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A Pause or A Correction ? May 3, 2020

Posted by Tom in Thoughts.
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May 1, 2020 – “Hooray Hooray, the 1st of May !” So far earnings have been a mixed bag, even in the Technology sector. Some have been pretty good considering, while others poor, with even worse guidance. The big issue is what will happen over the next 2-3 months with the impact of the virus. No one knows. But with states opening up we should get a glimpse into the future over the next 2 weeks. Do the number of cases increase, stay the same or decrease? I think that metric will be key for the next 6-9 months.

In the mean time the long anticipated pause / correction appears to have started on Friday. I show two scenarios on the chart below.

NASDAQ Composite Index; click to enlarge

Scenario #1 is a very mild drop to the 8215 support level which I would call a “pause” before a general up trend resumes. Scenario #2 is more severe with a drop to around the 7288 level. I note that the volume on Friday (the last bar) was rather light; “no demand”, but not significant selling either. So far it looks like option #1 is the most likely but be aware that if we get bad news #2 could definitely be in play as well.

So far most indicators remain “bullish”, with Price Strength being “neutral”. We should have a good idea about the strength of this market over the next 2-3 days. I’m watching the price (of course) but also volume; which would confirm price.

The short term sector strength table is shown below.

I’m still wary of the energy sector, but if anything will lead this market high it will probably be Technology in one form or another. Banks and Finance would come in as a second.

I just have this feeling that the complete effects of the Corona Virus have yet to be fully appreciated. Will it be just jump back to the “old normal” or transition into something else? Will everyone get their old jobs back? (I doubt it.) Will restaurants, airlines, cruise ships and casinos pick up where they left off? Very doubtful ! The economy, not to mention the Federal debt load, will feel the effects for years to come. I’m cautious.

Have a good week and watch price and volume (activity). But mostly, Take Care. ………. Tom ………

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

Next Week Will Be Important April 25, 2020

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April 24, 2020 – Taking a quick look below; well . . not much happened this week. Most indexes are bouncing near resistance levels which are approximately at the 50% retracement level of this correction. Next week is important in that the big 4 of technology (Google, Facebook, Microsoft and Amazon will be reporting. What is of interest going forward is their “guideline”.

click on chart to enlarge

From above I note that “Price Strength” has gone neutral, but the remaining indicators are still positive / bullish. My more “advanced” model (not shown) is bullish, but backed off to a “neutral” reading. So, time to watch for a trend change . . . maybe.

The table below shows short term sector strength. But note: I would avoid “Energy” due to the excessive volatility in the oil market. ETF’s in this sector may not be able to track the underline commodity.

Not much else to say right now. But be aware of this resistance level and watch for a significant break in either direction. I am lightly invested, but will add more if this trend continues.

Have a good week. …….. Tom ………

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

Move Higher Continues, but . . . April 19, 2020

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April 17, 2020 – No doubt about it the recovery rally continues. Likely fueled by some positive news in the short term but mostly by FOMO. FOMO means “Fear Of Missing Out”. This typically happens after a sharp decline when most folks just sell and give up. After all of the selling is exhausted the bargain hunters start nibbling to buy; this nuggs the market higher. When no more selling comes into the market price recovers and more buying comes in. The buying continues with the last buyers feeling the “FOMO” pressure, and then . . . Well, we’ll see. The week coming up has some interesting earnings reports.

Those that expect a recovery soon to the previous highs would naturally assume that everything recovers quickly and there are no repercussions. The question is . . Is that realistic? IMHO, the best we could hope for is prices to oscillate around this level. IF there was any bad news, we could go back down and test the previous lows. We’re dealing with a virus and people. Both are rather unpredictable.

NASDAQ Composite Index

Everything on the chart about is positive and “Bullish”. Volume is increasing on up bars showing buyers are in control. But I’ve noticed an up tick in short selling of the S&P 100 Index. This indicates to me that there are some that feel we’ve come too far, too fast and are looking to “hedge” their positions just in case.

Also here is a chart of recent market down turns.

How Markets Recover

You’ll notice that major corrections are rarely (if ever) just a sharp down, then an abrupt move back to previous highs. It also shows that we still remain well above the very long term trend (red line) of market history. Just something to think about in perspective and valuation.

Lastly (food for thought) how did we get so high so fast over the past 3 years?

