The Guru Scorecard, and What’s Ahead for September

by JDH on September 4, 2010

Let’s review the “experts” predictions, shall we?

Expert #1: Martin Armstrong

Last week I stated that our favorite incarcerated guru, Martin Armstrong, was predicting bad things for the market. In an essay titled World Share Market Outlook and Grand Unified Theory published on August 10, he states, on page 7, that August is a turning point in time, with particular attention to be paid to the weeks of August 2 and August 30. As the previous charts showed, the week of August 2 marked the high point for the month; it will be interesting to see if the week of August 30 is the beginning of a significant correction. On page 8 he summarizes his outlook by saying:

Only a low the last week of August would warn we could flip to the upside. This is NOT going to be a walk in the park. The markets are going to be very volatile and we have to pay close attention to the outcome of the Sept/Oct time period. We are preparing to make a very important directional change.

Hmmm. Here are the numbers:

The Dow was up 2.9% this week, and both the S&P 500 and the Nasdaq were up 3.7% this week (the first weekly gain in three weeks). Does that mean the directional change is the markets are going to go up? Perhaps, but that’s not what I interpreted from Mr. Armstrong’s “NOT going to be a walk in the park” comment.

Guru score: not accurate, at least not yet.

Expert #2: The Hindenburg Omen

Two weeks ago, in The Hindenburg Omen: Don’t Believe It, But Expect A Crash, I walked you through the reasoning behind this prediction of a market crash:

Named after the famous Hindenburg disaster from 1937, the Hindenburg Omen was created by Jim Miekka, and here’s how it works: if the following four indicators are tripped, a stock market decline is imminent:

  1. The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows are both greater than 2.5 percent of total NYSE issues traded that day (other sources put the number at 2.2%)
  2. The NYSE 10 Week moving average is rising.
  3. The McClellan Oscillator is negative on the same day.
  4. New 52 Week Highs cannot be more than twice the new 52 Week Lows (though new 52 Week Lows may be more than double new Highs).

It would appear that the “Omen” was triggered on August 19, and then again on August 20. Many Hindenburg Omen followers believe that the triggers must occur three times in a row from the triggering of the first event, so whether or not these is a true Omen or not will remain to be seen.

So, does the Hindenburg Omen have merit?


And No.

Yes, because every “crash” on the New York Stock Exchange since at least 1985 has been preceded by a Hindenburg Omen.

No, because, as we know, economists have predicted 25 of the last 15 recessions. In other words, it’s not that difficult to back test data to come up with criterion that work in all past cases, but that doesn’t mean it will work in the future.

My thoughts?

I’m not losing any sleep over the Hindenburg Omen. I will not be counting on my fingers 36 days from August 19, expecting to see a crash before the end of September because a series of technical indicators predicted it.

Does that mean I don’t expect a crash before the end of September, 2010?

No, as a matter of fact I would not be at all surprised to see a crash within the next few weeks. I would not be surprised at all, for a number of reasons.

I then went on to describe poor economic conditions, high unemployment, etc. as reasons why the economy was looking week, and therefore a stock market crash was possible. Of course, as of now, the crash hasn’t happened.

Jim Miekka appeared on CNBC yesterday afternoon, after the market close, and here’s what he had to say (if you can’t see the video, you can go to the CNBC website):

He now says: “I’m going to modify my position based on the last several days of action. I still think it’s a possibility that we will have a substantial decline if the McClellan Oscillator goes negative, but it’s positive right now, so if I was in the market, which I’m not, I would stay in the market as long as the Oscillator stays positive, because we are not going to have a substantial break down unless or until the Oscillator goes negative.”

He goes on to say that he will stay out of the market for now, because even though the Hindenburg Omen is no guarantee of a crash, it is an early warning indicator.

Of course, as we all know, it also predicts crashes that don’t happen, so you never know if this indicator will be proven correct. So far, the market has rallied, not fallen.

Guru score: not accurate, at least not yet.

Expert #3: The Dines Letter

In the August 20, 2010 edition of The Dines Letter, James Dines made the point that for the last year the markets have been in a neutral congestion area, neither up nor down, which is why the markets remain at about the same levels they were a year ago. He then has this to say:

In other words, market action is not necessarily menacing; it is either a platform for another upward lunge or a possible breakdown. Indeed, unlike some stock-market Analysts, the market does not always speak, and the jury is still out as we await the resolution’s debut. Until then it would be overly daring to guess in this type of situation.

So, he doesn’t know if we will end this period of consolidation by going up or down. Not predicting anything may appear to be a cop-out, and I guess it is. However, he is also correct. We are stuck in a trading range, and until we break through the resistance levels established over the last year, the market will not rise or fall. We are stuck.

Guru score: correct, much to my amazement.

Expert #4: JDH

Let’s review what I said last week:

Month end is August 31, on Tuesday, so even though that’s not the end of the quarter, fund managers still like to have a nice clean month end, so the market will rally on Monday and Tuesday. Here’s the chart (click to enlarge) of what’s happened over the last four months:

As you can see, the market stalls at the 200 day moving average, then drops 800 or 1,000 points, then recovers to over the 200 day moving average for a few days, then it crashes again. Simple. So, all we need to do is extend the chart for a few weeks:

Easy, eh? We have a big rally on Monday and/or Tuesday, and then we are stable for a bit, and then the big crap-out happens, taking us back to the July lows, and perhaps lower.

See how easy it is to predict the market? Download a chart, feed it into your graphics editing program, and boom, one minute later you know what the market will do. It’s that easy.

(Yeah, right).

So, how did I do? Remarkably well, actually. You can see the “fake” chart I prepared last week; here’s that same chart, but I’ll overlay what actually happened this week:

The green circle shows what actually happened this week. As you can see, the market did not fall as far as my fake chart predicted it would, but it rose as high as I predicted. It would now appear that the market will rally for another week, until it hits 10,800, and then it will drop.

Bear in mind, of course, that my prediction is completely fake; I just made it up. I didn’t do any technical analysis, or any real thinking; I just took last month’s chart, cut and pasted it onto the current chart, and there’s the prediction. It took me less than one minute.

And, so far, it’s working.

Guru score: correct, by blink luck.

The Month of September – What Will Happen?

As regular readers of this blog know, I have no idea what will happen. My predictions are as accurate as throwing a dart against the wall. However, let me take a shot at it. First, some facts:

September is historically a bad month for stocks. September has had more monthly declines than any other month of the year. That’s not good.

Of course, we also all know about the Labour Day Omen (or, for you non-Canadians, the Labor Day Omen), which states that if the market declines in the four day week after Labour Day, it will be a down month, so don’t buy. However, if the market is up that week, the market will keep rising. This indicator is correct more than half the time, but it is not always correct, so it’s just a guide.

(A cynic would say that “duh”, of course the market will continue to move in whatever direction it is going, so an up market is likely to continue moving up, and a down market is likely to continue moving down, so that’s not much of a prediction, Einstein).

The economy is still not strong. The Friday jobs report gave the market a boost because 67,000 private sector jobs were added, but it was not all good news:

  • total hours worked did not increase;
  • full-time employment crashed by 254,000 jobs, meaning that all of the job gains were for part time workers
  • manufacturing employment was down 27,000 jobs

So here’s the thing: we have just completed a massive round of government stimulus, with housing tax credits, and cash for clunkers, and everything else, and yet the economy still continues to drop manufacturing and full time jobs. That doesn’t sound like the end of a depression to me.

Interest rates are near zero, and the banks have about $1.3 trillion in cash, but they aren’t lending it to the private sector; instead, they use it to buy risk free Treasuries. With no lending, it’s doubtful the economy will recover any time soon.

And our big rally this week? Take a look at the chart: it was on low volume, just like what happened at the start of August. We are now back to the 200 day moving average, and a bump above that level is possible, but my dart throw is that the rally is running out of steam, and there is more down to come.

So, I remain largely in cash, with some short ETFs and some puts just for fun. I will also leave my stink bids on the table, because this is the month to be picking up inexpensive gold stocks, a topic to which I will return next week.

For now, Canadians, enjoy your Labour Day weekend, and for my American readers, enjoy Labor Day (because it means the NFL season starts next week).

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