The Siren Song of the Dead Cat Bounce Mike Swanson (02/14/2016)

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The Siren Song of the Dead Cat Bounce Mike Swanson (02/14/2016) On Friday the DOW rallied 300 points. Two weeks ago it rallied over 400 points.

I was considering the possibility last weekend that once the S&P 500 and DOW closes below their January lows that we could actually see a very fast and quick stock market meltdown.

In reality the S&P 500 is in a bear market as it is trading below it s 200-day moving averages and started a big downleg in this bear market at the beginning of the year when it closed below the

1 The Siren Song of the Dead Cat Bounce Mike Swanson (02/14/2016) On Friday the DOW rallied 300 points. Two weeks ago it rallied over 400 points. There were three other days this year in which the DOW rallied up over 200 point. Of course the DOW is down roughly 10% so far year to date. I was considering the possibility last weekend that once the S&P 500 and DOW closes below their January lows that we could actually see a very fast and quick stock market meltdown. Last week those lows were tested and on Friday we got the DOW rally over 300 points that everyone is talking about now. In reality the S&P 500 is in a bear market as it is trading below it s 200-day moving averages and started a big downleg in this bear market at the beginning of the year when it closed below the range and...the next leg down in the stock market is going to be worse than the one we saw in January. STAGE ANALYSIS OF KEY MARKETS S&P 500 Long-term: Stage Four Bear Market Short-term: We are in a major downleg. Gold Long-term: Stage Two Bull Market Begins Short-term: First big bull run launched. DBA ETF Long-term: Stage One Base Short-term: DBA churning, but doesn t look like it will breakout for now. Likely to fall with broad market for awhile.

2 dumped. This big downleg is still intact and is unlikely to end anytime soon. While the market has been trading down over the past few weeks we have actually seen the VIX barely go up at all.

For a real sign of a bottom we should have seen the VIX go up back above 30 and the ratio of sell to buy volume on the NYSE and Nasdaq go above 90%.

2 2 dumped. This big downleg is still intact and is unlikely to end anytime soon. While the market has been trading down over the past few weeks we have actually seen the VIX barely go up at all. In fact it closed Friday down 9.74% to close at in a week in which the market retested its most recent lows. For a real sign of a bottom we should have seen the VIX go up back above 30 and the ratio of sell to buy volume on the NYSE and Nasdaq go above 90%. Even in bull markets it takes a day of extreme fear selling to make a great bottom, but that failed to happen last week. The last time the VIX traded like this in a bear market was in the summer of 2008 and the Fall of The action now in fact is very comparable to the way the market traded in the Fall of 2000, because it started a big downleg that lasted until April and wiped many people out. You can see a chart of the Nasdaq on the right. It is still below its January low. The chart on the bottom right is the Nasdaq in the Fall of You can see how that big leg down in the market played out. During it the VIX basically spent most of the time during that decline trading between 25 and 30. I was shorting stocks during that decline and making money. The strategy I used can be used now and I will get to that in a bit, but first I just want to emphasize the point again that what is happening so far in

3 the market is very similar to what transpired in the Fall of One thing that happened is that as the market fell almost everyone kept looking for a bottom and trying to buy the fad internet stocks that were so hot in And according to Ameritrade the most popular stocks bought in January were of course Facebook, Netflix, and Amazon. Back during that 2000 decline even though the stock market was in a sharp downtrend what kept people hopeful and in denial were big one day wonder rallies that took place several times during the decline. So even though the market is falling this year with many stocks actually totally melting down instead of recognizing the reality of a bear market and a big downtrend people have seen the five scattered days that the DOW was up over 200 points and have been so mesmerized by them that they have stayed in denial of the powerful bear trend causing them to lose money. An up day makes them dream of a big new rally to come or to think a bottom is in when it isn t. It s like the stock market players are now going through what the goldbugs went through in that last gold bear market or what the oil stock holders are suffering through now. One thing that happens is that during a bear market when the market has an up day rumors float around that makes people excited. So on Friday the talk is oil is bottoming because it went up 10%. It s still below 30! And I just filled up my gas tank on Thursday for $19.96, which is the lowest price I ve paid for a tank of gas in over a dozen years. But the 10% move up was said to be the bottom and some on CNBC said that meant the stock market was going to be ok now. But if this was the real bottom for oil than oil commercial traders would be almost net long oil. And more importantly the oil stocks would have gone up huge like we have seen the gold stocks do in the past few weeks. Instead the XLE ETF went up only 2.63%. So here we are still in the denial phase of this bear market and bear market downtrend. Hopefully we are halfway through it and hopefully it will not have a crash, but it can. There is simply no way to predict exactly how long it will take to play out or how far low the market will go. What we know for sure 3

