Intro and Concepts
Business, beneath the products themselves, is the process of giving and receiving trust. The easier it is for people to trust in the system the more business expands. When people turn cautious then business contracts.
Sentiment precedes the economy, not the other way around. Sentiment becomes contagious with markets being key communication vehicles.
Most men and women are logical when external events are not impinging upon their emotions. However, the world of the markets is a den of uncertainty and market events shock people on a daily basis. Interpretation of a never-ending stream of economic data is often a knife-edge, with bullish or bearish decisions made on the margin. The instinctual brain is involved in this intellectual exercise and provides an emotional "conclusion" to the process. The same person looking at the same data on different days will many times come to two different conclusions, if only in nuance.
While much analysis is expended searching for opportunities, the action of the markets themselves is often the final determinant of the active impulse. It is my conviction that an individual market behaves in such a manner as to condition and draw in investors and speculators who have performed even minimal analysis of its prospects and historical performance. Repetitive behavior conditions market participants to expect outcomes. This is the foundation of technical analysis, from the extension of trendlines to overbought/oversold conditions, to breakouts from congestion, the markets create their own expectations. This behavior is Pavlovian and has it's roots in the instinctual brain.
Underlying both the reality of the world of commerce and the world of the markets is another, less perceived reality, which affects perceptions of groups of people focusing on the same object. In this world there are environmental variables that alter perceptions. The bullish or bearish cast that I project from my subconscious upon a market is not entirely from numerical analysis. The willingness of a person to give his trust to a salesperson on one day and not on another is part of the same emotional matrix. Business and the markets fluctuate based not only upon events but by people's changing perceptions of their environment and by the sharing of the emotional equivalent by conversation or the media. The instinctual brain is conditioned by its environment and 1 million years of evolution to respond one way or the other to the greed/fear (fight/flight) duality inherent in strong market movement. A rally when the environmental conditions are correct (I1 is rising, especially rising to an level above 5.5) will produce a fear of losing out (greed). Precipitous buying turns an ordinary rally into a strong movement which cascades and draws other market participants into its wake. The converse is equally true in that when I1 is falling, especially falling to a low level below 2, fear will cascade an ordinary decline into a strong movement.
Animal Spirit Forecasts produces a detailed 2-month forecast of market psychology. This forecast includes turn dates and indicates the extent of each subsequent move. Equity markets are the primary focus, although gold, silver, currencies, and oil are also provided as conditions warrant. Longer-term perspectives are also made available and are derived from the same data source as the 2-month forecasts.
The single most important tool is designated as I1 and has been correlated going back to 1965. I1 is the end product of 20 years of research into human instinctual behavior. I1 reflects the environmental factors that affect the instinctual brain. The correlation between instinct and behavior is clear in the history of the I1.
I1 is a composite of the natural world (ie. the individual sources are derived from natural phenomenon outside of the financial markets). There are 44 data series that are incorporated into I1. Longer-term forecasts will be made using extrapolations of the individual series and can anticipate momentum and turn dates within a week beyond a 5 month window.
I am posting I1 for several reasons:
1) I1 is unique in the financial world. I have tried to improve upon it but all that I arrive at are inferior. I will continue to search for an even better expression.
2) It is my belief that the world is going into a period of financial turbulence (per the longer-term forecast below). The volatility will be enormous, greater than any in the experience of traders still alive.
3) I have compared my market performance with other blogs and newsletters and have found it superior. Since March, 2010 my model portfolio is up 60% with tiny exposure. Typically I hold 80% cash.
I1 longer-term forecast is for March 2010 through the 1st half 2015 to be a bear market. I1 from 5/2010 through 5/2015 will contain only 7.25 months with I1>4, averaging 1.43 months per year. I1=4 is considered a balance point and historically the market averages 7 months per year >4.
By comparison, the bear market decade of 1966 through 1974 had a total of 13.5 months with I1 values > 4, averaging 1.5 months/year. The most recent bear market from 6/2007 through 3/2009 contained 5.25 months with I1<4, averaging 3 months per year.
So I1 is calling for a prolonged bear market with sub-par I1 values through 4/2015.
The I1 will allow for timely exits from primary trend positions and positioning for the savage counter-trend reactions that will occur. I will publish the turn dates for your decision support looking forward over the next 2 months. Of course, for the forecasts to be useful you must have confidence in their efficacy. To that end I am providing the following I1 historical charts dating back to 1970 and the trading rules.
