Monthly Archives: October 2009

Roubini Agrees with BAM Model’s View of US Dollar Carry Trade Risk

Over the last several months, markets of all types moved in lock-step (either up or down) based on weakness in the US Dollar Index.

During that period we continuously warned clients that the BAM Model was signaling an imminent stock market crash based on a “melt-up” in the US Dollar Index.

We also warned clients that this fairly new trading dynamic (we first identified it back in 2007 with relation to the YEN Carry Trade) whereby formerly diversified markets now move in lock-step, looked to us to be the single most dangerous dynamic we’ve seen in our years of following markets.

The idea that a major train-wreck based on a mechanical unwinding of a single (crowded) trade could crash AND melt-up markets across the globe is simply a disaster waiting to happen.

Today, Nouriel Roubini, Chairman, RGE Monitor, shares a similar forecast with us based on his fundamental view of the markets.

Click HERE for full story on CNBC

Nouriel Roubini

Nouriel Roubini - Chairman, RGE Monitor

Of course, if this does occur as our model is predicting, we’re going to hear the same old tired excuses from the masters of the financial universe.

In our opinion, we simply have too much money being controlled by too few “brains” but since this pattern of boom and bust is destine to repeat over the coming years, we’ll simply do the best we can to protect our followers and allow subscribers to make money from these apparently predictable blunders.

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Do We Need to See a Hindenburg Omen?

When we first started publishing the BAM Model’s stock market prediction of a 50% crash over the coming 2-5 months, several followers told us it would be impossible or unlikely for the market to crash without first registering a sell signal vis-a-vis the ‘Hindenburg Omen.’

Our response to them was that it is typical for the BAM Model to predict a crash prior to any Hindenburg Omen trigger.

In other words, while not predicting a Hindenburg Omen sell signal, IF we do see one we’ll likely see it trigger at lower levels after the crash is well underway.

Hindenburg Blast

I’ve posted information from Wikipedia here so that you can familiarize yourselves with this concept.

The Hindenburg Omen is a technical analysis that attempts to predict a forthcoming stock market crash. It is named after the Hindenburg disaster, the crash of the German zeppelin in late May 1937. The Hindenburg Omen is the alignment of several technical factors that measure the underlying condition of the stock market – specifically the NYSE – such that the probability that a stock market crash occurs is higher than normal, and the probability of a severe decline is quite high. The rationale behind the indicator is that, under normal conditions, either a substantial number of stocks establish new annual highs or a large number set new lows – but not both. However, this indicator mainly tracks new lows and downside risk. A healthy market requires some degree of internal uniformity, whether the direction of that uniformity is up or down.

Criteria

The traditional definition of a Hindenburg Omen has five criteria:

  • That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.
  • That the smaller of these numbers is greater than 75. (this is not a rule but a function of the 2.2% of the total issues)
  • That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.

These measures are calculated each evening using Wall Street Journal figures for consistency. The occurrence of all five criteria on one day is often referred to as an unconfirmed Hindenburg Omen. A confirmed Hindenburg Omen occurs if a second (or more) Hindenburg Omen signals occur during a 36-day period from the first signal.

Conclusions

Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty-days.

The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%. However, the occurrence of a confirmed Hindenburg Omen does not necessarily mean that the stock market will go down, although every NYSE crash since 1985 has been preceded by a Hindenburg Omen.

Because of the very specific and seemingly random nature of the Hindenburg Omen criteria, it is possible that this phenomenon is simply a case of overfitting. That is, if one backtests through a large data set and tries enough different variables, eventually correlations are bound to be found that don’t really have any predictive significance.

However, the fact remains that out of the previous 25 confirmed signals, only 8% (two) have failed to predict at least a mild (2-4.9%) decline.

The effects of the recent merger of the NYSE with Euronext may have an effect on future predictions.

All information provided by Wikipedia–  http://en.wikipedia.org/wiki/Hindenburg_Omen

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Why Finding The Catalyst Of A Market Crash Is Usually A Mystery

I want to start today’s discussion by updating our current view on world stock markets as well as the potential catalyst we think might play the most important roll in the coming crash.

