• What is it that makes people “invest“ in equities? 
• How are the investments people make affected by news events​?
• What is the difference between an investor and a trader?
• What role does one’s individual psychological experience play in investment decisions?
• Are the emotions of Fear and Greed important to your investment decisions?

​People invest in equities for a variety of reasons. Capital appreciation, income, inflation protection–all are valid reasons to invest, but in my opinion the primary reason people who can afford to invest do so is because they are programmed to believe that this is a proper use of their resources. 

News events can cause people to react on different levels, but changing investment goals isn’t something that changes immediately for the retail investor. Investors don’t react to events, but rather  to longer term trends. The difference between a trader and an investor can best be explained as one where a trader is willing to accept the risk of spotting the beginning of a trend change, as opposed to one who is willing to initiate or follow trends. The Venture Capitalist is an investor whose risk taking is based on trend creation. The worker with a passive 401K has his basic investing career set up for him via corporate guidance. There are multitudes of intermediate versions of the above criteria. Each one of them helps satisfy our primal emotions of Fear and Greed. 

It’s my opinion is that we develop our individual standards for investing or trading based on our personal realities. There are no two people who share any one path. Shakespeare looked at the difference between Nature and Nurture and aptly named his work “The Tempest”. A Prince acts like a Prince when abandoned on an island, where he meets a Princess who is still a Princess even though she herds sheep on that same island. We are all affected by events based on our personal history.

There are no two events that are exactly alike. While it may be true that “Those who can’t remember the past are doomed to repeat it,” the past is not a known quantity. For the most part, history is written by the victors. Their vision of the past is filtered by the results of time between Then and Now. You can rationalize any headline depending on your personal biases.

Putting this in context of the market’s reaction to news, the past may give us a good idea as to the meaning of an event, but whose meaning is it? As Ben Graham pointed out,  “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” For example, when there is trouble in the Mideast and many fear oil inflation, others see–should their view of history be confirmed–a conflict that is closer to being resolved. One person’s fear may be another’s vision of a better future. 
As Terry Laundry wrote in a 1997 paper on T-Theory

It takes a special state of mind to “sign up” for a short boat trip, in a flimsy landing craft, to a beach completely controlled by hordes who have anticipated your arrival and have set up every imaginable way to do you in. Buying into major market opportunities presents a similarly discouraging picture. You may have good reason to anticipate profits, but if a great opportunity does indeed exist, nearly everyone will be against you, including your friends, and the predominant opinion expressed by your peers, including people you respect, will be that you are embarking on a foolhardy enterprise.

There are always going to be inconsistencies between how the market may react to a specific event. It doesn’t mean that news doesn’t influence the market, but we each have our personal biases as to how we interpret events. I could show you charts of how “the market” reacted to different events in accordance or discord to what we would normally expect. If these inconsistencies didn’t exist, there would be no immediate “voting”, and all we would be doing is “weighing”. 

I’m reminded of the mathematician Goedels first theorem of incompleteness. Basically it states that any mathematical system is either incomplete or inconsistent. My personal view of reality is in tune with that concept on philosophical grounds. We are all not the same, and we don’t look at the universe around us in the same manner.

One example of how the market showed different responses to events can be found when one looks at the Great Recession. Why couldn’t we reverse it earlier? Why didn’t the market react earlier? Perhaps it was because the attempts missed the mark, and no one saw an end in sight.

Some may point out that the market shrugged off the Federal Reserve’s early attempts to stop the damage by lowering interest rates. If one was only considering those attempts as the “reason” the market continued to fall, they would be ignoring other events that occurred in the same time frame, such as the failure of major financial firms, and the fact that no one was going to borrow money at any interest rate. What turned the market around in March 2009? It could have been the exhaustion of sentiment but there was also a fresh attack to halt the recession not by lowering interest rates, but by large scale asset purchases.

If you’re inclined to think that the Fed is evil, or that it is irrelevant, you can dispute this. 

Our charts can give us a pathway for the future, but obviously none of them can dictate Price. Those of us who spend an inordinate amount of time studying these charts do not all have the same biases, and our results will be based on those biases.

The future is non-linear, and so are our lives. Have a great Sunday.

We’ve stayed in a quite tight range since my report of June 7. (Last week, I only offered a short update as I was only armed with my phone.) The June 7 report was posted after a close of 6000 on the SPX. Since then, we’ve remained within 1% of the close on June 6. That followed a May 25 report, where I noted how there might be a resting period after the sharp move in April, but how the T should continue on through June 24. We climbed another 250 points after that before breaking down.

I can report Volume Oscillator (VO) T’s to the best of my ability, but I don’t make the rules. This was clearly a Bullish T, and hopefully some of my readers caught the undercurrent of the titles to my recent posts to hold firm–Opening the Door to Truth, Stumbling Within the Larger T, Sometimes a Cigar is Just a Cigar. This year has had very clearly observed Bullish and Bearish T-Theory outcomes.

Terry Laundry (as I remember his rules), felt that the best returns were to be made from remaining invested through a T’s end–with the best moves slated for the beginning of the T and ending of a T. Personally, I broke with the second rule, based on my additional tools of the “Simple Chart” and the BPSPX. They both turned negative on June 13.

So what happens next? When there is no T, Terry did not expect the market to outperform the 10 year Treasury. And that Treasury is not outperforming the 3 month Treasury, so there is no incentive to put money in long term bonds (as will be discussed below).

The above chart shows us the potential for a new T to begin next month, but it’s much too early to confirm that. We would need to see a lower low in the VO and the McOsci–preferably below -100 on each. The VO would then have to rise above 32 at a minimum to create the next period of strength.

