Do they ring a gong at the bottom?

Trading lore says that they do not ring a gong at the bottom.  At "A Dash" we are interested in any successful approach -- fundamental or technical.  We are open to human interpretation of data and that derived from systems.  We have discussed a number of fundamental considerations in recent weeks, but fundamental analysis is tricky.  Earnings projections are open to dispute, and valuation may be ignored when sentiment is negative.

While the current month-long selling spree continues unabated, traders may well ask when a tradeable bottom has occurred.

Individual investors who have been worried about recession and stocks have similar questions.  Should they bail out?  Should they defer annual retirement contributions to stocks?  What is the signal to deploy fresh investments?

A Survey of Advice

Let us take a look at advice from some top traders and bloggers.  We shall then share the output of one of our own successful proprietary models.  All of the insights come from people we respect, feature on our site, and read daily.

Trader Mike,  has an interesting indicator: Visitors searching for information on inverse ETF's!  Mike concludes that we are getting close, but perhaps not there yet.  Read his entire post for some great charts and analysis.

Brett Steenbarger looks at the increasing VIX and discusses what it means.  Dr. Brett does not yet see the extreme levels suggesting a decline has ended.

Adam Warner, also looking at the VIX,  calls it "a start."

Charles Kirk, sees some technical indicators as close.  You need a membership to see the complete analysis, and it is worth the price.

Bill Luby, the  VIX expert, has  pointers to several great articles he has written, and also notes that the VIX has not really spiked.

Gary D. Smith follows the ISEE sentiment index, which has made a new record low.  Gary points out the good track record of this approach in marking bottoms.

Bespoke Investment Group also looks at the VIX, noting the levels still short of some past spikes.  Take a look at the article to see the expected beautiful charting.

Barry Ritholtz, drawing upon data from his new Fusion IQ method, shows a great chart of stocks below the 200-day moving average.  He carefully points out that while the readings are at bottoming levels, it is a process, not a specific call to buy.

At StockPickr.com James Altucher has generously shared the system trading methods he has developed and used successfully.  Traders should check out System Trades of the Day, which includes the QQQQ crash method.

Last but not certainly not least is Doug Kass.  He is like a human computer, looking for various sources and information to guide trading.  He has been accurate on the many problems facing the market, so his decision to buy deserves extra respect.   Doug has highlighted some financial stocks to buy and has turned more constructive on the market.  His bullish trading calls have worked extremely well in the many years we have followed him.

If one is looking to make an aggressive buy, reading these featured sources is essential.

The Gong Model

One of the systems we use is named the "Gong Model."  Our modeling guru, Vince Castelli, has developed a two-stage method.  In the first stage, the hammer is drawn back.  In the second stage it has rung.  When the gong rings, it is, as Barry Ritholtz suggests in describing his method, not an immediate buy signal, but the start of a process.  The results after some weeks are very good, but it is more geared to intermediate-term investors.

While we cannot reveal more specifics about this approach, it is still in a stage where the hammer is being drawn back.  The gong has not yet rung.  The hammer is not yet cocked.  We find this a bit surprising, but that is why one follows a disciplined system.  Readers will note that the result is consistent with the interpretation of several sources we cited.

TCA-ETF Update

In the current environment it is no surprise that the TCA-ETF model has reduced position size.  The readings for hedges have been negative for about ten days, but there have still been some sector buys.  It has been a bad time for any long-only system, but it goes with the territory.  The table below shows the current sector ratings.  There has been a lot of shifting, but the declines have been broad-based.  When looking at the rankings, readers should look at the number of sectors getting a "buy" signal, seven of 44.  The table is delayed.  As of tonight, there is only one sector in the buy range.

Since the model has a long-term track record, the key for our investors is timing on re-entry.  When the gong rings, investors will have a good opportunity, especially if choosing the right sectors.

Comments

[FINVEST]

As a Fisher Investments employee, I learn more about the stock market (and some common misperceptions) at http://www.fisherinvestmentsforum.com/stock-market-misperceptions.

[trish]

what is the reason why they hit r ring the gong?

[oldprof]

Bill

Thanks! I heard the same bell on Apple.

Jeff

[Bill]

Excellent work, as always, Jeff.

I thought I heard a bell as AAPL crossed under 128 a moment ago...

Cheers,

-Bill

[shrek]

Jeff,

You're doing a great job with the blog. Keep up the good work.

Shrek

[oldprof]

Shrek -

As a regular reader, and one who has made many valuable comments, you know that I do not look at valuation as a reason to buy all stocks in all sectors.

I agree with you about financials, which I underweighted in client portfolios when this started.

I think that valuation is an indicator of long-term sentiment, and useful for someone doing asset allocation in an index fund.

It is not a guidepost to particular stocks or sectors. Our individual accounts were up 16% last year by following this approach.

In short -- I agree -- and thank you for reminding me to make this point more clearly. I really appreciate the efforts of you and others who point out my failures to emphasize the right aspects of key elements.

Jeff

[shrek]

Ive always found the valuation argument the toughest to swallow the last couple of years. The market certainly was right not to give silly valuations for the banks and brokers.

[oldprof]

Mike

You are accurately citing my viewpoint about models. I have also noted the many reasons causing fear and skepticism about stocks, beginning with the 2000 experience and continuing through the 2004 election. Both individuals and market pundits have been skeptical about the economy and profits for years. We now have a year with some losses, so we shall see how much forward earnings expectations decline.

Thanks for (yet another) thoughtful comment.

Jeff

[Mike C]

"Earnings projections are open to dispute, and valuation may be ignored when sentiment is negative."

Jeff, I'd be interested to have you expand a bit on what you mean here, especially the part about valuation being ignored.

You once wrote a post about a good model being both descriptive and prescriptive which I thought was an excellent point. If a model doesn't capture the reality of what happens, then is it a good model?

I don't know what the S&P 500 will do over the next 6 months, but for the sake of the argument if we do end up down say 25 to 30% from the level 12 months prior, then what does that say about a model that said stocks were "undervalued" at the beginning of that 12 month time frame?

Was it that:

1. The market ignored valuation?
2. The valuation model used isn't a good one?
3. Maybe valuation doesn't matter over a 12 month time frame?

As an aside point, I wonder if too many of us are all operating from the same playbook, and thus have changed what works. Whether you believe a bear market has started or not, there seems to be a general consensus that we are due for a short-rebound from "oversold" levels. I've been operating from this premise, and looking for an opportunity to get more tactically long. I just wonder if the bounce hasn't happened because too many of use expect it? The old adage is the market will do whatever confuses the most participants.

These are certainly interesting times.