Then we‘ll talk a little bit about the nature of important market turning points and how we manage our own emotions during periods of “high emotion.”

The BAM Model is currently predicting a stock market crash of approximately 22% during the month of October.  Unfortunately, after the initial crash, we’re also expecting several mini-crashes during the coming months as the SPX moves back down toward our long-standing target at the SPX 529 level.

final_domino

Why are we sharing this information with non paying subscribers?

Simple.  We want to help people.

We also know that once we save/make you money that you’ll become a life-long enthusiast of behavioral analysis and a paying subscriber to one of our BAM Investor products.

The current stock market TOP (as all important turning points) has generated a lot of questions from followers, most of which are fairly typical.  The questions range from earnings related to more pointed insults–telling us things I can’t repeat here–but the main take-away is to understand that these are normal reactions, all of which we’ve witnessed before at major turning points.

This crash, as all crashes, will be based on a surprise factor and for that reason, it’s more difficult to answer questions based on fundamentals than it is to simply say that our model has been very accurate in forecasting both market melt-ups–like the ones we identified in wheat, gold and crude oil– as well as crashes–like the ones we forecast in the stock market and crude oil during 2008.

Our model is a little mysterious (even to us) in that we’re never sure what the catalyst might be for a big market move.

All we can be certain of is that our model is calling for the move and that, historically, the model has made many unexpected market calls that were very profitable.  In other words, we listen to the model even if we can’t figure out the reason it’s telling us what it’s telling us and we NEVER attempt to outsmart the model.

We’ve been fairly accurate over the years in analyzing intra-market relationship as a method for focusing on the most likely catalysts for large market moves.  In other words, if one market moves rapidly is it likely to create a fast-market move in another market.

The current crash, assuming it follows our script here, will most likely be tied to the fact that so many large funds have placed trades originating through a US Dollar-based Carry Trade.

What that implies, is that once the US dollar Index starts to rally sharply–and we think that will occur this week–the simple “mechanical” unwinding of these trades will be sufficient to cause bull markets to collapse while simultaneously causing bear markets to sky-rocket.  By “mechanical” we simply mean that market participants need not want to buy or sell for fundamental or personal preference reasons, they’ll eventually be forced to buy or sell during the unwinding phase.

Simply stated, we believe the pressure being applied to large hedge fund operators to generate market-beating results, has placed world markets in a precarious position of trading off the exact same catalyst which in turn creates a situation whereby markets– no matter how apparently diverse– are in reality joined at the hip.

Please remember that it’s typical for BAM Model followers to feel “wrong” at major turning points, after all most other services rely on trend following techniques as opposed to the market timing and contrarian investing discipline that our model forces us to follow.

Believe me, it’s difficult for even the most seasoned hedge fund operators to follow our work blindly so we certainly expect individuals to severely doubt us at important turning points.   But if you stick with us long enough, your comfort level will increase with each correct market timing call the model makes.

As a rule, if you’re uncomfortable to the point of losing sleep or thinking about our forecasts too much during the day, you’re probably gambling as opposed to investing.  Traders and speculators may wish to gamble in a controlled manner but it’s never a good ideas for investors.

Also please remember that what we do here on this site is intended to simply provide a “peek behind the curtain” with respect to our own personal portfolio positions as well as the positions we’re sharing with institutional investors and hedge funds.

If you follow any of what we’re doing here on this site, please be aware that you’re doing so at your own risk.  JG Savoldi, his family members and friends, are involved in trading ideas and portfolio positions mentioned on this website.  In other words, we’re walking the talk here with respect to the BAM Model.

Thank you again for your interest in the BAM Model.

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Massive Stock Market Crash Imminent According to BAM Model

Well, it looks like we’re at the moment of truth with respect to the BAM Model’s prediction of an imminent stock market crash.  Clients should be well prepared, having been provided ample warning and we’ve also done our best to warn individual investors who have been following us via our blog, website or Twitter campaign.

Imminent CrashThis has certainly been an interesting period for our business launch (to individual investors) and we hope we can assist a few in protecting their hard-earned money.

The catalyst for the expected crash–assuming we get this right–could come from anywhere or nowhere at all, but our best guess is that we’ll see USD strength set off a global short-covering stampede in the dollar index.

