Issue 8

Clinton/Kennedy: Amazing Stock Market Similarities
reprinted with permission of The Wall Street Journal

Flip on your radio. Do you hear "Moon River"? Check the marquee at your local movie theater. Is "West Side Story" playing?

Well, it's not 1961 in the real world, but in the stock market it's late 1961 revisited, says Ned Davis.

Are Striking Similarities a Great Opportunity for Huge Profits on the Short Side during 1994?

Mr. Davis, a Nokomis, FL, stock-market researcher who is respected for his technical and historical insights, sees striking similarities between the stock market's behavior so far under Bill Clinton.

Chart in Print Copy

Similarities Began Early

The similarities began during the election campaigns of 1960 and 1992. As it looked increasingly likely that a young Democrat would replace an older Republican, stocks dipped. Once Mr. Kennedy and Mr. Clinton took the reins, stocks reversed and began to climb.

During Mr. Kennedy's term, stocks topped out in December 1961, drifted sideways for a few months, and began to tumble in April 1962. A nasty bear market dragged the Dow Jones Average down 27%.

Is history about to repeat itself? Mr. Davis thinks so. He points to a flock of similarities between the market climate then and now.

More Similarities

In 1961 stocks were selling for over 20 times the prior 4-quarters' earnings. The same is true today.

The high stock prices, in 1961 as today, had pushed the average dividend yield on stocks down to well under 3%, a traditional warning zone. By almost any measure, both 1961 and 1993 are among the most expensive markets in history. And in both cases, the high valuations had persisted for an unusually long time - a year or more.

"People who are saying we're safe now (from a market decline) are pointing to low interest rates," says Mr. Davis. But, he adds, "interest rates were much lower then," and that didn't prevent the scorching 1962 bear market.

In November 1961 inflation was running at less than 1% (vs. perhaps 3% today), the interest rate on Treasury bills was about 2.5% (vs. just over 3% today) and long-term Treasury bonds yielded about 4% (vs. about 6% today).

Foreign Affairs Dominate Over The Economy

Both Mr. Kennedy and Mr. Clinton came into office intending to concentrate on domestic affairs and get the economy moving again. Mr. Davis says. But both had to devote considerable time to foreign crises. Mr. Kennedy had to deal with the Berlin wall and the failed Bay of Pigs invasion in Cuba. Mr. Clinton has wrestled with problems in the former Yugoslavia, Somalia and Haiti.

Mixed Technical Indicators

The stock market today, as in fall of 1961, is characterized by mixed technical indicators and "a lot of churning," Mr. Davis says. Technology stocks were leaders in both markets, and in each case the pipeline was gushing with newly issued stocks.


Gann Techniques Trading Course - John Brown

I suspect there are a great many traders who feel that some of Gann's techniques have something to offer for chart analysis.

Learn How To Use Gann in Actual Trading - Traders then wonder exactly how to apply these methods in a way to actually profit in actual trading situations. I would recommend Dave Green's Gann Techniques Trading Course as a good source of practical applications of Gann tools.

Principals of Gann for Reasonable Price - For a very reasonable price of $97.00, this spiral-bound book (Angle Tool included) offers many chart examples which illustrate entry and exit strategies based on principals from Gann's methodology.

Useful in Real Trading Situations - This course offers for the trader a concrete and practical approach to using Gann's tools that might be far more useful in real trading situations than some of the more esoteric (and far more expensive) applications which are offered for sale.

Editors Note: Gann Techniques Trading Course can be purchased from Webtrading - Click-Here to order


A Successful Momentum Based Method I Use for S&P
Gerry Stonehouse

I developed this mechanical approach to using a momentum indicator as a way to get on board a market that was starting to accelerate its trend. I then programmed this using Snap by CompuTrac. Charts in Print Copy


Surprising Data Differences - Randy Stuckey

Here is another bar chart which displays the surprising difference in continuous type data between 3 data sources: CSI, Peter Aan, and Trend Index. Chart in Print Copy


Profitable Performance of Swing Catcher System
Martin Thomassen from Germany

Here is a copy of the real-time performance of my Swing Catcher Trading System, as maintained on a spreadsheet, trading the recommended 35 commodities. Out of those 35 markets we are always following the best 18 commodities, based on the Trend Ranking module, which is built into the trading system and accessed from the main menu.

Successfully Trading Only the Recommended Markets

We are only trading the commodities which are ranked in the top 18 on the Trend Ranking list, and in Conservative Trading Mode. Note: 'Kons' is German for Conservative.

