Tag Archives: SP500

Major Market Buy/Sell Review: 04-27-20

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

NOTE: I have added relative performance information to each graph. Most every graph shows relative performance to the S&P 500 index except for the S&P 500 itself which compares value to growth, and oil to the energy sector. 

S&P 500 Index

  • Last week I wrote: “The break of the 50% retracement this past week, is bullish and suggests a run to the 200-dma is likely. However, the risk/reward is not in the favor of longer-term positions, so trading positions only for now.” 
  • This past week, SPY retested, and held above, the 50% retracement keeping a run to the 61.8% retracement still viable. However, the market does appear to be struggling and is overbought short-term. 
  • This analysis still doesn’t negate the risk of more volatility ahead, so be prepared for sharp declines which means keeping trading stops tight.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No core position
    • This Week: Trading “Rentals” Only 
    • Stop-loss moved up to $265
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • DIA is a little different story as it failed at the 50% retracement and closed below it.
  • Also, on a relative basis, SPY continues to smartly outperform DIA. 
  • If DIA fails to gain traction next week, we will likely see a failure of support. Trading “rentals” only for now with a tight stop at $226
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: Trading “Rentals” Only
    • Stop-loss moved up to $226
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • As we have noted previously, QQQ is by far “the best index” to own currently from a technical basis. 
  • QQQ is outperforming the SPY by a wide margin, but not surprising given the top-5 stocks in the SPY are also the top-5 in the QQQ and are most technology related shares. 
  • Last week’s break above the 200-dma and the 61.8% sets up a test of “all-time” highs. (Pretty incredible when you think about the amount of economic devastation that is coming.)
  • But, from a trading perspective, “What is…is.”
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: Trading “Rentals” Only
    • Stop-loss moved up to $200
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

  • Small caps continue to sorely underperform large caps in the current environment which also suggests the broader market remains at risk as well. 
  • No change to our positioning on Small-caps which are still “no place to be as both small and mid-cap companies are going to be hardest hit by the virus.”
  • Be careful what you own. 
  • Avoid small-caps. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop loss adjusted to $44 on trading positions.
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • As with Small-caps, we have no holdings. 
  • Relative performance continues to remain exceedingly poor. MDY failed at the 28.2% retracement level and is at risk of a much slower economic environment.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
    • Stop Loss moved up to $245 for trading positions. 
  • Long-Term Positioning: Bearish

Emerging Markets

  • As with small and mid-cap stocks, emerging and international markets are being hit hard by the virus. Economically, these countries are being destroyed right now. 
  • We previously stated that investors should use counter-trend rallies to sell into. If you haven’t done so, do so Monday. Relative performance remains exceedingly weak. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position.
    • Stop-loss moved up to $33 for trading positions.
  • Long-Term Positioning: Bearish

International Markets

  • Same with EFA as with EEM. 
  • The rally failed at the 28.2% retracement and relative performance remains exceedingly weak. 
  • Remain out of these markets for the time being.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position.
    • This Week: No position.
    • Stop-loss moved up to $51 for trading positions.
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • This past week, saw oil prices collapse and then rally back as futures contracts rolled from May to June. That’s the good news, the bad news is that oil prices are going to go lower again as we head into May and storage remains a problem. 
  • We continue to suggest using any rally to clear positions in your portfolio for now.
  • We have not changed out stance on the sector from a “value” perspective, however, and this past week we nibbled into XOM, CVX, and XLE as oil stocks had exceedingly strong relative performance relative to oil. This suggests most of the risk has been pulled out of the sector. We are still carrying very tight stops though. 
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: XOM, CVX, and XLE
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • We previously added to our positions in IAU and GDX. 
  • This past week Gold broke out to new highs as inflationary concerns continue to persist. 
  • The sectors are VERY overbought short-term so a pullback is likely that can be used to add to current holdings. 
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Hold positions – Positions can now be added at 157.50
    • Stop-loss moved up to $150
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • Bonds are back to “crazy” overbought with the Fed buying everything from the banks who are happy to mark-up prices and sell it to them. 
  • As we have been adding equity exposure to portfolios, we needed to increase our “hedge” against equity risk accordingly.  We added a 5% position of TLT on Friday for just this reason. 
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Added 5% position of TLT
    • Stop-loss is $152.50
    • Long-Term Positioning: Bullish

U.S. Dollar

Major Market Buy/Sell Review: 04-20-20

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • Last week I wrote: “This past week, the market was able to muster a rally to the 50% retracement level, and on many short-term fronts is extremely overbought. While a retest, and potential break of the March lows is likely, the market does have some lift short-term.”
  • The break of the 50% retracement this past week, is bullish and suggests a run to the 200-dma is likely. However, the risk/reward is not in the favor of longer-term positions, so trading positions only for now. 
  • This still doesn’t negative the risk of more volatility ahead, so be prepared for quick declines, so keep trading stops tight.
  • Remain cautious for now.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No core position
    • This Week: Trading “Rentals” Only 
    • Stop-loss moved up to $278
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • The same situation exists with DIA. 
  • The break of the 50% retracement sets up a run to the 200-dma. 
  • Trading “rentals” only for now with a tight stop at $238
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: Trading “Rentals” Only
    • Stop-loss moved up to $238
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • As we have noted previously, QQQ is by far “the best index in town,” technically speaking.
  • Last week’s break above the 200-dma and the 61.8% sets up a test of “all-time” highs. (Pretty incredible when you think about the amount of economic devastation that is coming.)
  • But, from a trading perspective, “What is…is.”
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: Trading “Rentals” Only
    • Stop-loss moved up to $200
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

  • No change to our positioning on Small-caps which are still “no place to be as both small and mid-cap companies are going to be hardest hit by the virus.”
  • Be careful what you own. 
  • Avoid small-caps. Use last week’s rally to clear positions for now.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop loss adjusted to $44 on trading positions.
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • As with Small-cap, we have no holdings. Use last week’s rally to sell positions.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
    • Stop Loss moved up to $245 for trading positions. 
  • Long-Term Positioning: Bearish

Emerging Markets

  • As with small and mid-cap stocks, emerging and international markets are being hit hard by the virus. Economically, these countries are being destroyed right now. 
  • We previously stated that investors should use counter-trend rallies to sell into. If you haven’t done so, use last week’s rally to clear positions.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position.
    • Stop-loss moved up to $33 for trading positions.
  • Long-Term Positioning: Bearish

International Markets

  • As noted previously: “A reflexive rally is likely. Use those levels to sell into.”
  • Use last week’s rally to sell holdings. 
  • Remain out of these markets for the time being.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position.
    • This Week: No position.
    • Stop-loss moved up to $51 for trading positions.
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • The “spike” in oil prices on Friday was due to the change in oil futures contracts from May to June. Oil actually declined on Friday with the May contract at $17/bbl. 
  • Regardless, $25 is the price for June delivery of oil. Without any help on the horizon, look for the June contract to head back towards $20/bbl. 
  • We continue to suggests using any rally to clear positions in your portfolio for now.
  • We have not changed out stance on the sector from a “value” perspective, however, the sector still has work to do, so be patient. 
  • Avoid for now.
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: No positions.
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • We previously added to our positions in IAU and GDX.
  • The sectors are VERY overbought short-term so a pullback is likely that can be used to add to current holdings. 
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Hold positions – Look at add if support holds at $150
    • Stop-loss moved up to $147.50
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • Bonds are back to “crazy” overbought with the Fed buying everything from the banks who are happy to mark-up prices and sell it to them. 
  • Bond prices will correct and provide a better entry point to add exposure. So, be patient for now. Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Take Profits and rebalance holdings as needed.
    • Stop-loss is $147.50
    • Long-Term Positioning: Bullish

U.S. Dollar

Major Market Buy/Sell Review: 04-13-20

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • Previously we wrote: “Well, that bounce finally came and it was as vicious as we expected. While this remains a “bear market” rally, the media was quick to jump on the “Bear market is over” bandwagon. It isn’t, and investors will likely pay a dear price in April.”
  • This past week, the market was able to muster a rally to the 50% retracement level, and on many short-term fronts is extremely overbought. While a retest, and potential break of the March lows is likely, the market does have some lift short-term.
  • Despite the Fed flooding money into the system, we could be set up for some very volatile moves as the economic data is about to become horrific, and earnings estimates will be revised sharply lower. 
  • Remain cautious for now. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No core position
    • This Week: No core position
    • Stop-loss moved up to $245
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • The same situation exists with DIA.
  • The bounce we discussed previously retraced to the 50% retracement level. We could see some positive action on Monday, but we remain firmly entrenched in a bear market for now. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop-loss moved up to $210
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • We had previously put on a small QQQ trade for a reflexive rally, but we closed that out. 
  • As with SPY and DIA, the QQQ has established a downtrend, but technically is in MUCH better shape than the other markets with the bull-trend still intact.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions
    • Stop-loss moved up to $180
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

  • Small-caps are no place to be as both small and mid-cap companies are going to be hardest hit by the virus.
  • Be careful what you own, there are going to be quite a few companies that don’t make it. 
  • Avoid small-caps. Use last week’s rally to clear positions for now.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop loss adjusted to $44 on trading positions.
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • As with Small-cap, we have no holdings. Use last week’s rally to sell positions.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
    • Stop Loss moved up to $245 for trading positions. 
  • Long-Term Positioning: Bearish

Emerging Markets

  • As with small and mid-cap stocks, emerging and international markets are being hit hard by the virus. Economically, these countries are being destroyed right now. 
  • We previously stated that investors should use counter-trend rallies to sell into. If you haven’t done so, use last week’s rally to clear positions.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position.
    • Stop-loss moved up to $33 for trading positions.
  • Long-Term Positioning: Bearish

International Markets

  • As noted previously: “‘A reflexive rally is likely. Use those levels to sell into.”
  • Use last week’s rally to sell holdings. 
  • Remain out of these markets for the time being.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position.
    • This Week: No position.
    • Stop-loss moved up to $51 for trading positions.
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • As stated last week, “Saudi and Russia are NOT likely going to cut production meaningfully as they now have shale drillers in a stranglehold. They are going to talk a lot, but they aren’t going to do anything until they extinguish shale to some degree. For the last couple of years, I have warned this outcome would eventually occur.”
  • Shockingly they did come to an agreement, but it may be too little ,too late and whose to say that member OPEC countries adhere to their commitments.
  • We also stated to use the rally last week to clear positions in your portfolio for now stating:
    • “We will very likely retest or set new lows in the coming months as drillers are forced to “shut in” production. At that point we can start picking through the ruble for portfolio positioning.” 
  • We still like the sector from a “value” perspective and expect that we will wind up making a lot of money here. We clearly aren’t at lows yet, so be patient. 
  • Avoid for now.
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: No positions.
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • We added to our positions in IAU and GDX last week as the Fed’s action are starting to raise the specter of rather serious inflation problems. 
  • Last week, Gold broke out to highs and brought the “buy signal” back online. 
  • Gold is a little overbought short-term so use pullbacks to support to add further holdings.
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Hold positions.
    • Stop-loss moved up to $142.50
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • We have reduced our overall bond exposure, because we are running a very reduced equity exposure currently. This aligns our “hedge” of fixed income relative to our equity book. 
  • However, bonds are now MORE overbought that at just about any other point in history which suggests we could see a tick up in rates and a fall in bond prices. (Such will provide a good opportunity to add bond exposure to portfolios.)
  • Normally, such a reversion would coincide with a “risk on” trade into equities. However, given the economic devastation coming, we need to look back at 2008. In November of 2008, the Fed hit the markets with QE which caused bonds and stocks to rise in unison. However, shortly thereafter, both declined sharply in price as economic realities came to the fore.

  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Take Profits and rebalance holdings as needed.
    • Stop-loss is $147.50
    • Long-Term Positioning: Bullish

U.S. Dollar

  • The dollar fell sharply as we had a reflexive “bear market” rally. However, with concerns over the deteriorating global economy and the demand for dollars from abroad, money is flowing back into the dollar for safety. 
  • The recent volatility of the dollar makes it hard to trade for now, so be patient for the moment and let things calm down. We may look to add a long-dollar trade on a pull back to the $98-99 areas. 
  • The dollar is on a strong “buy signal” and is NOT “overbought,” which suggests dollar strength may be with us for a while longer.

Major Market Buy/Sell Review: 04-06-20

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • Last week: “Well, that bounce finally came and it was as vicious as we expected. While this remains a “bear market” rally, the media was quick to jump on the “Bear market is over” bandwagon. It isn’t, and investors will likely pay a dear price in April.”
  • After running into the bullish trend line and the initial 38.2% retracement, the market failed and has established a downtrend. A retest, and potential break of the March lows is likely, but we will monitor this carefully. With the Fed flooding money into the system, we could be set up for some very volatile moves, but the economic data is about to become horrific and earnings estimates will be revised sharply lower. 
  • Remain cautious for now. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position
    • Stop-loss set at $220
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • The same situation exists with DIA.
  • The bounce we discussed previously retraced to the 38.2% retracement level and failed. We could see some positive action on Monday, but we remain firmly entrenched in a bear market for now. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop-loss set at $185
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • We had previously put on a small QQQ trade for a reflexive rally, but we closed that out. 
  • As with SPY and DIA, the QQQ has established a downtrend, but technically is in MUCH better shape than the other markets with the bull-trend still intact.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions
    • Stop-loss set at $170
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

  • Small-caps have a lot more downside to go as both small and mid-cap companies are going to be hardest hit by the virus.
  • Be careful what you own, there are going to be quite a few companies that don’t make it. 
  • Avoid small-caps. Use any reflexive rally to step-aside for the time being.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop loss adjusted to $42 on trading positions.
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • As with Small-cap, we have no holdings. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bearish

Emerging Markets

  • As with small and mid-cap stocks, emerging and international markets are being hit hard by the virus. Economically, these countries are being destroyed right now. 
  • We previously stated that investors should use counter-trend rallies to sell into. If you haven’t done so, use any rally to clear positions.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position.
    • Stop-loss set at $30 for trading positions.
  • Long-Term Positioning: Bearish

International Markets

  • As noted last week: “‘A reflexive rally is likely. Use those levels to sell into. Do so this week.”
  • Remain out of these markets for the time being.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position.
    • This Week: No position.
    • Stop-loss set at $46 for trading positions.
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • Last week, the President said he talked to Saudi Arabia and they were in talks with Russia to cut $10 million barrels of production. That tweet sparked a vicious rally in oil keeping prices above the critical level of $20.
  • Saudi and Russia are NOT likely going to cut production meaningfully as they now have shale drillers in a stranglehold. They are going to talk a lot, but they aren’t going to do anything until they extinguish shale to some degree. For the last couple of years, I have warned this outcome would eventually occur. 
  • Use this rally in oil to clear positions in your portfolio for now. We will very likely retest or set new lows in the coming months as drillers are forced to “shut in” production. At that point we can start picking through the ruble for portfolio positioning. 
  • We still like the sector from a “value” perspective and expect that we will wind up making a lot of money here. We clearly aren’t at lows yet, so be patient. 
  • Avoid for now.
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: No positions.
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • We previously added to our position in IAU and continue to have a small holding in GDX, as the previous liquidation left a lot of value in the sector. However, performance remains lazy at this point, so we are looking for pullbacks to support to add to our holdings. 
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Hold positions.
    • Stop-loss set at $137.50.
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • We have reduced our overall bond exposure, because we are running a very reduced equity exposure currently. This aligns our “hedge” of fixed income relative to our equity book. 
  • We remain very cautious on our bond exposure currently, and will look to add to that exposure once the credit markets calm down a bit. 
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss is moved up to $147.50
    • Long-Term Positioning: Bullish

U.S. Dollar

  • The dollar fell sharply as we had a reflexive “bear market” rally. However, with concerns over global economic strength rising, money is flowing back into the dollar for safety. 
  • The recent volatility of the dollar makes it hard to trade for now, so be patient for the moment and let things calm down. We can look to add a long-dollar trade on a pull back to the $98-99 areas. 
  • The dollar has reversed its sell signal, which suggests dollar strength may be with us for a while longer.

Major Market Buy/Sell Review: 03-30-20

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index 

  • We previosly wrote: “With the market now 3-standard deviations oversold, a bounce is likely next week as it is expected the Fed will cut rates and restart a substantial QE program. A retracement to the 31.8%, 50%, 62.8% levels are possible and each level should be used to reduce equity risk and hedge.”
  • Well, that bounce finally came and it was a vicious as we expected. While this remains a “bear market” rally, the media was quick to jump on the “Bear market is over” bandwagon. It isn’t, and investors will likely pay a dear price in April.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position
    • Stop-loss set at $220
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • The same situation exists with DIA.
  • The bounce we discussed previously retraced to the 38.2% retracement level and failed. While Monday and Tuesday could see a push higher for quarter end rebalancing, this is still a bear market to be sold into. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop-loss set at $185
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • Last Monday, in anticipation of a rally, we put on a small QQQ trade. The rally did occur and ran into resistance at the 38.2% retracement level. We closed out the trade Friday afternoon, as we were unwilling to hold over the weekend.
  • We may put on another trade soon, depending on getting the right setup. April promises to be sloppy. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions
    • Stop-loss set at $170
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

  • As noted last week, small-caps are extremely oversold, and on a very deep “sell signal.”  They did bounce this past week, but underperformed the major indexes substantially. 
  • Avoid small-caps. This particular group of stocks are the most susceptible to an economic slowdown from the virus. Use any reflexive rally to step-aside for the time being.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop loss adjusted to $42 on trading positions.
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • As with Small-cap, we have no holdings. 
  • MDY is oversold, and is on a very deep a “sell signal.” The rally this past week also underperformed the broad market. 
  • As noted last week, “MDY is oversold enough for a counter-trend bounce to sell into. Trading positions only.” That rally is likely done for now.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bearish

Emerging Markets

  • As noted last week, EEM was extremely oversold and on a deep sell-signal. A bounce was likely which occurred. 
  • We previously stated that investors should use counter-trend rallies to sell into. Do that now.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position.
    • Stop-loss set at $30 for trading positions.
  • Long-Term Positioning: Bearish

International Markets

  • Like EEM, EFA was also sold previously. as we return our focus back to large cap value.
  • As noted last week: “EFA is very sold and on a deep sell signal. A reflexive rally is likely. Use those levels to sell into.”  Do so this week.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position.
    • This Week: No position.
    • Stop-loss set at $46 for trading positions.
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • We still like the sector from a “value” perspective and expect that we will wind up making a lot of money here. We clearly aren’t at lows yet, so be patient. 
  • Oil continues to weaken and supplies are building as economic shutdowns are not good for the crude market. Bankruptcies are rising as well. 
  • Avoid for now.
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: No positions.
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • Last week we noted: “It seems that liquidation event may be passing. If Gold can climb back above the 200-dma we will look to add back our holdings.
  • It did.
  • We added to our position in IAU and continue to have a small holding in GDX, as the previous liquidation left a lot of value in the sector. 
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Added to position
    • Stop-loss set at $137.50.
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • We have reduced our overall bond exposure, because we are running a very reduced equity exposure currently. This aligns our “hedge” of fixed income relative to our equity book. 
  • We remain very cautious on our bond exposure currently, and will look to add to that exposure once the credit markets calm down a bit. 
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss is moved up to $147.50
    • Long-Term Positioning: Bullish

U.S. Dollar

  • Previously we stated: “This past week, the dollar surged through that resistance and is now extremely overbought short-term. Looking for a reflexive rally in stocks next week that pulls the dollar back towards the breakout level of last week.”
  • That occurred this past week, and the dollar is now approaching its moving average support. 
  • The credit crisis, and rush to cash, sent the dollar surging to 7-deviations above the mean. As we noted previously, with the credit markets calming down we are starting to see previous relationships between asset classes return to normal. 
  • The dollar has reversed its sell signal, which suggests dollar strength may be with us for a while longer.

