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Killer Bunny
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This lack of +ve momentum is increasingly troubling. The longer we go on without it the more likely the risk of a short-term volatility event a la October cascading sell off.

3-6 month view still +ve but we need to see buyers coming in pretty soon now else we could see another potential 300/500 points spike lower on FTSE

Bingo bongo.

If US markets continue to recover into the close then we may see a gap up on the FTSE open tomorrow. But one can imagine it will take a month or two to repair the damage as per usual.

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Still looks like a sentiment driven cascading price dislocation. Similar to 1987 & August 2011. It doesnt look (yet) like a 2000-2003 or 2007-2009 bear market even though most of the media/commentariat are obsessing over that.

Once the volatility recedes we should be targetting the breakdown area on the upside. So around 6500-6650 on the FTSE. Then well see where were at. Ultimately I still see new highs above 7100 possibly targetting 8000+ in this bull market.

http://stockcharts.com/freecharts/pnf.php?c=%24FTSE,PWTADANRNO[PA][D][F1!3!!!2!20]

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Inker/grantham qtrly gmo newsletter (couple of weeks old, my bad). May be subs only.

https://www.gmo.com/docs/default-source/research-and-commentary/strategies/gmo-quarterly-letters/price-insensitive-sellers-and-ten-quick-topics-to-ruin-your-summer.pdf?sfvrsn=8

The housing markets are a good example of how the capitalist process can easily be gummed up. In this case, by zoning. As prices rose in the U.S., Spain, and Ireland, home building was allowed to respond. And respond it did, with Ireland and Southern Spain practically sinking under the weight of newhousing and the U.S. building up to a million extra homes a year. This will break any bubble, and itdid in all three cases. The U.S. bubble (see Exhibit 4) was particularly well-behaved. In contrast, in the U.K. there was no such response to much higher prices as home building was largely unchanged, and the influx of foreign buyers in London sustained the new higher prices. Over the last 10 years or so this has increasingly pushed new buyers out of the inner city and into doubling up, with bad consequences for the local availability of cheap labor (see Exhibit 5). There is always a level of increased housing density that will bring house prices down, and no doubt this will eventually happen in London when the people and businesses are exasperated enough to get politicians, both in central and local politics, to act. But this type of governmental arbitrage is much slower than the unconstrained working of supply and demand, and has far more unintended consequences. A classic example of unintended consequences when policy – not too well thought out – gets in the way of markets is revealed in
6, which shows the increase in home ownership in the U.S. The growth in this ratio was artificially stimulated by low rates and low down payments, but now looks set to fall to new lows, below those of the stable 1990s. It looks like a parable on the consequences of interfering with the laws of nature, or at least with a market equilibrium. (The Australian housing situation – very probably a bubble – is very interesting and different from both the U.S. type and the U.K. type and I will cover it another time.)
Edited by R K
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A reminder of the August 2011 panic/price dislocation & subsequent recovery. I've highlighted the breakdown level which was regained late October before selling off again in November. We know what happened after that.

http://stockcharts.com/h-sc/ui?s=%24FTSE&p=D&st=2011-05-02&en=2011-12-30&id=p72274036606

Compare/contrast with today..........

http://stockcharts.com/h-sc/ui?s=%24FTSE&p=D&yr=0&mn=6&dy=0&id=p10572742183

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A reminder of the August 2011 panic/price dislocation & subsequent recovery. I've highlighted the breakdown level which was regained late October before selling off again in November. We know what happened after that.

http://stockcharts.com/h-sc/ui?s=%24FTSE&p=D&st=2011-05-02&en=2011-12-30&id=p72274036606

Compare/contrast with today..........

http://stockcharts.com/h-sc/ui?s=%24FTSE&p=D&yr=0&mn=6&dy=0&id=p10572742183

Buy the pull back could be another way to make some easy cash...