A copy of my detailed spreadsheet which has all my real-time Swing Catcher trades follows: (Please excuse the fact that the copy is not very clear). Chart in Print Copy


My Experiences with Various Trading Systems - Dr. Satish Arora

Larry Williams turned $10,000 into $1,000,000 but he could not repeat it again. The next year his performance was unmentionable.

Charles Chen made 1300% in 1989. After that year he does not even talk about his performance anymore.

Good Records Before The Sale but Big Losses and Negative Figures After The Sale - Mike Chalek made hundreds of thousands of dollars by selling his Dual Thrust and Talon Trading Systems. They had very good track records before the systems were sold, but big losses and negative figures after the sale of his systems.

Data Dot System worked well before its sale to the general public. After the sale of the system it did not work anymore.

Essex Trading Co sold many different systems, and they may have made many millions of dollars selling systems but none of them have worked after their release.

The Get System by Tom Joseph did not make money after it was sold.

About Profit Taker System ... the developers are the ones who are taking (making) all the profit by selling the system year after year.

Volatility Breakout System located in Colorado, worked well before it was sold. After the sale nothing worked and they made lots of money and then went out of business.

Don't waste your money on Taurus System by Michael Chisholm. So far it has only made money in the hypothetical track record. Red Line System did not work.

Money Was Made by Switching From System Sales to Toolbox Type of Programs - Bill Cruz from Omega Research spent 10 years working on various trading systems for Pork Bellies, Live Cattle. S&P, TBonds, only to find out they didn't work after the sale, so he stopped selling them. He then developed System Writer and Trade Station and he has made hundreds of thousands of dollars selling them, but not a penny from actually trading the markets.

George Angell sold many different systems for hundreds of thousands of dollars. None of those systems are making money now.

None of the many books sold by Windsor Books has made any money for the book buyers.

Jeff Rickerson made money selling his Market Optimizer System, not trading it.

Is Gann Methodology Too Subjective? Some 'Gann people' have given up trying to trade Gann's methods because they found it too subjective.

In my opinion if a system has a good track record prior to being sold to the general public, after the sale it then falls apart.

Keep on subscribing to Commodity Traders Club News if you want to make money.


Random Thoughts on Trading and System Design
Part 1 - Adam White

When designing a trading system or trading methodology, some curve-fitting is unavoidable.

Nearly every trader has had the frustrating experience of seeing a "can't lose" trading method fall apart when it is applied in real time.

Carefully Designed & Tested System Should Bring Success - The system can be carefully designed with the best of intentions. It seems to incorporate all the elements of a successful system. It controls risk and lets profits run. In testing it shows tremendous profits in nearly every market you intend to trade.

You have back tested, forward tested, and analyzed statistical measures that are supposed to ensure robustness. You have even paper traded for a while, adhering strictly to your trading rules, and the paper trading has been reasonably profitable, although not up to the standards of your test results.

Did Market Conditions Make It Less Successful? You can rationalize this by saying the markets have been tough lately and difficult to trade. You make money for a short time but then, incredibly, you experience a loss that exceeds any of the losses that your system saw in five years of testing and six months of paper trading. The drawdown continues, and eventually you stop trading the system.

This often-repeated scenario is almost certainly the most common trading experience among system traders. Ironically, the introduction of personal computers and sophisticated analytical software has not contributed to the solution of the problem but has probably made it more likely to occur.

With Advantage of Hindsight, Markets Appear More Orderly Than They Are - It is extremely easy to sit down in front of a screen and devise a trading system that seems, in hindsight at least, to be unbeatable. Most oscillators, for instance, look like they call market bottoms and tops pretty well. Most trend-following indicators hug major trends very nicely, With the advantage of our hindsight, markets usually appear to be much more orderly than they are, so buying dips in an uptrend, for example, seems to be an excellent strategy.

Effective Looking But Overly Curve-Fitted - Any trader with a PC, some data and some analytical software can devise an effective looking trading system with very little effort. The problem is that, more likely than not, the system will be overly curve-fitted and useless for real-time trading.

Defining curve-fitting isn't as easy as it may seem. It's a bit like art appreciation; it's hard to describe what you like, but you know it when you see it. In fact we curve-fit lots of data in our non-trading endeavors and think nothing of it. After all, if you stop and think about it, the line between experience and curve-fitting is a very fine one.

Examples of Curve-Fitting - A couple of examples may help define curve-fitting. Let's say you're a creative sort of person and you devise five new and different technical indicators that you hope will generate profitable trading signals.

You program them carefully, and display them one at a time against several favorite markets. Much to your chagrin, you find that four of the indicators seem to have no relationship to the markets at all. The fifth, however, follows prices very nicely and often seems to anticipate major moves. You decide to use the fifth indicator and discard the others.

