Shock and Awe Again?
It's been quite an interesting challenge to keep re-inventing models that work as precursor of market moves. It is a reflex of ours to quickly dismiss models that do not satisfy our high level of expectations. If you have followed our work you know we have kept up with our batting average.
By now most talking heads that had been screaming about a market crash have effectively made you lose sight of a great bull run. What ever the market projection you can find on the web will relate to a crash of a large magnitude ahead. We are not surprised to read one bearish view after another. It is a reflection of the current mood. Our thesis had been different as we still forecast further gains ahead once we complete a refreshing long pause.
In the context of a wave count, we favour a large 4th wave ahead for the S&P. We are at the most defensive point we have been in over a little more than one year. We carried a 90% stock allocation in 2013. After extensive selling in January, on a rise of our holdings, we sold enough to bring us to a 50% cash allocation. Our aim is not to beat the market but to perform in line with the market on the upswings. Where we aim to distinguish ourselves is in the downswings We are rather quick on the trigger to leave the market as we seek dynamic hedges to hide in a storm.
Market manipulation is alive and well. We have found quite astonishing the changes occurring in wave structures. Many patterns frequently seen at key levels have simply vanished or been replaced by patterns observed at a different level of an unfolding wave. Corrective waves seen in wave 2 now appear in wave 4. Rare corrective patterns such as running flats are now common occurrence. In other word when a big player such as a central bank sits on the other side of the market one should expect the patterns to be truncated in other words to not be able to unfold normally. It is what we are seeing today from gold to stocks. Of course, the flip side of stocks is to prevent them from running into bear territory.
We have understood these to be facts of life in our daily trading. Playing with such a new set of rules is required from investors today to be on the winning side. Be warned, we still think it is a temporary affair that will eventually run its course. We think the market stand to see a mini panic event this year. In our opinion, we could see a much larger stampede next year. This would coincide with our equity multiple expansion model that looks to contract soon until June 2015.
We have built this as money velocities vary greatly. This model had kept us into mega bull territory all of last year with no regrets. We did issue a call to sell all S&P position by the 6th August and managed to keep up with the market by changing our geographic allocations. We love to buy cheap and sell dear. Emerging markets today are more than disliked. Once they come back with a vengeance and they will, the retail investor will have again taken a hit on the chin and not have learned any lessons whatsoever.
Talking heads that have constantly presented gold as the best safe haven by now are fully discredited. We love gold but can be agnostic at times such as 2013. There, is a perfect example of manipulation and truncated waves recently. Our latest gold view was of a tradable bottom in December. We made a few pretty pennies on the recent rally. However it failed to meet the full extension of the rise as we expected a move between 1,400$ and 1,500$. This was a projected intrinsic value based on real rates. The bond market did deliver on our expectation of a fast and hard rise. We suspect that commercial banks started to sell precious metals early in the rally and prevented the full development of the wave to take place. Any real good safe haven should not be influenced or manipulated by exterior forces that have a different agenda. In other words as you trade gold or other assets your goal is to discover the intent of the other participants.
Under a specific set of rules we are now short in the precious metals arena. This link describes our new forecast as the bounce we expected materialized.
Our proprietary fear composite model shows the lowest fear level in over two years in gold and silver. We expect lower prices ahead.
We are watching events in Japan with much greater interests than Russia and Ukraine. Our adjusted demographic model for Japan rolls over sooner than most. It is why we have issued a call to sell all Japanese stocks. We think this rally was a counter trend rally. Our view of a prolonged bear market does not augur well for large money who is betting on Japan to turn the corner. Our view is to find the bull markets and avoid the rest.