Borrowed Money to Buy Stock

I believe one of the major factors was low interest rates, and this is indirectly shown in the chart above as investor credit or the amount of “margin” credit. Briefly, if you borrow money from your broker to buy stock (because it’s going higher) and all of a sudden the prices plummet, you get a “margin call”, that is you have to come up with that borrowed money quickly, or the broker sells your stock (quickly). I think this was a big driver of why the market went down so fast.

Lastly, here’s a table of short term sector strength.

I am very selectively long with a fair amount of Cash. Looking for a better opportunity to deploy that Cash. Have a good week & Stay Fast ! ….. Tom ….

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

The FED Jumps in with Both Feet April 11, 2020

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April 9, 2020 – Thursday was an important day, not because the market went higher but because of why it did. Accentually the FED announced that it would start buying corporate bonds at par value. This has not happened before; the FED has only purchased US Treasury bonds . . until now. What is implied by this action is that the FED will do “whatever it takes” to prevent a major bankruptcy. The market is also reading into this statement that junk bonds and ETF’s are now provided instant liquidity & a parachute if needed.

Obviously this is bullish news and the market reacted as such. So, next week will be interesting to see IF there is any follow through to the upside or if it is a “one & done” type of move. (editorial: for the Conservatives out there . . is this corporate welfare and “socialism”?)

The other implied statement is that the impact of the virus has a much deeper impact on the economy and the lives of our citizens than many originally thought. Yes . . . it is serious, very serious.

NASDAQ Composite Index

This could be an Up Thrust in the price structure (we’ll know that soon) or truly a genuine move higher. The closes above 7878 are telling. But I continue to be wary of at retest of the lows and the potential for a “double bottom”. The market reaction to Trump’s announcement next Tuesday about reopening the economy may just be a catalyst for the next move in either direction.

The pie charts below do show just how broad and strong this latest move has been to the stocks in the very broad S&P 1500 Index.

Percent of Stocks in Accumulation or Distribution:

Percent of Stocks Above / Below their 20 day Moving Average:

The short term sector strength table is shown below:

Banks, Financial and Real Estate reacted very strongly to the FED announcement (i.e. we won’t let you fail).

That about it for this week. MY main market model just turned back to Neutral, but I may wait until after the Tuesday announcement & reaction before I remove my hedge and consider small selective buys. Careful now !

Have a good week and Happy Easter for those to celebrate the holiday. In the mean time, Take Care & Be Safe. ………. Tom ………

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

Is This “The Bottom”? April 5, 2020

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April 3, 2020 – A familiar phrase: “Are we there yet?”. Well if anybody tells you that we definitely are or aren’t, you’re either listening to a gambler or a fool. IMHO. Because . . nobody really knows for sure. In that light let me give you a few possible scenarios.

1) Highly unlikely that we will see a “V” bottom. i.e. “that was the low”, and we only go up from here. Why? Because there was so much damage and unwinding of positions that was done during the last drop. It will take time with some “backing and filling” before true “real” progress can be made.

2) We go back and forth between the last significant high and low. This is show on the NASDAQ Composite chart (below) as 7878 and 6631 and labeled as #2; the dashed green line. This trading range would likely last for a few months at least, probably into the Fall. The action will build a “Cause” for the next move. So, the worst is over, but there is no hurry to re-enter.

3) We “test” the lower support of 6631 and perhaps bounce, but eventually (with bad news) break that level and continue lower. The purpose is a final wash out of the last holders and a final climatic sell off. One scenario via point & figure charting suggests a retest of 7878 in May, then a major break lower in mid June / July (forming a “spring”), before a major rally in the September / October time frame. This is shown as the dashed red line, labeled #1. Note that I didn’t have room in the time / date scale, so that is not representative.

My gut feel is that scenario 3 above is the most likely, but we should always be prepared for any possibility. Note how the volume on the last swing rally was low, i.e. No Demand. This market just doesn’t appear to be at the stage to go higher very soon. Buyers are not stepping in. Besides, we have yet to see the hard numbers of how badly this shut down is hurting corporate revenue.

I’m posting the (short term) Sector Strength table below, but honestly, I’d be very careful with any purchase and keep my time frame goals short term to say the least.

Even the strongest sectors are “less weak” since their weekly strength is not very good at all.

Time to be patient and continue caution. This is a weak, news driven market and picking a bottom is not going to be easy. Typically a major drop like this requires time and then a period of low volitility. I just don’t think all of the bad news has come out yet. I’m staying with a significant Cash position and trying to “hedge out” the rest.

