As in Music, to Time the Market, you ve got to keep the beat all the time

Transcription

1 January 26, 2014, revised January 27 As in Music, to Time the Market, you ve got to keep the beat all the time Question: I am confused, you are long inverse bonds, TMV, but show $TYX (30-year yield) dropping. The monthly 30-yr T-bond yield chart shows the big picture forest, while the 2-hour price chart of Inverse Bonds, TMV shows the Bearish trees. When stocks rise in the swing of the pendulum to the risk trade, Bonds drop from temporarily overvalued & overbought to undervalued and oversold. As this occurs, the price of bonds drops commensurately, to reflect the temporary drop in demand. To opportunistically swing trade the herd s emotional response, we reverse the trade,, at such times we buy inverse Bonds rather than wait on the sidelines. In a high volatility market there s always a profitable trade. As yield drops, the price of Bonds appreciates to reward investors who had the foresight to see it coming. Acting independently, with our timing signals, there s great reward in Bear Markets, when the losses of many become concentrated into the profits of very few. In the Rhythm of Life, wave 2 corrects at least 2/3 of wave 1, before wave 3 can take interest rates higher. Investors who anticipate are the ones rewarded in a Bear market, while mindless trend-followers get slaughtered. Rather than buying T-bonds for yield, the clever investors buy bonds well ahead of the Panic flight to safety & quality. The profit we trade over and over is a capital gain, the coupon is just icing on the cake. We are looking to make grand slam, capital gains in T-bonds, as 30-year yield drops to the area of 2.5%, from a close on Friday, January 24, 2014 of 3.63%. (3.89% when we first bought them) Page 1 of 9

2 Benoit Mandelbrot studied roughness to conclude that the English coastline becomes far longer as the yardstick drops from 200 km to 50 km, as shown below. Along the same lines, when the time increment used to trade Bear Market volatility drops from monthly to 2-hour increments, the Swing-Trade profits compound to yield outsized performance, in the identical way the English coastline gets longer. In the example below, reducing the yardstick 75%, augments the length only 42%. Since we trade the Cycles persistently, the incremental profit exceeds 300%. The image of the British Coastline on the left uses the 200km as the yardstick, to conclude 2400km. By simply taking a measure of 50km the coastline measures 3400km, 1000km or 42% more coastline than the image on the left. Source: Wikipedia Like the British coastline, Bear Markets are essentially jagged, trading them with a long yardstick results in nearly always being out of step with the market. In essence, Big Picture Volatility cannot be profitably traded with a Buy & Hold strategy, simply because it s always out of step. To persist hoping for a profit in precisely the wrong market conditions, is what Einstein termed insanity. That s why the vast majority of investors sell when they should be buying, and buy right at the top just prior to the plunge, often fully margined. They only tell you of their singular triumphs, while the infinitely larger, cumulative losses remain in denial. Bear Markets are characterized by high volatility, as opposed to the superficial smoothness characteristic of Bull Markets. Why? Because a Bull Market wave 3 drops Page 2 of 9

3 two semi-log steps in magnitude to 25% of the baseline volatility. Next after a 13-year Cycle Wave IV Bear, magnitude rises two semi-log steps to 400% of baseline magnitude, while corrections remain dwarfed two degrees lower. This is not that! Those who refuse to adapt, find themselves cutting expenses and paring back their lifestyles. Below is the Monthly yield chart, which reversed in 2012, although now headed up, it still must follow the 5-wave Elliott pattern, where waves ii & iv retrace much, or all of the previous advance of waves i & iii. In the TMV Bear Bond chart below, you see the red Diag IIs indicate the beginning a big drop. However, first there will be a bounce to a minimum of 72 marked by the dashed green line, to overlap the uppermost Diag II, at the first touch point. From Friday s close of $61.6, these inverse bonds will appreciate to at least $10.4 to $72. (10.4/ $61.6) for a 16.8% gain in a matter of weeks. Page 3 of 9