Assuming that occurs, it would likely spark a vicious cycle whereby mechanical selling–and buying in markets where Carry Trade money has found a home on the short side–literally unwinds this undiversified single-bet that the masses seem to be clinging on to.

Subscribers will remember that this is the same dynamic the model identified during 2007-2008 vis-a-vis the YEN–and we all know how that ended.  I vividly recall clients telling me the model’s very bullish YEN call made no sense at all and that Japan was still many years away from any recovery that could provide the proper fundamental backdrop for strength in their currency.

Don’t forget that whatever happens during October, this is only the start of the next leg down according to the model.  We’re facing what appears to be a brutal five months ahead of us and our target remains down at SPX 529.

As I said to clients yesterday…the rest is up to Mr. Market.

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“Stretching the Tape”

First of all I want to reiterate the BAM Model’s prediction calling for a stock market crash.  I also want to reiterate it’s prediction calling for a crash in Crude Oil–taking that market back to/through 36 dollars per barrel into year-end.

According to our model, we should see sharp downside moves in both of those mkts into Friday (October 9th) and, yes, we’re sticking with our SPX target of 944.

The BAM Model–as far as this bearish forecast is concerned is locked in place and there’s nothing that will change the forecast.  Could it be temporarily wrong?  Sure.  But based on everything I’m seeing, I’m confident we’ll be crashing very soon.

So what’s with Monday and Tuesday’s big rally?  (yes we’ve heard that a lot)

Well…the bounce of the last two session was a necessary element if we’re going to see a crash, in fact, all crashes experience a period of “stretching the tape” before the crash accelerates to the downside.

Stretching the Tape

This stretching of the tape is a result of bulls and bears fighting it out and it’s what creates the “resiliency” to pain which is what allows people to hang on to losing positions way too long which in turn forces the inevitable “capitulation” that comes at the bottom.

By the way, this dynamic happens fairly frequently if you study fractal-level intraday charts.

So could the market make another higher high?  Sure it could.  But I seriously doubt it will and if it were to occur, we’d be even more aggressive in buying November PUTS on the Nasdaq and Russell 2000 Indexes.  Is that reckless.  No, not according to our model.  According to our model, this is the time we must step up and follow its instructions.

The “Set-up”

This market ‘set-up’ has taken months and years to fall in place–as do all market crashes or melt-ups according to our work–and although the exact turning point can be tough to identify, I’ve never seen a single set up like this fail during the 90 years of stock market data I’ve studied.

But what about all of this talk about “resiliency?”

The stubbornness–many have been calling it “resiliency”–is exactly what is necessary to create a crash.  Think about it.  In order for a market to crash, you must have the majority on the wrong side of the trade.

By its very nature, a crash requires a boatful of investors on the “wrong side”–not simply a handful.

One thing is certain.  We’ll all know the answer to the October crash question soon enough.

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The 1929 Stock Market Crash vs the Current BAM Model Prediction

The 1929 market crash was key in building the BAM Model but what’s it telling us about today’s stock market?

We depend 100% on our proprietary BAM model but we also try to keep our head up with regard to other interesting ideas.  After all, our model makes some of the most outrageous predictions from time to time–like telling us that crude oil would crash from 147 dollars to 36 dollars over a 12-18 months period back in 2008.

Well…here we are again. 

We’re standing out on a limb here with our call for a 50% crash in the stock market over the coming 2-5 months and although we could have held that forecast to ourselves, we’d rather walk the talk by putting ourselves and our money on the line here.

These are interesting times and although I’d love to be bullish and I’d love to be the guy bringing great news to the table, the model is the most bearish I have ever seen it.  This includes the readings at the all-time high in 2007 and it also includes the 2008 pre-crash readings we were seeing.

I’ll leave the fundamentals up to those who follow that discipline, but the BAM Model, as we saw so many times during 2007 and 2008, is predicting something that most seem unprepared for– and we’re going to follow its predictions.

-Bearish stocks
-Bullish Bonds
-Bearish Crude Oil
-Bullish USD
-Bearish Gold

Disclosure: we have current positions reflecting all of these predictions

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