The rules for I1 are simple:
1) Buy signal rules:
a) As long as next I1 peak > 5.5 buy the low or 0 and exit at peak or when I1 returns back to 9.0, whichever is less. Initial position may be up to 6% of capital. Position can be added to when .56% upside 30-minute close SP futures 30-minute, 90-unit +.5% and again when 1.35% upside break of 5-min, 380 unit M/A.
b) If low<0 then buy half the distance from low to 0.
c) Use peaks as opportunity to take profits. Ignore selling a peak if the subsequent trough > 4.8 (stay long).
2) Shorting signal rules:
a) As long as next I1 trough < 3.25 sell the peak, exit low prior to rally above +3. If the peak is >+7 then wait and sell the peak prior to a decline below +7 as well as the crossover of +7.
Initial position may be up to 6% of capital. Position can be added to when .56% downside 30-minute close SP futures 30-minute, 90-unit -.5% and again when 1.35% downside break of 5-min, 380 unit M/A.
b) Exit low prior to rally above +3. If low<0 then cover at half distance from low to 0
c) Use troughs as opportunity to take profits. Ignore a trough if the subsequent peak < 0 (stay short).
3) In the absence of buy and sell signals the tactical rules are:
a) I1 uptrend, OK to buy up to 6% at I1 bottom, but must wait for .56% upside break of 15-min, 54-unit M/A before buying more. Cannot short until 1.35% downside break of 5-min, 380 unit M/A.
b) I1 downtrend, OK to short up to at I1 top, but must wait for .56% downside break of 15-min, 54-unit M/A before shorting more. Cannot go long until 1.35% upside break of 5-min, 380-unit M/A.
4) For longer-term traders:
a) stay long until final peak or until it falls below 9.0, whichever is lower.
b) stay short as long as next peak <3.0.
c) ignore I1 moves lasting less than 1 week or with a swing < .5.
If an I1 turn date is preceded or followed by a day with a value within .35 of the extreme it is possible for the turn to occur on either date but favoring the extreme date. On the non-extreme date use the 5-minute, 380-unit EMA to signal that the turn has indeed occurred then.
I use I1 to know when to sell the rallies and buy the dips. It also provides unequivocal guidance to take profits within larger moves without "missing out" on the move's continuation. Within this context I use moving averages and Elliott wave to time entry and exits. I find that I1 helps clarify Elliott wave counts of Minor degree and above. By knowing the upcoming daily and weekly trend the competing counts are eliminated more readily with different ordering of probabilities than would occur in a vacuum.
The images presented on this page are historical charts of I1 dating back to 1965. It is recommended that you print them and "play computer" using the above rule sets. The blue line is I1 and the black is S&P500. The correlation with market prices will be obvious upon applying the rules. People can only trade with confidence and the above process will reinforce the rule set as well as help instill the confidence to rely on future results. I realize that only a fraction of you will perform this exercise; however I1 is a unique data source and worthy of the effort. At the end you will not use it as just another tool in the box of 50, but as your primary light in a world of uncertainty. Your tools should revolve around it, not the other way around.
You can also download the I1 history (from 19870101) using this link:
I enter into small positions, even when I believe larger trends exist, until my profit allows me to increase position size without increasing risk beyond my initial tolerance. For instance, my initial maximum risk is less than 1% of capital. If a loss on any position reaches .5% then I shift stop-loss to just beyond the nearest support/resistance moving average that limits the risk to no more than .2% additional loss. Entering positions in ETFs is almost always 2% unless the trend is already in force and I've achieved and closed out profits in that direction already. I tolerate initial entry once trend has been established to 6% on any ETF until profit builds and I can expand.
If you inspect the posted Trade History you will find 3 spreadsheets, the second is entitled Trade History Profitability. This provides profitability of every trade that I have undertaken since this blog was created. Column J, Profit, is the net profit/loss of each trade from initial entry to ramp-up to close-out. The next Column K, is a cumulative account balance, assuming $100,000 starting capital. Looking at the Profit column any losses incurred are well under 1% of the running account balance and only 2 trades registered anywhere near .8%.
I will post daily by 7:30 EDT and as appropriate throughout the day with brief comments relating to current I1 and stop/entry points for short-term and intermediate-term trades.
The timestamps on the posts are PDT. The times mentioned within the posts are EDT which is 3 hours later.
The posts many times will include Elliott wave counts. Elliott Wave is described in detail in Bob Prechters's book "Elliott Wave Principle". For information/training/books on Elliott wave see Elliott Wave International.
I will do my best to respond to posts on this blog and email to email@example.com in a timely manner.