HOUSTON INVESTORS ASSOCIATION

ARE WE MOVING INTO A BEAR MARKET?A TECHNICAL ASSESSMENT

WAYNE J. YORK

UNIVERSITY OF HOUSTONHOUSTON, TXFEBRUARY 13, 2016

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Overview

• I USE TECHNICAL ANALYSIS, AMONG OTHER OBJECTIVES, TO DETERMINE THE OVERALL STOCK MARKET DIRECTION (ARE WE IN A BULL MARKET OR BEAR MARKET?).

90% OF STOCKS MOVE IN THE DIRECTION OF A BULL OR BEAR, SO KNOWING MARKET DIRECTION IS CRITICALLY IMPOTANT.

TECHNICAL ANALYSIS CAN HELP MINIMIZE DAMAGE CREATED BY A BEAR MARKET (I.E. PRESERVATION OF CAPITAL).

• DISCUSS VARIOUS TYPES OF MARKETS:

SECULAR BULL AND BEAR MARKETS CYCLICAL BULL AND BEAR MARKETS UNIQUE CHART I CREATED SHOWING BULL AND BEAR MARKETS SINCE 1929.

• TECHNICAL INDICATORS THAT I HAVE FOUND USEFUL IN DETERMINING MARKET DIRECTION: MOVING AVERAGES ON MONTHLY CHARTS MOMENTUM INDICATORS (RSI, MACD, WILLIAMS % R)

• WHAT THESE TECHNICAL INDICATORS ARE TELLING ME ABOUT THE STOCK MARKET DIRECTION NOW.

• RESOURCES THAT I USE FOR TECHNICAL ANALYSIS AND RECOMMENDED INVESTMENT BOOKS

SECULAR BULLS AND BEARS CYCLICAL BULLS AND BEARS

• Secular Bull and Bear Markets: Run from 8-20 years and alternate

between bull and bear. Secular bull / bear pattern since

1900 shown on left. Secular bears also known as

Trading Ranges since they often have a side-ways pattern (1966-1982 and 2000-present).

Huge question of the day: Is the secular bear since 2000 continuing or are we entering a new secular bull market starting in 2013?

• Cyclical Bull and Bear Markets: Bull and bear markets (moves)

within a Secular Market. Mostly well defined in a Secular

Bear Market – especially since 2000.

Cyclical bulls and bears less defined in Secular Bull Markets.

LONG-TERM CHART OF STOCK MARKET SINCE 1929

• Created starting in the mid-1990’s.

• Plotted the Dow Jones Industrials since 1929.

• Used the Point and Figure method on a log scale with a three-point reversal.

Point and Figure plotting better defines chart formations

Log scale better than conventional plotting since it is “equal percentage” at both low and high values of the Dow Jones Industrials.

• Resulting plot of the Dow Jones does the following:

More clearly defines secular and cyclical bull and bear markets than conventional charting.

Creates well-defined “trading channels” and Elliott Wave formations (i.e. expanding triangles).

Welcome to Sam M’BolletWhen In Gambia, Do As The Gambians Do

• Chart on left is Point and Figure of the Dow Jones from 2000 to the present.

Some technicians believe the 2009 low (c) represents the start of a new secular bull market.

In my opinion, the secular bear market remains in force.

• The secular bear appears to be creating an Elliott Wave formation called an “expanding triangle.”

• An expanding triangle, if and when completed, would consist of five parts: (a), (b),(c), (d), and (e), and these correspond to the cyclical bulls and bears within the broader secular bear.• (a) cyclical bear from 2000-2003.• (b) cyclical bull from 2003-2007.• (c) cyclical bear from 2007-2009.• (d) cyclical bull from 2009-present.• (e) In order to complete the formation, will

need a cyclical bear that would result in a 65% correction, or to Dow Jones of 5500 or so.

MOVING AVERAGESAn Extremely Powerful Technical Tool

• Example of moving of 3-month moving average:

Month Jan Feb Mar Apr May Jun Price 10 11 12 16 20 3 M/A 11 13 16 13

• Some make decisions to invest or not, based upon crossing over the moving average. Can create many “whipsaws.”

• My suggestion: Invest when the slope of the M/A is positive and become defensive when the slope of the M/A is negative.

• 12-Month Moving Average has worked remarkably well when using the slope. Never missed a call in 20 years!

• Appears the 12-Month Moving Average slope is transition from positive to negative.

MOMENTUM INDICATORS SUPPORT TRANSITION TO NEW BEAR

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• Three momentum indicators on the monthly plot used to evaluated the “health of the markets”

Refer to StockCharts ChartSchool for definition and use.

• Relative Strength Index (RSI). When in oversold territory (green), and slope is

negative it is an early warning of an impending bear market.

• Moving Average Convergence Divergence Oscillator –

MACD. When the slope changes and the red line crossed

over the black line, this too is an early or coincident confirmation of change in direction of the market.

• Williams % R Sustained moves below 50 generally confirm a

move into bear market territory.

MOVING AVERAGES AND MOMENTUM INDICATORS USEFULIN MONITORING OTHER INVESTMENTS - GOLD

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• Use monthly moving averages and momentum indicators as guides.

• Example: Gold

• Sell signals formed in 2011-2012 Moving averages rolled over in2012. Momentum indicators preceded moving average roll-over Williams %R below 50 for sustained period. Sold gold positions at approximately $1500/oz.

• Monitoring for buy signal None has formed since 2011-2012 Favorable signs appearing within last two months. If 10- and 15-month M/A have positive slope in coming

months, will add GLD to portfolio.

• The following are my views based upon my technical analysis of the markets.

• We are in the continuation of a secular bear market that started in 2000. This secular bear market has a reasonably high probability of completing an Elliott Wave expanding triangle formation. Expect that the formation will be completed by the end of 2017, after which we will enter a new secular bull market.

• We are completing a cyclical bull market – wave (d) that started in March, 2009 and are now rolling over into a cyclical bear market – wave (e) of the expanding triangle.

S&P 500 may move down to 550 or a loss of over 65% from the peak created at 2140 in May, 2015. Monthly moving averages and momentum indicators are confirming the transition from cyclical bull to cyclical bear.

• What if I am wrong? Observe market behavior with an open mind, and be flexible to change positions if warranted! Above all else, I will be monitoring the monthly moving averages. If the slope changes from negative to positive - will move

back on the long side into the market.

Conclusions

RECOMMENDED RESCOURCES• Recommended Technical Resources for Technical Analysis:

Purchase a charting service that you are comfortable with (I like StockCharts – StockCharts.com). Has free charting capability as well as several services that require a fee ($15.00 to $50.00 per month). Tutorials on charting techniques – tutorials are free.

FinViz provides great overview of the markets and market news. Finviz.com Advisor Perspectives with Doug Short is an excellent resource regarding the economy and markets. Dshort.com

Source for moving average charts used in this presentation. Chris Ciovacco provides weekly videos about the market conditions. Great learning website for technical analysis. Ciovacco.com Another excellent technical resource of the market is by Lance Roberts located here in Houston. Has weekly free newsletter.

Realinvestmentadvice.com

• Recommended Reading: Introductions to Investing

“Stocks for the Long Run” by Jeremy Siegel - Why one should be a long-term investor. “Common Sense on Mutual Funds” by John Bogle – The advantages of investing in low-cost indexed mutual funds “The Retirement Savings Time Bomb” by Ed Slott – How to manage your IRA’s

New Release “The Only Game in Town” by Mohamed El-Erian - Helps describe the global financial mess we are in and its implications.

BACKUP SLIDES

MOVING AVERAGES FROM 1928-1940

GLD POINT AND FIGURE CHART