Curve-Fitting Without Realizing It - Believe it or not, by choosing the study that best agrees with your perception of what a technical indicator should do, you have curve-fitted.

You might reply that this is the method by which virtually every trading system, whether mechanical or discretionary, is invented and you would be correct. After all, there are trading systems that work, and they have been put together by observation, not by luck or guesswork.

Some Curve-Fitting is Appropriate - Some fitting of a trading method to price movement is natural and beneficial. To the extent that we do this and still retain flexibility and the ability to handle future events, curve-fitting is entirely appropriate.

There is a vague line that is all too easily stepped over, however, and to cross that boundary brings certain failure rather than success. We find it difficult to come up with an exact definition and perhaps the line is so fine that there isn't a clear definition of where experience and common sense leave off and unproductive optimization sets in.

Two Mice and a Maze Analogy - Here is an analogy that may help to explain the phenomenon. Construct a maze that is relatively intricate and that requires a fair amount of twisting and turning to get to the center. Train two mice to navigate the maze.

The first mouse learns that if it turns left twice, then takes five steps, then turns right three times, takes two steps, turns left once, and then turns right twice it will be at the center of the maze.

The second mouse learns that at every junction it first turns left, and if it bumps into a partition it should turn around and go the opposite way.

The first mouse, once it has learned the pattern, negotiates the maze flawlessly every time. The second mouse is slower, although it eventually arrives at the proper destination.

Contrary to How it Appears, the First Mouse Does Not Have The Advantage - The first mouse seems to have an obvious advantage. It finds its way to the center of the maze with ease, while the second mouse, handicapped by a much simpler navigation system, struggles and makes many wrong turns before finally reaching the goal. The second mouse clearly seems much less capable than the first mouse.

A Similar Maze but A Difference - Now let's build a new maze ... make it similar to the first for a few turns, but different thereafter. The first mouse will proceed confidently for a while, but will soon be hopelessly lost and disoriented, much like some traders we have observed.

The second mouse won't notice the difference between the first maze and the second. The mouse that had previously seemed inferior plods along and treats every twist and turn in the new maze the same simple way. Slowly and inexorably the second mouse will find its way to the center, no matter how the maze is configured.

Rewards Providing the Maze Doesn't Change - The first mouse either performs perfectly or terribly because it has been taught an overly curve-fitted system, while the second mouse has learned a crude system that enables it to get to the center every time.

The first mouse will perform extremely well and will be rewarded as long as any maze the mouse encounters is substantially the same as the original maze that it memorized so capably. The second mouse will be slow but it will eventually be rewarded no matter what changes you make to the maze.

Trade Successfully With Crude Methods - The principles in our analogy hold true when trading systems are applied to the maze of futures prices. If we are going to navigate the markets successfully, we must create relatively crude systems that will work no matter what maze is created by tomorrow's prices.

Make Your Trading Less Complicated - We should be very careful about how we use computers to test and modify trading systems. Changes that merely improve the numbers without adding to the logic of the trading plan should be questioned. Try to find ways to make your trading less complicated and more adaptive to changes in market conditions.

In Futures Trading the Correct Answers to Questions seem Contrary - One of the underlying reasons why it is so easy to fall into inadvertent curve-fitting is that in futures trading the correct answers to even the simplest questions seem counter-intuitive.

New Traders Wrongly Want To Trade Contra-Trend - For example, one of the most basic decisions a trader makes when first conceiving a system is whether to be a counter-trend trader or a trend-follower. Almost all beginning traders, in our experience, opt to be counter-trend traders. They won't buy until prices appear "cheap" to them, and they won't enter a position unless there has been a reaction or some form of correction that allows them to buy on a dip or sell on a rally.

They buy only when there is a bargain to be picked off and sell only after prices have reached an apparent peak. They are constantly looking for signals like key reversals, support and resistance levels, and any other pattern that will allow them to get into the market at a major turning point.

Traders Want To Buy the Exact Bottom and Sell the Exact Top - It is only natural that such a trader gravitates toward counter-trend indicators like stochastics or RSI, and may become a devotee of Elliott wave theory, percentage retracement calculations, and methods that can forecast or identify tops and bottoms. If buying bottoms and selling tops is good, then buying at the exact time the market turns must be even better.

Picking Tops/Bottoms Easier Providing there's an Underlying Structure - It would be much easier to find tops and bottoms if the market had some form of underlying structure or order that made highs and lows predictable.

It seems that trading at tops and bottoms is so impossible using conventional methods that these traders, out of sheer desperation, must eventually fall prey to methods that presume some underlying orderliness to the markets.

Searching For Tops & Bottoms Forecasting Methods - Methods such as Gann angles, Fibonacci ratios, cycles, wave theories, or even such totally absurd approaches as astrology or the "delta phenomenon" offer the only hope of forecasting tops and bottoms on a regular basis.

Take any hare-brained idea and write a book about it or program it into a software package and suddenly it has instant credibility. Desperate top and bottom seekers will flock to it.

The Desire To Pick Bottoms & Tops Has Caused More Failure than Anything Else - After many years of observation, I have come to the conclusion that the natural desire to buy low and sell high is more responsible for failure among futures traders than any other behavior.

Successful Traders Are Trend-Followers - Almost every successful trader we are aware of is a trend-follower. This includes both private traders and professional Commodity Trading Advisors who trade billions of dollars worth of public funds.

Unfortunately, trend-follower is counter-intuitive. At first it seems to make no sense at all. It is the direct opposite of how we have been taught to succeed as shrewd traders.

Inexperienced Traders Think they Could Have Made the Trade Earlier than Trend Followers - Why buy at or near new highs when we obviously should have bought earlier at much better prices? Trend-following methods are usually scorned by less experienced traders who always assume that they somehow could have bought days ago, at the bottom.

The fact is, however, that a market must make new highs and lows continually in order to get anywhere important. When gold went from $200 to over $800 in 1979 it was making new highs all the way. When soybeans broke $5 and went to $12 in the early 70's the same thing was obviously true.

Trend-Following Approach Is Best - We won't go so far as to say that anyone who is successful at counter-trend trading should abandon it, but we firmly believe that the vast majority of traders should concentrate their efforts on the trend-following approach.

Using Too Many Indicators Result in Poorer Results - Another common theme that runs through system design is the search for confirmation of a trading signal. Simply put, this means that a trading signal given by one technical indicator or chart pattern must be confirmed by one or more other indicators in order to be valid.

For example, if a stochastic dips below 20 and then turns up, the trade won't be taken unless an RSI or another oscillator confirms the stochastic signal. This can be taken to absurd ends; we have seen trading systems with as many as thirty elements that all have to fall into line before a trade is taken.

Physiologically You Feel Better With Extra Filters - It is easy to see how that can happen. No one wants to take a loss. It is comforting, after a trading loss, to tinker with your trading system and add another filter or confirmation that, in hindsight, eliminates the loser. Software that emphasizes optimization makes it even easier.

Probably the best way to handle this sort of situation is to avoid redundancies. For example, if you are using one oscillator to signal market exits, it is better to decide exactly how the oscillator should be used and stick to your rules rather than adding several more oscillators to your system and requiring that they confirm one another before you exit.

Additional Rules Detract From System Performance - The same is true of any other type of indicator. Remove any indicator that essentially duplicates the information from any other. Remember the mice and the maze. Every new rule you add that makes your trading look better in hindsight detracts from your system's ability to handle future price aberrations.

One of the areas that is most easily abused during system design is data; specifically, which markets and time periods to test over and which markets to trade in a portfolio.

Some Systems are Designed to Only Work in Specific Markets Using Hindsight - It is a favorite technique of system sellers to design systems to fit specific markets, create a track record based on a complicated system with lots of rules that eliminate losers in hindsight, and market the hypothetical track record giving the impression that the results are reproducible in real time.

This is akin to teaching the first mouse how to navigate one maze, and then selling it as a mouse that can navigate any maze.

. . . part 2 of article appears in next months CTCN.


EDITOR'S COMMENTS

With reference to the interesting article about Clinton vs. Kennedy similarities, in my opinion, the most amazing similarity is the DJIA chart itself. The high correlation of the price swings between the Kennedy and Clinton time periods is truly amazing.

At that time both patterns were in a high area after a long overall up move that had lasted about 14-months.

According to my interpretation of the DJIA charts, right now (Wednesday Dec 29) the stock market is at an extreme high and is in the process of topping out now, as these words are being typed!

If in fact the correlation continues, the market should go down a little between now and late winter. A secondary swing high should come within 3-months, followed by a steady, precipitous and huge drop starting in the Mar/Apr time frame.

Kennedy era DJIA dropped 27% from the mid 700 area in Dec to the mid 500 area by June. If the current DJIA drops 27% from its current level of 3792, it would drop to 2768 by June.

Needless to say some gigantic profits can be made on the short side, if in fact the amazing correlation continues. Can you imagine the profits that can be made by shorting the S&P 500?

If the S&P 500 Index drops 27% from its current level of 470, it would drop to 343. The profit on 127 S&P 500 points would be $63,500 per contract! However, a warning is appropriate here ... there's a strong possibility the correlations could be just a coincidence! Only time will tell for sure.


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