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Tuesday, September 7, 2010

Back to the grind..........

It is said that Labor Day is the unofficial end to summer, because it is back to work and school for the vast majority of Americans; even though the Autumnal Equinox for 2010 occurs on September 23rd. For us here at Moneta Advisors it is also back to work after a much needed vacation, which is why the publication of this blog was halted. Typically the month of August is a slow one in the markets as most traders and fund managers are off to the Hamptons or other greener pastures to while away the hot summer days. During this summer period the markets tend to be lighter on volume and the moves one way or another are not truly meaningful; this summer has been no exception. Although the direction of the market has been a source of great speculation.

Most people think of October as the worst month for equities, however, this is not borne out by historical fact.  It is true that we have had crashes in October at various times in our history that are famous as in October 28 and 29 1929(-23% +/-), 1987(-25% +/-), 1997 (6%+/-).  However, crashes have occurred in many months: Nov '29, Aug '32 Jul '33, Aug '96, Apr '00 and even lately on May 6th '10 also known as the "Flash Crash".

Dow Jones Industrial Average monthly returns

*** Chart from chartoftheday.com (Live Link to Chart of the Day )********

In Addition to all the talk about crashes there has been much hype about the “Hindenburg Omen” and how the conditions have lined up for this to predict a crash.  The Hindenburg omen utilizes the following criteria:

1 -The daily number of NYSE new 52 week highs and the daily number of new 52 week lows are both greater than or equal to 2.8 percent of the sum of NYSE issues that advance or decline on a given day

2 -The NYSE index ishigher than it was 50 trading days ago.

3 -The McClellan Oscillator is negative on the same day.

4 -New 52 week highs cannot be more than twice the new 52 week lows (conversely new 52 week lows may be more than double new highs).



The omen itself has a decent rate of prediction of predicting a decline of some magnitude over the following 40 days once triggered, but this is only when the omen is not a “one off” but confirmed at least 3 times in a two week period.  Additionally, it appears at least to me that if you wish you can back test multiple situations to find points in market history where the “omen” could be viewed as a predictor. The usefulness of the “Hindenburg Omen” is questionable in my opinion as circumstances are different in each market period and will ultimately determine if the omen is fulfilled.



For crashes to occur the market should not be expecting them, instead what we have today is the world’s most advertised potential market crash. As I spent time on the beach this vacation I had the opportunity to chat with people from all walks of life and socioeconomic strata. Based on my conversations it was apparent was that the economy was not nearly as rosy as the media keeps pumping and the vast majority of people are predicting a market event.  There is an old saying the “markets climb a wall of worry” and as Robert Prechter of Elliot Wave Intl has added in recent years “markets slide on the slope of hope”. Clearly we as a nation are in worry mode and I believe that markets will remain choppy and probably move more to the upside. This is not to say that there is no train wreck coming but the timing of it has shifted. You will know that the trend is shifting  again when you are hearing that your barber, a cab driver or one of your family members is beginning to move money out of their bond funds and telling you about these great stocks they are buying and you should too…



In the mean time one is best off looking at what they might want to buy when there is a fire sale or in the vernacular a crash (steep correction). Take the time now to think about what you want out of your investments and watch the items that are of interest….in other words do your homework now. If you are looking to buy downside insurance follow the VIX, options/leaps on the major indices or an inverse ETF. The vehicles I mentioned before provide you with downside protection and or profit and get less expensive as the market rises; so when you are betting that the top is neigh you can protect yourself and reduce your cost to do so. You will need to buy these when everyone around you appears optimistic..just like you don’t buy homeowners insurance as your house burns.

Remember no one ever got rich by “buying high and selling low”, with the exception of buying downside protection when the market is high and selling them at the market low.

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