Model Portfolio wildmap:GRQ/M

2010 has been a weird year. Fundamentally and technically we were set up for major reversal and potential new bear market. The troubles over in Europe should have guaranteed such a bear turn. The slowdown in the US economy the icing on the cake for the bears. So what happened? The FED is what happened. Why traders believe anything they can do will work to fix the economy is beyond me, though enough big money players seem to believe enough in the FED to keep the stock market together through the dark times. Now the window of opportunity has past the bulls have a great opportunity ahead. Sideways churn like we've experienced over the past year is either a base that launches a major advance, or a top that gives birth to a new bear collapse. Seasonal cycles are super bullish the last quarter of mid term election years (here,) as well as the first three quarters of pre-presidential election cycle years (2011.) The internal action of stocks confirm this bullish set-up, so don't be surprised to see a major move in year end, and even better action going into 2011. This is sure to all end very badly for the bulls, and I would become majorly bearish once we experience a peak and reversal trend change. But till then we should give the bulls the benefit of the doubt, since throughout history the current set-up is what has delivered the most returns ever. The sideways churn of 2010 has been a struggle for trend following systems such as the one I use - though to be expected, and trend following provides the absolute very best returns over the long term as sideways churn periods always deliver great returns on the breakout - and the addition of a new leadership confirming indicator that I discovered this year should help buffer future volatility of sideways churn years, as well as really juicing performance over all. The system I currently trade turned $10,000 into $220 million 1973-2009 in testing, and I am very excited about enjoying these types of returns in the future.

Posted by Kevin Wilde at 5:20 PM | Permalink

While the trend remains up for now, there are many troubling signs that a major peak has landed and a painful sell-off is underway. The semis have broken below important support. Ditto for the financials. European indexes are breaking below critical support of their 50 day moving averages. China is breaking to new 7 month lows, trading below both the 50 and 200 moving averages. The Energizer Bunny rally has been going and going for well over a year now without any meaningful pullback, and even if that prolonged advance was the early stages of a robust bull market, a 50% retracement of those gains would be no surprise at all.

Whether such a painful pullback would then lead to even higher prices as the correction ends and the bull market resume - versus such a pullback representing the early moves of an on-going bear market destined to take out the March '09 lows - depends on the fundamentals going into the second half of 2010 and beyond. There is a clear bull and bear case for both scenarios - and plenty of people to offer such sage (and useless) advice - so we'll leave such jawboning and speculation to others, while keeping an open mind that both outcomes are possible.

I made my case for what I expect in the forecast issue I published late last year - accessible over in the archives at alphaking.com - though I will follow would ever trend develops, even if such trends are totally opposite what I expected.

Risk of a harsh reversal remains extreme, so be careful of buying on dips this time around.

Kevin Wilde, Chief Trading Strategist, AlphaKing.com

Posted by Kevin Wilde at 5:19 PM | Permalink

Trader Talk

The major stock indexes enjoyed another modest recovery bounce today, this time on mildly higher volume

Officially, the Dow Industrials rose 1.1% on NYSE volume of 5.4 billion shares, while the NASDAQ advanced 0.9% on 2.5 billion. The leadership profile remains weak, though remains positive for now, with 157 stocks making new highs versus 57 making new lows.

The short term momentum oscillators remain negative, confirming the now BEARISH stance of the AlphaKing Trading Indicator. We have new trades below to exit all longs and to begin accumulating short positions (or inverse ETFs) using a dollar cost averaging approach.

The AK Trading Indicator has signaled an official change in trend from up to down, and we are acting accordingly to adjust our trades in-line with the new trend. Risk remains high that the stock indexes will rally further to test their 50 day moving averages (blue lines in the charts below,) so we continue to hold a lot of cash that we expect to put to work as any continuation of the rally unfolds.

Only those investors who understand and accept the additional volatility trading short and inverse ETFs involved - especially on leverage - should consider entering these new trades, with more conservative investors best served following the text advisory we offer to 401K investors. Feel free to email us via the contact us page at AlphaKing.com with any questions you may have on portfolio positioning, or any other topic.

401K investors should move ALL monies to a money market fund, and stay there till the trend turns bullish again.

The Index portfolio will be ¼ invested in the inverse ETF QID tomorrow, which will give us a 50% exposure to the short side. Expect more trades over the next few days.