Major Market Buy/Sell Review: 03-23-20

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • Last week: “With the market now 3-standard deviations oversold, a bounce is likely next week as it is expected the Fed will cut rates and restart a substantial QE program. A retracement to the 31.8%, 50%, 62.8% levels are possible and each level should be used to reduce equity risk and hedge.”
  • Well, no bounce this week, and markets are even more extended and deviated the previously.
  • Again, we suspect a bounce is likely from such extreme moves, but a retest of lows likely before this over. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Hold position
    • This Week: No position
    • Stop-loss set at $250
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • The same situation exists with DIA.
  • DIA is on a very deep “Sell signal” so rallies will most likely fail in the weeks ahead. All stops have been triggered on trading positions.
  • A bounce is still likely, stops reset at recent lows.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Hold current positions
    • This Week: No positions.
    • Stop-loss set at $190
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • QQQ tested and violated its bullish trend line, is now on a deep “sell signal.” This suggests that rallies will likely fail for the time being. 
  • The index is very oversold, so a reflexive rally back to $190-195 is possible. which coincides with the 200-dma, 
  • Trading positions only with stops at recent lows.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Hold position
    • This Week: No positions
    • Stop-loss set at $170
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

  • As noted in our portfolio commentary, we sold our small-cap positions 5-weeks ago.
  • Small-caps are extremely oversold, and on a very deep “sell signal.”  
  • This particular group of stocks are the most susceptible to an economic slowdown from the virus. Use any reflexive rally to step-aside for the time being.
  • You can deploy a trading position in small-caps for a bounce, but they are underperforming large cap, so I am not sure its worth the risk.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop loss adjusted to $42 on trading positions.
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • As with Small-cap, we have no holdings. 
  • MDY is oversold, and is on a very deep a “sell signal.”
  • MDY has broken all critical supports, and like SLY, there is no reason to “buy” the sector currently. However, MDY is oversold enough for a counter-trend bounce to sell into. Trading positions only. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bearish

Emerging Markets

  • Last week: “EEM has completed a “head and shoulders” topping pattern and violated support at the 61.8% retracement level. EEM will eventually test previous lows particularly with a sell signal now registered.” 
  • EEM is very now extremely oversold and on a deep sell-signal.
  • Use counter-trend rallies to sell into. Trading positions only. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position.
    • Stop-loss set at $30 for trading positions.
  • Long-Term Positioning: Bearish

International Markets

  • Like EEM, EFA was also sold previously. as we return our focus back to large cap value.
  • EFA is very sold and on a deep sell signal. A reflexive rally is likely back to $58 to 63 which doesn’t even get you back to the 200-dma. Use those levels to sell into.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position.
    • This Week: No position.
    • Stop-loss set at $46 for trading positions.
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • As noted last week: “We just didn’t realize how bad it would get until Saudi Arabia decided to launch a price war, thankfully, we had recommended selling all energy holdings on the Friday before that announcement.”
  • We still like the sector from a “value” perspective and expect that we will wind up making a lot of money here. We clearly aren’t at lows yet, so be patient. 
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: No positions.
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • Last week we noted: “Gold had been holding up well as a hedge until this past week where two hedge funds (we suspect Citadel and Millennium) blew up creating margin liquidation across all asset classes included gold, bonds, and even bitcoin.” 
  • It seems that liquidation event may be passing. If Gold can climb back above the 200-dma we will look to add back our holdings.
  • We also added a small position to GDX this past week, as the previous liquidation left a lot of value in the sector. 
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Look to add above $140.
    • Stop-loss set at $137.50.
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • As noted last week: “We previously sold our small position in TLT, and this past week reduced our IEF position by 50% and increased BIL accordingly to shorten duration. The rest of our bond holdings have done the work of supporting the portfolio.” 
  • The margin liquidation event is now bringing bonds back to a “buyable” range and bonds did hold support at the previous market highs. 
  • We remain very cautious on our bond exposure currently, and will look to add to that exposure once the credit markets calm down a bit. 
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Sold bond mutual funds, added position of STIP.
    • Stop-loss is moved up to $147.50
    • Long-Term Positioning: Bullish

U.S. Dollar

  • Three weeks ago we stated: “This past week, the dollar surged through that resistance and is now extremely overbought short-term. Looking for a reflexive rally in stocks next week that pulls the dollar back towards the breakout level of last week.
  • The credit crisis, and rush to cash, has sent the dollar surging to 7-deviations above the mean. As the credit markets calm down we should see relationship between asset classes return to normal. 
  • The dollar has reversed its sell signal, which suggests dollar strength may be with us for a while longer.

Major Market Buy/Sell Review: 03-16-20

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

This commentary was written over the weekend prior to the Fed’s Sunday action.

This week I am leaving LAST WEEK’S charts ABOVE this week’s charts so you can realize the magnitude of the moves last week. This is important to keep “perspective” on current allocations and expectations.

S&P 500 Index

  • Last week: “Warning: SPY has triggered a longer-term “sell” signal which historically coincides with deeper declines. We highly suspect that any rally will ultimately fail and we will test the 62.8% retracement level.
  • With the market now 3-standard deviations oversold, a bounce is likely next week as it is expected the Fed will cut rates and restart a substantial QE program. A retracement to the 31.8%, 50%, 62.8% levels are possible and each level should be used to reduce equity risk and hedge. 
  • We are going to have a retest of lows before this over. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Hold position
    • This Week: Hold positions
    • Stop-loss set at $250
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • The same situation exists with DIA.
  • Now back to extreme oversold, trading positions can be added for a counter-trend bounce back to resistance at $240-265.
  • DIA is on a very deep “Sell signal” so rallies will most likely fail in the weeks ahead.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Hold current positions
    • This Week: Trading positions for rally only.
    • Stop-loss set at $210
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • Despite the correction last week, the QQQ is the best looking index from a trading perspective. QQQ tested and held its bullish trend line, but has now registered a “sell signal.” This suggests that rallies will likely fail for the time being. 
  • The the index is very oversold, so look for a reflexive rallies back to $200, which coincides with the 200-dma, or $207 to $215 (which is optimistic.) to reduce exposure and take profits on trading positions. 
  • Trading position in QQQ for a reflexive rally back to the 200-dma which resides at $200
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss set at $175
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

 

  • As noted in our portfolio commentary, we sold our small-cap positions 4-weeks ago.
  • Small-caps are extremely oversold, and on a very deep “sell signal.”  
  • This particular group of stocks are the most susceptible to an economic slowdown from the virus. Use any reflexive rally to step-aside for the time being.
  • You can deploy a trading position in small-caps for a bounce, but they are underperforming large cap, so I am not sure its worth the risk.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop loss adjusted to $48 on trading positions.
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • As with Small-cap, we have no holdings. 
  • MDY is oversold, and is on a very deep a “sell signal.”
  • MDY has broken all critical supports, and like SLY, there is no reason to “buy” the sector currently. However, MDY is oversold enough for a counter-trend bounce to sell into. Trading positions only. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bearish

Emerging Markets

  • Three weeks ago, we stated that “EEM failed at resistance and we sold our exposures to international holdings and return our focus on large cap value for now. EEM has completed a “head and shoulders” topping pattern and violated support at the 61.8% retracement level. EEM will eventually test previous lows particularly with a sell signal now registered.” 
  • EEM is very now extremely oversold and on a deep sell-signal.
  • Use counter-trend rallies to sell into. Trading positions only. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position.
    • Stop-loss set at $32 for trading positions.
  • Long-Term Positioning: Bearish

International Markets

  • Like EEM, EFA was also sold previously. as we return our focus back to large cap value.
  • EFA is very sold and on a deep sell signal. A reflexive rally is likely back to $58 to 63 which doesn’t even get you back to the 200-dma. Use those levels to sell into.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position.
    • This Week: No position.
    • Stop-loss set at $50 for trading positions.
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • Wow. After Russia failed to join OPEC+ in cutting production, and US drillers are producing more than current demand can offset, we said: “Drillers have to drill to make revenue to meet their debt obligations, so ultimately this is going to end very badly.”
  • We just didn’t realize how bad it would get until Saudi Arabia decided to launch a price war, thankfully, we had recommended selling all energy holdings on the Friday before that announcement.
  • We still like the sector from a “value” perspective and expect that we will wind up making a lot of money here. However, we were early, so we are going to step back and look for a better bottom to buy into. We aren’t there yet.
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: No positions.
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • Two weeks ago we stated: “Gold rallied sharply and broke out to new highs, suggesting there was something amiss with the stock market exuberance. The correction came this past week, confirming Gold’s message was correct.”
  • Gold had been holding up well as a hedge until this past week where two hedge funds (we suspect Citadel and Millennium) blew up creating margin liquidation across all asset classes included gold, bonds, and even bitcoin. 
  • Fortunately, we previously sold our GDX position (people intensive) and with the liquidation event over we think Gold will return to its ability to hedge. 
  • We will look to add to our position this week if Gold can hold the $200 dma and our stop level at $137.50
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Look to add at support of $140.
    • Stop-loss set at $137.50.
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • As noted last week: “Carl Swenlin at Decision Point agrees with our view: ‘Price has accelerated into a parabolic advance, so we should be alert for a breakdown very soon. That doesn’t mean that we’ll see a complete collapse, but it is not likely that this vertical ascent will be maintained.’”
  • We previously sold our small position in TLT, and this past week reduced our IEF position by 50% and increased BIL accordingly to shorten duration. The rest of our bond holdings have done the work of supporting the portfolio. 
  • The margin liquidation event is now bringing bonds back to a “buyable” range.
  • As we noted last week: “We agree. Bonds are getting ‘stupid’ overbought which suggests there is plenty of ‘fuel’ for a pretty vicious ‘reflex rally’ in stocks. At 5-standard deviations you are going to see a reversal in rates back to $150-152 on TLT. This is will be your next entry point to buy bonds and sell stocks.”
  • That positioning remains the same this week.
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Sold 1/2 of IEF, Added to BIL, looking to add TLT back to portfolios for trading.
    • Stop-loss is moved up to $147.50
    • Long-Term Positioning: Bullish

U.S. Dollar

  • It’s been a roller coaster for the US Dollar this past two weeks.
  • Two weeks ago we stated: “This past week, the dollar surged through that resistance and is now extremely overbought short-term. Looking for a reflexive rally in stocks next week that pulls the dollar back towards the breakout level of last week..
  • The dollar rallied last week as the collapse in assets across the board from the margin liquidation event left the “dollar” as the only “safe haven.”
  • The dollar is trying to reverse its sell signal, and with the dollar back to 2-standard deviations, the rally may slow here a bit into next week. 

Special Report: Fed Launches A Bazooka As Markets Hit Our Line In The Sand

The severity of the recent market rout has been quite astonishing. As shown below, in just three very short weeks, the market has reversed almost the entirety of the “Trump Stock Market” gains.

The decline has been unrelenting, and despite the Fed cutting rates last week, and President Trump discussing fiscal stimulus, the markets haven’t responded. In mid-February we were discussing the markets being 3-standard deviations above their 200-dma which is a rarity. Three short weeks later, the markets are now 4-standard deviations below which is even a rarer event. 

On Wednesday, the Federal Reserve increased “Repo operations” to $175 Billion.

Still no response from the market

Then on Thursday, the Fed brought out their “big gun.”

The Fed Bazooka

Yesterday, the Federal Reserve stepped into financial markets for the second day in a row, this time dramatically ramping up asset purchases amid the turmoil created by the combination of the spreading coronavirus and the collapse in oil prices. 

In a statement from the New York Fed:

The Federal Reserve said it would inject more than $1.5 trillion of temporary liquidity into Wall Street on Thursday and Friday to prevent ominous trading conditions from creating a sharper economic contraction.

‘These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.’

The New York Fed said it would conduct three additional repo offerings worth an additional $1.5 trillion this week, with two separate $500 billion offerings that will last for three months and a third that will mature in one month.

If the transactions are fully subscribed, they would swell the central bank’s $4.2 trillion asset portfolio by more than 35%.” – WSJ

As Mish Shedlock noted,

“The Fed can label this however they want, but it’s another round of QE.”

As you can see in the chart below, this is a massive surge of liquidity hitting the market at a time the market is hitting important long-term trend support.

Of course, this is what the market has been hoping for:

  • Rate cuts? Check
  • Liquidity? Check

It is now, or never, for the markets.

With our portfolios already at very reduced equity levels, the break of this trendline will take our portfolios to our lowest levels of exposure. However, given the extreme oversold condition, noted above, it is likely we are going to see a bounce, which we will use to reduce risk into.

What happened today was an event we have been worried about, but didn’t expect to see until after a break of the trendline – “margin calls.”

This is why we saw outsized selling in “safe assets” such as REITs, utilities, bonds, and gold.

Cash was the only safe place to hide.

This also explains why the market “failed to rally” when the Fed announced $500 billion today. There is another $500 billion coming tomorrow. We will see what happens.

We aren’t anxious to “fight the Fed,” but the markets may have a different view this time.

Use rallies to raise cash, and rebalance portfolio risk accordingly.

We are looking to be heavy buyers of equities when the market forms a bottom, we just aren’t there as of yet.

Special Report: Panic Sets In As “Everything Must Go”

Note: All charts now updated for this mornings open.

The following is a report we generate regularly for our RIAPRO Subscribers. You can try our service RISK-FREE for 30-Days.

Headlines from the past four-days:

Dow sinks 2,000 points in worst day since 2008, S&P 500 drops more than 7%

Dow rallies more than 1,100 points in a wild session, halves losses from Monday’s sell-off

Dow drops 1,400 points and tumbles into a bear market, down 20% from last month’s record close

Stocks extend losses following 15-minute ‘circuit breaker’ halt, S&P 500 drops 8%

It has, been a heck of a couple of weeks for the market with daily point swings running 1000, or more, points in either direction.

However, given Tuesday’s huge rally, it seemed as if the market’s recent rout might be over with the bulls set to take charge? Unfortunately, as with the two-previous 1000+ point rallies, the bulls couldn’t maintain their stand.

But with the markets having now triggered a 20% decline, ending the “bull market,” according to the media, is all “hope” now lost? Is the market now like an “Oriental Rug Factory” where “Everything Must Go?”

It certainly feels that way at the moment.

“Virus fears” have run amok with major sporting events playing to empty crowds, the Houston Live Stock Show & Rodeo was canceled, along with Coachella, and numerous conferences and conventions from Las Vegas to New York. If that wasn’t bad enough, Saudi Arabia thought they would start an “oil price” war just to make things interesting.

What is happening now, and what we have warned about for some time, is that markets needed to reprice valuations for a reduction in economic growth and earnings.

It has just been a much quicker, and brutal, event than even we anticipated.

The questions to answer now are:

  1. Are we going to get a bounce to sell into?
  2. Is the bear market officially started – from a change in trend basis; and,
  3. Just how bad could this get?

A Bounce Is Likely

In January, when we discussed taking profits out of our portfolios, we noted the markets were trading at 3-standard deviations above their 200-dma, which suggested a pullback, or correction, was likely.

Now, it is the same comment in reverse. The correction over the last couple of weeks has completely reversed the previous bullish exuberance into extreme pessimism. On a daily basis, the market is back to oversold. Historically, this condition has been sufficient for a bounce. Given that the oversold condition (top panel) is combined with a very deep “sell signal” in the bottom panel, it suggests a fairly vicious reflexive rally is likely. The question, of course, is how far could this rally go.

Looking at the chart above, it is possible we could see a rally back to the 38.2%, or the 50% retracement level is the most probable. However, with the severity of the break below the 200-dma, that level will be very formidable resistance going forward. A rally to that level will likely reverse much of the current oversold condition, and set the market up for a retest of the lows.

The deep deviation from the 200-dma also supports this idea of a stronger reflexive rally. If we rework the analysis a bit, the 3-standard deviation discussed previously has now reverted to 4-standard deviation move below the 200-dma. The market may find support there, and with the deeply oversold condition, it again suggests a rally is likely.

Given that rally could be sharp, it will be a good opportunity to reduce risk as the impact from the collapse in oil prices, and the shutdown of the global supply chain, has not been fully factored in as of yet.

The following chart is a longer-term analysis of the market and is the format we use for “onboarding” our clients into their allocation models. (Vertical black lines are buy periods)

The triggering of the “sell signals” suggests we are likely in a larger correction process. With the “bull trend” line now broken, a rally toward the 200-dma, which is coincident with the bull trend line, will likely be an area to take additional profits, and reduce risk accordingly.

The analysis becomes more concerning as we view other time frames.

Has A Bear Market Started?

On a weekly basis, the rising trend from the 2016 lows is clear. The market has NOW VIOLATED that trend, which suggests a “bear market” has indeed started. This means investors should consider maintaining increased cash allocations in portfolios currently. With the two longer-term sell signals, bottom panels, now triggered, it suggests that whatever rally may ensue short-term will likely most likely fail. (Also a classic sign of a bear market.)

With the market oversold on a weekly basis, a counter-trend, or “bear market” rally is likely. However, as stated, short-term rallies should be sold into, and portfolios hedged, until the correction process is complete.

With all of our longer-term weekly “sell signals” now triggered from fairly high levels, it suggests the current selloff is much like what we saw in 2015-2016. (Noted in the chart above as well.) In other words, we will see a rally, followed by a secondary failure to lower lows, before the ultimate bottom is put in. If the market fails to hold current levels, the 2018 lows are the next most likely target.

Just How Bad Can It Get?

The idea of a lower bottom is also supported by the monthly data.

NOTE: Monthly Signals Are ONLY Valid At The End Of The Month.

On a monthly basis, sell signals have also been triggered, but we will have to wait until the end of the month for confirmation. However, given the depth of the decline, it would likely take a rally back to all-time highs to reverse those signals. This is a very high improbability.

Assuming the signals remain, there is an important message being sent, as noted in the top panel. The “negative divergence” of relative strength has only been seen prior to the start of the previous two bear markets, and the 2015-2016 slog. While the current sell-off resembles what we saw in late 2015, there is a risk of this developing into a recessionary bear market later this summer. The market is very close to violating the 4-year moving average, which is a “make or break” for the bull market trend from the 2009 lows.

How bad can the “bear market” get? If the 4-year moving average is violated, the 2018 lows become an initial target, which is roughly a 30% decline from the peak. However, the 2016 lows also become a reasonable probability if a “credit event” develops in the energy market which spreads across the financial complex. Such a decline would push markets down by almost 50% from the recent peak, and not unlike what we saw during the previous two recessions.

Caution is advised.

What We Are Thinking

Since January, we have been regularly discussing taking profits in positions, rebalancing portfolio risks, and, most recently, moving out of areas subject to slower economic growth, supply-chain shutdowns, and the collapse in energy prices. This led us to eliminate all holdings in international, emerging markets, small-cap, mid-cap, financials, transportation, industrials, materials, and energy markets. (RIAPRO Subscribers were notified real-time of changes to our portfolios.)

While there is “some truth” to the statement “that no one” could have seen the fallout of the “coronavirus” being escalated by an “oil price” war, there has been mounting risks for quite some time from valuations, to price deviations, and a complete disregard of risk by investors. While we have been discussing these issues with you, and making you aware of the risks, it was often deemed as “just being bearish” in the midst of a “bullish rally.” However, it is managing these types of risks, which is ultimately what clients pay advisors for.

It isn’t a perfect science. In times like these, it gets downright messy. But this is where working to preserve capital and limit drawdowns becomes most important. Not just from reducing the recovery time back to breakeven, but in also reducing the “psychological stress” which leads individuals to make poor investment decisions over time.

Given the extreme oversold and deviated measures of current market prices, we are looking for a reflexive rally that we can further reduce risk into, add hedges, and stabilize portfolios for the duration of the correction. When it is clear, the correction, or worse a bear market, is complete, we will reallocate capital back to equities at better risk/reward measures.

We highly suspect that we have seen the highs for the year. Most likely,,we are moving into an environment where portfolio management will be more tactical in nature, versus buying and holding. In other words, it is quite probable that “passive investing” will give way to “active management.”

Given we are longer-term investors, we like the companies we own from a fundamental perspective and will continue to take profits and resize positions as we adjust market exposure accordingly. The biggest challenge coming is what to do with our bond exposures now that rates have gotten so low OUTSIDE of a recession.

But that is an article for another day.

As we have often stated, “risk happens fast.”

Special Report: S&P 500 – Bounce Or Bull Market

Headlines from the past two days:

Dow sinks 2,000 points in worst day since 2008, S&P 500 drops more than 7%

Dow rallies more than 1,100 points in a wild session, halves losses from Monday’s sell-off

Actually its been a heck of a couple of weeks for the market with daily point swings running 1000, or more, points in either direction.

However, given Tuesday’s huge rally, is the market’s recent rout over with the bulls set to take charge? Or is this just a reflexive rally, with a retest of lows set to come?

Let’s take a look at charts to see what we can determine.

Daily

On a daily basis, the market is back to oversold. Historically, this condition has been sufficient for a bounce. Given that the oversold condition (top panel) is combined with a very deep “sell signal” in the bottom panel, it suggested a fairly vicious reflexive rally was likely. The question, of course is how far could this rally go.

Looking at the chart above, it is quite possible we could well see a rally back to the 32.8%, or even the 50% retracement level which is where the 200-dma currently resides. A rally to that level will likely reverse much of the current oversold condition and set the market up for a retest of the lows.

This idea of a stronger reflexive rally is also supported by the deep deviation from the 200-dma. If we rework the analysis a bit, the 3-standard deviation discussed previously has now reverted to 2-standard deviations below the 200-dma. The market found support there, and with the deep oversold condition it again suggests a rally to the 200-dma is likely.

Given that rally could be sharp, it will likely be a good opportunity to reduce risk as the impact from the collapse in oil prices and the shutdown of the global supply chain has not been fully factored in as of yet.

The following chart is a longer-term analysis of the market and is the format we use for “onboarding” our clients into their allocation models. (Vertical black lines are buy periods)

The triggering of the “sell signals” suggests we are likely in a larger correction process. With the “bull trend” line now broken, a rally back to toward the 200-dma, which is coincident with the bull trend line, will likely be an area to take profits and reduce risk accordingly.

The analysis becomes more concerning as we view other time frames.

Weekly

On a weekly basis, the rising trend from the 2016 lows is clear. The market has NOW VIOLATED that trend, which suggests maintaining some allocation to cash in portfolios currently. With the two longer-term sell signals, bottom panels, now triggered, it suggests that whatever rally may ensue short-term will likely fail.

The market is getting oversold on a weekly basis which does suggest a counter-trend rally is likely. However, as stated, short-term rallies should likely be sold into, and portfolios hedged, until the correction process is complete.

With all of our longer-term weekly “sell signals” now triggered from fairly high levels, it suggests the current selloff is much like what we saw in 2015-2016. (Noted in chart above as well.) In other words, we will see a rally, a failure to lower lows, before the ultimate bottom is put in.

Monthly

The idea of a lower bottom is also supported by the monthly data.

On a monthly basis, sell signals have also been triggered. HOWEVER, these signals must remain through the end of the month to be valid. These monthly signals are “important,” and one of the biggest concerns, as noted in the top panel, is the “negative divergence” of relative strength which was only seen prior to the start of the previous two bear markets, and the 2015-2016 slog. Again, the current sell-off resembles what we saw in late 2015, but there is a risk of this developing into a recessionary bear market later this summer. Caution is advised.

What We Are Thinking

Since January we have been taking profits in positions, rebalancing portfolio risks, and recently moving out of areas subject to slower economic growth, a supply-chain shut down, and the collapse in energy prices. (We have no holdings in international, emerging markets, small-cap, mid-cap, financial or energy currently.)

We are looking for a rally that can hold for more than one day to add some trading exposure for a move back to initial resistance levels where we will once again remove those trades and add short-hedges to the portfolio.

We highly suspect that we have seen the highs for the year, so we will likely move more into a trading environment in portfolios to add some returns while we maintain our longer-term holdings and hedges.

Given we are longer-term investors, we like the companies we own from a fundamental perspective and will continue to take profits and resize positions as we adjust market exposure accordingly. The biggest challenge coming is what to do with our bond exposures now that rates have gotten so low OUTSIDE of a recession.

We will keep you updated accordingly.

Major Market Buy/Sell Review: 03-09-20

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • As noted previously, “extensions to this degree rarely last long without a correction.” Now the markets are extremely oversold to the downside so a reflexive rally is likely. However, SPY will trigger a sell signal in the lower panel suggesting that any initial rally will fail and retest of support is likely.”
  • Last week, we did see a reflexive rally but it was short-lived and didn’t reverse the oversold condition. We are still long our “rental trade” in VOOG as the market ended up just slightly above where we ended last week. 
  • On Friday, there was a good bit of last hour buying which suggests institutions have likely gotten exhausted on selling. As such, there should be another reflexive rally again this next week in which we will remove the rental trade.
  • Warning: SPY has triggered a longer-term “sell” signal which historically coincides with deeper declines. We highly suspect that any rally will ultimately fail and we will test the 62.8% retracement level.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Hold position
    • This Week: Hold positions
    • Stop-loss adjusted to $290
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • The same situation exists with DIA.
  • Now back to extreme oversold, trading positions can be added for a counter-trend bounce back to resistance at $265-270.
  • DIA has triggered a “Sell signal” so rallies will most likely fail in the weeks ahead.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Hold current positions
    • This Week: Hold current positions
    • Stop-loss moved up to $250
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • Despite the correction last week, the QQQ is the best looking index from a trading perspective.
  • The correction this past week took the index back to oversold, and the buy signal has now reversed but has NOT yet triggered a “Sell” signal like SPY and DIA. 
  • Trading position in QQQ for a reflexive rally back to the 50-dma which resides at $221
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss moved up to $207
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

 
  • As noted in our portfolio commentary, we sold our small-cap positions the week before last. 
  • Small-caps are oversold, and on a “sell signal.”  
  • This particular group of stocks are the most susceptible to an economic slowdown from the virus. Use any reflexive rally to step-aside for the time being.
  • In our portfolio we own KGGIX which is “technically” a “small-cap value fund.” However, we don’t classify it that way as it holds a significant chunk of Gold Miners which fits with our hedge theme.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Sold all positions.
    • This Week: No positions.
    • Stop loss adjusted to $62
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • Previous, we said: “MDY remains extremely extended above the 200-dma, so more corrective action is likely. MDY is still on a buy-signal but is pushing rather extreme deviations from long-term means.”
  • Over the last two weeks, that changed. Now MDY is oversold, and has triggered a “sell signal.”
  • Since Mid-caps are more impacted by supply chain impacts we are centering our portfolio strategy on domestic large caps until the “virus crisis” is resolved. We will then start picking through other areas for value.
  • MDY has broken all critical supports and is holding one of its last two “lines of defense.” It will ultimately fail and likely set lower lows. However, MDY is oversold enough for a counter-trend bounce to sell into. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bearish

Emerging Markets

  • Previously: “EEM failed at resistance and we sold our exposures to international holdings and return our focus on large cap value for now.”
  • EEM has completed a “head and shoulders” topping pattern and violated support at the 61.8% retracement level. EEM will eventually test previous lows particularly with a sell signal now registered. 
  • EEM is very oversold short-term so use counter-trend rallies to sell into. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Sold positions
    • This Week: No position.
    • Stop-loss set at $40
  • Long-Term Positioning: Bearish

International Markets

  • Like EEM, EFA was also sold previously. as we return our focus back to large cap value.
  • EFA is very sold and on a deep sell signal. A reflexive rally is likely back to $65. Use that level to sell into.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Sold positions
    • This Week: No position.
    • Stop-loss set at $61
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • Last week, Russia failed to join OPEC+ in cutting production, and US drillers are producing more than current demand can offset. Drillers have to drill to make revenue to meet their debt obligations, so ultimately this is going to end very badly.
  • We nibbled around the energy sector previously, but with the break of the 2018 lows in oil prices, suggesting we are going to see sub-$40/bbl oil, we were stopped out of our trades.
  • On Friday we sold all energy related assets (AMLP, XOM, RDS.A).
  • We still like the sector from a “value” perspective and expect that we will wind up making a lot of money here. However, we were early, so we are going to step back and look for a better bottom to buy into. 
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: Sold All Holdings.
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • As noted last week: “Gold rallied sharply and broke out to new highs, suggesting there was something amiss with the stock market exuberance. The correction came this past week, confirming Gold’s message was correct.”
  • We previously sold our GDX position (people intensive) but are maintaining our gold position as a hedge to the overall portfolio.
  • We missed our entry on gold last week, as we never worked off the overbought condition enough. But support at $147.50 held.
  • Our positioning looks good, and if we get some follow through next week on a “reflexive rally,” it should allow us another opportunity to add to our positions. 
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Hold positions
    • Stop-loss for profits adjusted to $142.50, Look to buy at $147.50
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • Previously we stated: “As with Gold, Bonds were also suggesting something was amiss with the market. Bonds broke out to new highs this past week, and after adding exposure previously, the rally was a welcome hedge against stock market volatility.
  • While we sold our small position in TLT previously, the rest of our bond holdings have done the work of supporting the portfolio. 
  • Carl Swenlin at Decision Point agrees with our view: ““Price has accelerated into a parabolic advance, so we should be alert for a breakdown very soon. That doesn’t mean that we’ll see a complete collapse, but it is not likely that this vertical ascent will be maintained.”
  • We agree. Bonds are getting “stupid” overbought which suggests there is plenty of “fuel” for a pretty vicious “reflex rally” in stocks. At 5-standard deviations you are going to see a reversal in rates back to $150-152 on TLT. This is will be your next entry point to buy bonds and sell stocks.
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Holding positions.
    • Stop-loss is moved up to $142.50
    • Long-Term Positioning: Bullish

U.S. Dollar

  • As noted previously: “This past week, the dollar surged through that resistance and is now extremely overbought short-term. Looking for a reflexive rally in stocks next week that pulls the dollar back towards the breakout level of last week.”
  • The early week rally in stocks pulled the dollar sharply lower and has now corrected a large chunk of the 3-standard-deviation extension to the upside. With the dollar back to oversold, it should find support near current levels to help support a reflexive rally in equities.
  • The dollar is close to triggering a sell signal, so be cautious with positioning, there is risk down to the 38.2% retracement level.

Major Market Buy/Sell Review: 03-02-20

Each week we produce a chart book of the major financial markets to review whether the markets, as a whole, warrant higher levels of equity risk in portfolios or not. Stocks, as a whole, tend to rise and fall with the overall market. Therefore, if we get the short-term trend of the market right, our portfolios should perform respectively.

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • As noted last week: “With the market now trading 12% above its 200-dma, and well into 3-standard deviations of the mean, a correction is coming. That correction started last Friday.”
  • We did add a position of VOOG to the Models this past week (a smidge early) as the markets are now extremely oversold short-term. We are looking for a bounce to initial resistance between $310 and $315 where we will likely sell and add a short-hedge back to the portfolio.
  • As noted previously, “extensions to this degree rarely last long without a correction.” Now the markets are extremely extended to the downside so a reflexive rally is likely. However, SPY will trigger a sell signal in the lower panel suggesting that any initial rally will fail and retest of support is likely.
  • Short-Term Positioning: Neutral Due To Extension
    • Last Week: Hold position
    • This Week: Added a “rental trade” of VOOG to portfolios.
    • Stop-loss adjusted to $290
    • Long-Term Positioning: Neutral due to valuations

Dow Jones Industrial Average

  • The same situation exists with DIA.
  • Now back to extreme oversold, trading positions can be added for a counter-trend bounce back to resistance at $265-270.
  • DIA has triggered a “Sell signal” so rallies will most likely fail in the weeks ahead.
  • Short-Term Positioning: Neutral due to extensions
    • Last Week: Hold current positions
    • This Week: Add trading positions
    • Stop-loss adjusted to $250
  • Long-Term Positioning: Neutral

Nasdaq Composite

  • Despite the correction last week, the QQQ is the best looking index from a trading perspective.
  • As noted last week: “With the Nasdaq “buy signal” at extremely overbought levels, there is likely more correction to come.”
  • The correction this past week took the index back to oversold, and but the buy signal still remains fairly elevated.
  • Add a trading position in QQQ for a reflexive rally.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: Hold position
    • This Week: Trading positions can be added.
    • Stop-loss set at $200
  • Long-Term Positioning: Neutral due to valuations

S&P 600 Index (Small-Cap)

  • As we said last time: “Small caps have failed to participate with the markets and under performance is weighing on portfolios. The buy signal has continued to correct as small-caps are struggling to maintain recent support levels.”
  • As noted in our portfolio commentary, we sold our small-cap positions early last week.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Sold small cap. No positions.
    • Stop loss adjusted to $62
  • Long-Term Positioning: Neutral

S&P 400 Index (Mid-Cap)

  • Last week we said: “MDY remains extremely extended above the 200-dma, so more corrective action is likely. MDY is still on a buy-signal but is pushing rather extreme deviations from long-term means.”
  • That all changed last week. Now MDY is oversold, and about to trigger a “sell signal.”
  • Since Mid-caps are more impacted by supply chain impacts we are centering our portfolio strategy on domestic large caps until the “virus crisis” is resolved. We will then start picking through other areas for value.
  • The previous breakout level held which is very bullish, so if the overbought condition can get worked off with some consolidation, we will have a good entry point to add exposure.
  • Short-Term Positioning: Neutral
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bullish

Emerging Markets

  • As we noted last week, EEM failed at resistance and we suggested we were going to reduce our exposure to international holdings and return our focus on large cap value for now.
  • Early last week, as noted in the Portfolio Commentary section, we sold emerging markets.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Sold position.
    • Stop-loss set at $40
  • Long-Term Positioning: Neutral

International Markets

  • Like EEM, EFA was also sold early last week as we begin to return our focus back to large cap value.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Sold position.
    • Stop-loss set at $61
  • Long-Term Positioning: Neutral

West Texas Intermediate Crude (Oil)

  • The brief rally in oil previously, failed and collapsed back to 2019 lows.
  • With oil approaching support at $42.50, and 3-standard deviations oversold, I suspect we are about to see a fairly vicious reflexive rally in oil. This will likely coincide with central bank interventions.
  • We started building positions in RDS/A last week, and we are going to add XLE to the ETF Model and add further to XOM and AMLP. These will initially be “rental trades” but there is value in the sector we are looking for longer-term if positions can hold.
  • We remain cautious and are “nibbling” on positions.
  • Short-Term Positioning: Neutral
    • Last Week: No positions
    • This Week: Added small amounts to AMLP and RDS/A.
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • As noted last week: “Gold rallied sharply and broke out to new highs, suggesting there was something amiss with the stock market exuberance.”
  • The correction came this past week, confirming Gold’s message was correct.
  • On Friday, we sold our GDX postion (people intensive) but are maintaining our gold position as a hedge to the overall portfolio.
  • We are watching this pullback. If gold gets oversold but doesn’t violate our support levels at $137.50 we will increase our gold holdings.
  • Our positioning looks good, but we are likely going to get a stock market bounce next week, allowing a better entry point to add to Gold positions.
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Hold positions, sold Gold Miners (GDX)
    • Stop-loss for profits adjusted to $145, Look to buy at $137.50
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • As with Gold, Bonds were also suggesting something was amiss with the market. Bonds broke out to new highs this past week, and after adding exposure previously, the rally was a welcome hedge against stock market volatility.
  • We sold TLT this past week, just to take in some profits due to the extreme overbought condition of the market. If we get a counter-trend rally, we will likely get a pullback to support and can re-enter the trade when we hedge the rest of the equity portfolio.
  • Bonds have triggered a “buy” signal which suggests that we are not “out of the woods,” just yet, and a recession later this year is likely.
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Sold TLT to take profits. Holding all other positions.
    • Stop-loss is moved up to $137.50
    • Long-Term Positioning: Bullish

U.S. Dollar

  • As noted previously: “This past week, the dollar surged through that resistance and is now extremely overbought short-term. Looking for a reflexive rally in stocks next week that pulls the dollar back towards the breakout level of last week.
  • While stocks didn’t rally just yet, I expect they will next week, the dollar started to correct its 3-standard-deviation extension to the upside.
  • The dollar decline should help Oil and commodities short-term, but don’t get too overly aggressive as we are very early in the entire process of what is happening economically.
  • Move slowly and carefully.
  • The “buy” signal has been triggered suggesting the dollar is going to move higher from here.

Special Report: S&P 500 Plunges On Coronavirus Impact

Dow plunges 1,000 points on coronavirus fears, 3.5% drop is worst in two years

“Stocks fell sharply on Monday as the number of coronavirus cases outside China surged, stoking fears of a prolonged global economic slowdown from the virus spreading. – CNBC

According to CNBC’s logic, the economy was perfectly fine on Friday, even though the market sold off then as well. However, over the weekend, stocks are plunging because the virus is now important?

No, this has been a correction in the making for the past several weeks that we have been discussing in our weekly market updates. Here was what we posted yesterday morning:

  • As noted last week: “With the market now trading 12% above its 200-dma, and well into 3-standard deviations of the mean, a correction is coming.” That correction started last Friday.
  • Currently, there is a strong bias to “buy the dip” of every corrective action. We recognize this and given the S&P 500 hit initial support on Friday we did add 1/2 position of VOOG to the Dynamic Model. The model is underallocated to equities and has a short hedge so we are taking this opportunity to add slowly. However, we suspect there is more to this corrective action to come this week.
  • As noted previously, extensions to this degree rarely last long without a correction. There is more work to be done before the overbought and extended condition is corrected. We will look to add to our holdings during that process.

While the correction occurred all in one day, which wasn’t our preference, it nonetheless set the markets up for a short-term bounce. We highly suggest using that bounce to rebalance portfolio risks accordingly.

Daily

On a daily basis, the market is back to oversold. Historically, this condition has been sufficient for a bounce. The difference, however, is the current oversold condition (top panel) is combined with a “sell signal” in the bottom panel. This suggests that any rally in the markets over the next few days should be used to reduce equity risk, raise cash, and add hedges.

If we rework the analysis a bit, the 3-standard deviation discussed previously is in the correction process. However, with the break of the 50-dma, uptrend channel, and triggering a short-term sell signal, the 200-dma comes into focus as important support.

As with the chart above, the market is oversold on a short-term basis, and a rally from current support back to the 50-dma is quite likely.

Again, that rally should be used to reduce risk.

The following chart is a longer-term analysis of the market and is the format we use for “onboarding” our clients into their allocation models. (Vertical black lines are buy periods)

Notice that while the market has been rising since early 2016, the momentum indicators are extremely stretched. Historically, such divergences result in markedly lower asset prices. In the short-term, as noted above, the market remains confined to a rising trend which is denoted by the trend channel. At this juncture, the market has not violated any major support points and does not currently warrant a drastically lower exposure to risk. However, if the “sell signals” are triggered, it will suggest a larger “reduction” of risk.

The analysis becomes more concerning as view other time frames.

Weekly

On a weekly basis, the rising trend from the 2016 lows is clear. The market has not violated that trend currently, which suggests maintaining some allocation to equity risk in portfolios currently. However, the two longer-term sell signals, bottom panels, are closing. If they both confirm, it will suggest a more significant correction process is forming.

The market is still very overbought on a weekly basis which confirms the analysis above that short-term rallies should likely be sold into, and portfolios hedged, until the correction process is complete.

Monthly

On a monthly basis, the bulls remain in control currently, which keeps our portfolios primarily allocated to equity risk. As we have noted previously, the market had triggered a “buy” signal in October of last year as the Fed “repo” operations went into overdrive. These monthly signals are “important,” but it won’t take a tremendous decline to reverse those signals. It’s okay to remain optimistic short-term, just don’t be complacent.

Don’t Panic Sell

The purpose of the analysis above is to provide you with the information to make educated guesses about the “probabilities” versus the “possibilities” of what could occur in the markets over the months ahead.

It is absolutely “possible” the markets could find a reason to rally back to all-time highs and continue the bullish trend. (For us, such would be the easiest and best outcome.)

However, the analysis currently suggests the risks currently outweigh potential reward and a deeper correction is the most “probable” at this juncture.

Don’t take that statement lightly.

I am suggesting reducing risk opportunistically, and being pragmatic about your portfolio, and your money. Another 50% correction is absolutely possible, as shown in the chart below.

(The chart shows ever previous major correction from similar overbought conditions on a quarterly basis. A similar correction would currently entail a 58.2% decline.)

So, what should you be doing now. Here are our rules that we will be following on the next rally.

  1. Move slowly. There is no rush in adding equity exposure to your portfolio. Use pullbacks to previous support levels to make adjustments.
  2. If you are heavily UNDER-weight equities, DO NOT try and fully adjust your portfolio to your target allocation in one move. This could be disastrous if the market reverses sharply in the short term. Again, move slowly.
  3. Begin by selling laggards and losers. These positions are dragging on performance as the market rises and tends to lead when markets fall. Like “weeds choking a garden,” pull them.
  4. Add to sectors, or positions, that are performing with, or outperforming the broader market.
  5. Move “stop-loss” levels up to current breakout levels for each position. Managing a portfolio without “stop-loss” levels is like driving with your eyes closed.
  6. While the technical trends are intact, risk considerably outweighs the reward. If you are not comfortable with potentially having to sell at a LOSS what you just bought, then wait for a larger correction to add exposure more safely. There is no harm in waiting for the “fat pitch” as the current market setup is not one.
  7. If none of this makes any sense to you – please consider hiring someone to manage your portfolio for you. It will be worth the additional expense over the long term.

While we remain optimistic about the markets currently, we are also taking precautionary steps of tightening up stops, adding non-correlated assets, raising some cash, and looking to hedge risk opportunistically.

Everyone approaches money management differently. This is just our approach to the process of controlling risk.

We hope you find something useful in it.

Major Market Buy/Sell Review: 02-24-20

Each week we produce a chart book of the major financial markets to review whether the markets, as a whole, warrant higher levels of equity risk in portfolios or not. Stocks, as a whole, tend to rise and fall with the overall market. Therefore, if we get the short-term trend of the market right, our portfolios should perform respectively.

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • As noted last week: “With the market now trading 12% above its 200-dma, and well into 3-standard deviations of the mean, a correction is coming.” That correction started last Friday.
  • Currently, there is a strong bias to “buy the dip” of every corrective action. We recognize this and given the S&P 500 hit initial support on Friday we did add 1/2 position of VOOG to the Dynamic Model. The model is underallocated to equities and has a short hedge so we are taking this opportunity to add slowly. However, we suspect there is more to this corrective action to come this week.
  • As noted previously, extensions to this degree rarely last long without a correction. The is more work to be done before the overbought and extended condition is corrected. We will look to add to our holdings during that process.
  • Short-Term Positioning: Neutral Due To Extension
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss moved up to $320
    • Long-Term Positioning: Neutral due to valuations

Dow Jones Industrial Average

  • As goes the S&P 500, goes the DIA, especially when MSFT & AAPL are the two top holdings and drivers of the advances in both indexes.
  • Like SPY, DIA is very overbought and extended from long-term means and the correction this past week has started to reverse that condition. Dow 30k will have to wait for now.
  • Wait for this correction to complete before adding further exposure.
  • Short-Term Positioning: Neutral due to extensions
    • Last Week: Hold current positions
    • This Week: Hold current positions
    • Stop-loss moved up to $280
  • Long-Term Positioning: Neutral

Nasdaq Composite

  • Despite the correction on Friday which centered on “big Tech,” it did little to reverse the extreme conditions of the market.
  • The correction this past week has not done nearly enough reversal to warrant adding exposure here.
  • With the Nasdaq “buy signal” at extremely overbought levels, there is likely more correction to come.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss moved up to $215
  • Long-Term Positioning: Neutral due to valuations

S&P 600 Index (Small-Cap)

  • Small caps have failed to participate with the markets and under performance is weighing on portfolios.
  • The buy signal has continued to correct as small-caps are struggling to maintain recent support levels.
  • We may remove our exposure to small-caps and focus our attention more on domestic large cap value for now.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop loss moved up to $69
  • Long-Term Positioning: Neutral

S&P 400 Index (Mid-Cap)

  • MDY remains extremely extended above the 200-dma, so more corrective action is likely. MDY is still on a buy-signal but is pushing rather extreme deviations from long-term means.
  • The previous breakout level held which is very bullish, so if the overbought condition can get worked off with some consolidation, we will have a good entry point to add exposure.
  • Short-Term Positioning: Neutral
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bullish

Emerging Markets

  • EEM rallied and failed at resistance last week, which is concerning.
  • Like small-caps, we are going to reduce our exposure to international holdings and return our focus on large cap value for now.
  • The Dollar (Last chart) is also suggesting we reduce our exposure to international positioning. The dollar has reversed and broke out to new highs suggesting there is more upside to the dollar currently.
  • We are maintaining our holdings, but will likely remove our holdings soon.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss set at $42
  • Long-Term Positioning: Neutral

International Markets

  • Like EEM, EFA also rallied off support last week but failed at recent highs.
  • As with EEM, the key to our positioning is the US Dollar which is rallying strongly.
  • We are going to likely remove our international exposure soon and return our focus back to large cap value.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss set at $67
  • Long-Term Positioning: Neutral

West Texas Intermediate Crude (Oil)

  • Oil has rallied over the last week showing some signs of life. However, oil stocks have yet to reflect the improvement. We suspect they will soon if oil can continue to rise.
  • As noted last week, “Oil is extremely oversold so a counter-trend rally is highly likely.”
  • We got a little bounce this past week, but need follow through this week.
  • We remain on hold for now, but are getting more interested.
  • Short-Term Positioning: Neutral
    • Last Week: No positions
    • This Week: No positions
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • As noted last week: “Gold rallied sharply and broke out to new highs, suggesting there was something amiss with the stock market exuberance.”
  • The correction came this past week, confirming Gold’s message was correct.
  • On Friday, gold rallied sharply off support and with the buy signal intact, higher levels are likely.
  • Our positioning looks good, but we are likely going to get a stock market bounce next week, allowing a better entry point to add to Gold positions.
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Hold positions
    • Stop-loss for whole position adjusted to $145
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • As with Gold, Bonds were also suggesting something was amiss with the market. Bonds broke out to new highs this past week, and after adding exposure previously, the rally was a welcome hedge against stock market volatility.
  • Hold positions for now, but look for a bit of correction before adding more weight.
  • Bonds are very close to triggering a sell-signal. Suggesting higher prices are likely (Lower yields)
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss is moved up to $136
    • Long-Term Positioning: Bullish

U.S. Dollar

  • As noted previously: “The dollar has rallied back to that all important previous support line. IF the dollar can break back above that level, and hold, then commodities, and oil, will likely struggle.”
  • This past week, the dollar surged through that resistance and is now extremely overbought short-term. Looking for a reflexive rally in stocks next week that pulls the dollar back towards the breakout level of last week.
  • The rising dollar is not bullish for Oil, commodities or international exposures. So watch carefully.
  • The “buy” signal has been triggered suggesting the dollar is going to move higher from here.

Major Market Buy/Sell Review: 02-17-20

Each week we produce a chart book of the major financial markets to review whether the markets, as a whole, warrant higher levels of equity risk in portfolios or not. Stocks, as a whole, tend to rise and fall with the overall market. Therefore, if we get the short-term trend of the market right, our portfolios should perform respectively.

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • As noted last week: “With the market now trading 12% above its 200-dma, and well into 3-standard deviations of the mean, a correction is coming.” But the belief is currently “more stimulus” will offset the “virus.” This is probably a wrong guess.
  • Extensions to this degree rarely last long without a correction.
  • Maintain exposures, but tighten up stop-losses.
  • Short-Term Positioning: Neutral Due To Extension
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss moved up to $320
    • Long-Term Positioning: Neutral due to valuations

Dow Jones Industrial Average

  • As goes the S&P 500, goes the DIA, especially when MSFT & AAPL are the two top holdings and drivers of the advances in both indexes.
  • Like SPY, DIA is very overbought and extended from long-term means.
  • Take profits, but as with SPY, wait for a correction before adding further exposure.
  • Short-Term Positioning: Neutral due to extensions
    • Last Week: Hold current positions
    • This Week: Hold current positions
    • Stop-loss moved up to $280
  • Long-Term Positioning: Neutral

Nasdaq Composite

  • The Nasdaq remains “extremely” extended currently and is 21% above the long-term average which is historically rare. As noted last week, “With QQQ now pushing towards a 4-standard deviation event. A correction is inevitable, it is just a function of time now.”
  • The rally this week has pushed overbought conditions to extremes.
  • The Nasdaq “buy signal” is also back to extremely overbought levels. It is likely a correction is coming and it may be bigger than expected.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss moved up to $215
  • Long-Term Positioning: Neutral due to valuations

S&P 600 Index (Small-Cap)

  • Small caps corrected more than the major markets, but they also haven’t moved as much.
  • The buy signal has continued to correct as small-caps have struggled to maintain recent support levels.
  • Hold positions for now, but move stops up to recent lows.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop loss moved up to $69
  • Long-Term Positioning: Neutral

S&P 400 Index (Mid-Cap)

  • MDY remains extremely extended above the 200-dma, so more corrective action is likely. MDY is still on a buy-signal but is pushing rather extreme deviations from long-term means.
  • The previous breakout level held which is very bullish, so if the overbought condition can get worked off with some consolidation, we will have a good entry point to add exposure.
  • Short-Term Positioning: Neutral
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bullish

Emerging Markets

  • EEM held support at the 200-dma which is encouraging, and the extended buy signal is getting worked off.
  • However, the Dollar (Last chart) is the key to our international positioning. The dollar has reversed its move lower and is rising which isn’t beneficial for international or commodity exposures.
  • Also, the coronavirus has yet to be priced into to global risk.
  • We are maintaining our holdings but tightening up stops.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss set at $42
  • Long-Term Positioning: Neutral

International Markets

  • Like EEM, EFA also rallied off support last week.
  • As we stated last week, “Any good news with the virus and international exposure should rally. EFA looks better than EEM, so we will likely revisit our holding on a rally.” Hopes of a containment of the contagion was what drove markets last week. This is likely fleeting.
  • As with EEM, the key to our positioning is the US Dollar which is rallying strongly.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss set at $67
  • Long-Term Positioning: Neutral

West Texas Intermediate Crude (Oil)

  • As noted last week:
  • “Oil completely broke down last week, and collapsed below all of the important levels. Oil is now testing critical support at $51. A failure there and a break into the low $40’s is probable.”
  • The support is barely holding and oil looks extremely weak. However, oil is extremely oversold so a counter-trend rally is highly likely. We got a little bounce this week, but not much.
  • We remain on hold for now, as stops are close to being triggered.
  • Short-Term Positioning: Neutral
    • Last Week: No positions
    • This Week: No positions
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • Gold rallied sharply and broke out to new highs, suggesting there was something amiss with the stock market exuberance.
  • On Friday, gold rallied holding support at the previous breakout level which is bullish.
  • Our positioning looks good particularly since gold has registered a new “buy signal.”
  • Short-Term Positioning: Neutral
    • Last week: Hold positions.
    • This week: Hold positions
    • Stop-loss for whole position adjusted to $138
    • Long-Term Positioning: Neutral

Bonds (Inverse Of Interest Rates)

  • The correction in bond prices we had previously suggested occurred as bonds broke out of their declining trend sending yields lower. That breakout was a decent entry point to add exposure to bonds if you need it. However, that opportunity has now passed.
  • Take profits and rebalance holdings and look for a trade on the equity side short-term. However, another trade for bonds is likely setting up shortly with a buy signal approaching. Be patient.
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss is moved up to $136
    • Long-Term Positioning: Bullish

U.S. Dollar

  • As noted previously: “The dollar has rallied back to that all important previous support line. IF the dollar can break back above that level, and hold, then commodities, and oil, will likely struggle. It may be too early for a sharper dollar decline currently, as the U.S. economy is still the “cleanest shirt in the dirty laundry.”
  • That is exactly what happened over the last two weeks and the dollar has strengthened that rally as concerns over the “coronavirus” persist. With the dollar testing previous highs, a break above that resistance could result in a sharp move higher for the dollar.
  • The rising dollar is not bullish for Oil, commodities or international exposures.
  • The “sell” signal has began to reverse. Pay attention.

Major Market Buy/Sell Review: 02-10-20

Each week we produce a chart book of the major financial markets to review whether the markets, as a whole, warrant higher levels of equity risk in portfolios or not. Stocks, as a whole, tend to rise and fall with the overall market. Therefore, if we get the short-term trend of the market right, our portfolios should perform respectively.

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • As noted last week: “With the market now trading 12% above its 200-dma, and well into 3-standard deviations of the mean, a correction is coming.” That correction started last week, but was completely reversed this week with the market winding up right back where it started.
  • As noted, the sell-off barely registered in terms of reducing the overbought or extended levels of the market. There is likely a bit more correction to come to buy into so be patient.
  • We did add some short-term trading positions early in the week, but we will be patient to take on more weight.
  • Short-Term Positioning: Neutral Due To Extension
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss moved up to $300
    • Long-Term Positioning: Neutral due to valuations

Dow Jones Industrial Average

  • As goes the S&P 500, goes the DIA, especially when MSFT & AAPL are the two top holdings and drivers of the advances in both indexes.
  • Like SPY, the sell-off barely registered on the chart. The “buy” signal remains extremely extended along with a very overbought condition.
  • Take profits, but as with SPY, wait for a correction before adding further exposure.
  • Short-Term Positioning: Neutral due to extensions
    • Last Week: Hold current positions
    • This Week: Hold current positions
    • Stop-loss moved up to $275
  • Long-Term Positioning: Neutral

Nasdaq Composite

  • Like SPY, the sell-off on Friday barely registered. The Nasdaq remains “extremely” extended currently. As noted last week, “With QQQ now pushing towards a 4-standard deviation event. A correction is inevitable, it is just a function of time now.”
  • Despite the correction, nothing changed as the rally this week reversed the entire correction and the extension is now nearly 19% above the long-term mean.
  • The Nasdaq “buy signal” is also back to extremely overbought levels. It is likely a correction is coming and it may be bigger than expected.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss moved up to $195
  • Long-Term Positioning: Neutral due to valuations

S&P 600 Index (Small-Cap)

  • Small caps corrected more than the major markets, but they also haven’t moved as much.
  • The buy signal remains extended, but the index has corrected some of the short-term overbought.
  • The correction is trying to hold the previous breakout levels with a stop moved up to the 200-dma.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop loss moved up to $68
  • Long-Term Positioning: Neutral

S&P 400 Index (Mid-Cap)

  • Like SLY, MDY also started to correct this past week.
  • MDY remains extremely extended above the 200-dma, so more corrective action is likely. MDY is working off the overbought condition and holding breakout support.
  • The previous breakout level needs to hold while the overbought condition is reversed.
  • Short-Term Positioning: Neutral
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bullish

Emerging Markets

  • EEM was more deeply impacted last week, and did hold stop levels at the 200-dma.
  • EEM is holding breakout level support at the moment and is oversold. However, the entire technical performance is a bit weak at the moment.
  • The Dollar (Last chart) is the key to our international positioning. The dollar looks to have reversed its move lower which isn’t beneficial for international exposure.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss set at $42
  • Long-Term Positioning: Neutral

International Markets

  • Like EEM, EFA also sold off last week, and is testing important support.
  • As we stated last week, “Any good news with the virus and international exposure should rally. EFA looks better than EEM, so we will likely revisit our holding on a rally.”
  • That good news came, and EFA rallied as expected holding previous important support. EFA is working off the overbought condition but is still extended currently. Be patient.
  • As with EEM, the key to our positioning is the US Dollar which is beginning to rally.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss set at $67
  • Long-Term Positioning: Neutral

West Texas Intermediate Crude (Oil)

  • As noted last week:
  • “Oil completely broke down last week, and collapsed below all of the important levels. Oil is now testing critical support at $51. A failure there and a break into the low $40’s is probable.”
  • The support is barely holding and oil looks extremely weak. However, oil is extremely oversold so a counter-trend rally is highly likely.
  • We remain on hold for now, as stops are close to being triggered.
  • Short-Term Positioning: Neutral
    • Last Week: No positions
    • This Week: No positions
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • As noted last week, Gold had rallied sharply and broke out to new highs, suggesting there was something amiss with the stock market exuberance.
  • On Friday, gold rallied holding support at the previous breakout level which is bullish.
  • Our positioning looks good particularly since gold has registered a new “buy signal.”
  • We used the recent weakness to add to our GDX and IAU positions taking them back to full weightings.
  • Short-Term Positioning: Neutral
    • Last week: Hold positions.
    • This week: Hold positions
    • Stop-loss for whole position adjusted to $137
    • Long-Term Positioning: Neutral

Bonds (Inverse Of Interest Rates)

  • The correction in bond prices we had previously suggested occurred as bonds broke out of their declining trend sending yields lower. That breakout was a decent entry point to add exposure to bonds if you need it. However, that opportunity has now passed.
  • Take profits and rebalance holdings and look for a trade on the equity side short-term. However, another trade for bonds is likely setting up shortly with a buy signal approaching. Be patient.
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss is moved up to $132
  • Long-Term Positioning: Bullish

U.S. Dollar

  • As noted previously: “The dollar has rallied back to that all important previous support line. IF the dollar can break back above that level, and hold, then commodities, and oil, will likely struggle. It may be too early for a sharper dollar decline currently, as the U.S. economy is still the “cleanest shirt in the dirty laundry.”
  • That is exactly what happened over the last two weeks and the dollar has strengthened that rally as concerns over the “coronavirus” persist. With the dollar close to testing previous highs, a break above that resistance could result in a sharp move higher for the dollar.
  • The rising dollar is not bullish for Oil, commodities or international exposures.
  • The “sell” signal has began to reverse. Pay attention.

Major Market Buy/Sell Review: 02-03-20

Each week we produce a chart book of the major financial markets to review whether the markets, as a whole, warrant higher levels of equity risk in portfolios or not. Stocks, as a whole, tend to rise and fall with the overall market. Therefore, if we get the short-term trend of the market right, our portfolios should perform respectively.

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

Over the last 3-weeks we have been warning of a pending correction due to the extreme overbought, extended, and overly bullish condition. All that was needed was a “catalyst” to trigger the correction which came in the form of a “Coronavirus.” This is a common theme in this week’s market update.

S&P 500 Index

  • As noted last week: “With the market now trading 12% above its 200-dma, and well into 3-standard deviations of the mean, a correction is coming.” That correction started last Friday and continued this week.
  • Even with the sell-off on Friday, it barely registered in terms of reducing the overbought or extended levels of the market. There is likely a bit more correction to come to buy into.
  • As noted we took profits in both the ETF and Equity Model (See Portfolio Commentary). We will likely have a much better entry point to buy into on a longer-term basis.
  • We may add a short-term trading position after we see where the market trades on Monday.
  • Short-Term Positioning: Neutral Due To Extension
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss moved up to $300
    • Long-Term Positioning: Neutral due to valuations

Dow Jones Industrial Average

  • As goes the S&P 500, goes the DIA, especially when MSFT & AAPL are the two top holdings and drivers of the advances in both markets. (We reduced both of those holdings last week.)
  • Like SPY, the sell-off on Friday barely registered on the chart. The “buy” signal remains extremely extended along with a very overbought condition.
  • Take profits, but as with SPY, wait for a correction before adding further exposure.
  • Short-Term Positioning: Neutral due to extensions
    • Last Week: Hold current positions
    • This Week: Hold current positions
    • Stop-loss moved up to $275
  • Long-Term Positioning: Neutral

Nasdaq Composite

  • Again, like SPY, the sell-off on Friday barely registered. Nasdaq remains “extremely” extended currently. As noted last week, “With QQQ now pushing towards a 4-standard deviation event. A correction is inevitable, it is just a function of time now.”
  • The Nasdaq “buy signal” is also back to extremely overbought levels so look for a correction to add exposure. As with SPY we may pick up a short-term trading position for a reflex rally but this will be trade, not an investment.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss moved up to $195
  • Long-Term Positioning: Neutral due to valuations

S&P 600 Index (Small-Cap)

  • Small caps corrected more than the major markets, but they also haven’t moved as much.
  • The buy signal remains extremely extended, but the index has corrected some of the short-term overbought.
  • Th correction needs to hold the previous breakout levels with a stop moved up to the 200-dma.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop loss moved up to $68
  • Long-Term Positioning: Neutral

S&P 400 Index (Mid-Cap)

  • Like SLY, MDY also started to correct this past week.
  • MDY remains extremely extended above the 200-dma, so more corrective action is likely. MDY is getting oversold short-term so a bounce is likely.
  • The previous breakout level needs to hold while the overbought condition is reversed.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: No holding
    • This Week: No holding/May add a trading position for a reflex rally.
  • Long-Term Positioning: Bullish

Emerging Markets

  • EEM was more deeply impacted by the potential impact of the “Coronavirus.”
  • As noted previously, with the “buy signal” extremely extended, a correction is coming so be patient to add exposure assuming stop levels are not violated.”
  • Initial support failed and stop loss levels are coming quickly into focus. If there is good news on the virus front, EEM will bounce sharply. We will likely use that to sell our positions into.
  • The Dollar (Last chart) is the key to our international positioning. The dollar looks to have reversed its move lower which isn’t beneficial for international exposure.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss set at $43
  • Long-Term Positioning: Neutral

International Markets

  • Like EEM, EFA also sold off last week, and is testing important support.
  • Any good news with the virus and international exposure should rally. EFA looks better than EEM, so we will likely revisit our holding on a rally.
  • As with EEM, the key to our positioning is the US Dollar.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss set at $67
  • Long-Term Positioning: Neutral

West Texas Intermediate Crude (Oil)

  • Oil completely broke down last week, and collapsed below all of the important levels. Oil is now testing critical support at $51. A failure there and a break into the low $40’s is probable.
  • As noted last week: “With oil prices falling back below $60/bbl, it is imperative that oil maintains the 200-dma support level which it is currently testing.” That level failed and prices plunged back towards recent lows.
  • This keeps us on hold for now from adding to positions and stops are close to being triggered.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions.
    • This Week: Hold positions
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • As noted last week, Gold had rallied sharply and broke out to new highs, suggesting there was something amiss with the stock market exuberance.
  • That was confirmed last week with the onset of the “Coronavirus” and the fall in the market.
  • On Friday, gold rallied to new highs once again as money sought safety from stocks. As noted last week: “If gold can muster a rally and break above recent highs, it is likely we will see a further advance.”
  • Our positioning looks good particularly since gold has registered a new “buy signal.”
  • We used the recent weakness to add to our GDX and IAU positions taking them back to full weightings.
  • Short-Term Positioning: Neutral
    • Last week: Hold positions.
    • This week: Hold positions
    • Stop-loss for whole position adjusted to $137
    • Long-Term Positioning: Neutral

Bonds (Inverse Of Interest Rates)

  • As noted two weeks ago: “I suspect we are going to get some economic turmoil sooner, rather than later, which will lead to a correction in the equity markets and an uptick in bond prices.”
  • That occurred as bonds broke out of their declining trend sending yields lower. That breakout was a decent entry point to add exposure to bonds if you need it. However, that opportunity has now passed.
  • Take profits and rebalance holdings and look for a trade on the equity side short-term.
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Take profits and rebalance holdings.
    • Stop-loss is moved up to $132
  • Long-Term Positioning: Bullish

U.S. Dollar

  • Previously, we noted the dollar broke down below both the 200-dma and the bullish trend line. It then retested, and failed, at that previous support level which confirms a breakdown in the dollar from its previous bullish channel.
  • As noted previously: “The dollar has rallied back to that all important previous support line. IF the dollar can break back above that level, and hold, then commodities, and oil, will likely struggle. It may be too early for a sharper dollar decline currently, as the U.S. economy is still the “cleanest shirt in the dirty laundry.”
  • That is exactly what happened last week and the dollar appears to be back in a bullish trend. Oil has collapsed, along with international exposures. We are close to triggering stops on all those positions.
  • The “sell” signal has began to reverse. Pay attention.