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Meb Faber mean reversion article from May 2010

http://mebfaber.com/2010/05/25/mean-reversion-or-the-return-of-the-bear-or-how-about-a-july-and-august-rally/

My research has shown that negative returns 2 and 3 years ago produce approximately 6% outperformance in the current year. If you are lucky enough to have 3 down years in a row, the outperformance jumps to well over 10%. (Supported heavily by the academic literature.)

On the monthly time frame, I examined asset class performance after a really bad month.

The take-aways from this study were:

– It does not pay to buy an asset class after a really bad month for the following 1 month.

– 12 Months later the return is not much different than average.

– 3 and 6 month returns, however, are stronger. You pick up on average about 3-4% abnormal returns buying after a terrible month.

A simple strategy would be:

After an asset class has a terrible month, wait a month then take a 2 month position. i.e. after this (probably) terrible month, buy July 1 for a two month hold. Those with a little longer time frame could move out to a 5 month hold.

It looks like a good “trigger” for equity like asset classes is around -10%, and for bonds around -4%. That equates to about the worst 2% of all months. The worst 5% of all months is around a -7% trigger for equities and -3% for bonds.

Below is a summary chart of this strategy for the five asset classes I mentioned in my paper. The returns are simply the excess returns (nets out the average monthly return over the entire time period) to a strategy of buying an asset class a month after a really bad month, with a two month hold.

Note that this does not work for the commodity index, and one could speculate that is due to differing risk premiums and sources of return to that asset class.

study.jpg

- See more at: http://mebfaber.com/2010/05/25/mean-reversion-or-the-return-of-the-bear-or-how-about-a-july-and-august-rally/#sthash.LG7QDOsS.dpuf

Not dissimilar in fact to my buy the dip on a 3-6 mth timeframe except he is using monthly data

Edited by R K
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Still looks like a sentiment driven cascading price dislocation. Similar to 1987 & August 2011. It doesnt look (yet) like a 2000-2003 or 2007-2009 bear market even though most of the media/commentariat are obsessing over that.

Once the volatility recedes we should be targetting the breakdown area on the upside. So around 6500-6650 on the FTSE. Then well see where were at. Ultimately I still see new highs above 7100 possibly targetting 8000+ in this bull market.

[url=http://stockcharts.com/freecharts/pnf.php?c=%24FTSE,PWTADANRNO[PA][D][F1!3!!!2!20]]http://stockcharts.com/freecharts/pnf.php?c=%24FTSE,PWTADANRNO[PA][D][F1!3!!!2!20]

I see a bit of wandering back over the next few weeks, 1% on cash deposit and no respite against 4%. The noise doesn't appear that catastrophic to me. May be 6500 regained soon and another go over 7000 in the spring.

Edited by crashmonitor
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Well, that worked well then. Bad June so invests from July 1 for 2 months....LOL :P

To be fair he suggests a (rather arbitrary) definition of "bad" as -10% for equities (monthly data), so June doesnt qualify. August may not quite qualify either depending how we close out the month. But it may be more of that order.

I think the main point is that volatility events can take several weeks to settle back down hence "wait 1 month".

Oki doki, FTSE chart. Were back to the Jan 13 breakout which has now been re-tested/provided support 3 times (4 if you count Dec 14). Just an observation.

http://stockcharts.com/h-sc/ui?s=%24FTSE&p=W&yr=5&mn=0&dy=0&id=p36755210931

Edited by R K
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To be fair he suggests a (rather arbitrary) definition of "bad" as -10% for equities (monthly data), so June doesnt qualify. August may not quite qualify either depending how we close out the month. But it may be more of that order.

I think the main point is that volatility events can take several weeks to settle back down hence "wait 1 month".

Oki doki, FTSE chart. Were back to the Jan 13 breakout which has now been re-tested/provided support 3 times (4 if you count Dec 14). Just an observation.

http://stockcharts.com/h-sc/ui?s=%24FTSE&p=W&yr=5&mn=0&dy=0&id=p36755210931

Interesting.

Regarding the tests of a perceieved support level, I always felt and I've read it as well, that the more times a price vists a supposed support level, the more likely it will, at some point, break through it as it get weaker, whether it is to the down side or up side?

