are bullish - the markets will move higher.

 

You might think that the markets have more than doubled since the lows shown in 2009 and they cannot move even higher. However, that's human reasoning. We know that doesn't work in the markets and why we need to use tools like I've shown you as a guide.

 

Greg Capra

President & CEO

Pristine Capital Holdings, Inc.

[Yorkid 10]

"Global markets and economies are mired in the early stages of the biggest disaster ever. Most people think both areas are in the early stages of a prolonged recovery, but in fact they are on the cusp of the second downturn, which will be of epic proportions."

(Robert Prechter, Elliott Wave Theorist, Sept. 12th, 2012.

In other words, he sees new lows in the DJIA below that of March 2009 before any move above the high of Oct 2007.

If Prechter loses this one, what (if anything) will get him to reconsider his methodology? If the frog is boiled slowly enough will enough people believe that he's still alive if he pretends not to notice?

Just who exactly are the zombie frogs in this debate?

[hoierman 10]

Where do I find the COTW mentioned in the article.

 

Dick

[DbPhoenix 42]

Where do I find the COTW mentioned in the article.

 

Dick

 

First, go to the Pristine site. Then click the "Free Trading Education" tab at the top, then select "Free Weekly Lessons" from the drop-down menu, then either "Chart of the Week" or "Trading Lesson of the Week".

 

If you find something you like, copy it out. These don't last forever.

 

Note that you will have to register now. If you don't want to go through all that, perhaps someone who does will be willing to copy and paste the article here. OTOH, he may be referring to the "Bringing Common Sense to Trading" article.

 

Db

Edited September 13, 2012 by DbPhoenix
Add link