Where is the top?

Discussion in 'Trading' started by tubytrader, Mar 29, 2006.

  1. I just don't get it!!! FOMC said interest rates ARE going up,the yield curve is starting to go inverted,ETC........Can somene please tell me why or at least give me an excuse??
  2. Sashe


    We're probably @Dow 6500 right now if calculated in 1998 dollars, so my take is that we're not really going up, rather just catching up with this huge inflation. (look at RE prices, oil, gold etc). Just imho.
  3. thirst


    I think it is overly dangerous to try to interpret news to trade. Use good money management and go with the trend, don't try to force your will onto the market.
  4. tuby, this is probably the final stage in this bull market. my guess is we have as much as a month and a half more of upside, but it's prolly limited to two weeks or so.

    the smart money is out of the game right now, but we need a little more dumb money to push up prices, IMHO, before the correction starts.
  5. short????? I'm holding on
  6. thirst


    I think markets will continue to rise. but my guess is as good as my monkey's guess.
  7. I did not see the rally today. Ispoke to the CME flor tradrs and they thought the same thing. I hate being wrong>>>
  8. Interest rates are still low and reasonable, they aren't high enough to really hurt the economy or the market. From 1995 to 1999 the average Fed Funds Rate was 5.5%. During that time there was a powerful bull market. The market top in 2000 came when the rate hit about 6.5%. In this context, the current rate of 4.75% is not "high" yet.
  9. yes, i'm short. i expect my position to go against me for a little bit here, but my horizon is a two year trade.

    for a short term move down, i will feel a little more confident if i see a little cash flowing into rydex bull funds and the OEX traders getting bearish.

    but looking at a 10 year horizon, i'm fairly confident that we are a top.

    - Positioning in Index Futures the most bearish for stocks in over a year: commercials are close to the most net short they've been over the past year, and small speculators are close to the most net long.

    - The ratio between stocks and bonds (using 90 day moving average) has stretched to an historical extreme - an event that while not perfect, has highlighted important market turning points within days an eerie number of times. Anything outside of 2 standard deviations can be considered extreme - it occurs less than 95% of the time. A 3 standard deviation event is supposed to occur only about 1% of the time, so we're talking about a highly unusual event. When this indicator has reached real, true extremes - 3 standard deviation events - on either the upside or downside, it has a good track record at highlighting market turning points within days. While it is not a 100% slam-dunk, mortgage-the-house-and-buy-puts kind of indicator (I don't know what is), it is a consistent enough measure on both sides of the trade to add to my conviction that this breakout in the S&P will fail within weeks.

    - We have gone three full years without a substantial decline from a six-month high. This seminal event has occurred only three other times in the past 100+ years of market history, and those precedents suggest the best times are behind us.
    Long periods of low volatility in and of themselves do not doom us to a future of increased risk. Let's take a look at those three prior instances in the S&P and see how the market fared from the date of its 3-year anniversary. First, we'll look at 1965.

    On November 5th of that year, the S&P reached its third full year of not having had a 10% correction at any time within the prior six months. It had come close earlier that year, but no cigar.

    After that point, the index bounced around for the next three months, losing a little then gaining a little (less than 2% maximum), before finally beginning a plunge later that spring. By the time the selling was finished, the S&P had lost over 20% of its value within the year.

    It wasn't for another 20 years that selling pressure had dried up so much for so long. Our next occurrence takes us to 1987. By July of '87, we had once again seen 3 full years without a major correction. The market had one more spirited spurt left in it, jumping more than 9% over the next few weeks before rolling over. The lack of volatility that many traders had grown accustomed to obviously changed with the events leading up to and after Black Monday.

    The last and most recent occurrence was more than a decade ago. The bull market that had been kicked off with a war in Iraq (hmm...) hit its 3rd year without a substantial correction on January 11th, 1994. We once again saw a relatively short-lived spike soon afterwards, but the S&P wasn't able to tack on any more than 2% before failing.

    Over the next few months, volatility picked up big-time. The VIX implied volatility indicator closed at 11.29 on January 11th (not far from the 11.87 level it closed at this past Friday), but had nearly tripled to 28 by April.

    That increase in volatility was of course notable in each of the instances. 21-day historical volatility (a rough substitute for the VIX) was at 5 in November 1965 but had nearly quintupled by September 1966. In 1987, the VIX was at 17 in July and spiked to over 150 at the time of the October crash. It is the complacency that takes over traders' mindsets after this long period of time that creates the trouble.

    - Assets in US equity funds set a new record high in December, and cash levels at those funds are close to a new record low. There could be mitigating circumstances, but historically when cash levels (adjusted for interest rates) reached this level, it spelled long-term trouble.

    the table below shows the performance of a strategy in which we short the three major equity indexes after any month when the deficit reached 2.5% or more, and buy back the short 12 months later.

    Shorting when cash deficits equal 2.5% or more 1955 - 2006:

    ...................................S&P 500......Nasdaq Composite.....DJIA
    Average Return............+5.8%................+17.9%............+2.9%
    % Positive.......................71%....................81%................58%
    Average Max Loss.........-8.6%..................-12.5%............-7.5%
    Average Max Gain........+17.9%................+31.5%.........+14.4%

    The best performer was shorting the Nasdaq Composite, as that trade went 17 for 21 (just so there's no confusion, I want to reiterate that these were short trades, which means that the Naz Composite declined 17 out of 21 times).


    These are all reasons why i favor a long term short trade here.
  10. DOW all time high at 11750 i think

    We are very close..break that and who knows how high we go

    R2K strong trend up also.
    #10     Mar 30, 2006