S&P500 dropping to 600 by spring 07

[(former)FormerSanDiegan]

PS – I agree that stocks suffer in recessions, that is not my point.

Your original post stated
This chart predicts the S&P500 will keep falling and hit 600 by summer 07.

I have a problem with interpeting this graph to mean that when the HMI decreases by xx% (currently 50%) the stock market declines by xx %. Making a quantitative argument for S&P 500 dropping to 600, based on the false premise that the HMI index predicts stock market values 12-months hence is dangerous.

Now as for predicting a recession and a significant decline in stocks based on weakness in housing. I can agree with that general statement.

Once again, it’s the quantitative part that bothers me.

Good luck on your endeavor. Look forward to seeing the occasional thought provoking posts, even if they are more infrequent.

[rocketman]

I came across this article this morning I thought was interesting. It seems more investors are pulling out of small caps in lieu of large cap stocks for safety reasons Link to article .

I have been wondering why gold is not in as much demand I think it should be lately. One thought is that Global Bankers are selling as much gold as people out there are buying – trying to keep things from unraveling. I'm not sure how long they can last.

Another idea is that the dollar is still strong and so the psychology to buy is not there yet. Look what happened to the Yen today. It's hard to argue when you see the Yen fall against the dollar so sharply. However Chris J points out there is not much correlation between the dollar and gold.

I like the article PS. Thanks. One stock advisor I have been checking out lately is Gorilla Trading . I bought a monthly membership for $59.00 / $499.00 a month/year and the Gorilla advises on longs and shorts. I think I'd rather be using this service in a more Bull market – but he does advise on shorts as well.

If anyone has any feedback on The Gorilla I'd like to hear it.

Thanks!

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

During the period of time that data covers there were only 2 mid-term congressional election periods, both of which produced a rally. In any event, a sample size of 2 is meaningless data chatter. You cannot draw any conclusions from a set up two. You could have two consecutive heads come up vs tails, which hardly means every flip of the coin will be a tail.

Small sample sizes on fundamentally based relationships is okay, but not that small.

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

Rocket man – the phenomena you mention about large caps is a bearish sign. I mentioned this in my post on May 10th in my blog as a reason to sell your stocks. When the Dow starts out performing the S&P 500 it is a reason to start looking for a sell spot.

The dollar does have an indirect relationship to Gold. The point of that section of my newsletter was just watching inflation keeps your analysis much simpler, and the straight correlation is better. KISS is very valuable in investing.

[rocketman]

Thanks for the clarification Chris. Your newsletter is very professional and informative. Yes, the dollar appears not to be the only factor. I will be keeping my eye on inflation. I think the article I was posting had to do with how investors are starting to head out of risk and into safe mode. If I am not mistaken, this looks like a gradual set-up for a new sector of investments (precious metals and gold). However, I see a lot of news from the metals sector advocating gold and they have to make a living too :-). So who are you going to believe nowadays?

I’ve never seen anything like these times for investing. It used to be KISS – now everything is too unpredictable and you got to pay major attention. Thanks again Chris.

[ybc]

Chris, can you give the address of your blog? THanks.

[Daniel]

Powayseller asked…

“which stocks went up and earned more than CDs, without taking on any more risk?”

My answer: none, never. If you want a stock that has less risk than a CD and returns more, I have news for you: it doesn’t exist.

And an answer to some other comments on this thread: missing an opportunity to make a profit is exactly the same as taking a loss. Most people fail to see that. They will be happier with 3 trades that return $100 each, instead of a trade that makes $500, and two that lose $100 each.

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

ybc – blog address is http://iamafuturestrader.blogspot.com/ you can also get there via a link to it in the last paragraph from the home page of my web site, address to the site is above. You will have to dig for the May 10 or 11 post because it is in the archives, but it is there.

[no_such_reality]

In the 2000-2001 recession, the S&P 500 lost the following in each of quarter of 2001: -23.2%, -39.4%, -35.4%, -24.2%.

