Study and Screening Process
Does
the current market look more like 2004 or 2007? The answer is important because
stocks did well from August 2004 to October 2007, but they performed very
poorly between October 2007 and March 2009. The fundamental picture remains
quite uncertain with:
- Debt problems
in Europe and the U.S.
- Inflation in
Asia
- Central
bankers with limited ammo
Based
on a detailed study we just completed looking at market profiles dating back
to 1981, there are similarities between the current market's technical
profile to both 2004 and 2007. The study can help us understand what to look
for in 2011-2012 and if the implications lean toward bullish or bearish
outcomes.
Why
did our study begin in 1981? Fair question; the answer lies in the
availability of detailed technical data. The study used historical values for
the CCM Bull Market Sustainability Index (BMSI) and
the CCM 80-20 Correction
Index. You can use the links in the previous sentence to see the long
list of technical parameters incorporated into these proprietary market
models. This data is not easy to find going back into the 1970s.
The
study looked at an extensive array of technical data based on daily, monthly,
and weekly charts. The varied time frames help us zero in on periods in
history where the balance of greed and fear in the markets was most similar
to what we have today. After running historical data through the process
shown in the flow chart below, four periods remained beginning in 1984, 2004,
2005, and 2007.
 
The
video below compares these periods to the present day and highlights both
bullish and bearish signals that may emerge in the coming weeks. These
signals can help us better access the market's risk-reward profile within the
context of today's fragile fundamental backdrop. The charts covered in the
video are also shown below the video player for further study.
Commentary
related to the charts below can be found in the video above.
The
chart above is the present day market. The chart below shows the similar
period in 1984 identified in the study. Notice how the present day chart above
looks more like the right side of the 1984 chart below, which is the
"healthy" side. If the current market begins to look like the left
side of the chart below, it will increase the odds of bearish outcomes.
If
the market begins to resemble the chart below from 2007, we would take a more
defensive stance. From a risk-reward perspective, a key bearish development
occurred in January 2008 when the slope of the 200-day moving average turned
down (near red arrow).
The
chart of 2004 below does share some significant similarities to July 2011.
Even though the slope of the 200-day moving average did not roll over in
2004, the market still remained volatile and weak for roughly nine months. We
could face a similar situation in 2011-2012. A positive slope on the 200-day
moving average does not mean the market will be easy to navigate, but it does
mean the odds still favor bullish outcomes over bearish outcomes.
The
period in 2005 below may offer the best proxy relative to the current
technical backdrop. Like 2004, a relatively healthy slope on the 200-day
moving average did eventually lead to higher highs, but staying with the
market was difficult.
How can all this help us? As long as the charts look similar
to 2004 and 2005, then the odds will continue to favor higher highs in the
months ahead. If that is the case going forward, we would hold more stocks
and commodities and less cash. We have been and continue to be interested
in gold (GLD) and silver (SLV). We also prefer to gain exposure to stocks
via liquid and flexible vehicles, such as an S&P 500 exchange-traded fund
(SPY). If the charts begin to take on characteristics seen in the first half
of 1984 and early 2008, we would reduce our exposure to risk and increase our
cash positions.
Chris Ciovacco
Ciovacco
Capital
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