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Thursday, March 26, 2015

Daily update 3/26 Bull/bear market model

 Downside follow through.  However, Bob Pisani was very encouraged since the futures were down 18 points in the early morning when he got up and we ended only down slightly.

SPX closed slightly below the 100 DMA for the fifth time this year.  Will the 100 DMA dip buyers show up again?  New highs were the lowest this year at 24.  Breadth was -58% and TRIN was 1.21.  No sign of panic selling in the stats. 

The -DI line crossed above the 35 threshold again.  As I have previously noted it has done that with a lot more frequency since Oct. then in the prior years of this bull market.  We are definitely seeing higher levels of selling pressure on pullbacks these days.  I read that this was day 26 without consecutive up days which is the longest streak since 2001.   As I am sure you are aware that 2001 was a bear market year.  The market is throwing out warning signs right and left.

I have no way of knowing if the people that have been buying at the 100 DMA are still interested in doing that or not.  It obviously has not been working so well this year.  We also have the added distraction of war in the middle east.  We have considerable room to bounce without disturbing the short term downtrend.  Whether we bounce or not likely depends on the news flow.  We have not had a TRIN over 1.5 on this pullback yet and that tends to diminish the odds of a swing low that runs to new highs.  Bounce or not tomorrow I expect we will see lower prices yet to come.

I saw an interesting article with a somewhat misleading title.  Is a New U.S. Bear Market Hanging Over Our Head?  The author has a decent looking model for entry and exit into a bear markets.  Here is the long term view.

In December 2010, the Forecasting Advisor began to calculate in real-time the probability for the S&P 500 stock price index of entering a bear market phase with its proprietary stock market cycle model. In practice, this means that at the start of each month the probability of entering a bear market was calculated for the current month and the subsequent month, using a number of U.S. economic indicators, such as a proprietary coincident index of economic activity, the unemployment rate, interest rates, the price-to-earnings ratio, and consumer confidence. (The model predicts the start of a bear market if the probability equals to or exceeds the usual 50% threshold. Otherwise, the bull market is projected to continue.) Figure 1 illustrates the performance of the model in predicting bull and bear markets over the past fifty years. The model does very well in predicting all the reversals from a bull (bear) to a bear (bull) markets during that period. On average, the model signals the start of a bear market with a lead of less than a month before its actual start and the start of a bull market with a lead of one month. A description of the model and its performance can be obtained from: http://www.theforecastingadvisor.com/background-papers.php).

That certainly looks interesting.  Here is a closeup of the last bear market.

We have a 0% probability now.  This model did an excellent job with the last bear market.  Now here is the problem.  They started calculating this model in 2010.  That was long after the last recession was over and plenty of time for the final data revisions.  I really wonder if this model will work at all in real time.  In general most economic data is often revised, but going into and out of recessions the revisions tend to be even bigger.  I intend to watch for this in the future.  I suspect they will put it out there as soon as it triggers the next bear since they will be wanting the publicity.  If this works in real time it would be an excellent long term investment management tool.  I have my doubts, but one can always hope.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.