Bunk. The S&P 500 index closed on the first day of each quarter at the following:
Jan 2000 = 1455
Apr 2000 = 1505
Jul 2000 = 1469
Oct 2000 = 1436
Jan 2001 = 1283
Apr 2001 = 1145
Jul 2001 = 1236
Oct 2001 = 1038
Jan 2002 = 1154

The first quarter of 2001 lost 10%. The 2nd gained 8% and the 3rd due to September 11th got slaughtered for 16%, but the fourth pulled back for a 11% gain. The entire year saw a 10% loss.

2002 was a different story, Q2 & Q3 got walloped, combined losing 27%.

[ybc]

Chris, thanks. I can’t believe that I didn’t notice that you’ve posted your web address all along!

[lewman]

I found it a bit interesting that some of you have very strong opinion about your own view and method and seem to suggest that it is mutually exclusive to others (e.g. keeping money in CDs vs shorting the market vs identifying sectors that’d still thrive despite a falling market). Rather I think they are just different investment methologies and risk management techniques that I believe could co-exist as that’s diversification and diversification is always good.

I figure if I position my portfolio in anticipation of an upcoming recession, I’m eseentially relying on a crystal ball of some sort because I’m making a call about the future that as clear as it seems when the call is made the outcome could easily be totally different (and yes to state my position, as of today I’m one foot in the housing-led recession camp and am looking into how I’d ride the S&P500’s fall in 2007).

At the same time I agree certain sectors could still work despite a recession and I’ll continue to go long on these. Precious metals is one and I’m debating on oil. But this also requires a crystal ball.

These versus analysing seasonality (my research confirmed that an investment in SP500 during the fall of each of the past 9 mid-term years would be a win; this kind of percentages just can’t be ignored) which does not require a crystal ball but does require a pattern in the past to continue to hold into the future. But for 2006, I’d like to see a deeper correction before I act.

For me, the objective is to make money without taking on too much risk while at the same time hopefully not missing too many opportunities due to “over risk avoidance”. So I’ll likely execute all three trades; make sure I have stop losses for all three and hopefully at least one out of three will be a win and the amount of profits will be greater than the losses … rather than arguing to death that one method has to be better than the others and it’s the only game in town.

Happy investing !

[PD]

Just like everybody else, I have been trying to find the right investment mix. I was heavily long in stocks until early May, when I sold most of my stocks. I kept only the stocks that I felt would do well in a recession. Because I think housing is going down, I put some money where my mouth is and shorted two homebuilders and a lender. My trade was not very big, however. I recently bought puts on another homebuilder and a lender. I have the rest of my cash with USAA.

[powayseller]

no-such-reality, bunk to you too. Just kidding….My data is correct. I’m using yoy.

luenglewis, my best way is mostly cash (various currencies), maybe some commodities (unless recession creates losses as demand declines), PMs once price comes down, and long on oil stocks or recession proof stock w/ low P/E. shorting is good for those who dare.

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

SB/poway – there is absolutely no reason to be afraid of shorting, you need to get over this fear. I make more money on the short side than the long side when I measure all of my trades over time. Why? prices drop faster and more sharply than they rally in general. As a result you can get a bigger bang with less exposure ( time in the market risk ).

[lewman]

I suspect the fear of shorting has to do with the theoretical risk that losses could be infinite as opposed to going long where worst case scenario is just total loss. I think that becomes a real risk only if you short small companies so a relatively small amount of money can push the price through the roof. I just started shorting stocks about a month ago and I made sure these are fairly large companies. Plus I make sure there’s a stop loss in place and between these two policies I hope I’ve reduced the risk of getting squeezed to a minimal.

But I would also look into PUT options as they come with a built-in stop loss mechanism. So I can execute the trade then go away and know that while I may lose my shirt, I will definitely be able to keep my pants on.

Cheers
Lewis

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