To close out our two-week Fall Outlook series, we were glad to get time with Jeffrey Hirsch, editor-in-chief of the popular Stock Trader’s Almanac. Since 1966, the Almanac has become the definitive guide to market cycles and long-term patterns in the stock market. You’ll find it on the shelf of nearly every investor and trader, and for good reason: Its predictions, and the way Jeff’s team explain them, are usually right and presented in a way anyone can understand.
As you know, we prefer contributors who are also working traders and professionals who walk their talk. We have a bias against the “using my system, you would have bought here and sold here” sort of Monday-morning quarterbacking so common in financial news. I was talking yesterday to a broker and friend of mine, a 30-year veteran, who puts out his trading recommendations in real time and makes both the winners and losers visible to the public. Needless to say, such honesty also leads to his having one of the best performing trading methods of the past year. There are people making two- and three-digit returns in the market. Many of them are our friends and contributors.
The portfolio based on the Almanac is an example of this combination of transparency and exceptional performance. It is up over 300% since 2001, compared to the 31% performance of the S&P. It is real-time proof (to subscribers) that buy-and-hold investing doesn’t have to turn into buy-and-hold-and-worry-and-pray when the markets do poorly. If anyone has been qualified to write a book titled Super Boom: Why the Dow Will Hit 38,820 and How You Can Profit from It (Wiley, 2011), Jeffrey is. He is comfortable recommending the short side and sets an example of successfully integrating fundamental and technical analysis. In his latest book on stock market cycles, he deals with long-term patterns in the markets.
We asked him for a long-term view on the rest of 2013.
Some are predicting a major drop in the S&P and stocks in fall 2013, maybe as far as 1500. What do you think?
I think 1400 is a real possibility. This would not even be a 20% decline from the S&P 500 August 2 closing high. No major bear. George Lindsay’s Three Peaks and a Domed House Top (3PDH ) Pattern model suggests a return to S&P 1400 (point 14 is 1400 in late December 2012). QE has definitely inflated stocks and it appears tapering will happen and likely deflate stocks. Interest rates and geopolitics are major wildcards with substantial potential to damage confidence. Higher energy prices and a showdown in D.C. over the budget and debt ceiling, plus seasonal weakness fueled by end of Q3 portfolio restructuring and Octoberphobia, create a recipe for further declines.
What is your outlook for other markets you follow, trade, and teach about, such as bonds, metals, grains, and individual stocks or sectors? How could a broad drop in the major indices affect those markets? Will interest rates and gold prices rise in a “flight to safety,” for example?
My outlook remains cautious. While some bounce back is likely between now and mid-September due to a combination of some rather oversold short term conditions and a usual bullish bias in the early part of September, downside risk has increased. On the technical front, the A/D line continues to deteriorate along with other indications. Because of Fed intervention, correlations are high across asset classes. An S&P 500 selloff is highly likely to impact other asset classes negatively. Bonds and gold may see a bid in a flight to safety scenario as well as oil, but I expect weakness to be broad and far-reaching.
How are you advising your students and clients (and your followers in the MrTopStep IM-Pro chat room) on how to respond to a major drop in the S&P and its effects? Hedge, use options, stay out? Or are you skeptical that there will even be a major drop?
I would be a buyer of inverse index ETFs as the market breaks down. ProShares UltraShort S&P 500 (SDS), ProShares UltraShort QQQ (QID) and Direxion Small Cap Bear 3x (TZA) are my favorites to trade during periods of elevated market volatility. These work best over shorter duration. Slightly out-of-the-money put options expiring in October or November could also prove profitable over a longer time frame. Ranger Equity Bear ETF (HDGE), which shorts equities, is also a good downside protection play.
Is there a piece of wisdom you draw on when the markets get especially crazy?
There are so many bits of wisdom in the Almanac, but when the market starts to fall apart I always remember this one: “He who panics first panics best.” One of the hardest parts of trading is letting go of losing positions. If you cut and run early, there is no major loss to make up for. If you were right, then you were right. If it turns out you were wrong, but you cut your losses early and small, you still have the capital to trade again. The full quote as it appears in the Almanac is: “Today’s Ponzi-style acute fragility and speculative dynamics dictate that he who panics first panics best.” — Doug Noland (Prudent Bear Funds, Credit Bubble Bulletin, 10/26/07)
What has been the biggest surprise this year and are you expecting more this fall?
Biggest surprise: Stamina of this bull. Although I forecasted fractional new all-time highs in my 2013 Annual Forecast back in December 2012, I did not expect the Fed’s bond buying program would push the market all the way to 1700. Housing and labor markets have been improving, but are still quite tepid within a historical context. Additionally, the sequester has not really had a significant impact on the market. This fall I suspect the Bull’s stamina to remain weaker, then to regain some strength toward year end and into Q1 2014, before succumbing to any major bear market. Save a geopolitical hotspot eruption (like Syria) or the Fed pulls the punch bowl cold turkey or DC political battles get nasty or some other black swan event, I do not expect Ursa Major until next year.