From what I can gather you could argue we should have a retest of the lows on the SP500 & the DOW because we are not there yet at a psychological bottom.

From what you have written before, I assume you are using DOW theory and hence the next leg higher, (after the retests some time in the next two months), we should see the final horrah up to previous highs before a proper crash of 20% or more.

Be interesting to read your thoughts if you have the time.

Cheers

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Interesting.

Regarding the tests of a perceieved support level, I always felt and I've read it as well, that the more times a price vists a supposed support level, the more likely it will, at some point, break through it as it get weaker, whether it is to the down side or up side?

From what I can gather you could argue we should have a retest of the lows on the SP500 & the DOW because we are not there yet at a psychological bottom.

From what you have written before, I assume you are using DOW theory and hence the next leg higher, (after the retests some time in the next two months), we should see the final horrah up to previous highs before a proper crash of 20% or more.

Be interesting to read your thoughts if you have the time.

Cheers

Well Im not personally a fan of very specific price levels, more a general price area. I guess it depends in large part where the order flow is & how that evolves over time i.e. the supply & demand (apols for stating obvious). Also daily closes can look different to weekly & monthly closes.

As it stands today 5800-6200 looks to be a broad area of support. I agree with you that it may change in the future as new information unfolds (earnings, rates, output, currency moves etc). It also seems to be the case that short term volatility takes some time to settle down as prices adapt to this new level. That may lead to a continued shift lower, or it may lead to a renewed trend higher (apols again for stating obvious)

Im not necessarily an advocate of any particular theory preferring to see how price, breadth & sentiment evolves over each coming 3 month or so timeframe within the overall macro environment. hence I posted that price level chart as an observation rather than a firm "view" that price will hold at these levels. But in general I havent changed my view that we remain in a long term bull market and that we are probably in the latter phase of this economic cycle (on the basis we havent yet closed the output gap, employment is still strengthening & rates havent yet started to rise/yield curve invert). Of course China or elsewere may throw up a shock but Im not convinced this was it (at least not yet) & Im further not convinced that China was the "cause" of this correction. More likely to my mind it is the impending change to FED policy. But who knows. global markets are a complex system.

In sum - I see the bull market continuing, albeit prices are elevated (future long-term returns likely poor) with the possibility (maybe even probability) of short-term (weeks/months) volatility remaining quite elevated. Minor corrections tend (if you look at the charts to reverse to new highs quite rapidly - sometimes in just 6-8 days for the bulk of the move before moving to new highs (Oct 2014 for example). More sinificant corrections and Id probably count this as one of those (See also Meb Fabers post above) tend to take longer (there is data on this but I cant find my link). But as an example Auust 2011 is worth looking at where it took 3 months or so to settle down before moving to new highs the following spring. I suspect were looking at something similar this time - but one must look at how the market itself evolves as prices change within this timeframe. Even if you look at October 1987 you will see the same phenomenon. The crash was largely over in 3 days followed by a prolonged period of consolidation then a resumption of the bull market. Asian crisis 97/98 ditto.

hope that helps answer your question to some small degree.

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S&P recoveries after 10%+ selloffs outside recessions tend to be strong: 3% in 1 week; 8% in 1 month, 10% in 3m and 19% in 6m - Deutsche




Jamie McGeever @ReutersJamie 1h1 hour ago





10%+ corrections in the S&P 500 are extremely unusual outside of recessions; there have only been 13 in the last 65 years - Deutsche Bank



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http://www.financialsense.com/contributors/kurt-kallaus/oversold-extremes-case-october-low

Sentiment indicators & prior corrections/dislocations (87, 97/8, 2008,2011 etc)

I am wondering if / when we get more QE, the markets will initially dive down given that the obvious past moves have been up? You know, expected the unexpected..

I heard some great commentary about (and one has to take it at face value), the plunge protection team works, and that when the DOW fell a 1000 points it shows even the PPT can't actually stop the markets when it wants to fall. All fascinating stuff, expeically when the screens are red.

Edited by bovinedealer
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