Moving to TLT, the following charts show TLT:

These are not “pretty” charts. The chart on the left represents TLT’s price irrespective of dividend adjustments, and it hasn’t been able to move above its Optimum Moving Average. That’s a negative. At the same time, the chart on the right shows TLT’s price with what I consider to be trendline resistance.

There is still no fear in the bond market. The following chart shows the annualized return of major bond ETFs for the last year. The clear winner is still High Yield. That should always be the case, but perhaps it’s a little sideways right now, as volatility should show more damage to junk bonds at this point, in my opinion.

Have a good week.

While the Volume Oscillator T will continue through June 24, I advised those who are members of ellottwavetrader.net that I was closing my position when the market rebounded Friday to 6013, before it collapsed into the close.

As I pointed out last week, my personal indicators suggested that there was a possibility that the T could end June 17. Since I’ve captured most of the advance since April 8, this wasn’t a difficult decision. I’m traveling right now and not able to create a full post.

Doom sells papers. But sometimes things are just what they appear to be. In the present case, we are just on a roll that will eventually end, but using the existing rules of T-Theory as I understand them, we are in a bullish Volume Oscillator (VO) T that will last until June 24.

Our T’s this year have been very clear on direction. A Bear T ends with a rally at its end, followed by a collapse. That is what occurred , and it was then followed by the present Bull T which doesn’t need to collapse at its end–it merely ends the defined period of “extra” strength, after which we would expect equities to produce a return not above that of the ten year Treasury.**

The VO and McOsci have recaptured positive territory after making their expected returns to the zero line. Following the trading signals I’ve mentioned since on April 8 on elliottwavetrader.net, we’re up about 1000 points. The April 17 post (after a move off the lows of about 300 points) suggested an end to the rally. That was wrong. After missing the next 250 points, I confirmed the new T (on April 27) which we are following now. We had a Price T (in May) that I suggested would end around May 16, allowing us to capture some of that missed advance, as the market dropped 200 points. This offered a re-entry, or at least a hedging of positions.

While I still expect Price to climb through June 24, the bulk of this move is hitting what I consider a strong range of Price resistance. Friday’s high was just a point or two away from the lower part of a resistance zone I’ve been suggesting since January:

But while I’m on alert for a pullback, there’s very little technical confirmation of a change of direction at this time. BPSPX and the “Simple Chart” that I have used for years are not changing direction. Sometimes things are just what they appear.

There is a chance that June 17 can evolve into an early ending of strength, but it hasn’t developed into a reliable date at this time.

Counter to my thoughts on long term rates, TLT has advanced lately, but was stopped at the middle daily Keltner band:

It needs to break above 87 to create traction.

**Coincidentally, I am seeing a critical event developing in the Ten Year Treasury rates just around the time the Equity T is scheduled to end:

That last week of June should be “interesting.”

In last weekend’s update, I reviewed an early end to the Price T (which was due to end May 23) within the context of the larger Bullish Volume Oscillator T (that exists until June 24). I discussed my expectation for that early end to the Price T, based on technicals.

We normally expect a return to the Volume Oscillator zero line on the right hand side of the T to occur much earlier than occurred in this instance. I believe that the Complex Bull Structure (shown with an orange circle) delayed that return to zero, but it has finally taken place.

Interesting on its own is the fact that this return to the zero line happened when the red line denoting the lower peaks in the VO crossed the zero line. (That is normally a point at which I expect the formation of a new T.) Those who have been following my posts here (April 18) and on elliottwavetrader.net may remember that my initial thought was that I expected weakness to last until now–the middle of May. That was based on where this red line was due to cross the zero line. While that premise was incorrect based on how the VO T developed, the Price T did end (for all practical purposes) at that Time.

It would be extremely difficult for this VO T to become a Bear T. To do that, the VO would have to break down below -176, and the McOsci would have to move below -98. This is not my base case. We are traveling within the lower half of the hourly Keltner Bands:

This may be considered as a resting period from the sharp move up in April, as we are nearing support in RSI. MACD appears to be ready to either cross positively, or just kiss, and continue to move down.

On the other hand, the Daily T Companion chart shown above shows MACD approaching a critical crossover or kissing point. As I mentioned in a post on elliottwavetrader.net, the relative height of the MACD is immaterial. MACD is a momentum indicator, and until the fast line crosses the slower red line, MACD is showing a positive trend. I also pointed out that because of its incredibly quick ascent, it wouldn’t take much to create a negative MACD–it’s like a roller coaster at its peak. Support here is 5688, as shown by the middle line inside the Keltner bands. Price needs to continue to close above this line to support the VO T.

Outside of the standard T-Theory view, the “Simple” chart has turned negative in the intermediate term on both Breadth and Volume. That is concerning. The BPSPX (Bullish Percentage SPX) chart has turned down, but it is still above the upper Keltner Band. Until it crosses below from above that upper band, it is a positive. It is also reading 69%, and any reading above 50 represents a positive outlook. I will also point out that the A/D line has passed below the 20 EMA, and needs to hold the 50 EMA:

TLT moved down about 2% this week. While it did bounce off the lower Keltner band (now at 83.36), I’m not looking for a sharp reversal at this time (I use the green background to denote this chart doesn’t include dividends):

The high on $TYX this week was 5.113%, but it closed at 5.031%–up from last week’s 4.899%. We have an administration whose answer to Moody’s downgrade of US Treasury Bonds was “Who Cares?” Evidently the bond market did care.

I would like to apologize for a typo in last week’s report. It should have read as follows:

At this point (versus 2011), long term rates as visualized with TLT have not been “static”. They are pointing HIGHER.

(Please note this was corrected online from lower—5/19).

I’m not planning weekly posts, but might do so if conditions warrant.