Blog Post On: 5/17/2009

The Economic Model (MTR-EM) was updated with data for April 2009.

All percentages are Year over Year changes (April 2009 vs. April 2008)

• Real-Wages (gray line): + 4.48%
• Real-Wages All Employed (green line) : -.44%
• Employment: -4.71%
• S&P 500 (purple line): -37% 

Interpretation: Real-Wages increased by 4.48% reflects the drop in CPI and fuel. Real-Wages for all employed workers is down -44%. This reflects the continuing drop in year over year employment which down -4.71%. The increase in real-wages is positive for the market since employed workers have more money in their pockets than last year. This is offset by the continued decrease in employment. This again is another reflection of the weight on consumer spending. Consumer spending continuing to be impacted will show up in lower corporate earnings. The MTR-EM is a mid term model and can be used as an indicator of how to investment when the Market Timing Model (MTR-TM) issues a market up or market down call.

The chart below can be customized on the Economic Model page.

Blog Post On: 5/15/2009

We post commentaries on the MTR-TM from time to time when it appears the MTR-TM is close to a trend change. Today the MTR-TM was down -7.31% week over week.  The back tested criteria was very close to issuing a Market Down signal today. It was missed by a very small fraction.

As discussed in a previous post positions in index related ETFs would have been stopped out. We are on the sidelines right now in most positions other than commodity based ETFs (Gold, Oil, and Grains).

When the MTR-TM peaked at +2 standard deviations on the Z-Score indicator we started buying Gold ETFs to hedge our oil related positions. We typically buy puts at +2 on the Z-Score indicator but this time around we did not take any action. We have noticed that the last week of the month (option expiration) typically trends down and we were looking at late next week for a deep pullback but it may happen sooner.

If you notice Bollinger Bands and Z-Score is right at the +1 standard deviation. This is a level of resistance.  Arron is close to crossing down 70 which is a key point in the Arron indicator for a trend change.

Volume has been low to flat while the market has been trending down. This shows that traders are holding on and could mean either a short down trend or some sideways movement. In either case if a sell signal fires we follow the trend keeping our customary 4-5% stop. Traders that are fans of Investors Business Daily would apply an 8% stop on all trades.  The stop loss rule can be called the PPC rule. This acronym was made popular by Marcel Link, the author of High Probability Trading. PPC stands for "Preserve Precious Capital. "

Blog Post On: 5/13/2009

The MTR-TM was down today -5.83%. Week over week it is down -6.82%.

No sell on the market was issued today by the MTR-TM. The MTR-TM takes its inspiration from the 4% Model which would have issued a sell on the market today. That model has also been prone to many false signals and whipsaws.  The MTR-TM will not catch a new trend as soon as it starts. This helps avoiding whipsaws. This post covers the recent market action and where the MTR-EM and MTR-TM stands.

We posted back in mid April we had some apprehension regarding the market because many indicators were showing the trend would reverse so we tightened stops on our positions, but as we all know well the trend continued. Regardless in that post we recommended tightening up stops protect profits. We also closed out many positions not long after, but did so early and without an MTR signal or a 4% drop in the market, thus missing some of the gains. 

The news that consumer spending was down was today should be no surprise. If you follow the economic model on this site you would see that wages are still under pressure (green line).  We also posted last week with year over year employment being worse than before the 1950's that the consumer has a long way to go to recover. These factors all called for caution with this market.

Looking closer at the MTR-TM below, we still see that many indicators are diverging from price and this signals that a trend is slowing and will reverse. Also the Z-Score indicator reached a peak at +2. The Z-Score at times may not be enough to say a trend is slowing but reaching +2 fires a warning shot across the bow.

Looking at the MTR-TM below it is clear the MTR Indicator went negative today. This is not enough to issue a sell. Based on the indicator action buying puts would have been a good idea (as discussed) in this market, and it was a good idea a month ago but it would have ended in a loss. This is where risk management comes into play with buying puts to protect stock positions or keeping tight stops.

From a seasonal standpoint we are entering the "sell in May" phase of the market where the risks are greater to be long in the market.

Take another look at the chart above. Notice when the Z-Score reached +2 the market turned and the Z-Score dropped to -2 quickly. You will see that the Aroon indicator was still Green on Top which tells us the trend was still up. Buying at -2 would have been a good call. This may come again but all indicators will have to be examined.