Have a good week and stay as healthy as you can. Take Care. ….. Tom …..

Volitility Continues, No Clear Direction March 29, 2020

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March 27, 2020 – Sorry about being late last week.  The post was completed but only in Draft form.  It took until mid-week before I found that out.  I’m now back to using the “classical editor” and should happen again (I hope).

Yes, back to volatile up and down swings.  Each move seems to begin with news, then gets amplified by computer algos.  And so it goes, back and forth.  I’ve laid out two possible scenarios.  The first is “bullish” and is shown via dashed green line.  The logic is the NASDAQ Composite Index retreats back to roughly a 7194 “mid point”, then rallies higher nexy week.  This puts in a “higher low” price swing, which is positive.  The “bearish” version is shown with a dashed red line.  It just continues back to the previous low.  At that point it just oscillates between Resistance & Support areas or, worse yet, heads even lower.

It all depends on virus and corporate news.  Which in this environment is not a surprise.  The markets are weak and nervous, and just about anything will send them off in any direction.  No value in trying to predict but knowing key price patterns can help decipher overall directions; if only for the short term.

The table below tries to show short term sector strength.  Though it’s hard to read too much into these right now.  (Who would have thought Utilities / Defensive would be right near Semiconductors – Aggressive?)

That’s about it for now.  I’m trying to avoid jumping into things too quickly, but also trying to remain optimistic as well.  Have a good week.   ……….  Tom  ………

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

Don't Be Surprised If . . . March 24, 2020

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March 20, 2020 – I don’t like predictions and much prefer looking at data, but . . . I just need to mention that don’t be surprised if we get a quick explosive rally in the stock market (based off of rosy news) and then an equally quick sell off back to the previous lows (or lower). It’s an age old game of trying to pick the bottom, sucking people in, then selling into a rally. How will be know? Likely by very high volume since there has to be a seller for every buyer, volume will go “off the charts” as folks scramble to get in . . but also to get out. It’s a swing door.

NASDAQ Composie Index

Right now I prefer to see a close above 7878 (green line), with support at around 6686 (red line). When either of these get taken out on a close, then (and only then) will it get my attention. Plus, let’s see if any rally has any “legs” or staying power. This action is easier to see on an intraday chart, say looking at 30 minute bars. Is a price move up being met with heavy volume and resistance as sellers come in to meet the buying demand?

This is not going to be easy, as nothing worthwhile is, but it’s important to be skeptical. There has been a lot of damage done and the outlook for the world economy is still unknown. There will be bad news, especially about corporate earnings. And we know that in the loooong run. It’s all about future earnings.

To illustrate how tough it is, I’m showing a pie chart of the percent of stocks in the S&P 1500 index that are in Accumulation (buying), Distribution (selling) and how strong their prices are.

Accumulation/Distribution –

% of Stock in S&P 1500

Price Strength –

The bottom line is to stay safe and look out for one another. Then be patient about this market. IF there is any logic . . it shouldn’t turn on a dime, but will take time to settle and build a base to effectively launch from.

Take Care and have a good week (or as best that you can). ….. Tom ….

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

Waiting for the Next Shoe to Drop March 14, 2020

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March 13, 2020 – Ok then . . a volatile week that ended in the last half hour on Friday with short covering before the weekend. Is that it? Not expecting a “V” style bottom, but I’m thinking about two scenarios: 1) we bounce around up and down for a few weeks, maybe months, roughly between 8347 and 7194; attempting to build a base. 2) more bad news, both virus and corporate and we continue lower.

click to enlarge

The light blue arrows on the chart above give you a rough idea of scenario #1; #2 is just lower. All indicators are Bearish / Negative, with no surprise there. Why not just a rip upwards? Way to much damage done plus the virus threat, plus the likely effects on corporate revenues. We’ll just have to wait this out for more clarity. Next week should provide us with at least a hint of what’s on the minds of traders.

Sector wise there is not much to see on the long side . . possibly long the US Dollar, but that’s about it.

short term sector strength

I’m very heavy in Cash and the few remaining holdings are hedged out with a “Q’s” Bear fund / ETF. Now is the time to be patient and wait for an opportunity to re-enter. It make take awhile for that to develop.

Have a good week and Stay Safe. ……….. Tom ………….

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

The Three Scenarios March 7, 2020

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March 6, 2020 – Another volatile week in the world markets.  But the question is always, “What Next?”  Right now there are 3 scenarios / possibilities.