4 4 is that this is a bear market and the market is going to go lower from here before it bottoms. But a day in which the DOW is up over 300 points keeps people in even though they are losing their money. On the low last month I had someone I know call me on the phone to tell me that their elderly mother was worried about losing more money. The DOW was down 500 points at the moment and that morning I finally got a few s from people either worried about the market or almost desperate to short some stocks so I was thinking a temporary low was going to be made that day. I told this person well the market will probably bounce for a few weeks so there is no need to panic today. I told him to tell their mother to show me their statements so I can see what she owns and that she should schedule an appointment with her investment advisor. Well he never called me back. So I called him on Friday and I found out that they are no longer worried about the stock market at all. The up day on Friday had them convinced. It is not my responsibility or place to try to make them change their mind, but I can see that it will take big losses to make them want to sell or at least make changes. They really do not know anything about investing and are now in full blown hope mode. This is where the masses are at now. They are losing money and have no idea what they can do so they just do nothing. And the dead cat bounce fascinates them. And most active traders, such as the Ameritraders simply chase the fad stocks on up days and lose. And they will keep doing this over and over again. It is about impossible to make money shorting the stock market when it is in a bull market and just as hard to make money buying stocks in a bear market. I have very little confidence that Friday s rally will be able to lead to even the type of bounce we saw in January that took the S&P 500 back up to The bulls thought that was a bottom, but if it was the S&P 500 would have continued higher. It failed so we are now at 1864 even with Friday s rally. The level on the S&P 500 is now huge powerful resistance. If the market can go up a few more days that is about where such a move would probably end. But I m not sure if it can even do that at this point. I really cannot predict what the market will do over a few days (that s why you focus on the big meaningful trends that will last for months), but when I look at individual stocks Friday s bounce is unlikely to lead to much and could simply end Tuesday. Look at these stocks.

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6 You have to do more than turn on your TV and see the action of the day to know what is really going on. You have to put the context of one day s move in the market with the big trend of the market and look at what the stocks in the market are actually doing too. So what went up the most on Friday was bank stocks that had just collapsed. It looks like a classic dead cat bounce that could go on another day or two in these bank stocks to take the S&P 500 up to the area if it can even continue another day. Bounces are just traps. The only way to make money in a bear market is to short rallies. I use the daily stochastics to identify overbought conditions by going above 80 that make for entry points in a bear market. They gave that signal two weeks ago. I really have my short positions right now and have no need to take anymore. However, you can also use the 60 minute stochastics to make more short-term entry points. This is what I did during that 2000 Fall decline. The market was falling and trending down, but what it would do is make a new low, dump, and then have a wonder rally bounce that would last 1-2 days. Then it would fall and be on its lows again. What I would do is short when the 60-minute stochastics went above 80 for a few hours to take entry points after the wonder rallies. After the big up days they would be overbought and if the market then went up a little more and faded on the close the next day or day after it they would give a sell signal and the heavy selling would hit the market again almost immediately. So if you have no short positions at all right now or are looking to do short-term shorting you could do the same thing now. If the market goes up Tuesday morning and then is red by the close or on Wednesday that would make these 60 minute stochastics get overbought and give a sell signal. Today I really do not do real short-term trading, but mainly use the core portfolio ETF balancing system with the bulk of my money. I ll have a new individual stock idea to bet against in a moment. I can find 6

Before we go into some new POS stock ideas let s take a look at gold first.

