The Difference Between Methodology And Crystal Ball When Anticipating Direction In Stocks

Many experts, citing factors such as stretched fundamentals to relatively high investor sentiment, suggest that the time is right for a substantial stock market decline. The suggestion that the market remains on the cusp of a major decline denies that capital, seeking protection against further currency devaluation, has begun its secular transfer from the public to private sector. This transfer includes the movement from sovereign debt to global equities.

In addition, substantial stock market declines usually materialize a major cycle dates with clear evidence of a deteriorating long-term technical setup. This deterioration can include significant trend line breaks, the clustering of various sell signals, and various negative divergences within the trend. Interpreting anything shorter than the long-term fundamental and technical setup is better suited for crystal ball gazing.

Kennedy Gammage said it best,

“Those of us who make a living looking into a crystal ball will end up learning how to eat lots of broken glass.”

The following chart illustrates one of several long-term technical perspectives (setups) for the NYSE.

NYSE Composite:


Headline: Time For A Correction

Since January 1871, whenever the price-dividend ratio has spiked in a given month, stock prices passed through a trough (a short term bottom) 24.1% of the time during the same month as the spike, 59.4% of the time within one month of the spike and 81.4% of the time within two months of a spike.

Because there is no trough in average monthly stock prices in the months leading up to December 2010, that correlation suggests that there is a very high likelihood of one occurring by the end of February 2011.

Meanwhile, we don't see any significant deterioration in the fundamentals underlying today's stock price valuations, which indicates to us that the market will soon go through a short term correction, with stock prices rebounding quickly afterward.

Consequently, we view today's upward movement in stock prices as a selling opportunity. We would expect a buying opportunity to follow in the near future.

Source: businessinsider.com

Headline: Clouds Among Stocks' Blue Skies

In the stock market, another tune from that era, "Blue Skies," seems to capture the mood of the moment. "Never saw the sun shining so bright, never saw things going so right," Irving Berlin wrote back in the late 1920s. And that's the sentiment pervading the market these days.

Investors Intelligence's latest readings of advisers' opinions show the bulls have backed down a bit, to 54.5% from 55.6% the previous and their three-year high of 58.8% the week before that. Those calling for a correction moved up to 25.0% from 24.4% in the preceding week and 20.6% two weeks ago. But bears remain around the 20% mark, leaving a wide spread of 35 percentage points between bulls and bears -- a level of exuberance that's been associated with the market sitting on a precarious perch.

Source: online.barrons.com

American Association of Individual Investors Sentiment Survey:


Source: aaii.com