Swing Trading, Round 2: Buy

Have you done all your Christmas shopping yet? I know many stocks that are On Sale right now. I’m trying my hand at speculating once again. And now we’ll find out if my last swing trade success was just beginner’s luck.

Why is it a good time to buy now? After all, the VIX (which we used before to successfully time the market) is pretty low right now. However I have another secret weapon up my sleeve which I will share today. Sometimes when I’m bored I would overlap random charts over the stock market to see if I can find forward looking indicators to better my chances at trading. Lately, I have discovered how to use people’s saving habits to predict the future of the markets with 74% accuracy  ( ゚д゚) And I’ve searched all over the internet, so far it doesn’t look like anyone else has realized this yet. How does it work? Here is how much US individuals have been saving over the last 10 years.

As you can see, it’s pretty random for the most part, except maybe in recessionary times (highlighted in gray) when people might save more money because they are uncertain about the future. But there is actually some correlation between how much people are currently saving and future stock market performance. If we overlap the US stock market (S&P; 500 index) over the above graph, we get the new graph below.

What I’ve done is mark all the points where personal savings dipped and rebounded, which I define as going through any kind of a “v” shape. Then from that point in time, find out which way the stock market had gone over the next couple of months. Well out of the 27 times that American’s have bounced off the bottom on saving rates, 20 have resulted in short-term stock market gains (marked by the little green arrows.)

The S&P; 500 has gone nowhere in the last 10 years, (literally 0% change) as of today. You can see on the chart it ended on the same place it started in 2001, Hah ( ゚∀゚). So if the market fluctuates up and down but ends with no net change, then you’d expect random locations along the graph to have a 50/50 chance of being on an up or down trend. But history shows that when our’s savings rate dip, more often than not stocks will increase within 60 days or so. This is good to know for swing trading, which could last for months. I don’t know the reason behind this correlation, but it probably has something to do with less saving means more spending which translates to more sales and earnings for companies. Seems obvious, but I guess it’s not. Only you and other readers of my blog know about this analysis, so let’s keep it between us (^_~)

Finally, if you look at the right side of the graph where the “?” is, you see we have just entered another small “v” dip in savings rate. This marks dip number 28. What color arrow will we get this time? Since probability is in my favor, I’m going to go for it and see what happens.

So earlier today, Friday Dec 16th, I threw about $2,000 into the stock market. But I used the power of leverage to purchase roughly $4,000 worth of stocks via a margin account. I’ll explain how that works in another post. And I’ve split that money between 2 stocks, just like I did last time. Here are the details.

Silver Wheaton Corp (TSE : SLW)  ———- BUY ———> $29.76 x 66 shares = $1964.16 CAD
Halliburton Company (NYSE : HAL) ——— BUY ———> $31.60 x 63 shares = $1990.80 USD

I will write about why I bought these 2 companies next week. It’s past midnight now, too tired to to type any moor.

 

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Simple Rich Living
Simple Rich Living
12/17/2011 10:11 am

Interesting correlation, looking forward to hearing how it worked out.

Liquid Independence
12/17/2011 5:14 pm

Me too. I'm a little nervous (^_^') though but we shall see.

Vexare
Vexare
02/16/2012 4:53 pm

Hi,

Fan of the blog, (also a fellow Vancouverite) but the grasp of basic economics in this post is lacking. The correlation between personal savings and economic activity has been pretty well established for the last century or so.

en(dot)wikipedia(dot)org/wiki/Paradox_of_thrift

What your correlation doesn’t take into account is the effect of government and the role of the federal reserve in creating and removing money from the economy through interest rates and bond purchases, otherwise known as quantitative easing (perhaps try overlaying interest rates on the graph).

That being said, I certainly agree that there is a strong correlation between the rate of savings and economic activity (i.e. stock prices), but I also would argue that its utility as a forward looking indicator is questionable. Traditional indicators such as employment data and mfg. output are utilized by analysts well before the sales data is correlated against income levels as per the personal saving rate.

Regards,

Liquid
Admin
02/17/2012 1:39 am
Reply to  Vexare

Thanks for the link Vexare. Interesting stuff. I certainly forgot to include some major factors like monetary policy in my calculations. I haven’t tried overlaying interest rates on the graph yet, but that’s an interesting idea. Do you have an economic background? You seem to know a lot about these sorts of things.

Vexare
Vexare
02/18/2012 11:01 am
Reply to  Liquid

Not an expert by any means – just a 1st year course in macroeconomics that I really enjoyed. I try and keep up with it by reading books and articles.

Keep up the posts by the way, really enjoyed the last one on saving.

Regards,