7 7 stocks that are overbought on the daily stochastics to give better entry points. Last week I picked out WBC, HIBB, and TRI. HIBB and TRI are down from Monday s open with TRI falling roughly 5% before bouncing Friday. WBC is about even from that Monday open and I am short that stock at the moment. Before we go into some new POS stock ideas let s take a look at gold first. We have seen a huge move up in mining stocks and the miner ETF s GDX and GDXJ and of course in the price of gold itself in the past few weeks that have taken most people totally by surprises. But this move was made possible by the fact that gold had been in a four year bear market and mining stocks have really been in a long six month plus mini-base despite the fake breakdown in January that provided a launch pad for the big rally. Gold and mining stocks are now in a bull market. They closed above their 200-day moving averages and have gone through their October highs. They have completed their transition out of a stage one basing phase and into a bull market I already have positions and have zero interest in selling what I own. I only have 20% positions in gold and in the mining stocks just like the model rebalancing portfolio and do not plan on buying more. The reason why is that I have learned my own lessons over the years and have found that it is easier for me to make money in something if I just put 20% into it and use that as a core position. If one tries to go all-in on one single market or trend then it becomes difficult to remain objective over things. This is the real reason why the stock market bubble bull remains in denial. When you are all-in on one thing it also be-

8 comes tough to hold that trade for long, because every little gyration can have a big impact on your account. So I try to bet on multiple trends and in a diversified portfolio you want to try to have a low intra-portfolio correlation level to do just that. Gold and mining stocks are among the most volatile things in the stock market and now they have double and triple ETF s for them which are attracting traders. I would not try to buy DUST, which is a short mining stock ETF, or short gold. There have been people who have been doing that over the past few years. Some have been successful and some not so much, but to do it now in a bull market is a total mistake no different than being a bubble bull in the US stock market. To make money in a financial market you must go with the dominant trend of the market. So in a bull market I want to hold my 20% core position. And the best way to buy in a bull market is to buy on dips and pauses. Trying to short it makes it that much more difficult to do the latter, because it gets you caught up in subpar trades that can simply lead to more mistakes. So if you have been shorting gold or mining stocks I would stop doing it at this point. I know many people are still doing it, because the gold short ETF s are showing up as the most watched and searched tickers on various financial websites. Instead you want to buy the dips and pauses in them. Now I cannot predict when this move up will end on a short-term basis. Perhaps gold will peak out at $1300 and trade in a range for a few months, but it might and that is why I am not trying to jump in and out of my position. Even though I am bullish on gold and mining stocks I cannot tell you to buy them right now. I m not a fast money guy that just looks to see what is up the most in a given week and then yell buy! What I can do is wait for a dip or pause and then make some mining stock recommendations for us both. So that is what I am going to do. I am also considering putting out a mini-course on trading gold and the mining stocks sometime next few month for you. I realize that much has changed in the financial markets since the first time I bought them in So a new course on them would be helpful for people. Gold and mining stocks is the only thing going up this year, besides Treasury bonds, so more and more people are going to flock into them. With ETF s now being the favored trading vehicle of the day they will have an impact on what stocks go up at first. So right now many of the small miners and Vancouver type stocks not in an ETF are badly lagging the ETF s. It will be months before they really catch on fire. So there will be lots of various opportunities in different types of stocks linked to this trend 8

9 9 and most of the people that trade ETF s probably do not even know much about the stocks in them, much less even know what a junior mining stock is. We are in a funny time when everyone has big opinions and hopes on the stock market going up for them, but have almost zero knowledge about the stocks they are buying. I have heard bubble bulls in the past say that valuations do not matter as a way to justify chasing stocks without doing any research into them. During the stairway to heaven rally of 2013 and 2014 this worked for people, but now the people still trying to do it are losing their shirt. Here is an interesting POS stock with a good entry point right now. Take a look at MMM, because if there is any stock that is a poster boy for debt financed stock buybacks it is MMM. The company did $5.45 BILLION dollars in stock buybacks in 2014 when it made $4.95 billion in revenue and in 2015 it continued this accelerated buyback mess with over $5 billion in share buybacks on less revenue again. It bridged this revenue gap by issuing debt in the form of corporate bonds. And it s balance sheet has suffered as a result. Stockholders equity is now a negative $6.79 billion and the stock has over $90 billion in debt for a debt to equity ratio of 90. Revenue shrank 5.5% in the past twelve months and its earnings dropped by 12%. In December the stock dumped on a bad earnings report and the CEO announced in response that he was going to do more share buybacks. That news and the fact that MMM is a high volume DOW stock provoked robot traders into buying so MMM helped lead the January stock market bounce. But now it is in overbought territory and I think it is probably the best DOW stock lined up for a short position right now. In fact on Wednesday a top executives of MMM who is paid well over a million a year sold over $600,000 worth of stock and insiders have dumped about 3% of their holdings in the past few months. But one of the things about MMM is it trades with a PEG ratio of 2.31 and a P/S ratio of 3 and a forward P/E of 17. Most DOW stocks are still in what is historically a crazed valuation level for them and this is another reason why the stock market is going to continue to decline. What happens to stocks like MMM when they stop their buybacks? Many are slowing them down, but this process is only starting. You can also do options on MMM by buying a July put with a strike price of 150. They last traded on Friday for $8.00. Here is a great way to take advantage of Friday s move.