Major Market Buy/Sell Review: 1-27-20

Each week we produce a chart book of the major financial markets to review whether the markets, as a whole, warrant higher levels of equity risk in portfolios or not. Stocks, as a whole, tend to rise and fall with the overall market. Therefore, if we get the short-term trend of the market right, our portfolios should perform respectively.

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • As noted last week: “With the market now trading 12% above its 200-dma, and well into 3-standard deviations of the mean, a correction is coming.” That correction started on Friday.
  • Even with the sell-off on Friday, it barely registered in terms of reducing the overbought or extended levels of the market. There is likely a bit more correction to come to buy into.
  • As noted we took profits in both the ETF and Equity Model (See Portfolio Commentary). We will likely have a much better entry point in the next couple of months to buy into.
  • Short-Term Positioning: Neutral Due To Extension
    • Last Week: Hold position
    • This Week: Take profits and rebalance to target weights.
    • Stop-loss moved up to $300
    • Long-Term Positioning: Neutral due to valuations

Dow Jones Industrial Average

  • As goes the S&P 500, goes the DIA, especially when MSFT & AAPL are the two top holdings and drivers of the advances in both markets. (We reduced both of those holdings last week.)
  • Like SPY, the sell-off on Friday barely registered on the chart. The “buy” signal remains extremely extended along with a very overbought condition.
  • Take profits, but as with SPY, wait for a correction before adding further exposure.
  • Short-Term Positioning: Neutral due to extensions
    • Last Week: Hold current positions
    • This Week: Take profits and rebalance risk.
    • Stop-loss moved up to $275
  • Long-Term Positioning: Neutral

Nasdaq Composite

  • Again, like SPY, the sell-off on Friday barely registered. Nasdaq remains “extremely” extended currently. As noted last week, “With QQQ now pushing towards a 4-standard deviation event. A correction is inevitable, it is just a function of time now.”
  • The Nasdaq “buy signal” is also back to extremely overbought levels so look for a correction to add exposure.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: Hold position
    • This Week: Take profits and rebalance risks.
    • Stop-loss moved up to $195
  • Long-Term Positioning: Neutral due to valuations

S&P 600 Index (Small-Cap)

  • Small caps corrected more than the major markets, but they also haven’t moved as much.
  • The buy signal remains extremely extended, and the index overbought, so there is likely more correction to come.
  • Th correction needs to hold the current support level while it works off the overextended buy signal. A failure here and the previous breakout levels will be the next important support and our stop level.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop loss moved up to $69
  • Long-Term Positioning: Neutral

S&P 400 Index (Mid-Cap)

  • Like SLY, MDY also started to correct this past week.
  • MDY remains extremely extended and deviated above the 200-dma, so more corrective action is likely. Look for a reversal of the overbought condition to add to the index.
  • The previous breakout level needs to hold while the overbought condition is reversed.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bullish

Emerging Markets

  • EEM is just like every other market.
  • As noted last week, with the “buy signal” extremely extended, a correction is coming so be patient to add exposure assuming stop levels are not violated. That correction started on Friday.
  • Initial support is being tested and the market remains extremely overbought so be patient.
  • The Dollar (Last chart) is the key to our international positioning. The dollar looks to have confirmed a break lower, but has been strengthening as of late which is a negative for Oil and International Markets.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss set at $43
  • Long-Term Positioning: Neutral

International Markets

  • Like EEM, EFA rallied out of its consolidation channel, broke out, and has now rallied well into 3-standard deviation territory. The correction that started on Friday is extremely mild, so more correction is likely.
  • With EFA both EXTREMELY overbought and extended with the buy signal at levels which signaled the start of the short- to intermediate term correction.
  • As with EEM, the key to our positioning is the US Dollar.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss set at $67
  • Long-Term Positioning: Neutral

West Texas Intermediate Crude (Oil)

  • Oil completely broke down last week, and collapsed below all of the important levels.
  • As noted last week: “With oil prices falling back below $60/bbl, it is imperative that oil maintains the 200-dma support level which it is currently testing.” That level failed and prices plunged back towards recent lows.
  • This keeps us on hold for now from adding to positions and stops are close to being triggered.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions.
    • This Week: Hold positions
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • As noted last week, Gold had rallied sharply and broke out to new highs, suggesting there was something amiss with the stock market exuberance.
  • On Friday, gold rallied to new highs once again as money sought safety from stocks. As noted last week: “If gold can muster a rally and break above recent highs, it is likely we will see a further advance.”
  • Our positioning looks good particularly since gold has registered a new “buy signal.”
  • We used the recent weakness to add to our GDX and IAU positions taking them back to full weightings.
  • Short-Term Positioning: Neutral
    • Last week: Hold positions.
    • This week: Hold positions
    • Stop-loss for whole position adjusted to $137
    • Long-Term Positioning: Neutral

Bonds (Inverse Of Interest Rates)

  • As noted last week: “I suspect we are going to get some economic turmoil sooner, rather than later, which will lead to a correction in the equity markets and an uptick in bond prices.”
  • That occurred last week as bond broke out of their declining trend sending yields lower. That breakout is a decent entry point to add exposure to bonds if you need it. Use a counter trend rally in stocks to pick up bond exposure if needed.
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss is moved up to $132
  • Long-Term Positioning: Bullish

U.S. Dollar

  • Previously, we noted the dollar broke down below both the 200-dma and the bullish trend line. It then retested, and failed, at that previous support level which confirms a breakdown in the dollar from its previous bullish channel.
  • As noted last week: “The dollar has rallied back to that all important previous support line. IF the dollar can break back above that level, and hold, then commodities, and oil, will likely struggle. It may be too early for a sharper dollar decline currently, as the U.S. economy is still the “cleanest shirt in the dirty laundry.”
  • The dollar has continued to test that overhead resistance and looks ready to make a move higher. Such a move will likely trigger stops on international, oil and commodity plays.
  • The “sell” signal remains intact currently suggesting there is further downside, if it begins to reverse that will be an important clue.

Major Market Buy/Sell Review: 1-21-20

Each week we produce a chart book of the major financial markets to review whether the markets, as a whole, warrant higher levels of equity risk in portfolios or not. Stocks, as a whole, tend to rise and fall with the overall market. Therefore, if we get the short-term trend of the market right, our portfolios should perform respectively.

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

This week’s analysis should be titled “Extreme Extension” week. You are going to see in multiple charts the same major deviation from long-term moving averages which have ALWAYS led to a corrective event in the past. Pay attention – risk is extremely elevated currently. Reduce portfolio risk and rebalance accordingly.

S&P 500 Index

  • With the market now trading 12% above its 200-dma, and well into 3-standard deviations of the mean, a correction is coming.
  • The “buy signal” (lower panel) is back to levels of extensions normally only seen with short-term tops and corrective actions, particularly when combined with extreme extensions and deviations from long-term means.
  • As noted we took profits in both the ETF and Equity Model (See Portfolio Commentary) and we still recommend taking profits and rebalancing risks in positions accordingly. We will likely have a much better entry point in the next couple of months to buy into.
  • Short-Term Positioning: Neutral Due To Extension
    • Last Week: Hold position
    • This Week: Take profits and rebalance to target weights.
    • Stop-loss moved up to $300
    • Long-Term Positioning: Neutral due to valuations

Dow Jones Industrial Average

  • sAs goes the S&P 500, goes the DIA, especially when MSFT & AAPL are the two top holdings and drivers of the advances in both markets. (We reduced both of those holdings last week.)
  • The “buy” signal is extremely extended along with a very overbought condition.
  • Hold current positions and take profits, but as with SPY, wait for a correction before adding further exposure.
  • Short-Term Positioning: Neutral due to extensions
    • Last Week: Hold current positions
    • This Week: Take profits and rebalance risk.
    • Stop-loss moved up to $275
  • Long-Term Positioning: Neutral

Nasdaq Composite

  • Again, like SPY, the Nasdaq is just “extremely” extended currently. With QQQ now pushing towards a 4-standard deviation event. A correction is inevitable, it is just a function of time now.
  • The Nasdaq “buy signal” is also back to extremely overbought levels so look for a correction to add exposure.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: Hold position
    • This Week: Take profits and rebalance risks.
    • Stop-loss moved up to $195
  • Long-Term Positioning: Neutral due to valuations

S&P 600 Index (Small-Cap)

  • As noted above, small-caps have also pushed above 2-standard deviations of the 200-dma.
  • With the buy signal also extremely extended, and the index overbought, like all the other markets, a correction will provide a better entry point to add to our positions.
  • That correction has started and the current support level is being tested. A failure here and the previous breakout levels will be the next important support and our stop level.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop loss moved up to $69
  • Long-Term Positioning: Neutral

S&P 400 Index (Mid-Cap)

  • Like SLY, MDY is also extremely extended and deviated above the 200-dma, and the market accelerated further into 3-standard deviation territory on Friday.
  • With MDY’s “buy” signal extremely extended, and very overbought, this is a prime setup for a correction. Hold off adding exposure until we see a better entry point.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bullish

Emerging Markets

  • EEM is just like every other market. The recent surge has taken it well into 3-standard deviation territory.
  • With the “buy signal” extremely extended, a correction is coming so be patient to add exposure assuming stop levels are not violated.
  • EEM has tested, and held the 61.8% Fibonacci retracement level, so if it can break above the recent high, that will continue the bullish trend.
  • The Dollar (Last chart) is the key to our international positioning. The dollar looks to have confirmed a break lower which should support our thesis of adding back international exposure.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss set at $43
  • Long-Term Positioning: Neutral

International Markets

  • Like EEM, EFA rallied out of its consolidation channel, broke out, and has now rallied well into 3-standard deviation territory.
  • EFA is both EXTREMELY overbought and extended with the buy signal at levels which have normally preceded short- to intermediate term corrections.
  • As with EEM, the key to our positioning is the US Dollar.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss set at $67
  • Long-Term Positioning: Neutral

West Texas Intermediate Crude (Oil)

  • Oil finally broke above the downtrend resistance line from the 2018 highs, which was bullish, but unfortunately was not able to hold the breakout level.
  • With oil prices falling back below $60/bbl, it is imperative that oil maintains the 200-dma support level which it is currently testing. This keeps us on hold for now from adding to our positions until we get confirmation oil prices are going to hold.
  • As noted previously, with the short-term buy signal for oil is extended, the struggle we saw was not unexpected.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions.
    • This Week: Hold positions
    • Stop-loss for any existing positions is $58.
  • Long-Term Positioning: Bearish

Gold

  • Gold rallied sharply during the brief “Iran crisis” but has failed to breakout and hold new highs.
  • While gold is overbought short-term, the “buy signal” is very close to triggering. If gold can muster a rally and break above recent highs, it is likely we will see a further advance.
  • With gold now testing old highs, our positioning looks good particularly given that gold remains on a sell-signal currently. A reversal of the signal could suggest further highs to come.
  • We used the recent weakness to add to our GDX and IAU positions taking them back to full weightings.
  • Short-Term Positioning: Neutral
    • Last week: Hold positions.
    • This week: Hold positions
    • Stop-loss for whole position adjusted to $137
    • Long-Term Positioning: Neutral

Bonds (Inverse Of Interest Rates)

  • Bond prices rallied last week, again, and are testing downtrend resistance. For now bonds remain in a bearish channel, suggesting higher yields (lower prices) are still likely short-term.
  • I suspect we are going to get some economic turmoil sooner, rather than later, which will lead to a correction in the equity markets and an uptick in bond prices.
  • Use lower bounds of the downtrend, and the 200-dma, to add to holdings currently.
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss is moved up to $132
  • Long-Term Positioning: Bullish

U.S. Dollar

  • Previously, we noted the dollar broke down below both the 200-dma and the bullish trend line. It then retested, and failed, at that previous support level which confirms a breakdown in the dollar from its previous bullish channel.
  • Last week, the dollar has rallied back to that all important previous support line. IF the dollar can break back above that level, and hold, then commodities, and oil, will likely struggle.
  • As stated last time: “It may be too early for a sharper dollar decline currently, as the U.S. economy is still the “cleanest shirt in the dirty laundry.”
  • Be patient for now on commodity related exposures. Momentum still rules the market as a whole.
  • The “sell” signal remains intact currently suggesting there is further downside, if it begins to reverse that will be an important clue.

Major Market Buy/Sell Review: 1-13-20

Each week we produce a chart book of the major financial markets to review whether the markets, as a whole, warrant higher levels of equity risk in portfolios or not. Stocks, as a whole, tend to rise and fall with the overall market. Therefore, if we get the short-term trend of the market right, our portfolios should perform respectively.

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • On Friday, the market had a small drop after we took profits in our portfolios. However, that drop did little to resolve any of the overbought conditions which currently exisit.
  • The S&P remains more than 2-standard deviations above the 200-dma (shaded blue area).
  • The “buy signal” (lower panel) is back to levels of extensions normally only seen with short-term tops and corrective actions, particularly when combined with extreme extensions and deviations from long-term means.
  • As noted we took profits in both the ETF and Equity Model (See Portfolio Commentary) and we still recommend taking profits and rebalancing risks in positions accordingly. We will likely have a much better entry point in the next couple of months to buy into.
  • Short-Term Positioning: Neutral Due To Extension
    • Last Week: Hold position
    • This Week: Take profits and rebalance to target weights.
    • Stop-loss moved up to $300
    • Long-Term Positioning: Neutral due to valuations

Dow Jones Industrial Average

  • As goes the S&P 500, goes the DIA, especially when MSFT & AAPL are the two top holdings and drivers of the advance in both markets. (We reduced both of those holdings last week.)
  • The “buy” signal is extremely extended along with a very overbought condition.
  • Hold current positions and take profits, but as with SPY, wait for a correction before adding further exposure.
  • Short-Term Positioning: Neutral due to extensions
    • Last Week: Hold current positions
    • This Week: Take profits and rebalance risk.
    • Stop-loss moved up to $275
  • Long-Term Positioning: Neutral

Nasdaq Composite

  • Again, like SPY, the Nasdaq is just “crazy” extended currently. With QQQ now pushing the limits of 3-standard deviations, a correction is inevitable, it is just a function of time now.
  • The Nasdaq “buy signal” is also back to extremely overbought levels so look for a correction to add exposure.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: Hold position
    • This Week: Take profits and rebalance risks.
    • Stop-loss moved up to $195
  • Long-Term Positioning: Neutral due to valuations

S&P 600 Index (Small-Cap)

  • As noted above, small-caps have also pushed above 2-standard deviations of the 200-dma.
  • With the buy signal also extremely extended, and the index overbought, like all the other markets, a correction will provide a better entry point to add to our positions.
  • That correction has started and the current support level is being tested. A failure here and the previous breakout levels will be the next important support and our stop level.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop loss moved up to $69
  • Long-Term Positioning: Neutral

S&P 400 Index (Mid-Cap)

  • Like SLY, MDY is also extremely extended and deviated above the 200-dma, and it has started to correct a bit finally.
  • With MDY’s “buy” signal extremely extended, and very overbought, this is a prime setup for a correction. Hold off adding exposure until we see a better entry point.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bullish

Emerging Markets

  • EEM continues to underperform but did finally breakout above resistance. The next target will be the old highs.
  • With the “buy signal” extremely extended, the set up to add exposure is not present. Be patient for a correction that does not violate our stop.
  • EEM has tested, and held the 61.8% Fibonacci retracement level, so if it can break above the recent high, that will continue the bullish trend.
  • The Dollar (Last chart) is the key to our international positioning. The dollar looks to have confirmed a break lower which should support our thesis of adding back international exposure.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss set at $43
  • Long-Term Positioning: Neutral

International Markets

  • Like EEM, EFA rallied out of its consolidation channel and broke out.
  • But, like EEM, the market is both EXTREMELY overbought and extended. Also, EFA is testing old highs which, as previously expected, is providing short-term resistance.
  • As with EEM, the key to our positioning is the US Dollar.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss set at $67
  • Long-Term Positioning: Neutral

West Texas Intermediate Crude (Oil)

  • Oil finally broke above the downtrend resistance line from the 2018 highs, which is bullish. However, the spurt from the “Iran spat,” shot oil prices to the 61.8% Fibonacci retracement level where it failed badly.
  • With oil prices falling back below $60/bbl, it is imperative that oil maintains the 200-dma support level.
  • As noted last week, with the short-term buy signal for oil is extended, the struggle we saw was not unexpected.
  • Add positions on weakness that doesn’t violate the 200-dma
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions.
    • This Week: Hold positions
    • Stop-loss for any existing positions is $58.
  • Long-Term Positioning: Bearish

Gold

  • Gold found its mojo last week, as Iran sparked fear in the markets. However, it faded a bit as tensions quickly dissapated.
  • With gold now testing old highs, our positioning looks good particularly given that gold remains on a sell-signal currently. A reversal of the signal could suggest further highs to come.
  • We used the recent weakness to add to our GDX and IAU positions taking them back to full weightings.
  • Short-Term Positioning: Neutral
    • Last week: Hold positions.
    • This week: Hold positions
    • Stop-loss for whole position adjusted to $137
    • Long-Term Positioning: Neutral

Bonds (Inverse Of Interest Rates)

  • Bond prices rallied last week, again, and are testing downtrend resistance. For now bonds remain in a bearish channel, suggesting higher yields are still likely short-term.
  • I suspect we are going to get some economic turmoil sooner, rather than later, which will lead to a correction in the equity markets and an uptick in bond prices. The weak employment and wages report last Friday suggested such may be coming.
  • Use lower bounds of the downtrend, and the 200-dma, to add to holdings currently.
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss is moved up to $132
  • Long-Term Positioning: Bullish

U.S. Dollar

  • Previously, we noted the dollar broke down below both the 200-dma and the bullish trend line. It then retested, and failed, at that previous support level which confirms a breakdown in the dollar from its previous bullish channel.
  • Last week, the dollar has rallied back to that all important previous support line. IF the dollar can break back above that level, and hold, then commodities, and oil, will likely struggle.
  • As stated last time: “It may be too early for a sharper dollar decline currently, as the U.S. economy is still the “cleanest shirt in the dirty laundry.”
  • Be patient for now on commodity related exposures. Momentum still rules the market as a whole.
  • The “sell” signal remains intact currently suggesting there is further downside, if it begins to reverse that will be an important clue.

Comparison & The Role Your Advisor Should Play

A recent article on MarketWatch by Sanjib Saha caught my attention:

“After taking the Series 65 exam last February, I set a goal for 2019: Help 10 friends and family members with their finances. Instead of giving specific investment advice, I wanted to educate them on money matters. I knew that they would benefit from one-on-one discussions, well-regarded books, educational videos and credible websites.”

Think about that for a moment. Here is a young man, who grew up during the longest bull market in history, just took his exam last year, has no real investment experience to speak of, and is now giving advice to people with no investment knowledge.

What could possibly go wrong?

While the majority of the article is grossly misinformed and a regurgitation of the “bullish mantras,” there was one paragraph that jumped out with respect to investment success and failure over time. To wit:

“Many years ago, Aisha, received a windfall that she needed to invest. She interviewed a few financial advisers and went with someone who had an impressive job title, a long list of designations and a friendly demeanor. She regularly reviewed her portfolio with the adviser, but never considered there might be performance problems. After all, a paid professional ought to do better than the market, not worse—or so she thought.

As it turned out, her portfolio had more than doubled over 16½ years.Aisha was impressed, until she backtested an identical asset allocation—one with half U.S. stocks and half corporate bonds. A 50-50 allocation consisting of just two broadly diversified index funds would have quadrupled her money over the same holding period. She stared at the results in disbelief. The opportunity cost was huge.”

The Comparison Trap

This is one of the biggest tools used by financial advisors to get clients to switch their accounts over to a “better” program. Let me explain.

Comparison is the cause of more unhappiness in the world than anything else. Perhaps it is inevitable that human beings as social animals have an urge to compare themselves with one another. Maybe it is just because we are all terminally insecure in some cosmic sense. Social comparison comes in many different guises. “Keeping up with the Joneses,” is one well-known way.

Think about it this way.

If your boss gave you a Mercedes as a yearly bonus, you would be thrilled, right? However, what if you found out shortly afterward that everyone else in the office got two cars.

WTF? Now, you are ticked.

But really, are you deprived of getting a Mercedes? Shouldn’t that enough?

Comparison-created unhappiness and insecurity is pervasive, judging from the amount of spam touting everything from weight-loss to plastic surgery. The basic principle seems to be that whatever we have is enough, until we see someone else who has more. Whatever the reason, comparison in financial markets can lead to remarkably bad decisions.

It is this ongoing measurement against some random benchmark index which remains the key reason why investors have trouble patiently sitting on their hands, letting whatever process they are comfortable with, work for them. They get waylaid by some comparison along the way and lose their focus.

If you tell a client that they made 12% on their account, they are very pleased. If you subsequently inform them that “everyone else” made 14%, you’ve now made them upset. The whole financial services industry, as it is constructed now, is predicated on making people upset so they will move their money around in a frenzy.

