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At (or Near) The Point . . . September 26, 2020

Posted by Tom in Thoughts.
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Sept. 25, 2020 – Well my feeling is that we’re at or near an inflection point. On the chart below you can see that prices (near term) are bouncing up and down with no clear trend. Yes, Friday was a very positive day that closed above the downward sloping channel (purple lines) but we need far more confirmation. A positive break above the 11300 level would be bullish for going higher (green arrow) but also a break below 10412 would be bearish (red arrow). And of course, we could just continue to bounce back and forth between the two levels until after the election (in yellow). Is this a pause in a down trend or re-accumulation? Watch volume and a broadening leadership within the market.

click to enlarge chart

The leadership lately has been “all Tech, all the time” and that’s not a recipe for a strong continuing market. Besides there are many economic headwinds to overcome and right now they are being ignored (IMHO). Here’s one thing that concerns me: in general, strength is being shown in only a few stocks, and these are large cap Tech stocks that have a major effect on the indexes.

The pie chart above shows the number of industry sectors (48 in total) and their 5 day % return on price. 44 of them had a negative week (shades of red). One week does not a trend make, but if this continues . . . . well, not good. Narrow leadership.

Last point is the valuation of this market. The chart below shows the P/E (price/earnings) ratio from a historic perspective. i.e. “Are stocks cheap or expensive?”

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The yellow line is roughly where the classical point is between expensive and cheap (about a P/E ratio of 23). So looking at stocks in the S&P 500 index, the current evaluation is not “cheap”. Not to say that over valuation can’t continue, but we are in that “expensive” region.

My thinking is that we’ll hover around these levels until after the election . . and then we’ll see (or maybe after the first debate on Tuesday?). Until then I’m very cautious and only dipping my toes in certain areas and only in small amounts.

Sector Strength table –

I note a number of defensive sectors toward the top.

Have a good week. ……. Tom …….

Pushing On a Rope September 19, 2020

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Sept. 18, 2020 – This market continues to consolidate with no clear trend. I see folks trying hard to guess the next move either up or down. I feel that getting involved with that logic is like “Pushing On a Rope”; it’s just not going to work. Sure, some will guess correctly and others not, but that’s not investing IMHO.

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Looking at the chart above we note the trend indicators are all Bearish / negative. I’ve labeled three price bars 1,2,3 to show that the close of those bars are all very nearly the same. A “triple bottom”? Perhaps, but it does indicate to me that (on a closing basis) that the level around 10728 is gaining in importance. A close below the 10412-ish level would likely move the market lower. A close above the 11300 level would be a bullish breakout. The third scenario is shown by the gray bracket, and that is prices would remain within the trading range for a while, bouncing back and forth.

Typically one would look to the volume for confirmation but this Friday was options expiration day so there was (expected) high levels of volume as option writers “squared up”. We’ll have to wait until next week and with all of the political cross currents there is uncertainty. And markets don’t like uncertainty. Any breakout, in either direction, may take awhile.

Short Term Sector Strength –

None of these sector are very strong trend wise (i.e. values under 200).

And so it goes. I’m heavy into Cash with a light hedge. No need to “jump the gun” or “Push on the Rope” here trying to make something happen, or worse let, trying to be a hero. Patience.

Have a good week & Take care. ….. Tom ….

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

Price Consolidation September 12, 2020

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Sept. 11, 2020 – A quick look at the chart below of the broad NASDAQ Composite Index shows signs of price consolidation near the current levels. The dashed blue line is the near term support. If we drop (especially on the close) below this level we’re in for further weakness.

click to enlarge

Yes, this chart is rather “Bearish” with all indicators indicating the same, but when I look at the “cause” of this sudden drop, I’m not so sure. The chart below shows the dramatic increase of small trader (less than 10 contracts) call option buying (light blue line; S&P 500 in black).

click to enlarge

This certainly shows wild speculation and was likely driven by many people sitting at home due to the virus. (Nothing to do? Make lots of money trading options!) Funny how this fell apart days after Apple & Tesla split their stock, and . . SoftBank revealed that they had $ Billions in call options. The stage was set; everybody had “bought in”.. I’m thinking we’ll bounce around until next Friday (Sept. 18) when those call options expire. Then we may have an opportunity to reset and see just where we go from here. This sudden move was driven more by news and the market itself. An economic awakening may yet to occur and will likely happen over weeks and not days.

Sector Strength table below:

I remain heavy in Cash right now. Looking for the market to decide, and yes, it can go either way. Let’s see if these levels can hold and this market takes a “breather” perhaps into the election. Earnings will not be great, so folks will be cautious for a while.

Have a good week. …. Tom ….

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

Start of a Correction or “Buy the Dip”? September 7, 2020

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Sept 4, 2020 – A significant and violent sell off last last week. The big question will be is this just the start of a correction or an opportunity to “Buy the Dip”?

As a background, this market, especially Tech stocks, were way overvalued. Note the “typical” price earnings ratio for major / S&P 500 stocks is around 22-23 for a Price -Earnings ratio when they get “over bought”. Apple (for example) had around a 34 P/E ratio earlier last week. And then we have Tesla, semiconductors, etc. So the stage was set, the question was really “when” a sell off would occur. The Japanese tech conglomerate Softbank was reported to have billions $ in U.S. tech company options and that started to raise big concerns. Regardless of “why” the market just sold off quickly.

click to enlarge

The 11090 level held on a closing basis, and that is important. Money & Volume Flow indicators did show weakness, but volume was not excessive for this range of a price movement. The stage is now set for a bounce come Tuesday late morning. But we’ll have to wait until Wednesday / Thursday to see if any bounce has “legs” to continue. Right now this could just be an opportunity to buy at lower prices or the early stages of a more meaningful correction. Currently it looks like a short term thing. We need to see what the major traders do in the next few days. Is there support here, or does more selling & volume come into play.

We do have some retail companies reporting earnings this week and those could set the tone for what shape the economy is in. The “back to school” shopping is a big unknown and not likely to be strong.

Stocks in the broad S&P 1500 index did surprisingly well. More more red and yellow, but the green / strong section still is in evidence.

Sector Strength showed a big change with the Tech leading sectors falling dramatically; now #22 on the list. The more defensive sectors rose to the top.

So a time to be cautious because this market will likely turn in either direction quickly. I did sell out much of the tech holdings on Thursday and placed a “light hedge” on the remaining positions. Very rarely do markets turn this quickly with little time for the “smart money” to sell into strength, so we may be in for a modest consolidation going into the U.S. elections.

Have a good week. …………. Tom ………..

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

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