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Market Neutral, but Could Change Quickly June 27, 2020

Posted by Tom in Thoughts.
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June 26, 2020 – This will be an unusual posting, in that I’ll cover a few extra market indicators that I look at. But first the market as shown via the NASDAQ Composite Index below.

click to enlarge

You can see that the broader market has not gone very far over the past 3 weeks. The upward momentum has definitely slowed way down and indicators are either neutral or negative. The overall question is this a pause within an up trend or the beginning of a correction? And IF it is a correction, how far down will it go? Actually, no one really knows the answer to either question. I am watch the price levels shown for support.

I’ve labeled a possible Buying Climax (bc?) and and an UpThrust (UT?) on the chart. What should really draw our attention is the big volume on Friday . . much larger than the Friday before (which was caused by option expiration). High volume = High activity, and a down bar would indicate more selling than buying. So even though my main model is “Neutral” (cash) I did put on a small hedge via an inverse ETF. I can always increase or close it out.

But here’s what else concerns me: What is going on in the broader market breath indicators. I’ll only give you a quick explanation, but if you study these, you’ll see what I mean.

Cumulative Up/Down Volume –

click to enlarge

The S&P 500 is shown in the background as a white line for reference. I look for breaks above or below the channel, then confirmation them the following day above / below the signal bar. The lower indicator helps to draw attention to a possible signal.

McClellan Summation Index –

click to enlarge

Same basic principle. A break of an envelope with confirmation. For those interested, you can “Google” these indicators for more information. The idea is to develop an early warning system to detect when the risk is increasing and money is moving out of the market. The “Smart Money” will typically sell into rising prices / a rally, and not wait for things to get weak and prices begin to soften.

The third confirming indicator is the VIX. It is basically a ratio of put to call options volume. Options are the cheapest & quickest way for traders to hedge out their positions and “buy insurance” when they begin to get concerned. It looks like the easy money is done for the time being.

I should note that none of these indicate how far prices will go, just that things are getting “soft”, and extra caution is warranted. Onward to sectors.

Of note above is the decline in Technology sectors and the rise of Treasury Bonds and Precious Metals. It’s early, but things appear to be getting more defensive.

That’s it for this week. Have a good and safe 4th of July (USA readers) and continue being safe with this virus. It’s NOT over. … Tom …

Price charts by MetaStock & TC2000/Warden Brothers; table by http://www.HighGrowthStock.com. Used with permission.

“Steady as She Goes” June 20, 2020

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June 19, 2020 -There are many things that could trip up this market, but (apparently) many very positive things as well. I can’t help feeling that looking only at a market index will only tell us part of the story, especially going forward. What I’m saying is that this will likely turn out to be a “stock pickers market”. But also a specialized sector market as well. Likely not every company stock will do well over the coming year or so. We’re going to need to be selective.

That said I’ve recently broadened my ETF candidate list significantly to not just cover the major sectors but to drill down deeper. I do note that any instrument that I trade must be “liquid”, that is, have sufficient daily volume / activity to absorb both buy & sell orders so that the spread between the Bid & Ask price is reasonable. With trading costs extremely low this makes sense, especially in an IRA type of account where there is no short term tax consideration.

click to enlarge chart

The chart above shows a continuation of the current move. Still within the up sloping channel (purple lines), though it looks like the “bullishness” has subsided recently. This market is not “cheap” if you look at the overall price to earnings it is rather expensive. The true test with begin in mid July & August when the second quarter earnings start to come in. Then we should see what effects the virus & shut down have actually had on earnings. I doubt if many will escape some level of reduced revenue and hence profits. A late summer slump could likely be in the offing. By then we should have a handle on an virus up tick as well. BTW, the volume spike on Friday is the result of options expiring & settling up; nothing unusual.

So, I remain cautious and extra mindful of money flow in the market breath indicators for signs of Distribution. So far, so good, but it does look like the major buying is behind us. I note in the chart above that the near term support price has been moved higher to follow price action.

Short term sector strength looks like this-

We see a number of Technology sectors up there along with a resurgence of BioTech and China. If you want to maximize sector rotation you can drill down even more and see what is the best sub-sector. Case in point is Software within Technology. Just a suggestion.

So . . . . that’s about it for now. “Steady as She Goes” but be aware of ice bergs. There are a few of those out there Captain. 🙂 Have a good week. …… Tom ……

Price chart by MetaStock; pie chart & table by http://www.HighGrowthStock.com. Used with permission.

Market Neutral (for now) June 13, 2020

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June 12, 2020 – OK, an interesting week. What we knew going into the week was that the market was “over bought”, both technically (gap up and too far, too fast), plus fundamentally (valuations, earnings & revenues) are excessive in the historical context. The bottom line is there was too much money chasing stocks prices higher for . . . . . what reason?

The two big contributors are the FED with easy money . . . . . it’s got to go somewhere with companies not investing in themselves right now. The other is a very unusual phenomena of a big surge of retail investors. The surge is likely driven by the “stay a home” virus situation. Need money? Trade at home; it’s easy. The recipe for a bubble ready to burst.

So now what? My model is near the Neutral point, and will likely confirm that with a close below the low on Thursday. (9560 level)

Click on Chart to Enlarge

From the chart above (click on it to enlarge) we see the top indicators remain positive / bullish. The bar color is neutral (a warning). The low price pretty much held at the 9560 level, well at least for now. On the plus side I note the volume has been dropping off. Two observations: one, a sign of No Demand (lack of buying) but there is not a major rush for the exits. At least not yet. We’re still in the “Buy the Dips” mode apparently.

IF we get a major news item, such as the number of virus cases sky rocketing or similar, the correction could just be starting. Time to have a plan to exit IF need be. I have lightened up positions that were showing weak relative strength to the market and I’m ready to get more liquid as needed.

One thing I noticed, is the number of “Put” options being bought, likely as a hedge, increased significantly on Wednesday afternoon and Thursday morning. At the Friday close some of that had unwound, but remains relatively high. Looks like the “Pros” are not taking any chances.

Short Term Sector Strength is shown below.

I note the number of International sectors that are holding up. Perhaps a rotation or maybe just diversifying. We’ll see it that holds into next week.

That’s about it for now. Don’t rush, but keep an eye on the exit door. Have a good week. …………. Tom ……….

Price chart by MetaStock; pie chart & table by http://www.HighGrowthStock.com. Used with permission.

Caution: Over Bought Market June 7, 2020

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June 5, 2020 – This will be a quick post. Obviously the markets continue higher, but also (not) as obvious is we are at the upper limits of a trend and thus (likely) “over bought”. Time to set an exit strategy just in case.

NASDAQ Composite Index: click on image to enlarge

The chart above shows three possible levels to either hedge or begin the exit process if hit; especially on the Close of the day. The high volume concerns me; looks like FOMO (Fear Of Missing Out) is driving this market.

Sector strength is shown in the table below.

I find it most interesting that the sectors that were most lethargic over the past 6 months are now starting to show significant strength. Perhaps a healthy sign, or just some investors trying to catch up before the 2nd quarter ends in a couple of weeks.

That’s it for now. I’m watching the market breath indicators for signs of liquidation. None so far, but . . . .

Have a good week. ………….. Tom ………….

Price chart by MetaStock; pie chart & table by http://www.HighGrowthStock.com. Used with permission.

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