Therein lies the dirty little secret. Money in motion creates revenue. The creation of more and more benchmarks, indexes, and style boxes is nothing more than the creation of more things to COMPARE to, allowing clients to stay in a perpetual state of outrage.

Aisha, for example, was completely happy with doubling her money over the last 16-years, until our young, inexperienced, newly minted financial advisor showed her “what she could have had.” Now she will make decisions which will potentially increase the amount of risk she is taking in the second most expensive bull market in history.

Our Worst Enemy

I have written about the psychological issues which impede investors returns over longer-term time frames in the past. The two biggest factors, according to Dalbar Research, which lead to chronic investor underperformance over time are:

  • Lack of capital to invest, and;
  • Psychological behaviors

Psychological factors account for fully 50% of investor shortfalls in the investing process. Of course, not having the capital to invest is equally important.

These factors, as shown by data from Dalbar, lead to the lag in performance between investors and the markets over all time periods.

Behavioral biases are an issue which remains little understood and accounted for when individuals begin their investing journey. There are (9) nine of these behavioral biases specifically which impact investors the most.

  • Loss Aversion – The fear of loss leads to a withdrawal of capital at the worst possible time.  Also known as “panic selling.”
  • Narrow Framing – Making decisions about on part of the portfolio without considering the effects on the total.
  • Anchoring – The process of remaining focused on what happened previously and not adapting to a changing market.
  • Mental Accounting – Separating performance of investments mentally to justify success and failure.
  • Lack of Diversification – Believing a portfolio is diversified when in fact it is a highly correlated pool of assets.
  • Herding– Following what everyone else is doing. Leads to “buy high/sell low.”
  • Regret – Not performing a necessary action due to the regret of a previous failure.
  • Media Response – The media has a bias to optimism to sell products from advertisers and attract view/readership.
  • Optimism – Overly optimistic assumptions tend to lead to rather dramatic reversions when met with reality.

These cognitive biases impair our ability to remain emotionally disconnected from our money. As a consequence, we are continually lured into making decisions which are inherently bad for our long-term outcomes.

The Advisor’s Role

These psychological and behavioral issues are exceedingly difficult to control and lead us regularly to making poor investment decisions over time. But this is where the role of an “experienced advisor” should be truly defined and valued.

While the performance chase, a by-product of the very behavioral issues we wish to control, leads everyone to seek out last years “hottest” performing manager or advisor, this is not really the advisor’s main role. The role of an advisor is NOT beating some random benchmark index or to promote a “buy and hold” strategy. (There is no sense in paying for a model you can do yourself.)

Jason Zweig summed it well:

“The only legitimate response of the investment advisory firm, in the face of these facts, is to ensure that it gets no blood on its hands. Asset managers must take a public stand when market valuations go to extremes — warning their clients against excessive enthusiasm at the top and patiently encouraging clients at the bottom.”

Given that individuals are emotional and subject to emotional swings caused by market volatility, the advisors role is not only to be a portfolio manager, but also a psychologist. Dalbar suggested four successful practices to reduce harmful behaviors:

  1. Set Expectations Below Market Indices: Change the threshold at which the fear of failure causes investors to abandon an investment strategy. Set reasonable expectations and do not permit expectations to be inferred from historical records, market indexes, personal experiences or media coverage. The average investor cannot be above average. Investors should understand this fact and not judge the performance of their portfolio based on broad market indices.
  2. Control Exposure to Risk: Include some form of portfolio protection that limits losses during market stresses. Explicit, reasonable expectations are best set by agreeing on a goal that consists of a predetermined level of risk and expected return. Keeping the focus on the goal and the probability of its success will divert attention away from frequent fluctuations that lead to imprudent actions
  3. Monitor Risk Tolerance: Periodically reevaluate investor’s tolerance for risk, recognizing that the tolerance depends on the prevailing circumstances and that these circumstances are subject to change. Even when presented as alternatives, investors intuitively seek both capital preservation and capital appreciation. Risk tolerance is the proper alignment of an investor’s need for preservation and desire for capital appreciation. Determination of risk tolerance is highly complex and is not rational, homogenous nor stable.
  4. Present Forecasts In Terms Of Probabilities: Simply stating that past performance is not predictive creates a reluctance to embark on an investment program. Provide credible information by specifying probabilities, or ranges, that create the necessary sense of caution without negative effects. Measuring progress based on a statistical probability enables the investor to make a rational choice among investments based on the probability of reward.

The challenge, of course, it understanding that the next major impact event, and market reversion, will NOT HAVE the identical characteristics of the previous events. This is why comparing today’s market to that of 2000 or 2007 is pointless. Only the outcome will be the same.

One thing that all the negative behaviors have in common is that they can lead investors to deviate from a sound investment strategy which was narrowly tailored towards their goals, risk tolerance, and time horizon.

The best way to ward off the aforementioned negative behaviors is to employ a strategy that focuses on one’s goals and is not reactive to short-term market conditions. The data shows that the average mutual fund investor has not stayed invested for a long enough period of time to reap the rewards that the market can offer more disciplined investors. The data also shows that when investors react, they generally make the wrong decision.

The reality is that the majority of advisors are ill-prepared for an impact event to occur. This is particularly the case in late-stage bull market cycles where complacency runs high.

When the impact event occurs, advisors who are prepared to handle responses, provide clear messaging, and an action plan for both conserving investment capital and eventual recovery will find success in obtaining new clients.

The “do-it-yourself” crowd will also come to learn the value of experience. When the impact event occurs, the losses in passive investments, “yield-chase” investments, and ETF’s will be substantially larger than individuals currently imagine. Those losses will permanently impair individuals ability to obtain their financial goals.

If you don’t believe me, then explain why, with 30 of the last 40 years in major bull market trends, is a large majority of the population woefully underfunded for retirement?

The reason is that investing is not simple. If it was, everyone would be rich. The reality is that whatever gains investors have garnered over the last decade will be largely wiped away by the next impact event.

Of course, this is the sad history of individual investors in the financial markets as they are always “told to buy” but never “when to sell.”

You can do better.

Market Bubbles: It’s Not The Price, It’s The Mentality.

“Actually, one of the dangers is that people could be throwing risk to the wind and this [market] could be a runaway. We sometimes call that a melt-up and produces prices too high and then if there’s a shock, you come down to Earth and that could impact sentiment. I think this market is fully valued and not undervalued, but I don’t think it’s overvalued,” Jeremy Siegel

Here is an interesting thing.

“Market bubbles have NOTHING to do with valuations or fundamentals.”

Hold on…don’t start screaming “heretic,” and building gallows just yet.

Let me explain.

I can’t entirely agree with Siegel on the market being “fairly valued.” As shown in the chart below, the S&P 500 is currently trading nearly 90% above its long-term median, which is expensive from a historical perspective.

However, since stock market “bubbles” are a reflection of speculation, greed, emotional biases; valuations are only a reflection of those emotions.

In other words, bubbles can exist even at times when valuations and fundamentals might argue otherwise. Let me show you an elementary example of what I mean. The chart below is the long-term valuation of the S&P 500 going back to 1871.

Notice that with the exception of only 1929, 2000, and 2007, every other major market crash occurred with valuations at levels LOWER than they are currently. 

Secondly, all market crashes have been the result of things unrelated to valuation levels such as liquidity issues, government actions, monetary policy mistakes, recessions, or inflationary spikes. Those events were the catalyst, or trigger, that started the “reversion in sentiment” by investors.

For Every Buyer

You will commonly hear that “for every buyer, there must be a seller.”

This is a true statement. The issue becomes at “what price.” What moves prices up and down, in a normal market environment, is the price level at which a buyer and seller complete a transaction.

Market crashes are an “emotionally” driven imbalance in supply and demand.

In a market crash, the number of people wanting to “sell” vastly overwhelms the number of people willing to “buy.” It is at these moments that prices drop precipitously as “sellers” drop the levels at which they are willing to dump their shares in a desperate attempt to find a “buyer.” This has nothing to do with fundamentals. It is strictly an emotional panic, which is ultimately reflected by a sharp devaluation in market fundamentals.

Bob Bronson once penned:

“It can be most reasonably assumed that markets are sufficient enough that every bubble is significantly different than the previous one, and even all earlier bubbles. In fact, it’s to be expected that a new bubble will always be different than the previous one(s) since investors will only bid up prices to extreme overvaluation levels if they are sure it is not repeating what led to the last, or previous bubbles. Comparing the current extreme overvaluation to the dotcom is intellectually silly.

I would argue that when comparisons to previous bubbles become most popular – like now – it’s a reliable timing marker of the top in a current bubble. As an analogy, no matter how thoroughly a fatal car crash is studied, there will still be other fatal car crashes in the future, even if the previous accident-causing mistakes are avoided.”

Comparing the current market to any previous period in the market is rather pointless. The current market is not like 1995, 1999, or 2007? Valuations, economics, drivers, etc. are all different from cycle to the next. Most importantly, however, the financial markets adapt to the cause of the previous “fatal crashes,” but that adaptation won’t prevent the next one.

It’s All Relative

Last week, in our MacroView, I touched on George Soros’ theory on bubbles, which is worth expanding a bit on in the context of this article.

Financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. The degree of distortion may vary from time to time. Sometimes it’s quite insignificant, at other times it is quite pronounced. When there is a significant divergence between market prices and the underlying reality, the markets are far from equilibrium conditions.

Every bubble has two components:

  1. An underlying trend that prevails in reality, and; 
  2. A misconception relating to that trend.

When positive feedback develops between the trend and the misconception, a boom-bust process is set into motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced. Eventually, market expectations become so far removed from reality that people are forced to recognize that a misconception is involved. A twilight period ensues during which doubts grow, and more people lose faith, but the prevailing trend is sustained by inertia.

As Chuck Prince, former head of Citigroup, said, ‘As long as the music is playing, you’ve got to get up and dance. We are still dancing.’ Eventually, a tipping point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction.”

Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions.

The chart below is an example of asymmetric bubbles.

The pattern of bubbles is interesting because it changes the argument from a fundamental view to a technical view. Prices reflect the psychology of the market, which can create a feedback loop between the markets and fundamentals.

This pattern of bubbles can be seen at every bull market peak in history. The chart below utilizes Dr. Robert Shiller’s stock market data going back to 1900 on an inflation-adjusted basis with an overlay of the asymmetrical bubble shape.

As Soro’s went on to state:

Financial markets do not play a purely passive role; they can also affect the so-called fundamentals they are supposed to reflect. These two functions, that financial markets perform, work in opposite directions.

  • In the passive or cognitive function, the fundamentals are supposed to determine market prices. 
  • In the active or manipulative function market, prices find ways of influencing the fundamentals. 

When both functions operate at the same time, they interfere with each other. The supposedly independent variable of one function is the dependent variable of the other, so that neither function has a truly independent variable. As a result, neither market prices nor the underlying reality is fully determined. Both suffer from an element of uncertainty that cannot be quantified.”

Currently, there is a strong belief the financial markets are not in a bubble, and the arguments supporting that belief are based on comparisons to past market bubbles.

It is likely that in a world where there is virtually “no fear” of a market correction, an overwhelming sense of “urgency” to be invested, and a continual drone of “bullish chatter;” the markets are poised for the unexpected, unanticipated, and inevitable event.

Reflections

When thinking about excess, it is easy to see the reflections of excess in various places. Not just in asset prices but also in “stuff.” All financial assets are just claims on real wealth, not actual wealth itself. A pile of money has use and utility because you can buy stuff with it. But real wealth is the “stuff” — food, clothes, land, oil, and so forth.  If you couldn’t buy anything with your money/stocks/bonds, their worth would revert to the value of the paper they’re printed on (if you’re lucky enough to hold an actual certificate). 

But trouble begins when the system gets seriously out of whack.

“GDP” is a measure of the number of goods and services available and financial asset prices represent the claims (it’s not a very accurate measure of real wealth, but it’s the best one we’ve got.) Notice the divergence of asset prices from GDP as excesses develop.

What we see is that the claims on the economy should, quite intuitively, track the economy itself. Excesses occur whenever the claims on the economy, the so-called financial assets (stocks, bonds, and derivatives), get too far ahead of the economy itself.

This is a very important point. 

“The claims on the economy are just that: claims. They are not the economy itself!”

Take a step back from the media, and Wall Street commentary, for a moment and make an honest assessment of the financial markets today.

The increase in speculative risks, combined with excess leverage, leave the markets vulnerable to a sizable correction at some point in the future. The only missing ingredient for such a correction is the catalyst to bring “fear” into an overly complacent marketplace.  

It is all reminiscent of the market peak of 1929 when Dr. Irving Fisher uttered his now famous words: “Stocks have now reached a permanently high plateau.” 

This “time IS different.” 

However, “this time” is only different from the standpoint the variables are not exactly the same as they have been previously. The variables never are, but the outcome is always the same.

Major Market Buy/Sell Review: 1-6-20

Each week we produce a chart book of the major financial markets to review whether the markets, as a whole, warrant higher levels of equity risk in portfolios or not. Stocks, as a whole, tend to rise and fall with the overall market. Therefore, if we get the short-term trend of the market right, our portfolios should perform respectively.

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • Despite the market not making much headway last week, the S&P is currently more than 2-standard deviations above the 200-dma (shaded blue area). You are going to see this extreme extension in several charts below.
  • The “buy signal” (lower panel) is back to levels of extensions normally only seen with short-term tops and corrective actions, particularly when combined with extreme extensions and deviations from long-term means.
  • Take profits and rebalance risks in positions accordingly. We will likely have a much better entry point in the next couple of months to buy into.
  • Short-Term Positioning: Neutral Due To Extension
    • Last Week: Hold position
    • This Week: Take profits and rebalance to target weights.
    • Stop-loss moved up to $300
    • Long-Term Positioning: Neutral due to valuations

Dow Jones Industrial Average

  • So goes the S&P 500, so goes the DIA especially when MSFT & AAPL are the two top holdings and drivers of the advance in both markets.
  • The “buy” signal is extremely extended along with a very overbought condition.
  • Hold current positions, but as with SPY, wait for a correction before adding further exposure.
  • Short-Term Positioning: Neutral due to extensions
    • Last Week: Hold current positions
    • This Week: Hold current positions.
    • Stop-loss moved up to $275
  • Long-Term Positioning: Neutral

Nasdaq Composite

  • Like SPY, the technology heavy Nasdaq has broken out to new highs but is pushing very extended levels. As noted with SPY above, the QQQ is more than 2-standard deviations above the 200-dma. This will likely not last long.
  • The Nasdaq “buy signal” is also back to extremely overbought levels so look for a consolidation or correction to add exposure.
  • The liquidity from the Fed has pushed markets to more dangerous levels. Be careful
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss moved up to $195
  • Long-Term Positioning: Neutral due to valuations

S&P 600 Index (Small-Cap)

  • As noted above, small-caps have also pushed above 2-standard deviations of the 200-dma.
  • With the buy signal also extremely extended, and the index overbought, like all the other markets, a correction will provide a better entry point to add to our positions.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop loss moved up to $69
  • Long-Term Positioning: Neutral

S&P 400 Index (Mid-Cap)

  • Like SLY, MDY is also extremely extended and deviated above the 200-dma.
  • MDY’s “buy” signal is also extremely extended, as well being very overbought, which is a prime setup for a correction. Hold off adding exposure until we see a better entry point.
  • Short-Term Positioning: Neutral due to extensions.
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bullish

Emerging Markets

  • EEM continues to underperform but did finally breakout above resistance. The next target will be the old highs.
  • However, with the “buy signal” extremely extended, the set up to add exposure is not present. Be patient for a correction that does not violate our stop.
  • The Dollar (Last chart) is the key to our international positioning. The dollar looks to have confirmed a break lower which should support our thesis of adding back international exposure.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss set at $43
  • Long-Term Positioning: Neutral

International Markets

  • Like EEM, EFA rallied out of its consolidation channel and broke out.
  • But, like EEM, the market is both EXTREMELY overbought and extended. Also, EFA is testing old highs which will likely provide short-term resistance.
  • As with EEM, the key to our positioning is the US Dollar.
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss set at $67
  • Long-Term Positioning: Neutral

West Texas Intermediate Crude (Oil)

  • Oil finally broke above the downtrend resistance line from the 2018 highs, which is bullish. With Iran kicking up and a weaker dollar prospect, our recent oil adds, and desire to add more, seem to be the right call for now.
  • The short-term buy signal for oil is a bit extended and with oil testing the Fibonacci retracement level, we might see oil struggle in the next week or so. In the short-term it will be what happens in Iran that drives speculators, longer-term it will be the dollar.
  • Add positions on weakness that doesn’t violate the 200-dma
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions.
    • This Week: Hold positions
    • Stop-loss for any existing positions is $58.
  • Long-Term Positioning: Bearish

Gold

  • Gold found its mojo last week, as Iran sparked fear in the markets.
  • With gold now testing old highs, our positioning looks good particularly given that gold remains on a sell-signal currently. A reversal of the signal could suggest further highs to come.
  • We used the recent weakness to add to our GDX and IAU positions taking them back to full weightings.
  • Short-Term Positioning: Neutral
    • Last week: Hold positions.
    • This week: Hold positions
    • Stop-loss for whole position adjusted to $137
    • Long-Term Positioning: Neutral

Bonds (Inverse Of Interest Rates)

  • Bond prices rallied last week, but failed at the downtrend resistance keeping bonds in a bearish channel for now, suggesting higher yields are still likely short-term.
  • I suspect we are going to get some economic turmoil sooner, rather than later, which will lead to a correction in the equity markets and an uptick in bond prices.
  • Use lower bounds of the downtrend, and the 200-dma, to add to holdings currently.
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss is moved up to $132
  • Long-Term Positioning: Bullish

U.S. Dollar

  • Last week, we noted the dollar broke down below both the 200-dma and the bullish trend line. It then retested, and failed, at that previous support level which confirms a breakdown in the dollar from its previous bullish channel.
  • This is an important development, as noted above, which supports our thesis on adding commodities, gold, energy, and international holdings to our portfolios.
  • However, while we are picking around the edges, it may be too early for a sharper dollar decline currently, as the U.S. economy is still the “cleanest shirt in the dirty laundry.” We will wait and watch closely.
  • The “sell” signal remains intact currently suggesting the sell-off could have some room to go.

The Next Decade: Valuations & The Destiny Of Low Returns

Jani Ziedins via Cracked Market recently penned an interesting post:

“As for what comes next, is this bull market tired? Is a crash long overdue? Not if you look at history. Stocks rallied for nearly 20 years between the early 1980s and the late 1990s. By that measure, we could easily see another decade of strong gains before the next “Big One”. Of course, the worst day in stock market history happened during that 20-year bull market in 1987, so we cannot be complacent. But the prognosis for the next 10 years is still good even if we run into a few 20% corrections along the way.”

After a decade of strong, liquidity-driven, post-crisis returns in the financial markets, investors are hopeful the next decade will deliver the same, or better. As Bob Farrell once quipped:

“Bull markets are more fun than bear markets.” 

However, from an investment standpoint, the real question is:

“Can the next decade deliver above average returns, or not?”

Lower Returns Ahead?

Brian Livingston, via MarketWatch, previously wrote an article on the subject of valuation measures and forward returns.

“Stephen Jones, a financial and economic analyst who works in New York City, tracks the formulas that several market wizards have disclosed. He recently updated his numbers through Dec. 31, 2018, and shared them with me. Buffett, Shiller, and the other boldface names had nothing to do with Jones’s calculations. He crunched the financial celebrities’ formulas himself, based on their public statements.

“The graph above doesn’t show the S&P 500’s price levels. Instead, it reveals how well the projection methods estimated the market’s 10-year rate of return in the past. The round markers on the right are the forecasts for the 10 years that lie ahead of us. All of the numbers for the S&P 500 include dividends but exclude the consumer-price index’s inflationary effect on stock prices.”

  • Shiller’s P/E10 predicts a +2.6% annualized real total return.
  • Buffett’s MV/GDP says -2.0%.
  • Tobin’s “q” ratio indicates -0.5%.
  • Jones’s Composite says -4.1%.

(Jones uses Buffett’s formula but adjusts for demographic changes.) 

Here is the important point:

“The predictions might seem far apart, but they aren’t. The forecasts are all much lower than the S&P 500’s annualized real total return of about 6% from 1964 through 2018.”

While these are not guarantees, and should never be used to try and “time the market,” they are historically strong predictors of future returns.

As Jones notes:

“The market’s return over the past 10 years,” Jones explains, “has outperformed all major forecasts from 10 years prior by more than any other 10-year period.”

Of course, as noted above, this is due to the unprecedented stimulation the Federal Reserve pumped into the financial markets. Regardless, markets have a strong tendency to revert to their average performance over time, which is not nearly as much fun as it sounds.

The late Jack Bogle, founder of Vanguard, also noted some concern from high valuations:

“The valuations of stocks are, by my standards, rather high, butmy standards, however, are high.”

