Fellow Traders,

Dow RSIs this morning are 81/73/85.5 (M/W/D), so some distribution is at hand. (Source: Schwab StreetSmartPro)

Regardless of when, and despite recent bull trend, many of us believe the US equity market is close to entering a bear phase. If so, it's definitely time to get ready.

I would like to encourage readers & posters to submit:
(1) market conditions that would confirm (to you) a bear market rollover, and
(2) your trading plans under these conditions

There are many ways to profit (and not lose $$) during a bear; let's use this forum to share ideas, challenge one other, and be ready.

I have been working on a "market meltdown" plan and will post it here assuming this topic is of interest to others.

t4k

Clarification: RSIs are for $DJI, not Dow chemical.

Jock,

TC2007 does support Wilder smoothing.

I checked ABX on stockcharts.com

Daily RSI7 and weekly are both OVER 30.

Please email me and I will get you the correct PCF's.

...david... email: chirodude@ulster.net

Today's CARA 100 stocks with RSI 7's over 70 on daily, weekly and monthly time frames are:

GS JNJ RIMM DB HBC LEH CHL JCP UBS PG KSS

Good luck.

...david...

t4k-

I am closely monitoring trendline channels on the indices. From their slopes a break below them will be significant.

Of the indices the most vulnerable to correction are those "acting badly" in this rally IMO. That incudes MDY and RUT, the trannies. I think the QQQQs are vulnerable as I don't see where earnings forecasts have been all that favorable. Those are your short candidates.

For longs I would look to bear market relative outperformers and then I would hedge them. You won't get hurt on a sharp rally; you can outperform absolutely on a sharp correction.

Off topic, what are people thinking of the jobs number this morning?

I'm showing a lot of shorting possibilities, but I've been burned a couple times fighting this trend already. Think I'll wait to see what the MidCaps (MDY) are going to do about the wad of consolidation they're in before I short any further.

The path of least resistance is up, but even that looks a little tepid.

"I would like to encourage readers & posters to submit:
(1) market conditions that would confirm (to you) a bear market rollover, and
(2) your trading plans under these conditions"

as to 1) a weak close accompanied by weak earning numbers/earnings forcast from mayor companies (with relevance to the overall economy)
as to 2) i already advised my clients to build up cash and ride these upwave in the market with long calls. We surely will hold onto core positions through nearly any market downturn this year, but sell the long calls as the market turns. Also writing calls on core positions currently. Also currently buying for small, speculative amounts some of the "left behind" stocks of this rally, like Biotechs. Also on a turn in the market we would consider shorting Homebuilders and hombuilding related stocks. Maybe other sectors also, but thats up to another day and other sets of information.

Bill has asked me to re-post my early morning entry here. It read:

Positive divergence between the miners and gold yesterday. XAU 120 has been the bottom a couple of times and it reached into the 118s early then recovered. I would have liked to have seeen that action on a day when the indices weren't blowing their tops so I am a bit hesitant about the signal given.

Gold needs to regain 610 and probably 640 to "fix" that chart.

Classic ABC bottom pattern on oil. Some traders will enter indicated ST low here. That would be helpful to gold as it was yesterday.

Agree with T'man that traders are blowing out of commodities and into large caps. That is not offense, that is defense. Here it is so intense it is providing huge paper gains. If significant slowdown in 1Q '07, most traders will not keep these gains. My work is estimating 3Q GDP LESS THAN 2. Jobs number coming up will tell me if I am correct or not. However we don't see that initial number GDP until late October. As T'man says, only earnings warnings can reverse this freight train in its tracks.

I know a lot of Bill's readership comes here for advice on gold and hope all is well with the portfolios out there. Bill has seen 50% corrections in the middle of bull markets before but I doubt many have. That is why a system like g034's is so valuable here. It doesn't try to pick bottoms or tops and lets the charts and stops provide rules based entries and exits.

Good luck all.

Posted by: MarkM at October 5, 2006 5:11 AM

@MarkM

i somewhere read (and saved it in my brain :)) that a number under 320.000 for weekly claims means expansion of jobs in the economy and vice versa. So combined with new retail sales numbers, this points to the main scenario, that economy will cool off due to housing, but not severe downturn, and also still some good factors in economy setting off negativity from housing. All clear for stocks, so far.

Also Oratier has posted a good article of the Washington Post as of today, as how Mr. Bernake sees the current state of the economy. See the Daily Planet for the post.

As to #1 (market conditions), I track VIX & VXN. Naz has been leading downtrends and trailing uptrends, and this is confirmed by VXN, which has not tested lows on this rally, unlike VIX. I assume VIX is more widely followed.

VXN is nearing the apex of a big triangle @ ~17.70, so if the bear is gonna roar, VXN will find support there and breakout higher, "continuing" the uptrend begun in May. Expect VIX to follow suit.

