Ok kid, ya got two choices.
OPTION A:
Six chambers, ONE bullet. Pick up the piece, put it to your head and pull the trigger. Survive, and you win $1 MILLION!
OPTION B:
Six chambers, FIVE bullets. Pull the trigger and live? You win $10 MILLION!
Whichever option you choose -
if you live, you WIN!
$$$$$
So which option you gonna take?
$$$$
Which has the best risk / REWARD??
$$$
Come on now, this is a strictly time-limited offer. Just a few seconds left... don't miss out!
$$
Pick up the gun, kid - you know you want to!
$
...Ten seconds left to choose or muppet,
YOU LOSE!!!
________0O0________
So which option did you pick?
If you chose Option A... friend, you need to go away and lie down in a darkened room.
If you chose Option B... check yourself into rehab IMMEDIATELY.
The truth, of course, is that both options are a total crock. There's only one way to win that high-stakes game: by refusing to play.
But refusing to play in the markets? That's Option C, the one the big boys will never tell you about. You gotta be in it to win it, right? You can't time the market, right?
WRONG. Our biggest advantage as individual investors is that at any point we can get up from the table, cash out and walk away. Used smartly, that's a tremendous edge.
What is amazing is that so many traders and investors, when asked to play Russian Roulette in the stock market, will choose to pick up the revolver.
Fuelled by a cocktail of greed, desperation and blind ignorance, these adrenaline junkies have a knack of buying in to positions at the exact moment they are most likely to get their financial brains blown out.
 |
JULY 4TH 2012 |
True, the market has surged in the last few days, and muppets everywhere are preparing to load up and fire. So how can we tell for sure whether now is a good or a bad time to get in?
WHEN BREADTH SMELLS
The glory of trading broad indexes as opposed to individual stocks is that there are a smorgasbord of useful indicators we can use to track the overall market's health which look under the hood at its individual components.
We all know of people who seemed a picture of health, only to one day suddenly succumb to an illness which only gradually built up within them over time.
Stock indicies are similar - they can look perfectly healthy at a cursory glance and keep sailing higher, while many or even most individual stocks within them are failing. If the 'organism' is unable to repair itself from within, an index, being merely a weighted average of its components, will eventually break down.
One of the longest-established tests of the broad market's internal health is the McClellan Oscillator. This indicator, created back in the 1960s, measures the momentum of breadth. Just as an indicator like RSI or MACD can tell if prices are likely over-stretched one way or the other, the McClellan Oscillator is a kind of MACD for the index's internal components. And since internals lead prices, it usually pays to keep a close eye on them.
S&P500 July 2012
 |
July 4th. Oscillator reading hits 100.8. Ten days before, it exceeded 83 - hmm, not the best entry point. |
On Tuesday, the daily McClellan Oscillator hit a reading of 100.8. This reading (solid vertical line) is among the top four since 1998, when my data series begins.
Since such high readings are so rare, I decided to take a look at every reading above 70 (dashed vertical line). Those are also rare, but instead of 4 instances over 14 years at least we can now check 38, and hopefully get a reliable indication of whether the market may have gotten over-cooked here or not.
The question we're trying to answer, remember, is what our risk is - compared to our potential reward - of entering the market now. Below is every instance of a 70+ reading since 1998.
1998
2002
2004
2006
2007
2008
2009
 |
Even in the kick-off to this incredible bull market, a 70+ reading on the Oscillator was a sign that you should wait for a better entry point |
2010
 |
The only instance in which a plus-70 reading did not result in a swift pullback. When the pullback did come, however, traders had almost no time to get out. |
2011
So wait, let's get this straight. Of the 38 instances since 1998 where the oscillator exceeded 70, only once (March 2010) did the index begin a sustained move higher without falling back to, or below, or substantially below the closing price on the day of the reading.
_____0O0_____
Hey, you:
still wanna pull that trigger?
_____0O0_____
Of course, these charts can also lull us into a false sense of security. In a number of cases, the market moved higher over the longer term after a brief pullback or sideways move (and I'm inclined to think it will this time, too.) But unfortunately, today's chart is stuck stubbornly in the present. We've no idea whether the coming pull back will last a few days, a few weeks, or turn into a major downdraft like the instance in July 2011. That is not in our control.
The only thing which most definitely is in our control is our own decision-making. Is this a smart place to enter the market on the long side or not? Sensibly, this judgement can only be made on the basis of perceived risk versus perceived potential reward.
At the moment, we have an edge. We know from historical study that short-term risk/reward is overwhelmingly skewed in favour of the down side; short sellers will be licking their lips as we speak.
Medium and longer term though, the current readings do not appear to give us an edge. As the market pulls back therefore, we'll need to reassess and see if the long side seems more attractive. If it fails to pull back, like March 2010, we'll also reassess; but today we do know that the odds in favor of that outcome are stacked against us.
You know I love a cute & cuddly muppet as much as the next guy. But if there are any trading muppets out there still itching to pull the trigger, I've just one thing to say to you: put the gun down and back away from the computer...