When considering stock valuations, Bogle’s method differs from Wall Street’s. For his price-to-earnings multiple, Bogle uses the past 12-months of reported earnings by corporations, GAAP earnings, which includes “all of the bad stuff.” Wall Street analysts look at operating earnings, “earnings without all that bad stuff,” and come up with a price-to-earnings multiple of something in the range of 17 or 18, versus current real valuations which are pushing nearly 30x earnings.

“If you believe the way we look at it, much more realistically I think, the P/E is relatively high. I believe strongly that [investors] should be realizing valuations are fairly full, and if they are nervous they could easily sell off a portion of their stocks.” – Jack Bogle

These views are vastly different than the optimistic views currently being bantered about for the next decade.

However, this is where an important distinction needs to be made.

Starting Valuations Matter Most

What Jani Ziedins missed in his observation was the starting level of valuations which preceded those 20-year “secular bull markets.”  This was a point I made previously:

“The chart below shows the history of secular bull market periods going back to 1871 using data from Dr. Robert Shiller. One thing you will notice is that secular bull markets tend to begin with CAPE 10 valuations around 10x earnings or even less. They tend to end around 23-25x earnings or greater. (Over the long-term valuations do matter.)”

The two previous 20-year secular bull markets begin with valuations in single digits. At the end of the first decade of those secular advances, valuations were still trading below 20x.

The 1920-1929 secular advance most closely mimics the current 2010 cycle. While valuations started below 5x earnings in 1919, they eclipsed 30x earnings ten-years later in 1929. The rest, as they say, is history. Or rather, maybe “past is prologue” is more fitting.

Low Returns Mean High Volatility

When low future rates of return are discussed, it is not meant that each year will be low, but rather the return for the entire period will be low. The chart below shows 10-year rolling REAL, inflation-adjusted, returns in the markets. (Note: Spikes in 10-year returns, which occurred because the 50% decline in 2008 dropped out of the equation, has previously denoted peaks in forward annual returns.)

(Important note: Many advisers/analysts often pen that the market has never had a 10 or 20-year negative return. That is only on a nominal basis and should be disregarded as inflation must be included in the debate.)

There are two important points to take away from the data.

  1. There are several periods throughout history where market returns were not only low, but negative.(Given that most people only have 20-30 functional years to save for retirement, a 20-year low return period can devastate those plans.)
  2. Periods of low returns follow periods of excessive market valuations and encompass the majority of negative return years. (Read more about this chart here)

“Importantly, it is worth noting that negative returns tend to cluster during periods of declining valuations. These ‘clusters’ of negative returns are what define ‘secular bear markets.’” 

While valuations are often dismissed in the short-term because there is not an immediate impact on price returns. Valuations, by their very nature, are HORRIBLE predictors of 12-month returns and should never be used in any investment strategy which has such a focus. However, in the longer term, valuations are strong predictors of expected returns.

The chart below shows Dr. Robert Shiller’s cyclically adjusted P/E ratio combined with Tobin’s Q-ratio. Again, valuations only appear cheap when compared to the peak in 2000. Outside of that exception, the financial markets are, without question, expensive. 

Furthermore, note that forward 10-year returns do NOT improve from historically expensive valuations, but decline rather sharply.

Warren Buffett’s favorite valuation measure is also screaming valuation concerns (which may explain why he is sitting on $128 billion in cash.). The following measure is the price of the Wilshire 5000 market capitalization level divided by GDP. Again, as noted above, asset prices should be reflective of underlying economic growth rather than the “irrational exuberance” of investors. 

Again, with this indicator at the highest valuation level in history, it is a bit presumptuous to assume that forward returns will continue to remain elevated,.

Bull Now, Pay Later

In the short-term, the bull market continues as the flood of liquidity, and accommodative actions, from global Central Banks, has lulled investors into a state of complacency rarely seen historically. As Richard Thaler, the famous University of Chicago professor who won the Nobel Prize in economics stated:

We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping. I admit to not understanding it.

I don’t know about you, but I’m nervous, and it seems like when investors are nervous, they’re prone to being spooked. Nothing seems to spook the market.”

While market analysts continue to come up with a variety of rationalizations to justify high valuations, none of them hold up under real scrutiny. The problem is the Central Bank interventions boost asset prices in the short-term, in the long-term, there is an inherently negative impact on economic growth. As such, it leads to the repetitive cycle of monetary policy.

  1. Using monetary policy to drag forward future consumption leaves a larger void in the future that must be continually refilled.
  2. Monetary policy does not create self-sustaining economic growth and therefore requires ever larger amounts of monetary policy to maintain the same level of activity.
  3. The filling of the “gap” between fundamentals and reality leads to consumer contraction and ultimately a recession as economic activity recedes.
  4. Job losses rise, wealth effect diminishes and real wealth is destroyed. 
  5. Middle class shrinks further.
  6. Central banks act to provide more liquidity to offset recessionary drag and restart economic growth by dragging forward future consumption. 
  7. Wash, Rinse, Repeat.

If you don’t believe me, here is the evidence.

The stock market has returned more than 125% since 2007 peak, which is roughly 3x the growth in corporate sales and 5x more than GDP.

It is critical to remember the stock market is NOT the economy. The stock market should be reflective of underlying economic growth which drives actual revenue growth. Furthermore, GDP growth and stock returns are not highly correlated. In fact, some analysis suggests that they are negatively correlated and perhaps fairly strongly so (-0.40).

However, in the meantime, the promise of another decade of a continued bull market is very enticing as the “fear of missing out” overrides the “fear of loss.”

Let me conclude with this quote from Vitaliy Katsenelson which sums up our investing view:

Our goal is to win a war, and to do that we may need to lose a few battles in the interim.

Yes, we want to make money, but it is even more important not to lose it. If the market continues to mount even higher, we will likely lag behind. The stocks we own will become fully valued, and we’ll sell them. If our cash balances continue to rise, then they will. We are not going to sacrifice our standards and thus let our portfolio be a byproduct of forced or irrational decisions.

We are willing to lose a few battles, but those losses will be necessary to win the war. Timing the market is an impossible endeavor. We don’t know anyone who has done it successfully on a consistent and repeated basis. In the short run, stock market movements are completely random – as random as you’re trying to guess the next card at the blackjack table.”

For long-term investors, the reality that a clearly overpriced market will eventually mean revert should be a clear warning sign. Given the exceptionally high probability the next decade will be disappointing, gambling your financial future on a 100% stock portfolio is likely not advisable.

30% Up Years – Should You Sell It?

The bull market turned in an impressive gain of over 30% (on a total return basis) in 2019. While not a rarity in market history, it certainly falls into the “outlier” category. Not surprisingly, the media has been quick to jump on the story suggesting that if 2019 was strong, just wait until 2020. To wit:

“BTIG’s Julian Emanuel believes 2020 will be a milestone year. With the major indexes kicking off Christmas week at fresh all-time highs, he’s not ruling out a 22% surge in the S&P 500. 

The reason: Most investors don’t trust the record rally.”

I am not sure such is the case judging by both our “Smart/Dumb Money” and “Investor Positioning Fear/Greed” indices.

One of the primary tenants of investing, other than “buy low and sell high,” is always analyzing BOTH sides of every argument to avoid confirmation bias. Therefore, while many are making the case for being invested in the market, we should at least question the possibility of what could go wrong?

With the S&P 500’s stellar gain for 2019, the case for raising some cash is comprised of three primary issues:

    1. The impact of reversions,
    2. Historical length of economic recoveries, and;
    3. Historical returns following years of 30% market returns.

The Impact Of Reversions

There have been numerous studies and discussions on the historical impact to returns due to “reversions to the mean.” However, the impact of reversions remains lost on most individuals as the emotion of “greed” overtakes rationality during strong market advances.

One of the biggest mistakes that individuals make when investing is “not doing the math.” Let’s assume that the S&P 500 is trading at 3000 (nice round number for easy math purposes). If the market advances 30% it would then be trading at 3900 (3000 x 1.3).

However, the “risk,” and inherently the reality for the majority of investors, is that individuals would not “sell out” of their portfolios at the next market peak and would suffer the next 20% decline.

“So what, I am still up 10%.”

That is where the flaw in “the math” comes in. A 20% decline, following a 30% advance, does not leave you holding a 10% gain. In reality, the 30% gain is reduced to just 4%, as the market reverts back to 2600.

In other words, if a 20% correction occurs at any point in the next year, your previous gain would be almost entirely wiped out, not to mention the emotional strain of the decline.

The impact of reversions are devastating to long term portfolio returns, particularly when individuals, as opposed to financial markets, have a finite period within which to save and invest before needing those savings for retirement.

Economic Recoveries & Subsequent Market Returns

However, the real issue is the market is unlikely to correct “just 20%.” The next major market correction will very likely coincide with the next economic recession. (Of course, by simply writing the “R” word, this article will be summarily dismissed by the ‘financial illuminati’ who continue to marvel at the day to day levitation of the market with the inherent belief ‘trees can grow to the sky'”). However, all economic recoveries will eventually contract. The chart below shows every post-recession economic recovery from 1879 to the present.

The statistics are quite interesting:

  • Number of economic recoveries = 29
  • Average number of months per recovery = 42
  • Current economic recovery = 126 months
  • Number of economic recoveries that lasted longer than current = 0
  • Percentage of economic recoveries lasting 60 months or longer = 20.6%

Think about this for a moment. We are currently experiencing the longest economic recovery in history, with most analysts and economists giving no consideration for a recession in the near future.  This is important because, as stated above, major market corrections occur during economic recessions, and those “reversions” tend to be much larger than 20%. The chart shows each of the past economic recoveries and the subsequent market correction during the inevitable contraction.

The statistics are equally interesting:

  • Average number of months of contraction: 14
  • Average market declines during all contractions: -29.13%
  • Average market decline following top seven economic recoveries: -36%

With these statistics, it is somewhat easy to assess the risk/reward of remaining invested in the markets currently in hopes of further advances. If we assume that the markets reach our target of 3300 before the onset of the next economic contraction, the resulting decline, using the historical average of -36%, would push the markets back down to 2100ish.

In other words, all your gains since 2015 would be wiped away.

30% Gains And Sideways Markets

The following chart shows the annual real returns (capital appreciation only) using monthly data for the S&P 500. The purple bars are years of gains 29% or greater. I then showed the subsequent years following that 30% gain and the P/E cycle (expansion or contraction) they were contained in.

Here are the statistics:

  • Number of years the market gained 29% or more:  19
  • Average return of 19 markets:  35.65%
  • Number of total subsequent years measured: 53
  • Average return in subsequent years following a 30% year:  1.48%

What you should notice is that 29%+ return years tended to mark the beginning of a period of both declining rates of annualized returns and typically sideways markets. It is also essential to notice that some of the biggest negative annual returns eventually followed 30% up years.

While it is entirely possible that the markets could “melt up” another 20% from current levels due to the ongoing monetary interventions; history suggests that forward returns not only decline, but bad things have eventually happened.

Go To Cash Now?

I want to be clear that I am not advocating that anyone should go to cash today. The problem with this analysis, unfortunately, is while individuals are unlikely to sell at the top of the market; they are just as unlikely to buy at the bottom. History is replete with market booms and busts and the devastation of individuals along the way.

This is why chasing an all equity benchmark is inherently flawed. Benchmark indexes are riddled with issues that you can not replicate in your portfolio which I discussed in detail in Active vs. Passive & The Simple Reasons You Can’t Beat An Index:”

The reason that individuals are plagued by these emotional behaviors is due to well-meaning articles espousing stock ownership at cyclical valuation peaks.

Sure, it is entirely possible the current cyclical bull market is not over yet.

Momentum driven markets are hard to kill in the latter stages, particularly as exuberance builds. However, they do eventually end. That is unless the Fed has truly figured out a way to repeal economic and business cycles altogether. As we enter into the next decade, we are likely closer to the next contraction than not. This is particularly the case as the Federal Reserve continues to build a bigger economic void in the future by pulling forward consumption through its monetary policies.

Will the market likely be higher in another decade from now? Maybe. However, if interest rates or inflation rise sharply, the economy moves through a normal recessionary cycle, or if Jack Bogle is right – then things could be much more disappointing. As Seth Klarman from Baupost Capital once stated:

“Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.”

We saw much of the same mainstream analysis at the peak of the markets in 1999, and again in 2007. New valuation metrics, IPO’s of negligible companies, valuation dismissals as “this time was different,” and a building exuberance were all common themes. Unfortunately, the outcomes were always the same.

“History repeats itself all the time on Wall Street”  – Edwin Lefevre

Major Market Buy/Sell Review: 12-30-19

Each week we produce a chart book of the major financial markets to review whether the markets, as a whole, warrant higher levels of equity risk in portfolios or not. Stocks, as a whole, tend to rise and fall with the overall market. Therefore, if we get the short-term trend of the market right, our portfolios should perform respectively.

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • Surprise. No change from last week.
  • The “buy signal” has only gotten even more extended with the market severely overbought.
  • Maintain long bias currently as we head into the end of the year, particularly with the Fed flooding the system. However, be aware, that what the Fed is doing suggests something isn’t right with the system, so tighten up stops and pay attention to your holdings.
  • Given the deviation from the mean, and the more extreme overbought condition, we will likely add a short-market position to the portfolio. It is advisable to wait for some consolidation/correction before increasing equity allocations.
  • Short-Term Positioning: Bullish
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss moved up to $300
    • Long-Term Positioning: Neutral due to valuations

Dow Jones Industrial Average

  • Same story as the S&P 500.
  • The “buy” signal is getting even more extremely extended along with a very overbought condition.
  • Hold current positions, but as with SPY, wait for a correction before adding further exposure.
  • Short-Term Positioning: Neutral
    • Last Week: Hold current positions
    • This Week: Hold current positions.
    • Stop-loss moved up to $272.50
  • Long-Term Positioning: Neutral

Nasdaq Composite

  • Like SPY and DIA, the technology heavy Nasdaq has broken out to new highs and is even more extended than before.
  • The Nasdaq “buy signal” is also back to the second most overbought level since early this year. Look for a consolidation or correction to add exposure.
  • The liquidity from the Fed has pushed markets to more dangerous levels. Be careful. If we short the S&P 500 index to hedge our long positions, the Nasdaq can likewise be shorted.
  • Short-Term Positioning: Bullish
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss moved up to $195
  • Long-Term Positioning: Neutral due to valuations

S&P 600 Index (Small-Cap)

  • As noted previously, small-caps broke out above previous resistance and we added to our small cap exposure.
  • Performance since the addition has been unimpressive, but if this rally is going to continue, we should see some catch up.
  • Small caps are very overbought short-term, so a consolidation is needed that doesn’t break support or our stop level.
  • Short-Term Positioning: Bullish
    • Last Week: Added small-cap value SLYV
    • This Week: No change this week.
    • Stop loss moved up to $69
  • Long-Term Positioning: Neutral

S&P 400 Index (Mid-Cap)

  • MDY has broken out to new highs, but like small caps relative performance has not been impressive.
  • MDY has a short-term “buy” signal, but needs a slight correction/consolidation to reduce the extreme overbought and extended condition. The buy signal is very extended as well.
  • Short-Term Positioning: Neutral
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bullish

Emerging Markets

  • EEM traded higher last week after breaking out of resistance.
  • With the “buy signal” extremely extended, the set up to add exposure is not opportunistic.
  • As we noted last week, PAY ATTENTION to the Dollar (Last chart). If the dollar is beginning a new leg higher, EEM and EFA will fail. However, that doesn’t seem to be the case and we added exposure to the sector.
  • Short-Term Positioning: Bearish
    • Last Week: Added positions of DEM
    • This Week: No change this week.
    • Stop-loss set at $41
  • Long-Term Positioning: Neutral

International Markets

  • Like EEM, EFA rallied out of its consolidation channel and broke out.
  • Like EEM, it and the market are both EXTREMELY overbought and EFA is testing old highs.
  • We used the breakout to add exposure to the sector selectively with a tight stop.
  • Short-Term Positioning: Neutral
    • Last Week: Added a position of EFV
    • This Week: No change from last week.
    • Stop-loss set at $64
  • Long-Term Positioning: Neutral

West Texas Intermediate Crude (Oil)

  • Oil is finally showing some signs of life by breaking above the downtrend resistance line from the 2018 highs.
  • There is a short-term buy signal for oil and with the break above the 200-dma we are looking to add XLE if it can confirm the breakout. We will review again next week once we get through the light trading of the holidays.
  • We previously added AMLP to portfolios.
  • Short-Term Positioning: Neutral
    • Last Week: Added 1/2 position of AMLP
    • This Week: No change this week.
    • Stop-loss for any existing positions is $54.
  • Long-Term Positioning: Bearish

Gold

  • Gold got back to oversold and broke support at the 200-dma previously.
  • This past week, the dollar weakened a bit causing gold to shoot above resistance. A bullish short-term sign for gold.
  • We used the recent weakness to add to our GDX and IAU positions taking them back to full weightings.
  • Short-Term Positioning: Neutral
    • Last week: Took holdings back to full weights
    • This week: No change this week.
    • Stop-loss for whole position adjusted to $132.50
    • Long-Term Positioning: Neutral

Bonds (Inverse Of Interest Rates)

  • Bond prices remain in the downtrend resistance keeping bonds in a bearish channel for now, suggesting higher yields are still likely short-term.
  • I suspect we are going to get some economic turmoil sooner, rather than later, which will lead to a correction in the equity markets and an uptick in bond prices.
  • Use lower bounds of the downtrend to add to holdings currently.
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss is moved up to $132
  • Long-Term Positioning: Bullish

U.S. Dollar

  • Last week, we noted the dollar broke down below both the 200-dma and the bullish trend line.
  • This is an important development. If the break holds, which it did NOT previously, this would bode well for commodities, gold, and hedges (not good for stocks.)
  • This past week the dollar failed at the bottom of that previous support suggesting more downside is possible.
  • However, while we are picking around the edges, it may be too early for a sharper dollar decline currently. We will wait and watch closely.
  • The “sell” signal remains intact currently suggesting the sell-off could have some room to go.

Market And Investing Wisdoms For 2020

Last week, I posted our 2020 Outlook, which focused on the futility of trying to predict the future and the understanding of the current market risks headed into the next decade:

“The reality is that we can’t control outcomes. The most we can do is influence the probability of certain outcomes through the management of risks, and investing based on probabilities, rather than possibilities, which is important to capital preservation and investment success over time.

So, as we head into 2020, here is a short-list of the things we are either currently hedging portfolios against, or will potentially need to:

  1. China fails to comply with the terms of the “Phase One” trade deal, which reignites the trade war.
  2. Earnings growth fails to recover, and valuations finally become a concern for the markets.
  3. Corporate profits, which have been essentially flat since 2014, deteriorate due to slower economic growth both domestically and globally.
  4. Excessively high consumer confidence converges with low levels of CEO Confidence as employment begins to weaken.
  5. Interest rates rise, which trips up heavily leveraged consumers and corporations.
  6. Investors become concerned about excess valuations.
  7. A credit-related event causes a market liquidity crunch. (Convent-Lite, Leveraged Loans, BBB-rated downgrades all pose a potential threat)
  8. The Fed’s “repo-crisis” continues to grow and turns out to be something much more significant.
  9. Similar to 2016, a shocking election result.”

However, while the media looks to every headline as a reason to buy stocks, the reality is investing is about both the buying and the selling.

As an investor, advisor, or portfolio manager, it is important to become divorced from day-to-day headlines, and focus on the investment process and risk management of portfolios. A good place to start is by looking at the wisdom of other successful investors and learning from their experience.

These wisdoms were born out of years of mistakes, miscalculations and trial-and-error. Of course, what made them all successful was the ability to learn from their mistakes and capitalize on that knowledge in the future. Experience is an expensive commodity to acquire which is why it is always cheaper to learn from the mistakes of others. 


12 Market Wisdoms From Gerald Loeb

1. The most important single factor in shaping security markets is public psychology.

2. To make money in the stock market you either have to be ahead of the crowd or very sure they are going in the same direction for some time to come.

3. Accepting losses is the most important single investment device to insure safety of capital.

4. The difference between the investor who year in and year out procures for himself a final net profit, and the one who is usually in the red, is not entirely a question of superior selection of stocks or superior timing. Rather, it is also a case of knowing how to capitalize successes and curtail failures.

5. One useful fact to remember is that the most important indications are made in the early stages of a broad market move. Nine times out of ten the leaders of an advance are the stocks that make new highs ahead of the averages.

6. There is a saying, “A picture is worth a thousand words.” One might paraphrase this by saying a profit is worth more than endless alibis or explanations. . . prices and trends are really the best and simplest “indicators” you can find.

7. Profits can be made safely only when the opportunity is available and not just because they happen to be desired or needed.

8. Willingness and ability to hold funds uninvested while awaiting real opportunities is a key to success in the battle for investment survival.-

9. In addition to many other contributing factors of inflation or deflation, a very great factor is the psychological. The fact that people think prices are going to advance or decline very much contributes to their movement, and the very momentum of the trend itself tends to perpetuate itself.