I learned the hard way that markets can/tend to rally for some time under low volatility, and this year's VXN&VIX spikes have presented *buying* opportunities rather than confirming a rollover. A solid base and steady, confirmed uptrend in these indicators needs to be in place before the market will turn.

Right now low volatility is leading the market higher again. Anybody else use these??

t4k

PS: new yahoo charts tool is an improvement, here's VXN with VIX overlay (red) http://tinyurl.com/s8vsx

(GLD)/(SLV) showing some bullish divergences.

I'm taking a long position here in (GLD) and (SLV). I expect to take some heat on both positions (stop will be 2 ATR), but I think the bullish divergence will play out for a short term gain.

Actually, I think I'm way early on this, but if (GLD)/(SLV) tests my current support and closes above it, I think I might be fine. Mind you, I'm going against the current mid-term and long-term down trend. Trading off a divergence usually pits you against the current trend. It's not an advisable trading method unless you're willing to take on the risk.

Stop: 2 ATR from entry
75% Goal: 1.5 ATR from entry

From CNBC just now...

White House's Hubbard expects GDP 3Q to be between 1 and 2% and 4Q GDP to be weak also.

I do not have details other than that break-in special from CNBC.

Well that special news break seems to have caused another small breakout to the upside.

Now all we need is for the Fed to forecast negative GDP growth - and perhaps that will send the DOW to 13000!

Tradesman: Took the words out of my mouth. May be negative earnings will see no effect either? Or an asteroid on collision course with the Earth.

Re. Oil and gas. It appears that the inventories are so high that tankers have literally no where to go in the US. OPEC et all can talk about cuts all they want, oil is not going anywhere anytime soon. If GLD maintains its correlation with oil, that's not good news for the miners is it?

On natural gas: An analyst on RobTV mentioned that the gas inventories are so high that he would not be surprised to see it hit $2, briefly. Once gas falls further, could anyone here comment on what would be the best gas co. to buy to profit for the subsequent climb in prices?

Thx.

IT'S ALL GOOD.

Did you see the story on NatGas in UK? Saw it earlt this morning. That prices went negative there for awhile? Refusing delivery, etc? I think I have this right.

Ursus:

"Chesapeake Energy Corp. (CHK) and Questar Corp. (STR) have already announced that they are shutting down a combined 200 million cubic feet a day of natural gas production in response to low prices."

Here's a couple of NG gas names and some news that you might enjoy if you've not seen it already.

MarkM,

"That prices went negative there for awhile? Refusing delivery, etc? I think I have this right."

Yep, you're right, but it helps the situation when "the flow of gas from a new pipeline bringing gas from Norway...is in the process of commissioning."

http://business.guardian.co.uk/story/0,,1886899,00.html

In any case, it's only short term:

"Prices in the wholesale gas market for the months of December, January and February are still running at about 70p a therm - double the level of two years ago."

Hope that helps to clear things up.

Re Bill's comments on Citi's quant software, where does the individual have a potential edge, or at least a level playing field?

I'd guess in longer-term timing, which is probably less affected than the short-term of program and prop. trading, and in lower-volume stocks, where individuals find enough liquidity for their needs but institutions don't. Any thoughts?

Jock-

I believe Bill's system addresses the area where the individual has the edge. As Buffet says, we can stand there and look at pitch after pitch and not swing until we know we are going to hit it. A money manager can't do this. A trading program probably won't.

In the list I gave who bought WMT at 43 or PFE at 20ish or JNJ at 56ish or LYO at 19ish or INTC at 17ish or AA or DD or VZ or T etc and who would not like to have those gains in this market? All of those were discussed in these pages. All were great buys with a type of margin of safety. Not strict value plays al a Whitman or Grantham but good companies at very good prices. Nothing fancy.

These quant methods will all become useless sooner or later. It is just the "new thing" the big investment banks are trying to sell their clients. All quant-methods rely on historic data points. So generally spoken, they can not take into account new developments.

If you use the chess example: If you change just one little rule in the chess-game and do NOT change the world champion beating computerprogram, this same program will loose for sure to a normal player. One the stock/oil/gold/natGas market are not nearly as simple as a chess game, second rules on these markets change faster than i can write...ok at least sometimes, just ask Brian Hunter, huh :).

So all quant methods used on a stand alone basis will for sure loose over time.

Something completly different it is, if you use quant+humanbrain, but that is, what any idividual trader can do also, without paying big money to the likes of "Head of Equity, Citigroup". No pun, could be also CEO of "Quant Methods, we ASSURE YOU the BIG return".

Jansing,

Although I only invest for myself, and have no practical knowledge/experience of quant models, I agree with you (the pros smile and shake their heads).

If "When Genius Failed" is anything to go on, the point you made about all models being dependent on historic data is spot on. LTCM was very, very right...until it went all horribly wrong. Sure, massive leverage was part of their problem (250 to 1, if you include their derivative exposure), but the events that took place should never have taken place in a million years, at least according to their models.