Kevin Wilde, Chief Trading Strategist AlphaKing.com.

Posted by Ken Kam at 7:12 PM | Permalink

Trader Talk

The major stock indexes enjoyed a modest recovery bounce today - on low volume - after falling hard last week - on high volume. This spells big trouble for the bulls going forward.

Officially, the Dow Industrials rose 1.2% on NYSE volume of 4.8 billion shares, while the NASDAQ advanced 1.1% on 2.2 billion. The leadership profile remain weak, though remains positive for now, with 114 stocks making new highs versus 61 making new lows.

The short term momentum oscillators remain negative, non-confirming the bullish stance of the AlphaKing Trading Indicator. We have no new trades at this time.

I would be shocked if the AK Trading Indicator doesn't trigger a sell at the close tomorrow. 401K investors should be looking to move to the relative safety of a money market fund starting Wedneday, though more aggressive traders should be looking to use the current rebound rally attempt to enter some short positions (or inverse ETFs) ahead of the expected mini crash slated to land over the next handful of weeks (once the recovery rally attempt fails and reverses.)

There should be a wall of sellers waiting at those blue moving averages shown in the charts below, though there is no guarantee the stock market will be able to rally that far. We expect to be one of those expectant sellers looking to scalp the bounce. If tomorrow is a mega rally day then we may go all in 200% short, or if no such sweet set up rally then we'll probably be going in using a more cautious dollar cost averaging approach, starting off with a 50% exposure to the short side. This is all about following the results of our extensive research project conducted to answer the question of the absolute optimal exposure based on risk versus reward.

Right now risk of a continuation of the rally is high (potential pain to come for those shorting too soon,) though that risk decreases the higher the stock market rallies over the next few days. Exciting times for sure, though we hope that the cyclical bull versus secular bear argument we expect to discuss later in the week eventually lands in favor of the bulls, for the consequences of the alternative are pretty darn scary. Sit tight for now, and get ready to sell longs and trade short (or buy inverses ETFs), is our advice, and what we expect to be doing this week, starting the open Wednesday.

401K investors should have ½ of their portfolio invested in a stock index, or aggressive growth, mutual fund, with the other ½ remaining in a money market fund, though expect a new trade in tomorrow's update.

The Index portfolio is ½ invested in QQQQ with the other ½ remaining in cash.

Kevin Wilde, Chief Trading Strategist AlphaKing.com.

Posted by Ken Kam at 6:53 PM | Permalink

Welcome to the 2010 AlphaKing forecast issue. As always, I believe strongly that the only opinion traders and investors should be listening to when it comes to their trading and investment decisions is that of the stock market. I go long as intermediate rallies unfold and short as intermediate bear corrective phases land. So please keep that in mind as you read my thoughts on what we expect to see in 2010, as following the trends is the optimal and safest way to make money over the long term.

2010 should be a tumultuous year as the great bear returns. I see the action of 2009 as a bear market partial recovery bounce after the first down-leg of the great bear ended in March, 2009. Once the current rally exhausts itself, I expect the second down-leg of the great bear to land, and one that should be of equal length, or longer than, the brutal swoon of October 2007-March 2009. The technical action during the recovery bounce run-up - the post March 2009 rally - speaks strongly of the rally being nothing more than a sucker advance designed to trap the unwary into believing the bear is over and a new bull move underway. Such action is the classic set-up to a brutal reversal of fortunes that few are expecting. There are also a couple of major fundamental reasons why I believe the bull case to be all bull.

1) The debt de-leveraging process is for real, persistent, and no where near complete. For the economic recovery to stick we would need to see not only an end to the de-leveraging process, but also a return to debt expansion, and such a nirvana turnaround is a very long way from happening. Banks remain unwilling to lend; the economy continues to provide too much supply; which should all lead to more bankruptcies, more unemployment, and falling prices till the de-leveraging process completes and the economy reaches a balance of supply matching demand.

2) Aging baby-boomers, like banks, continue to hoard cash as they increase savings, and remain very picky consumers, avoiding big ticket items like the plague. Since consumers are 70% of the economy, and large ticket industries such as automakers and homebuilders need a resumption of past buying frenzies just to be able to stay in business, they are hardly likely to step forward to borrow and spend on mass debt, which means, yes, it is different this time around and the financial day of reckoning is here now that the financial musical chair song has ended.