4 As you see below, the 30-year Yield in Daily increments, shows yield is oversold, in the lower chart, as the Price of Bonds is temporarily overvalued and overbought. In the next couple of weeks it must bounce to complete wave (ii). This is where we are looking to sell, and lock in a profit, before the subsequent reversal. Page 4 of 9

5 Below the opposite perspective of long bonds dropping to complete wave (iv) of the Diag II, where the minimum downside is 44.5, from today s opening of Once our minimum target is reached we begins scaling out, to attempt the highest average price, while minbmizing risk. We sell TMV, and buyback TMF, the reciprocal long Bond ETF, to continue compounding profit, without missing a beat. This is just a fraction of the opportunity costs paid by Penny-wise & Dollar foolish misers, who pinch pennies by trying to trade the free weekly charts, or worse cancel their subscriptions once fully invested. PROFIT is only reason to maintain an uninterrupted subscription to Exceptional Bear. Try as you may, you will never beat my performance. A subscription to Exceptional Bear pays for in direct proportion to your capital. Roughness of Bear Markets vs. Smoothness of Bulls There is a very simple reason for the rough, versus the artificially smooth appearance of true, 5-wave Bull Markets. The last Bull Market ended March Since then, a Bear Market of Supercycle magnitude, lasting approximately 26 years, is so enormous that only a handful of individuals grasp its proportions. Neither RN Elliott, nor Robert Prechter ever imagined that Supercycle II could possibly have originated in Elliott Page 5 of 9

6 had Supercycle II popping-up out of nowhere in 1929, and everyone since has followed his lead and blundered identifying magnitude as well. What s more, the integral, Diag II corrective pattern was not discovered until the 1950 s, by Hamilton Bolton long after Elliott s passing, and identified uniquely as Bullish progression. It s Bearish reciprocal Diag II continues to stump most Elliott practitioners. Below a bird s eye view of Bear Markets since Only when reconciled against Smithers & Co s Values research, does the extreme Deflation ending in 1920 s Wave (A), to revert CPI to the American Civil War, 70 years earlier. Page 6 of 9

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8 The Big Picture only begins to make sense & when reconciled with Russell Napier s, Anatomy of the Bear: Lessons from Wall Street's four great bottoms (Jul 7, 2009) The values chart contains two yardsticks, Robert Shiller s Cyclically-Smoothed, P/E ratio, and the Q-ratio, which measures replacement values. Note the red horizontal line measures the minimum discount in the lesser of two Supercycle Waves and Cycle Degree Waves II & IV although severe pessimism can result such a plunge Primary Degree Bear as marked by 2. Each chart states the time interval this is important and not interchangeable. There are approximately 65 2-hour candlesticks, for each monthly candlestick. [(20 days/month x 6.5 hours/day)/2-hours)] The masses of investors are right in believing that interest rates will climb, they are just way off on the Timing. Before surging in wave 3, interest rates must first they plunge. A Wave 2 correction, precedes the wave 3 upside. In the rhythm of life, nothing is linear, all is cyclical, like the day follows night, and Autumn follows Summer. Before the subsequent Summer, winter must pass...investors project a perpetual summer, and even though the green shoots have wilted over and over, consensus estimates persist in double digit earnings rise, without a supporting rise in Sales for Companies can only buy back so much stock to divide the profit pie into fewer pieces. ALL these rosy projections are wrong. The Fed continues to ladle-out the Punch of perpetual boom, yet after years of stimulus the market no longer responds as it once did, just as the taper initiates. I have re-labeled the public charts on Stockcharts, follow this link with a description of what s occurring. It would greatly increase your understanding to read these. Below is another example of a winner Swing-trade, in the Volatility index, purposely not available in the free charts. Not subscribing is simply bad business! Page 8 of 9

9 For example interest rates have begun a LONG term Bull Market so, first they are dropping, and to the extreme low or slightly below, because of the degree of magnitude gearing required for the next move Upside. Eduardo Mirahyes Page 9 of 9