Once again, the BAM Model has rewarded us for having the courage to follow a fundamentally ‘baseless’ trading idea.

What I’m referring to is the wheat market and our purchase of wheat during the recent Twitter Campaign.

The model’s September prediction of a “melt-up” in the wheat market was followed by what analysts in a Bloomberg article today called “the biggest October rally in at least 50 years.”

However, for investors bold enough to follow the BAM Model’s prediction (buying into a multi-year low) the move had a more direct impact–one they saw reflected in their accounts.  Case in point is the tweet we received from a Twitter follower on October 21st saying “@Baminvestor per your suggestion, lightened up on Dec wheat today, sold a few contracts for a 950% profit, looking for the dip to re-enter.”

We’re glad the position worked out so well (we still own it ourselves) but our interest in bringing this post to you all is in simply pointing out the unpredictable nature of Mother Nature.

It turns out that the “experts” (the guys bearish wheat prices) were caught off guard when “recent weather patterns delayed planting.”  It was that quote–blaming the largest rally in 50 years on weather–that prompted this posting.

You see, one of the calls that first grabbed the eye of the hedge fund I eventually went to work for was a prediction in the OJ market back in 2004.

It was May of 2004 to be exact and Orange Juice had been in a brutal 13 year bear market from 1991 to 2004.   Adding to the brutality–as well as the certainty–of the decline was the fact that the nation was caught in the grips of a diet mania known as the “Atkins Diet.”  Some of you may recall that “low-carb” fad and, as we all know, orange juice is about as high in carbs as any drink out there.  Anyway, long story short, people did as they always tend to do, they moved heavily into an investment position at exactly the wrong time–shorting orange juice aggressively right into May of 2004.

The BAM Model on the other hand, was screaming bullish and alerting us to an immediate upside price reversal that would–if the market tracked the model–lead to an EPIC melt-up.

All of my friends thought I was crazy and they ignored the model’s call, choosing instead to follow the adage “the trend is your friend.”

Guess what happened next?

Four devastatingly strong hurricanes ripped directly through the orange groves of Florida.  In fact, Polk county–ranked first in citrus production–was the only county in the state to feel the eyewall of three of the four major hurricanes–Charley, Frances, and Jeanne.

What followed next was a 220% move in OJ that not only caught the eye of that hedge fund I referred to, but proved to me without a doubt that cycles in human behavior tend to peak opposite the cycles of mother nature.

It also taught me to never question the predictive nature of the BAM Model–no matter how seemingly outrageous those predictions might seem.

Click HERE for the full Bloomberg article.

JG Savoldi

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.

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 the NYSE 10 Week moving average is rising.

• That the McClellan Oscillator is negative on that same day.

• 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

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.

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.