3) Taxes are going up next year, and way up in 2011 and beyond, while government deficit spending increases dramatically as money is shifted from the haves to the have nots. Rising taxes in the face of rising unemployment, along with increased in trade protections, were hallmark of past depressions, and repeating things over and over while expecting a different outcome is the definition of insanity. Those who forget history are destined to repeat it.

4) Government control of the economy never works, as the 1930s US/Europe, post 1989 Japan, and entire Soviet experience can attest to. Raw capitalism where winners can climb on the backs of the losers is the best way to grow the economy as a whole, and if we want to be all the same then we can be, for we can all be poor and unemployed. We live in a world where losers are not allowed to exist, thus winners will diminish in numbers as their money is whisked away to help the growing numbers of have nots. Since politics is a numbers game, the dwindling number of winners will be outvoted by such a wide margin that I'm afraid our economic fate is sealed, or soon will be, on the backs of unintended consequences of good intentions.

So for my expectations in 2010:

1) The stock market should see a major life-changing peak, somewhere between Dow 10,500 (here) and 12,000, and then crash and crash and crash as the March 2009 lows get taken out in a big way.

2) We should see a complete unwinding of the USD carry-trade, which I aptly call the lemming trade. While selling US dollars to buy gold and other commodities, as well as stocks and all things China were the major trends of 2009, next year should see the exact opposite, as the race begins to grab dollars as the imploding debt bubble leaves too many individuals, corporations, institutions, and countries swimming naked and overexposed to debt backed by too little capital as the economic tide goes out. Gold should get cut in half. Oil should revisit and surpass the $35 per barrel area. China will implode, leading stock markets around the world into a crashing retest of the March lows, which will likely be breached by a significant margin.

3) 2010 should be the year of currency crises, with the British Pound the crown jewel of pending disasters, with the EURO not far behind in the race to the bottom.

4) Unemployment will rise to the very unexpected 12-14% range, creating an "off with their heads" mentality among voters as we head into the mid-term elections later in the year.

5) Voters will - eventually - balk at governments giving money to failing institutions, which means some very big name financial companies will go the way of the Dodo. AIG, Citibank, Chrysler, are sure to be in the crosshairs of such former too-big-to-fail companies who run out of money and time, though they will likely be the tip of a very large financial iceberg. Once one goes, all of them will suffer a collapse as investors shoot first and ask questions later, leaving each company struggling to show they have the means to survive.

I could go on, but basically what we are facing is the reality of what was threatened by the 2007-2009 bear market collapse, only this time no one will be fooled into believing anyone can save us, as the FED and government lose all credibility as all attempts to stem the financial blood-letting fail. A dark prediction, yes, though the good news is that eventually, once the winners have been separated from the losers and the debt de-leveraging problem gets defaulted away, the economy can start to grow again and the future can once again be expected to be brighter than the past.

If the economy and financial markets want to prove this analysis flawed, and dead wrong - which given the dark nature of our expectation I BETTER be wrong - then I have no problem making money on the long side as I follow the stock markets higher. As I always say, and I repeat it here again, the only opinion one should listen to is that of the stock market. Just keep in mind the potential severity of the situation facing us I've just outlined if indeed the stock market begins to slide, as failing to follow those trends could have life changing consequences, and I don't want any of us following those lemmings over the day of reckoning cliff.

Now try and have a great weekend and stay away from ledges and knives!

Kevin Wilde, Chief Trading Strategist, AlphaKing.com

Posted by Kevin Wilde at 11:30 AM | Permalink

The technical ducks continue to suggest a major rally peak is being formed around Dow 10,000, with rallies this week all run on decreasing volume that reads like a countdown to a rocket launch - 7 (billion), 6, 5, 4, and with Friday's positive close landing with a 3 handle. The current market remains the most technically fractured market I have encountered in the 20 years I've been trading. Many former leadership indexes badly lagged as a handful of indexes made new 52 week highs recently, and this splintered state can be seen around the world - UK leading while China, Japan, and Germany lag - and in the commodity sector, with silver and oil both failing to confirm recent new highs for gold. Volume on the recent advance was pitiful, with fewer and fewer stocks making new highs as October and November progressed. The MACD indicator continues to trend in a downward stair-step of lower highs and lower lows while the stock indexes were making higher highs and higher lows. These divergences are a classic text-book example of a war being waged with the generals marching up the hill and the troops refusing to follow. Risk of a harsh drop remains extreme. A massive multi-year bear market is likely to start once the current rally exhausts itself, which makes the current struggles near Dow 10,000 massively important, for it may be many years - maybe decades - before we get to experience a five digit Dow. It is wise to remember that bulls make money, bears make money, while pigs get slaughtered. The current sideways churn moves as the market completes its top offers near-perfect exit points to take profits so that you don't find yourself scoffing at the trough when the day of reckoning lands for real.

Have a great weekend!

Kevin Wilde, Chief Trading Strategist, AlphaKing.com

Posted by Kevin Wilde at 5:47 PM | Permalink

The Dow continues to grapple with the 10,000 level like an exhausted rock-climber having one hand on the ledge and zero energy left to haul himself up to safety. This is almost the exact level that the Dow recovery bounce failed after the 1929 crash, and with investor sentiment sitting at such extreme bullish levels history has the potential to repeat in a big way.

To go along with waning leadership - as the Dow Transports set up a potential Dow Theory sell signal as they have failed to confirm the Industrials recent rally attempts, to go along with weak semiconductor action and a very bearish looking Island Reversal pattern in the financials - we have the MACD indicator making lower lows and lower highs as the stock indexes have been making higher highs and higher lows, which is as bearish as it gets.

Twelve of the past thirteen rallies of this magnitude have ended with a crash to retest the 200 day moving average, and that is the minimum expectation going forward, with much more bearish potential after that. These technical warnings will not last forever, so investors better be acting fast to get their financial house in order, as the potential for severe stock market losses going forward is as high now as it was back in 1930 after everyone was convinced the worst was behind them.

Thus our message is a simple: "Buckle up, Lads" word of caution, as bulls make money, bears make money, and pigs get slaughtered.

Kevin Wilde, Chief Trading Strategist, AlphaKing.com

Posted by Kevin Wilde at 12:56 PM | Permalink

This weekend marks the six month anniversary of the current AK Trading indicator buy signal. Since 1973 there have been 13 rallies lasting six months or more, with the average lasting eight months. The average gain was 30%, versus the 37% return since the current buy signal was issued in late March. 1999/2000 and 2003 were the only times prolonged rallies delivered more than the current 37% return, and the follow on periods then were very difficult for the bulls. Indeed, 12 of the 13 prior prolonged rallies of this magnitude since 1973 led to a rapid retest of the 200 day moving averages post peak, and the 13th time came pretty darn close to doing so. Most of those retests of the 200 day happened in a very rapid crash pattern lasting less than a month post peak.

The average drop post prolonged rally peak was 18%, which is very close to new bear market territory. Thus, the danger going forward here is that once the rally peaks it will be followed by a one to two month crash of approximately 18%+ to retest the 200 day moving average for the stock indexes. That's a near 40% drop for those complacent bulls trading long on margin or by leveraged ETFs.

The goal is to make money when new trend signals are delivered upon, and then exit those gains with grace before the meat of the selling reversal lands, creating a steady upward staircase of advancing portfolio values followed by sideways movement on the performance charts, ready for the next new trading opportunity when hopefully the upward stair-step to new highs for portfolio returns continues.

Right now one should be looking to lock in profits ahead of the expected turn coming our way fast - so that we don't end up with a downward stair-step in our portfolio values - which I have been doing over the last few weeks in my GrQ portfolio.

Those chasing this market believing that a new mega bull is underway and that investment trees can grow to the sky are about to find out the hard way that bulls make money, bears make money, while pigs get slaughtered.

Kevin Wilde, Chief Trading Strategist AlphaKing.com

Posted by Kevin Wilde at 2:10 PM | Permalink

The primary cycles for 2009 called for a sell-off in a late February low, a rally into mid to late July, followed by a new bear plunge August and September, before a recovery bounce lands to end the year.

So four major swings - four major profit opportunity - expected in 2009.

The fist one worked like a charm - with a major swoon and new bear market lows for the major stock indexes (while GrQ made money) - and the rebound off the March lows through July delivered sweet gains too in-line with cycle expectations, and now we are set up for third of those cycle swings, as we get set to enter a potentially very bearish period August and September.

