Chris, your input and experience have been very valuable. My questions are to improve my understanding of the markets. People ask me questions all the time. Look at the objections I am getting over at the months inventory post. I think it is fair for people to question what I am saying; if my system is really that good, I will be able to answer the questions; if I cannot answer the doubters, maybe my system is not that good after all and needs to be modified.
In my opinion, we are heading into a long period of declining earnings later this year, which will bring on a bear market lasting for at least one year. I prepared for this in March 2006, by going 95% cash.
Then, I hear about a very interesting mid-presidential election year rally, which has never missed since the 1930s. Your theory is not anything that needs defending; it is a well known stock market cycle.
I am trying to reconcile the economic slowdown we are heading into, with a historic precedent for a rally in the late fall. I was hoping you could explain how this could happen, and if it happened before.
It’s my understanding that your trading system uses a variety of proprietary trading inputs, but not economic forecasts. You look at the bond yields, technical trading indicators, COT report, and various other things. Is the COT report a proxy for the economy? I assume the COTs go long when they perceive corporate earnings will rise in the near future.
Since you don’t use economic input, you wouldn’t have tracked earnings per share and probably don’t have the data on whether the stock market rallied while earnings decline. But I wonder if the COT report ever showed they were short, and the market rallied anyway. In your trading system, is there a proxy for the economy or do you trade on technical signals alone?
The question posed by anxvariety, about your historical returns is certainly fair. Some of the considerations you use, like not being in the market in years ending in 7, do sound unusual, so it does make one curious. Often a system works well during a bull market or a bear market, or a time of rising commodities (Zeal), but then the system no longer works when economic conditions change. How well will Zeal do when commodity prices retreat?
Also, I am not sure how my question relates to stock and oil prices. Your detailed review of 4 studies showed that oil prices do not affect the stock market, but I think it’s safe to say that earnings, inflation, and the Federal funds rate definitely affect the stock market. Inflation may stop rising and the Fed may lower interest rates, but I’m certain earnings will fall. So the question was: how can the stock market rally when earnings are declining?
I asked Bill Fleckenstein if he expects a rally this fall, in the mid-year cycle. He said
“I do not pay attention to cycles, but I don’t expect a rally this fall– just the opposite.”
I told him that in 1982 and 1990, both recession years, the stock market rallied after and during the recesson. He said
“1982 and 1990 are different from today”
This is just his opinion, and he could be wrong…
One more thing: Barry Ritholtz wrote today that the stock market ralied because core PPI came in low. But the rally will be short lived. PPI fell because low demand for light trucks forced discounts, so truck prices fell. Everything else in the PPI index rose, and rose by a lot. Some materials costs rose over 4%! In an ironic twist, GMs stock rose because demand for its trucks is down.