As for the Deutsche Bank rating the models of others poorly, they might want to look at their own more closely. Their equity prop desk did lose 86 million Sterling in the 2Q this year:

http://news.efinancialcareers.co.uk/NEWS_ITEM/newsItemId-7276

In any case, paraphrasing others, various fat tails and black swans will surely make their appearance in the future. We humans, and the markets we form every day, are just too unpredictable.

just -

Weren't all of LCTM's bets, in the end, bets that fixed income spreads would narrow? That's what I remember from what I read at the time. And in the financial crisis, spreads widened instead. So, no diversification in THAT portfolio. A model that didn't encompass the big picture, rather than a black swan?

Jock,

Partly true (they bet on narrowing spreads). Except they were exposed to virtually all markets, not just fixed income.

From "When Genius Failed", pg. 234:

"...LTCM's losses from various categories of trades from Jan 1, 1998, to the bailout:

Russia and other emerging markets: $430 million
Directional trades in developed countries (such as shorting Japanese bonds): $371 million
Equity pairs (such as Volkswagen and Shell): $286 million
Yield-curve arbitrage: $215 million
Standard & Poor's 500 stocks: $203 million
High-yield (junk bond) arbitrage: $100 million
Swaps: $1.6 billion
Equity volatility: $1.3 billion"

pg. 188:

"Turning to the international trades, Hilibrand showed Fisher rows of entries for bonds and swaps in Great Britain, mortgages in Denmarks, swap spreads in New Zealand, bonds in Hong Kong, and various exposures in Sweden and Switzerland as well as in Germany, France, and Belgium. Fisher saw bonds in Italy, Spain, and the Netherlands, too."

"And then Fisher saw more entries, now pertaining to the fund's positions in stocks. He was shocked by the massive entries for stock market volatility. Then came Long-Term's exposures in emerging markets: Brazil, Argentina, Mexico, Venezuela, Korea, Poland, China, Taiwan, Thailand, Malaysia, and the Philippines."

Finally, proving that even massive diversification doesn't help, pg. 233:

"Long-Term put supreme trust in diversification--one of the shiboleths of modern investing, but an overrated one. As Keynes noted, one bet soundly considered is preferable to many poorly understood. The Long-Term episode proved that eggs in separate baskets can break simultaneously."

Every single trade in every single market (stocks, bonds, etc.) went against them.

In other words, the perfect black swan.

In case you're wondering about the late timing of that post, I'm out on the west coast. ;-)

just_observing, you got my points exactly. I am interested in hearing what Bill has to say about the arguments.

Just for correctness, i think Bill referred to Citigroup execs badmouthing their Investment Bankers colleagues models, no guys from Deutsche Bank involved so far (hah some point of a patriotic defense of Deutsche :)^^), in case you wondering about time of my comment, i am sitting here with a good morning coffee in Germany.

Jansing,

Guten Morgen, also.

I spent a couple of years in Germany (2002-2005), 2 years in Hannover, half a year in Freiburg. Made some wonderful friends, learned a lot (spent a year researching the Biogas industry, also did some work involving the PassivHaus Institut). Will definitely go back.

As for Deutsche, I had some experiences with their Private Banking arm (long story, but they weren't great...maybe I was too small-fry for them). I don't know if they're the best ambassador for German banking (they were the first bank to finance John Meriwhether's next hedge fund, only 15 months after his LTCM blew-up ;-). What have your experiences been like?

Auf jeden Fall, geniesse Dein Kaffee und ich wuensche Dir einen schoenen Tag.

just_observing,

Vielen Dank, und gute Nacht(?) noch, nach Californien, war auch mal San Francisco aber zu kurz, hat mir sehr gut gefallen dort.

Regarding Deutsche Bank, they are quite serious, at least the german Bankers i know, but maybe these guys are more "old school" bankers than the new ones. So no bad experience on my side. If you would like to come over to Germany, visit me. My terrace with a good view on our beautifull Gartenteich :) is always open for a good beer and a good discussion on the stock market.

Disclosure: No commercial connection to Deutsche Bank, just defending Germany ;)

Jansing,

Die Zeit auf Bill's blog zeigt Eastern Standard, also 3 Stunden vor (schreibe das nur wegen den Fragezeichen ;-). Wohne eigentlich etwas noerdlich von Californien, in Vancouver, Kanada.

Yes, much of my frustration with DB came from their lack of a desire to explain what they were doing (sort of a 'we know best, just trust us attitude'). I wonder if the consolidation in the German banking sector that everyone has been talking about/predicting for the last decade is ever going to take off for real.

Vielen Dank fuer die Einladung. Bin noch am Lernen, bin also kein weiser Mann mit viel Erfahrung. Lese grad "Bull! A history of the Boom and Bust, 1982-2004", von Maggie Mahar. Sehr gut, kann ich auf jeden Fall empfehlen.