10. Most people, especially investors, try to get a certain percentage return, and actually secure a minus yield when properly calculated over the years. Speculators risk less and have a better chance of getting something, in my opinion.

11. I feel all relevant factors, important and otherwise, are registered in the market’s behavior, and, in addition, the action of the market itself can be expected under most circumstances to stimulate buying or selling in a manner consistent enough to allow reasonably accurate forecasting of news in advance of its actual occurrence.

12. You don’t need analysts in a bull market, and you don’t want them in a bear market


Jesse Livermore’s Trading Rules Written in 1940

1. Nothing new ever occurs in the business of speculating or investing in securities and commodities.

2. Money cannot consistently be made trading every day or every week during the year.

3. Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.

4. Markets are never wrong – opinions often are.

5. The real money made in speculating has been in commitments showing in profit right from the start.

6. At long as a stock is acting right, and the market is right, do not be in a hurry to take profits.

7. One should never permit speculative ventures to run into investments.

8. The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride.

9. Never buy a stock because it has had a big decline from its previous high.

10. Never sell a stock because it seems high-priced.

11. I become a buyer as soon as a stock makes a new high on its movement after having had a normal reaction.

12. Never average losses.

13. The human side of every person is the greatest enemy of the average investor or speculator.

14. Wishful thinking must be banished.

15. Big movements take time to develop.

16. It is not good to be too curious about all the reasons behind price movements.

17. It is much easier to watch a few than many.

18. If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole.

19. The leaders of today may not be the leaders of two years from now.

20. Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.

21. Few people ever make money on tips. Beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket.


Bernard Baruch’s 10 Investing Rules

1. Don’t speculate unless you can make it a full-time job.

2. Beware of barbers, beauticians, waiters — of anyone — bringing gifts of “inside” information or “tips.”

3. Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.

4. Don’t try to buy at the bottom and sell at the top. This can’t be done — except by liars.

5. Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.

6. Don’t buy too many different securities. Better have only a few investments which can be watched.

7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects.

8. Study your tax position to know when you can sell to greatest advantage.

9. Always keep a good part of your capital in a cash reserve. Never invest all your funds.

10. Don’t try to be a jack of all investments. Stick to the field you know best.


 James P. Arthur Huprich’s Market Truisms And Axioms

1. Commandment #1: “Thou Shall Not Trade Against the Trend.”

2. Portfolios heavy with underperforming stocks rarely outperform the stock market!

3. There is nothing new on Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again, mostly due to human nature.

4. Sell when you can, not when you have to.

5. Bulls make money, bears make money, and “pigs” get slaughtered.

6. We can’t control the stock market. The very best we can do is to try to understand what the stock market is trying to tell us.

7. Understanding mass psychology is just as important as understanding fundamentals and economics.

8. Learn to take losses quickly, don’t expect to be right all the time, and learn from your mistakes.

9. Don’t think you can consistently buy at the bottom or sell at the top. This can rarely be consistently done.

10. When trading, remain objective. Don’t have a preconceived idea or prejudice. Said another way, “the great names in Trading all have the same trait: An ability to shift on a dime when the shifting time comes.”

11. Any dead fish can go with the flow. Yet, it takes a strong fish to swim against the flow. In other words, what seems “hard” at the time is usually, over time, right.

12. Even the best looking chart can fall apart for no apparent reason. Thus, never fall in love with a position but instead remain vigilant in managing risk and expectations. Use volume as a confirming guidepost.

13. When trading, if a stock doesn’t perform as expected within a short time period, either close it out or tighten your stop-loss point.

14. As long as a stock is acting right and the market is “in-gear,” don’t be in a hurry to take a profit on the whole positions. Scale out instead.

15. Never let a profitable trade turn into a loss, and never let an initial trading position turn into a long-term one because it is at a loss.

16. Don’t buy a stock simply because it has had a big decline from its high and is now a “better value;” wait for the market to recognize “value” first.

17. Don’t average trading losses, meaning don’t put “good” money after “bad.” Adding to a losing position will lead to ruin. Ask the Nobel Laureates of Long-Term Capital Management.

18. Human emotion is a big enemy of the average investor and trader. Be patient and unemotional. There are periods where traders don’t need to trade.

19. Wishful thinking can be detrimental to your financial wealth.

20. Don’t make investment or trading decisions based on tips. Tips are something you leave for good service.

21. Where there is smoke, there is fire, or there is never just one cockroach: In other words, bad news is usually not a one-time event, more usually follows.

22. Realize that a loss in the stock market is part of the investment process. The key is not letting it turn into a big one as this could devastate a portfolio.

23. Said another way, “It’s not the ones that you sell that keep going up that matter. It’s the one that you don’t sell that keeps going down that does.”

24. Your odds of success improve when you buy stocks when the technical pattern confirms the fundamental opinion.

25. As many participants have come to realize from 1999 to 2010, during which the S&P 500 has made no upside progress, you can lose money even in the “best companies” if your timing is wrong. Yet, if the technical pattern dictates, you can make money on a short-term basis even in stocks that have a “mixed” fundamental opinion.

26. To the best of your ability, try to keep your priorities in line. Don’t let the “greed factor” that Wall Street can generate outweigh other just as important areas of your life. Balance the physical, mental, spiritual, relational, and financial needs of life.

27. Technical analysis is a windsock, not a crystal ball. It is a skill that improves with experience and study. Always be a student, there is always someone smarter than you!


James Montier’s 7 Immutable Laws Of Investing

1. Always insist on a margin of safety

2. This time is never different

3. Be patient and wait for the fat pitch

4. Be contrarian

5. Risk is the permanent loss of capital, never a number

6. Be leery of leverage

7. Never invest in something you don’t understand

Major Market Buy/Sell Review: 12-23-19

Each week we produce a chart book of the major financial markets to review whether the markets, as a whole, warrant higher levels of equity risk in portfolios or not. Stocks, as a whole, tend to rise and fall with the overall market. Therefore, if we get the short-term trend of the market right, our portfolios should perform respectively.

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • No change from last week.
  • The “buy signal” remains extended with the market severely overbought.
  • Maintain long bias currently as we head into the end of the year, particularly with the Fed flooding the system. However, be aware, that what the Fed is doing suggests something isn’t right with the system, so tighten up stops and pay attention to your holdings.
  • Given the deviation from the mean, and the more extreme overbought condition, it is advisable to wait for some consolidation/correction before increasing equity allocations.
  • Short-Term Positioning: Bullish
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss moved up to $300
    • Long-Term Positioning: Neutral due to valuations

Dow Jones Industrial Average

  • DIA broke out to new highs this past week.
  • The “buy” signal is getting more extremely extended along with a very overbought condition.
  • Hold current positions, but as with SPY, wait for a correction before adding further exposure.
  • Short-Term Positioning: Neutral
    • Last Week: Hold current positions
    • This Week: Hold current positions.
    • Stop-loss moved up to $272.50
  • Long-Term Positioning: Neutral

Nasdaq Composite

  • Like SPY and DIA, the technology heavy Nasdaq has broken out to new highs but is pushing very extended levels.
  • The Nasdaq “buy signal” is also back to extremely overbought levels so look for a consolidation or correction to add exposure.
  • However, as with SPY, QQQ is EXTREMELY overbought short-term, so remain cautious adding exposure. A slight correction that alleviates some of the extension will provide a much better entry point.
  • The liquidity from the Fed has pushed markets to more dangerous levels. Be careful
  • Short-Term Positioning: Bullish
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss moved up to $195
  • Long-Term Positioning: Neutral due to valuations

S&P 600 Index (Small-Cap)

  • As noted previously, small-caps broke out above previous resistance and we added to our small cap exposure again this past week.
  • This past week we added a small-cap value ETF to both the Equity & ETF Portfolios
  • We will wait to see where the next oversold trading opportunity sets up.
  • Short-Term Positioning: Bullish
    • Last Week: No position
    • This Week: Added small-cap value ETF – SLYV
    • Stop loss moved up to $69
  • Long-Term Positioning: Neutral

S&P 400 Index (Mid-Cap)

  • MDY is holding up better than SLY and has broken out to new highs.
  • MDY has a short-term “buy” signal, but needs a slight correction/consolidation to reduce the extreme overbought and extended condition. The buy signal is very extended as well.
  • Short-Term Positioning: Neutral
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bullish

Emerging Markets

  • EEM continues to underperform but turned up with the conclusion of the trade deal and more QE.
  • With the “buy signal” extremely extended, the set up to add exposure was opportunistic.
  • As we noted last week, PAY ATTENTION to the Dollar (Last chart). If the dollar is beginning a new leg higher, EEM and EFA will fail. However, that doesn’t seem to be the case and we added exposure to the sector.
  • Short-Term Positioning: Bearish
    • Last Week: No position
    • This Week: Added Position of DEM to both Equity & ETF Portfolios
    • Stop-loss set at $41
  • Long-Term Positioning: Neutral

International Markets

  • Like EEM, EFA rallied out of its consolidation channel and broke out. WE can now look to add exposure opportunistically to portfolios.
  • Like EEM, it and the market are both EXTREMELY overbought and EFA is testing old highs.
  • We used the breakout to add exposure to the sector selectively with a tight stop.
  • Short-Term Positioning: Neutral
    • Last Week: No position
    • This Week: Added a position of EFV to both the Equity & ETF Portfolios
    • Stop-loss set at $64
  • Long-Term Positioning: Neutral

West Texas Intermediate Crude (Oil)

  • Oil is finally showing some signs of life by breaking above the downtrend resistance line from the 2018 highs.
  • There is a short-term buy signal for oil and with the break above the 200-dma we are looking to add XLE if it can confirm the breakout. We will review again next week.
  • Last week we added AMLP to portfolios as well.
  • Short-Term Positioning: Neutral
    • Last Week: No position
    • This Week: Added 1/2 position of AMLP
    • Stop-loss for any existing positions is $54.
  • Long-Term Positioning: Bearish

Gold

  • Gold got back to oversold and broke support at the 200-dma previously.
  • This past week, the dollar strengthed a bit putting pressure on gold keeping it below resistance.
  • We used the recent weakness to add to our GDX and IAU positions taking them back to full weightings.
  • Short-Term Positioning: Neutral
    • Last week: Hold remaining position.
    • This week: Took holdings back to full weight.
    • Stop-loss for whole position adjusted to $132.50
    • Long-Term Positioning: Neutral

Bonds (Inverse Of Interest Rates)

  • Bond prices ralliied last week, but failed at the downtrend resistance keeping bonds in a bearish channel for now, suggesting higher yields are still likely short-term.
  • I suspect we are going to get some economic turmoil sooner, rather than later, which will lead to a correction in the equity markets and an uptick in bond prices.
  • Use lower bounds of the downtrend to add to holdings currently.
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss is moved up to $132
  • Long-Term Positioning: Bullish

U.S. Dollar

  • Last week, we noted the dollar broke down below both the 200-dma and the bullish trend line.
  • This is an important development. If the break holds, which it did NOT previously, this would bode well for commodities, gold, and hedges (not good for stocks.)
  • This week the dollar rallied to bottom of that previous support, it if fails it will confirm a downside break and suggest lower dollar values. If not, we could see a high dollar which would put pressure on the burgeoning commodity bounce.
  • However, while we are picking around the edges, it may be too early for a sharper dollar decline currently. We will wait and watch closely.
  • The “sell” signal remains intact currently suggesting the sell-off could have some room to go.

Stocks Vs. Bonds: Why We Own Them & You Should Too

Flip on CNBC, pick up a financial paper, or scroll a financial website and you will find a great range of materials discussing the stock market, hot stocks, bad stocks, stock trading tips, and stock investment strategies.

Why? Because stocks are sexy, and the Wall Street casino — with all its flickering lights, screaming patrons, and carnival barkers — makes money for the purveyors of products ranging from IPOs to mutual funds and investment research.

On the other hand, you don’t hear much about bonds. Why? Because bonds are boring? Maybe so. Historically, however, discounting bonds has constituted an investment mistake, and the inevitable cooling down and possible volatility of the stock market in the next decade will make bonds a crucial part of your portfolio.

A recent BNY Mellon Investment Management survey underscored the lack of understanding about bonds and the bond market.

“A BNY Mellon Investment Management national survey on fixed-income investing was stunning: A measly 8% of Americans were able to accurately define fixed-income investments.

The 29-question online survey of just more than 2,000 adults, conducted in July, clearly shows that many Americans admit to having little knowledge about various fixed-income markets and how to invest in them. Here’s a rundown of those who answered “I do not understand it at all” with regard to the following types of bonds: Treasuries, 39%; municipal bonds, 45%; high-yield bonds, 46%; corporate bonds, 51%; structured products, 53%; Treasury Inflation Protected Securities, 63%. Of the 849 respondents who don’t own fixed income or don’t have any investment portfolio, 44% said they don’t buy bonds because they don’t understand the different types of securities.”

This is fascinating but not surprising. Since the financial media focuses only on headline-grabbing corporate news, the minute-by-minute price change of the markets, or what some investment guy with a product to sell you has to say, bonds don’t get much attention.

But, as BNY states, if you don’t understand what bonds are — and more importantly, what they can do for your portfolio — you may be missing out on something really big: And not just if you’re a retiree either.

Bonds can play a vital role for investors of any age because they reduce overall portfolio volatility. The less volatility a portfolio has, the less likely an investor will be to act emotionally during market declines and panic-sell investments to reduce losses.

Bonds also provide the third leg to the total return of a portfolio. Equities offer the first two legs, capital appreciation and dividends. Bonds offers stability by providing investors with both a safety-of-principal function (by returning the initial principal at maturity) and interest income.

Adding bonds to portfolios create better diversification and asset allocation for investors, which can lead to better returns over time, particularly during periods of increased volatility.

Is It The Right Time To Invest In Bonds?

Because interest rates are currently low, concerns about a recession in the U.S. economy have risen. This has led many media commentators to suggest the bonds are now wildly overvalued. For example:

“When evaluating the desirability of government bonds as a long-term investment, it’s imperative to compare the prevailing yields of bonds with the earnings yields for stocks.”

While this is a common comparison, it is also wrong.

Let’s compare the two:

Earnings Yield

  • “Earnings yield” is the inverse of P/E ratios and tells you only what the yield is currently, not what it will be in the future.
  • Investors do not “receive” an “earnings yield” from owning stocks. There is no “yield payment” paid out to shareholders; it is merely a mathematical calculation.
  • There is no protection of principal.

Treasury Yield

  • Investors receive a specific yield, calculable to the penny, which is paid to the holder.
  • Holders also have a government-guaranteed return of principal at maturity.

As we have written previously, it is essential to align expectations and investing requirements. Stocks have liquidity, and potential return (or loss), but no safety of principal. Treasuries have a stated return and a high degree of safety. However, to guarantee the stated return, Treasuries must be held to maturity and may not be liquid, if liquidity is part of your goal.

For most investors, completely discounting the advantage of owning bonds over the last 20 years has been a mistake. By reducing volatility and drawdowns, investors were better able to withstand the eventual storms that wiped out large chunks of capital.

Some may look at the graph below and see that bonds and stocks are at the same level. While this is true, bonds gave you the same amount of return as stocks with much less risk (and, needless to say, stress) during two major bear markets.

It is also worth pointing out that stocks are once again grossly overvalued, and a significant drawdown is probable in the coming years.

Over the next decade, the prospect of low stock market returns, possibly approaching zero, seems much less appealing than the positive return offered by risk-free asset.

Given that we are in the most extended bull market cycle in history, combined with high valuations and weakening fundamentals, it might be time to pay more attention to what bonds can offer you.

They could turn out to be one of the best-performing assets in your portfolio during the next cycle.

Major Market Buy/Sell Review: 12-16-19

Each week we produce a chart book of the major financial markets to review whether the markets, as a whole, warrant higher levels of equity risk in portfolios or not. Stocks, as a whole, tend to rise and fall with the overall market. Therefore, if we get the short-term trend of the market right, our portfolios should perform respectively.

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • No change from last week.
  • With a “buy signal” triggered, there is a positive bias, however with both the price and “buy signal” very extended we expect a short-term correction for a better entry point to add exposure.
  • Given the deviation from the mean, and the more extreme overbought condition, it is advisable to wait for some consolidation/correction before increasing equity allocations.
  • Short-Term Positioning: Bullish
    • Last Week: Hold position
    • This Week: Hold position with a bias to add to holdings.
    • Stop-loss moved up to $300
    • Long-Term Positioning: Neutral due to valuations

Dow Jones Industrial Average

  • DIA broke out to new highs with the reversal of the “buy” signal to the positive. However, that buy signal is pushing some of the higher levels seen historically so a correction is likely.
  • Hold current positions, but as with SPY, wait for a correction before adding further exposure.
  • Short-Term Positioning: Neutral
    • Last Week: Hold current positions
    • This Week: Hold current positions.
    • Stop-loss moved up to $270.00
  • Long-Term Positioning: Neutral

Nasdaq Composite

  • Like SPY and DIA, the technology heavy Nasdaq has broken out to new highs but is pushing very extended levels.
  • The Nasdaq “buy signal” is also back to extremely overbought levels so look for a consolidation or correction to add exposure.
  • However, as with SPY, QQQ is EXTREMELY overbought short-term, so remain cautious adding exposure. A slight correction that alleviates some of the extension will provide a much better entry point.
  • Short-Term Positioning: Bullish
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss moved up to $195
  • Long-Term Positioning: Neutral due to valuations

S&P 600 Index (Small-Cap)

  • As noted previously, small-caps broke out above previous resistance but have been struggling.
  • Last week, small-caps successfully tested the breakout level, there is now a bias to add exposure.
  • This past week we added a small-cap value fund to the ETF Portfolio and are looking to increase that exposure opportunistically.
  • We will wait to see where the next oversold trading opportunity sets up.
  • Short-Term Positioning: Bullish
    • Last Week: No position
    • This Week: Added small-cap value fund 2% weight.
    • Stop loss set at $67
  • Long-Term Positioning: Neutral

S&P 400 Index (Mid-Cap)

  • MDY is holding up better than SLY and has broken out to new highs.
  • MDY has a short-term “buy” signal, but needs a slight correction/consolidation to reduce the extreme overbought and extended condition. The buy signal is very extended as well.
  • Look to add exposure to the market on a pullback that doesn’t violate support.
  • Short-Term Positioning: Neutral
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bullish

Emerging Markets

  • EEM continues to underperform but turned up with the conclusion of the trade deal and more QE.
  • With the “buy signal” extremely extended, the set up to add exposure here is not warranted. Watch the US Dollar for clues to EEM’s direction.
  • As we noted last week, PAY ATTENTION to the Dollar (Last chart). If the dollar is beginning a new leg higher, EEM and EFA will fail. However, that doesn’t seem to be the case and we are looking to add exposure to the sector.
  • Short-Term Positioning: Bearish
    • Last Week: No position
    • This Week: No position
    • Stop-loss set at $41
  • Long-Term Positioning: Neutral

International Markets

  • Like EEM, EFA rallied out of its consolidation channel and broke out. WE can now look to add exposure opportunistically to portfolios.
  • Like EEM, it and the market are both EXTREMELY overbought.
  • Be patient for now and wait for a slight correction to add holdings.
  • Short-Term Positioning: Neutral
    • Last Week: No position
    • This Week: No position.
    • Stop-loss set at $64
  • Long-Term Positioning: Neutral

West Texas Intermediate Crude (Oil)

  • Oil is finally showing some signs of life by breaking above the downtrend resistance line from the 2018 highs.
  • There is a short-term buy signal for oil and with the break above the 200-dma we are looking to add XLE if it can confirm the breakout.
  • Last week we added AMLP to portfolios as well.
  • Short-Term Positioning: Neutral
    • Last Week: No position
    • This Week: Added 1/2 position of AMLP
    • Stop-loss for any existing positions is $54.
  • Long-Term Positioning: Bearish

Gold

  • Gold got back to oversold and broke support at the 200-dma previously.
  • This past week, the dollar weakened and gold improved its positioning.
  • We took the opportunity to take our GDX and IAU positions back to full weightings.
  • Short-Term Positioning: Neutral
    • Last week: Hold remaining position.
    • This week: Took holdings back to full weight.
    • Stop-loss for whole position adjusted to $132.50
    • Long-Term Positioning: Neutral

Bonds (Inverse Of Interest Rates)

  • Bond prices had a nice rally on Friday but was not enough to reverse the sharp sell-off earlier in teh week.
  • Bonds remain in a downtrend currently, but are extremely oversold. I suspect that we are going to get some economic turmoil sooner, rather than later, which will lead to a correction in the equity markets and an uptick in bond prices.
  • Use any bounce to rebalance holdings.
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss is moved up to $132.50
    • Long-Term Positioning: Bullish

U.S. Dollar

  • This past week, the dollar broke down below both the 200-dma and the bullish trend line.
  • This is an important development. If the break holds, which it did NOT previously, this would bode well for commodities, gold, and hedges (not good for stocks.)
  • However, while we are picking around the edges, it may be too early for a sharper dollar decline currently. We will wait and watch closely.
  • The “sell” signal remains intact currently suggesting the sell-off could have some room to go.