1) Could we just rally from here go back up?  Sure, but not likely.  There has been a lot of damage done; a lot of money has been pulled out of the markets.  Just look at the volume on down bars.  2) Could we fall down even further?  Again, that’s possible and it all depends on news and the revenue streams coming into companies.  Thus, a time to be extra careful and watching price and volume.

3) Could we just remain in a trading range going back and forth with blips in the headlines?  In my opinion that’s the most likely direction; bouncing between 9070 at the top end and 8438 at the low end.

It looks like the markets are building a base / in consolidation.  But then again . .  it all depends on how badly business are feeling the virus effects on their revenue stream.  The virus scare impacts both supply of goods (manufacturing) and demand (will consumers buy?).  The virus effects on people is terrible and unfortunate, but one thing is fairly certain: the markets will recover.  The only question is when.  I’m watching for the results on consumer confidence & company revenue guidance for clues.  If there is a close below 8264, then more downside is likely.

The pie charts below tell the story of how the sell off has effected the stocks in the broad S&P 1500 index.

% in Accumulation / Distribution –% Price Strength –

BTW, what stocks were considered “Strong” in the S&P 1500 Index?  Only six.  Those six below –

The table below paints a lot of red as far as short term sector strength is concerned:

I am heavy in Cash with the remaining mutual fund holding completely hedged.  Have a good week and try to be patient.  Likely this is not going to get resolved soon or quickly.   …  Tom  …

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

Wait For It ! February 29, 2020

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Feb. 28, 2020 –  The British (I’m told) have a saying:  “Wait for it!”.  And now it’s all about being patient.  This week was significant in many ways, but if we’re temped to “buy the dip” we might want to be extra cautious even though that has worked well in the past +3 years.  You see . .  it’s all about the perception of earnings growth, which is derived from revenue.  If demand remains high and supplies are disrupted (i.e. China), revenue falls.  If supplies are good (high), but demand for products and services drop (low consumer confidence), well . .  revenue drops.

The corona virus has many folks in both the product and service sectors very concerned.  Even with the “bullish bar” on Friday, that doesn’t necessarily mean that the worst is over.  Markets don’t go up in a straight line, nor do they go down in a straight line (assuming this is not a “dip”).

As you can see the drop started on Monday and just continued all week.  Volume was significantly high as investors sold and computer amplified the selling automatically.  Now I’m looking at 8438 as support and 8943 as resistance levels on the NASDQ Composite Index.

How bad was this drop?  On the S&P 500 blue chip index, you would have to go back to Oct. 10, 2019 to find the same price level.  Every gain in between was wiped out.  You could also go as far back as Sept. 20, 2018 (a year and a half ago) to see nearly the same level.  When things like this happen I like to go back and see if there was any clear signs of an impending drop.  The chart below stood out to me.

The indicator is the Cumulative Volume indicator which measures volume of Up bars to the volume of Down bars.  (click on chart to enlarge)  The gray line is the closing price of the S&P 500 Index.  Note that all during the month of February while the S&P made new highs, the indicator was falling.  For all 500 stocks, there was more volume on down bars that up bars; an indication of Distribution (selling).  Only a few big names were propelling the index higher.

I could post a table on sectors, but in all reality the only one doing well was Treasury Bonds.  A flight to safety.  Even Gold and Gold Miners began to fall by mid week.  So now what?  “Wait for It !”.

There are too many things going on to assume the all clear.  This is a news driven market, so watching how markets react to news will give a clue.  Remember: “Weak markets react badly to bad news, while strong markets ignore it”.  Watching the bar strength (price and volume) will confirm that folks are trying to return.  I’d expect a small rally around mid week.  If that holds, maybe we start to consolidate prices within a low range for a few weeks while the true impact of this virus is felt. Maybe in a few weeks we’ll see a rebound, or if bad news continues we could see a resumption of lower prices.  At this point, it’s all about revenue and what corporations project for the future.  This is NOT the garden variety “buy the dip” situation.  Too much damage has been done.  It will take a while to recover.

I put on a light hedge a week ago Friday, then added to it last Monday.  Through the week I just had to sell stocks and ETF’s.  I am now pretty much “Cash Neutral” with hedges, holding only a few good mutual funds.  I took some losses, but managed to dodge most of it.   Have a good week and keep your powder dry !   🙂    …………  Tom  ………..

Price chart by MetaStock  & TC 2000.  Used with permission.

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