The AlphaKing trading system (which I use for my flag-ship GrQ Bull/Bear Small Cap fund) uses a targeted trend following approach as its primary trading weapon, using cycles and other technical variables to help define how aggressive trades should be at any given time. The portfolio currently has a net long position that is hedged with some inverse ETFs, and ready to make the profit taking switch from long to net short my trend indicators say it is time.

2009 continues to offer great opportunities to profit, but only for those riding the ups and downs in what should continue to be a very volatile year.

Posted by Kevin Wilde at 5:25 PM | Permalink

The biggest question I get these days is whether the March 9 lows saw the end of the bear. Below is an excerpt from my AlphaKing.com newsletter from March 27 where I tackle that issue:

Tonight we will try to tackle the very large question of whether the recent rally off the lows marks yet another sucker rally within an on-going bear market that will eventually see new lows, versus the start of a new cyclical bull market using the Elliott Wave principle as a guide of expectations.

Click here to read an article on Elliott Wave principle.

After a major secular bull market peak - like we saw going into 2000 - what should follow is a secular bear coming in a three step format labeled A-B-C in Elliott terms. The bear market collapse from 2000 to 2002 certainly fits the expectation of an Elliott A wave decline to start the secular bear market corrective phase. The rally off the 2002 lows going into the peak in October 2007 meets all the requirements of an Elliott B wave counter-trend advance within an on-going secular bear market. Thus what should follow that peak in October 2007 was an Elliott Wave C decline that challenges the 2002 bear market lows. Wave Cs come in five waves, and come with matching fundamentals - terrific in bull markets, horrible in bear markets.

The chart of the S&P500 over the past decade shows a clear three step corrective pattern that can only be labeled A-B-C. The question of whether the bear market is over and a new bull market underway - versus the bear having a lot further to go on the downside - is one of whether that C wave decline is complete or not.

The bull case is that those five waves of the decline from the October 2007peak and March 2009 lows are all five waves of Wave C. If that is the case, then a new bull market has begun, and while it may take many years to force a lasting break to new highs for the stock indexes, what should follow such an eventual breakout would be one heck of a blow-off bubble advance that would make 1999 look like a dull trading year. The entire sideways churn that started in 2000 would reveal itself as an Elliott Wave 4, with a giant Wave 5 blow-off run still to come. For this pattern to be the 'ONE' all rallies must land in a five wave pattern, rather than three. It is too early to say that is or isn't happening yet. But that is what the bulls need to see going forward for them to be correct.

The bear case is a grim one, where what follows the current counter trend rally is a collapse of the stock indexes into a deflationary depression where the charts would mimic the downward stair-step pattern into absolute misery like we saw in 1931-1933. Yes, we saw a five wave drop from October 2007, though the bear case is that those five waves are simply Wave 1 of a larger five wave decline. That means, once this Wave 2 rally exhausts itself, the stock indexes should suffer an absolute melt-down crashing run in Wave 3 that probably starts later this year. If this bear view is correct, then we should see a big rally here in wave A of Wave 2, followed by a double bottom retest in wave B of Wave 2, that leads to a five wave rally in wave c of Wave 2, which leaves the Dow somewhere between 10,000 and 12,000, the S&P500 between 1,000-1200, and the NASDAQ at 2000ish.

Thus both the bull and bear case call for a rally here into the summer. Other than waiting to see whether the first advance lands in five waves versus three, there is no way to be sure whether the bull or bear case is the correct one. Improving technical action would slant toward the bull view, while weak technical action would suggest the bears have it right. The technical action is smack on the cusp between good and weak here, so that too is currently of little help. The good news is we should see some mega moves going forward no matter which of the two lands, which offers the potential to make some serious profits for targeted trend following approaches along the likes of what AlphaKing employs. Our motto is: bull or bear, we don't care. And since we can't alter what the stock market or economy does, all we can do is focus on making money on whatever reality lands our way. You can bet that is exactly what we'll be trying to do as 2009 unfolds.

Kevin Wilde, Chief Trading Strategist, AlphaKing.com

Posted by Kevin Wilde at 1:33 PM | Permalink | TrackBacks (0)