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Best / Worst: Next?
Brazil (EWZ) vs Financial Sector (XLF)
Total Gain +913% vs -18%
and Benchmark Indexes
Weekly--Hypothetical--Worldwide ETFs Portfolio
Six years June 21, 2002--June 27, 2008
See Comments below
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26f
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Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the center cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
. . .
And what rough beast, its hour come round at last,
Slouches . . . to be born?
In the lines above, Yeats asks a question of the future, does not know the answer. Nor do I, nor does any man. If women know, they keep silence.
You will find no forecasts here, nor elsewhere on the site. Predictions are entertaining, nevertheless in my view, useless for managing money. Economics is not called the 'dismal science' for nothing.
But the chart is packed with valid information that will be of use in the future. It tells you that three out of four of its price curves are trending down. Each plays a distinct, unique, and giant role in what is happening in the market today.
The middle two curves show the largest, most liquid, widely traded indexes of the stock market in the world. The top curve is the best performing emerging-markets fund on the planet, bar none. The bottom curve defines the key sector without which no other sector can function. It is crucial.
The most striking feature of the chart, other than the astounding positive performance of Brazil, is the shocking speed, duration, and increasing velocity of decline of XLF, the Financial Sector without which no other sector can function. But that's not the worst of it. Note how the divergence gap to the downside between it and the SP500 continues to widen and accelerate.
One of three things can happen now. This is not a forecast. It is a self-evident description of certain outcome. 1] The widening can continue. 2] The gap will close by XLF rising toward S&P. 3] The gap will close by S&P accelerating downward faster that XLF continues to decline. Neither Yeats, nor I, nor any man knows what will happen.
If the last occurs, it will be more painful because the S&P is so monumental and more widely distributed and held than the others.
Fortunately, the trading system upon which this study is based, has built-in timing and selection mechanisms designed to get you out of everthing except cash or short sales from time to time.
Of what practical use is the chart above? The key lies in the rankings. The Financial Sector is so important to everything else, its rank must show a clear rising and breakout above the previous low bumps in March this year and in June of last year. When that happens it will be time to analyze whether a new bull market has started or not.
Well, yes, but what of the Black Swan? As you probably know, that's the symbol popularized by Nassim Taleb* to define a totally unexpected event that wreaks disaster on you or kills your portfolio. No system can anticipate the B.S. since it is, by definition, unexpected. There are steps that can be taken to ameliorate its arrival. That discussion is outside the scope of today's study.
The Swan flew over Wall Street on June 1, 2007, when XLF peaked in price. Nobody noticed--until Bear Stearns got carpet bombed the weekend of March 14-15th this year. Then it was indeed evident there had been a black-swan occurrence. The problem today is, Can there be another?
By definition, we do not know. if there is a run of insolvencies among counterparties anywhere, that will, in retrospect, amply qualify. (The results and handling of those circumstances are also beyond the scope of today's study.) They may never happen. In the meantime, the trading system is at hand, and there are ways to hedge the Swan.
Note. The opening verses are from the superbly apt and beautiful poem, The Second Coming by W.B Yeats.
* Nassim Taleb,
Fooled by Randomness, 2004
Posted
7/6/2008 5:20 p.m. EDT
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