10 10 MODEL REBALANCING ETF PORTFOLIO ALLOCATION The goal of this portfolio is to have five have core positions with no more than 20% invested in each one that together provide an investment allocation with a low intra-portfolio matrix. This makes it so that when one ETF goes down another can go up overtime. Traditionally people do this with using US stocks and Treasury bonds, but in the long-run a mix of more diversified assets can generate superior investment returns and if one day stocks and T-bills go down together then it will be a necessity. To make the strategy work one must also rebalance the positions to maintain the fixed allocation percentages. Rebalancing also boosts returns overtime and lowers the overall volatility of the account. To make this work monthly or weekly rebalancing is best. For more on how this strategy works read my January monthly newsletter from Also see module 7 of my Bear Market Power Pack for several videos and academic papers about this market strategy: Right now my recommended mix of ETF s is the following: 20% - SDS: Ultra Short 2X S&P % - DXD: Ultra Short 2X Dow-30 20% - CEF: Fund that invests in gold and silver 20% - GDX: Fund that invests in mining stocks 20% - DBA: Fund that invests in agriculture commodities. This generates an intra-portfolio correlation of A 50% in TLT and 50% in SPY currently generates a correlation of 0.29.You can use your own ETF s or funds to play with correlations by going to this website: A correlation of 1.00 would mean that everything in a portfolio is trading together. With these positions at this moment I do not expect DBA to go up over the next few weeks. It may be pushed down with the stock market as it fell last week. I have core positions in my trading and investment accounts roughly invested like this.

11 Disclaimer 11 WallStreetWindow.com is owned by Timingwallstreet, Inc of which Michael Swanson is President and sole shareholder. Both Swanson and employees and associates of Timingwallstreet, Inc. may have a stock trading position in securities which are mentioned on any of the websites or commentaries published by TimingWallStreet or any of its services and may sell or close such positions at any moment and without warning. Under no circumstances should the information received from TimingWallStreet represent a recommendation to buy, sell, or hold any security. TimingWallStreet contains the opinions of Swanson and and other financial writers and commentators. Neither Swanson, nor Timing- Wallstreet, Inc. provide individual investment advice and will not advise you personally concerning the nature, potential, value, or of any particular stock or investment strategy. To the extent that any of the information contained on any TimingWallStreet publications may be deemed investment advice, such information is impersonal and not tailored to the investment and stock trading needs of any specific person. Past results of TimingWallStreet, Michael Swanson or other financial authors are not necessarily indicative of future performance. TimingWallStreet does not represent the accuracy nor does it warranty the accuracy, completeness or timeliness of the statements published on its web sites, its alerts, podcats, or other media. The information provided should therefore be used as a basis for continued, independent research into a security referenced on TimingWallStreet so that the reader forms his or her own opinion regarding any investment in a security published on any TimingWallStreet of media outlets or services. The reader therefore agrees that he or she alone bears complete responsibility for their own stock trading, investment research and decisions. We are not and do not represent ourselves to be a registered investment adviser or advisory firm or company. You should consult a qualified financial advisor or stock broker before making any investment decision and to help you evaluate any information you may receive from TimingWallstreet. Consequently, the reader understands and agrees that by using any of Timing- WallStreet services, either directly or indirectly, TimingWallStreet, Inc. shall not be liable to anyone for any loss, injury or damage resulting from the use of or information attained from TimingWallStreet.

DBA Begins To Launch Mike Swanson (06/05/2016) So many small fries got shaken out by the recent gold drop.

DBA Begins To Launch Mike Swanson (06/05/2016) The chart above is of course the DBA ETF. I have a 20% position in DBA in the model ETF rebalancing portfolio and also as a core position of similar size