SNP500 is approaching the top
Signs of approaching the top:
- Panicking mode of ordinary investors, afraid of being left behind.
- The bull has a long run.
- Many ordinary investors did not participate in most part of the long bull.
- The surge is based on wishes, not on substance.
Confirming a top
- Not yet. Need to wait till the long-term monthly up-channel is broken.
- The minimum requirement
- The weekly up-channel has been broken and reaches the weekly channel break-down line.
- The daily chart forms a down-channel with at least two peaks and two dips.
- Follow channel trading to take care of the market top.
- Act fast, when it drops, it will be hard and fast.
The movement of the ordinary investors
- This time is different
- According to data from Bank of American Merrill Lynch, the benchmark SPDR S&P 500 ETF (SPY) saw a huge inflow of $8.2 billion on Wednesday, it’s largest for a single day since Dec. 19, 2014.
- A total of $124 billion has poured into ETFs in the first two months of 2017, the most aggressive start to a year ever. https://www.wsj.com/articles/small-investors-run-to-etfs-1488586244
- The six largest US banks have seen their market value jump by more than $280 billion in the past few months, on promises of sweeping deregulation of the industry.
- Skeptical in the long bull run
- Not too long ago, there are many articles mentioned that most American investors are not invested in the stock. They either did not have enough money, or they increased their holdings in cash.
- Nearly 7 in 10 Americans have less than $1,000 in savings – Here are six tips.
- Over half of Americans have $0 in stocks. http://money.cnn.com/2015/04/10/investing/investing-52-percent-americans-have-no-money-in-stocks/
- Well, one in five Americans who aren’t invested plead ignorance — they “don’t know enough” about markets. Nearly one in 10 don’t trust the people who would supposedly enlighten them — stock brokers and financial advisers.
Put the group sentiment into a picture, the current stage for the US stock is at least in the “this time is different” stage.
History repeats itself. For stocks:
1989 in Japan
2007 and 2015 in China
2000 and 2008 in the US
Each time, people said, this time is different. Our industry is different, our technology is different, our management is different, our government is different, our people are different, etc. We are smarter, we are stronger, we are better, and we are greater.
Before the burst, everyone jumped in. Most are afraid of not being in the market. People laughed at those not as aggressive as they were. It is the sentiment now?
Let’s exam the market pushers.
Who is buying recently? The ordinary guys.
What do they buy? The ETFs.
Why? Simply because ETFs cost less than the mutual funds?
Is it because they don’t know what to buy? We think so.
Because if one look into each individual stock, the earnings and gains will tell he/she clearly that many stocks are simply too expensive.
Since 2008, there are
750 stocks/ETFs have grown more than 5 folds.
260 stocks/ETFs have grown more than 10 folds.
129 stocks/ETFs have grown more than 15 folds.
75 stocks/ETFs have grown more than 20 folds.
Isn’t America already great?
You can also use Earning Channel to verify that many stocks have grown for years.
Using typical channels, 60 months, without setting other criteria, you would find 364 stocks that formed strong uptrend, and 153 with the steady uptrend. A total of 517 stocks has enjoyed the ride for at least 5 years. If we use the DIY channel and set the number of months to 90, we can find 144 stocks formed good looking long-term monthly up-channels.
That means many people have gained a lot from the stocks.
Then, why the anger and agony?
Two fundamental issues:
- Ill education of investment.
- The inequality in distribution.
Is there any education of personal investment by the formal educational system? No!
Due to the ill education, people tend to hide in ETF, pretending they are not buying the stocks or the commodities, underlying the ETFs, which are too expensive. It becomes a simple betting of long or short.
From the hundreds of stocks we sifted using Earning Channel, it is easy to find the weaker ones or undeserving ones by adding simple criteria, such as the growth rates of earnings and revenues. For the undeserving ones, it is now not only a good timing to take profit, but could be ready for short selling.
Who are the winners in ETF?
Why are there so many ETFs?
We’ve talked about the demand – the ill-educated ordinary investors.
How about the supply side?
It seems the providers of the ETFs are the winners.
Why should the providers or the authorized participant (AP) care for the ordinary investors? They don’t. They care about the size and volume. Not if people make money from the ETFs.
When the market goes down. Many will pull back from the ETF. The AP will redeem the ETF and sell the stocks in a hurry. By design or by mechanism, the downward spiral would be almost unstoppable. But either way, the ETF providers and AP’s will make profits.
Let’s use Peter Lynch’s guidance for guessing the potential of a company’s growth. Say for a chain store, how many more stores can it grow? How much for each store?
How about the country?
- Unemployment rate? Is US unemployment rate high?
- Salary? Is the salary in the US low?
- Housing? Are the houses cheap?
- Tax cut? Are the taxes for the riches high?
- More expenses? Is the debt low?
How much more room to grow without having to pay the consequences? The inflation? The uneven distribution?
How about the debt? No need to pay, just keep growing?
One doesn’t need to be an analyst or an economist, the answers to the above are common sense. Whoever tries to distort the nature will face the consequence eventually. The more the distortion the higher the price to pay.
The second problem, the inequality. We break it down to two simple ones
- Loss job or loss competitiveness
- Uneven distribution
The competitions in the near future will not lust come from the lower cost of the labor but from intelligent machines or robots. China has almost 14B people, and it is losing low pay jobs to other countries. Look ahead, even the latest business model like Uber would face a severe challenge when most cars drive themselves. By then, most people may not need to own a car.
It is very important to have a good sense of the market movement, especially at the turning points. We have discussed how to deal with the tops and the bottoms using channel trading in the previous articles. Hope they are useful to you.
“Topping Patterns and Channel Trading”
“Bottom Patterns and Channel Trading”
Let’s exam SNP again.
Look at the monthly chart, isn’t it beautiful?
But, beauty can be deceiving.
Notice that it is approaching the upper wall of the long-term monthly up-channel. The index has grown from 666 to 2400. That means the average growth of the top 500 companies was 3.6 times from 2009 to 2017.
Have the companies really done so well? Probably not! S&P500 3-year earnings growth from 2012~2016 was -3.84%.
Let’s have a closer look.
Let’s look at the weekly chart from June 2014 till now.
The round shaped top from December 2014 to July 2015, from our observation, was already a distortion caused by the FED. The stock movement was healthier from July 2015 to June 2016, when the FED let loose the interest rate. The market was moving with less intervention from the government. It seems an M-top or a triple top was about to form. But then, the index breakout its upper wall.
Strictly from the weekly chart above, it is obvious that now is the time to take profit, and not to increase the long position. We believe many of the big winners are cashing out along the way. Who are buying – the small guys.
A clearer observation is to look at the weekly chart from September 2013. It was obvious the channel has been broken in August 2015
So, what should an ordinary investor do? Please follow channel trading.
- When the channel breaks – go away.
- Stay away until a new channel is formed.
Since the price has been pushed up for too long and too high, and the last run was pushed by small guys, the fall, when it comes, may be hard and fast.
So, instead of waiting for the breaking of the monthly channel, it is better to
- Take partial profits now. The index is at the upper wall of the 9-year long up-channel.
- Take more profits when a daily down-channel is formed, with two peaks and two dips.
- Take most profits when the weekly up-channel is broken.
- Stay way.
- Short selling, when you are well prepared, and when a daily down channel has at least three dips.
- Use Earning Channel to practice. You can set the amount to closely resemble your financial status.
You can apply the analysis and practice to individual stocks.
If you are ready to short, please practice and practice using Earning Channel.
Hope this discussion is useful to you. Good luck!
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