Titan Inv Partners – As ever, the Doomsayers scream RUN after the fire has started…

Well, it was certainly an interesting week last week… From the calm and placid waters as the week dawned, it seems that a switch was flicked on Wednesday and out of nowhere (the catalyst supposedly being poor earnings from some bellwether U.S stocks), volatility picked up and a selling crescendo took place on Thursday in particular with the Dow taking a 300 points plus drubbing (see 10 day chart below).

We have been warning of an imminent correction for quite some time now here at Titan (see HERE & HERE) 

Now they shout FIRE!

As ever, financial pundits and commentators alike, unable to see generally beyond the nose on the end of their faces, are now warning of a continuation to the correction (today’s Sunday Times Business headline being “City warns investors of Autumn sell off”). With the DAX a good proxy for risk (being one of the most volatile of the global markets), it is interesting to note that is actually now down over 8% from the peaks only 4 short weeks ago (see chart below). By any measure that is a decent correction over the timescale in question, and so it is once more testimony indeed to the collective uselesness of these guys, that only now is “FIRE” being yelled by the punditry after it has already ripped through many of the aisles…

What we can see from the chart above however (circled in green) is that the DAX index is now the most oversold it has been for over 2 years. In addition, the deviation from the 37 day ema is at a level from which sharp rebounds have occurred.

We run a dataset here at Titan going back almost 8 years which incorporates key indicators, ratios and measures that we use to navigate us through the markets. From telling us for the last few months to position on the short side, it is now telling us that that time, for the moment, has now passed. Indeed, one particular indicator we use that has a near 90% success ratio in calling market turns over our dataset period to within 2 days is screaming buy at us. As the saying goes, “he who does not learn the lessons of history is doomed to repeat the mistakes”, well our “history” tells us that we are nearer a short term floor than a continued selling opportunity and we would be mad to ignore this.

As a now short term bull of the market, the trading activity on Friday was, to us, typical of “resigned” selling as shell shocked traders, the majority likely with their accounts depleted, decided the “weekend risk” was too great and so they sold long positions. I have seen this many, many, many times before in the markets and sure as eggs are eggs, the markets typically rebound the following week. Not always of course (there are no 100% certs in the markets), but with the technical set up we now see, we think that, barring another unforeseen event over the next 24 hours that creates a perpetuating crash type selling frenzy, that the markets are more likely to rise rather than fall over the next few weeks.

As an example of our indicators measurement methods, take a look at the chart below which depicts the S&P 500 during the month of August (coincidentally) 2011 to the end of that month and whose dataset is the closest fit to what we see at the close of play on Friday. The buy signal akin to what we see now was on the 8^th of August (circled).

Another example of a very similar dataset is revealed in the chart below from June 2011 (in essence our dataset is telling us that there is as much fear around as there was during the flare up of the Eurocrisis in the summer of 2011)  to end Jul 2011. Again, the buy signal is circled.

Basically you can see that if the statistics are anything to go by, the time to hedge and sell has passed. In both instances, circa 10% rallies ensued over the next few weeks.

So, to conclude, we have lifted our short positions again here at Titan as we did at the end of the correction in early February and our indicators tell us that the way to be positioned from a market overview perspective as of Friday’s close is not short but in fact to be bullish. This is quite a swing in such a short space of time but, as we can see in the CNN Greed-Fear index below, the swing in sentiment has also been extreme in the very same short space of time. From buying volatility in recent weeks, we think there is an opportunity to sell it now and so we are positioned.

If one overlays the S&P 500 chart relative to this Greed-Fear measure over the last 3 years you will see that measures of the current magnitude on the fear side have in fact been exceptional buying opportunities (circled in green below).

Jury’s out on whether this is another such buying opportunity or whether the utility of this particular measure has now ceased. As ever, only time will tell…

As the chart below relays, the region where we believe that we should be overweight and exposed to now is Europe, at the expense of the U.S. This chart was produced at the beginning of the week and given the underperformance of the DAX in particular relative to the U.S. this valuation disjoint is even more compelling. The weakening Euro will add a filip to German equities in particular and we expect the current weakness in the single currency relative to sterling specifically (and the dollar to a lesser degree) to continue as the year moves through its second half.

If you’d like to join us investing our OWN hard earned capital and where we try, unlike the very vast majority of other fund managers and market participants, to ANTICIPATE and not react to market events, click the banner below or email us at info@titanip.co.uk with any questions.

This piece should not be taken as an advocation to buy (or sell) these instruments and you should always take independent financial advice in relation to your own circumstances.