Looking for Signals…

Recently I have been reading a book called “Signals”, which after reading some of it I see a bit of the thinking that drives Trump. Contrary to what many Democrats think and say, Trump is smarter than 99 percent of them, the problem is, he is “Pure Evil” and will destroy our country is he ever gets in control again.

But getting back to “Signals”, what the author Dr Pippa Malmgren (who I have discovered was in the rather lame Bush Administration) says about the markets “”data is backward looking, it only confirms what happened yesterday. Extrapolating the past into the future might sound like a good idea, but it is (ironically) prohibited in the financial markets. Investment products always come with the boilerplate phrase “past returns are not indicative of future performance”, yet we assume the economy’s past performance somehow predicts the future.””

So here we are in markets that for 12 years were ruled by various forms of stimulus, and 1 year of retraction. Now all the guru’s who caught this past year’s down wave are flooding the airwaves.

In my over 50 years of market research and trading, I literally have run tens of thousands of backtests on data by having programmers code all the great ideas from all the great trading books along with some of my original ideas. What did I find? Well, really two things, in commodities, which are close to free supply/demand markets except for gold and oil which are based on monopoly and politics, you can find programs that work. On the other hand, in stock trading it is difficult over a long time frame to find a system that beats buy and hold. This is probably why “don’t fight the FED is so popular. If one combines buy and hold with don’t fight the FED, you have the best of all worlds.

But now one can see the basis for the conundrum that investors and market analysts are facing. They have a FED that is fighting buy and hold, oh my. But the real question is Powell really fighting buy and hold? My view is his base case is the old case, he is just at the moment trying to save face for making the big mistake of not ending low rates and QE in August of 2020. And, Powell now has a bigger problem, a stealth growth formation is taking over the market and inflation fighting is so old school, only Larry Summers still believes in it.

Moving on to Signals…

I have realized in starting to read the “Signals” book that my analysis and trading is based on a lot of the reasons covered above and is about trying to read the signals. In one part of my life, maybe 30 years ago, I was enamored with the “Kondratieff Wave”, ran thousands backtests to try and prove it or disprove it. I am not sure of what I believe at this point other than it is really a great way to get a picture of a market.

Pulling cycles out of a market, which in terms of the Kondratieff Wave is 18.2 years, reveals a pattern of cycles and sub-cycles (I like to use 1/3 cuts to a major cycle to root out the short cycles, so in terms of the 18.2 yr cycle I use sub levels of 6 years and 2 years. The picture that I will show next is a presentation version that adds the 18.6, 6.0, and 2 year cycles together into one chart as it ties together the sublties and macro for an indepth look.

This chart covers the period from 1900 to date. Hopefully you have a screen big enough that you can read the fine print on the tags in the chart, but for ease of analysis, here are the three categories of tags: (you will note that the chart uses monthly data so a date of 9/1/29 means September 1929.)

Market tops: 9/1/29, 6/1/60, 8/1/2000

Market Bottoms: 6/1/32, 12/1/74, 3/1/2009

Bull Setups: 6/1/46, 2/1/93, 11/1/2021

The tops and bottoms categories are standard stuff, what may be a bit original is what I use as a Bull Setup signal, the whiplash that occurs before a major bull move. One other comment, in spite of all the press about the greatest bull and bear markets since 2020, in reality it hasn’t been such a big deal compared to history, especially the 2000 top.

Onto Jerome’s speech at 12:40 ET…

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