Every seven years the stock markets take a hit. Or at least they have done so consistently for the last three quarters of a century. Sometimes it is small but usually it is large. The last two down cycles have taken away about 35% and 55% of the value of the Dow Industrials, respectively. The last time this happened it started in 2007, so now in 2014, the next down glitch appears to be due. As I watch the stock market and start the writing this paper on this Tuesday May 13, 2014, the Dow and the S&P 500 are hitting all time highs.  The complacency is obvious, with the VIX at 12.13 and the Arms Index at 0.49.  Yesterday there was a large gain in the averages, especially the Nasdaq, reflecting a lack of concern, even though the Nasdaq, unlike the other averages, had been sliding for over two months. The

Editor’s note: This was originally posted at Quantitative Trading and is reprinted here with permission. Dr. Chan will be providing more information about this topic in an upcoming MTA Educational Web Series presentation scheduled for July 9. Readers of zerohedge.com will no doubt be impressed by this chart and the accompanying article: Cumulative Returns of Most Shorted Stocks in 2013 Indeed, short interest (expressed as the number of shares shorted divided by the total number of shares outstanding) has long been thought to be a useful factor. To me, the counter-intuitive wisdom is that the more a stock is shorted, the better is its performance. You might explain that by saying this is a result of the “short squeeze”, when there is jump in price perhaps due to news and stock lenders are eager to sell the stock they own. If you have borrowed this stock to short, your borrowed stock may be

Most retail investors and traders think of the stock market or financial markets as “Main Street” and “Wall Street.” The Professionals of the market view the markets as Buy Side, Sell Side, and Retail. This is the stereotypical impression of the market with a mere three Market Participant Groups: Sell Side Institutions are Money Center Banks like Citigroup, JP Morgan, and Bank of America, or Financial Services, market makers such as Goldman Sachs, Morgan Stanley, and State Street. Buy Side Institutions are those like Northern Trust, Vanguard, and CALSTRS, Mutual Funds and Pension funds. Retail Investors are anyone who is not a professional trading the markets. Unfortunately, this type of Market Participant Group Cycle, which is a mild modification of the original Dow Theory, doesn’t include the full contingent of Market Participant Groups present in the automated, institution dominated market structure of today. The Market Participant Cycle, one of the most substantial financial cycles, has

This long-term perspective shows that investors should follow specific markets instead of general ideas. The BRICs (Brazil, Russia, India and China) are an important investment theme. While it is common to think of the countries as an economic unit (the BRICs), since 2000, stock markets of the BRIC nations have not moved in unison. India has tracked the Dow Jones Industrial Average more than the other countries. Brazil, Russia and China have yet to recover from the global bear market.