Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Economic Crisis Not Over but Stock Market Rally Can Last A Few More Quarters

Stock-Markets / Stock Index Trading Jul 29, 2009 - 06:39 AM GMT

By: Money_and_Markets

Stock-Markets

Best Financial Markets Analysis ArticleClaus Vogt writes: You might be familiar with this common example of probability theory: The exercise of drawing colored marbles from a container.

Half of the marbles are white, the other half are black. You remove one marble, write down the color, and put the marble back in the container. Then repeat the process, again and again.


In the short run you may experience streaks of drawing one black marble after another. It might happen three times in a row, five times in a row, even ten times in a row.

However, these short-term results do not change your long-term outcome — the fact that you’ll draw black marbles half of the time and white marbles half of the time.

When investing, this same law holds true. Some decisions will turn out to be losers. In the long run, though, you’ll earn money if your methodology has an edge.

Let me explain …

A Disciplined Approach Is My Edge …

Is Buffett just a lucky guy, or does he hold an edge when investing?
Is Buffett just a lucky guy, or does he hold an edge when investing?

The “random walk” approach to markets supposes that 50 percent of the marbles in the bucket are white and 50 percent are black. Accordingly, nobody can achieve more than the market’s average performance, and Warren Buffett was just an incredibly lucky guy.

I don’t think that premise is true. And I believe that Buffett’s long-term success proves this point.

In my opinion, the world of investing does not always deal with 50:50 chances … sometimes there are buckets with more black marbles than white ones by a wide margin and vice versa.

My indicators are geared to inform me when this is the case. And they tell me when the buckets hold special opportunities or unexpected risks.

I may still encounter a streak of losers in the short run. But in the long run, I’ll make money because my winners will outweigh my losers by sticking to my disciplined approach.

How My Approach Works …

When there are more white marbles than black ones, I run with the bulls.
When there are more white marbles than black ones, I run with the bulls.

If black marbles represent falling stock prices and white marbles represent rising prices, it becomes clear what to do: Whenever black marbles are a majority I implement a bearish strategy; whenever white marbles dominate I run with the bulls.

For example, when the yield curve is inverted, and the year-over-year percent change in the Index of Leading Economic Indicators (LEI) is negative three months in a row, chances are extremely high that a recession will follow soon.

In this case let’s say, that 90 percent of the marbles in the bucket are black. Whenever this rare condition is given I’ll get out of stocks and buy inverse ETFs and long-term Treasury bonds. The last time this condition prevailed was in 2007.

Technical analysis is just one part of my approach. Longer term, fundamentals and macroeconomics are the financial markets’ driving forces. But markets can stay irrational much longer than you might think. That’s why it pays to take technical analysis seriously … at least when compelling signals are generated.

And that’s precisely the case right now. Take a look at the chart below …

S&P 500 Index

Source: Tradestation

Last Thursday, the S&P 500 index rose above its June high. In doing so, it’s showing an important bottoming formation: A huge head and shoulders bottom. Rising volume and strong market breadth confirmed the buy signal. Additional proof came from foreign markets showing more or less the same bullish pattern. And from the 200-day moving averages, which are in the process of turning around as well.

I take these signals seriously. They’re telling me to expect a continuation of the bear market rally off of the March lows.

I deem it probable now that this rally will have legs. And I expect the markets to keep rising and not come under serious pressure again until the second quarter of 2010.

I use the LEI to back up this view. It moved up from minus 4.0 percent year-over-year in May to minus 1.2 percent in June. This clear improvement points to some kind of an economic rebound.

No, the crisis is not yet over. Longer-term fundamentals are strongly against a more optimistic outcome. But a few quarters of a shallow economic recovery, caused by the huge stimulus programs all over the world, is the most probable outcome now.

In other words, all my indicators are telling me the jar now has more white marbles in it than it did just a month ago.

Best wishes,

Claus

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules