Dr. Wish

How close is the $QQQ to the end of its short term up-trend?

@ 6:31 am
GMI6/6
GMI-28/9
T210861%

Being on break from the university, I had time to run an analysis of the length of QQQ   short term up and down-trends over the past 7 years.   I went back and labeled each up and down-trend as they occurred according to the set of rules I have been using to post the QQQ short term trend changes on this blog.   Note that a change in the QQQ short term trend is not the same as a change in the GMI status from buy to sell.   The GMI includes components of both the short and longer term market trends.   When the QQQ short term trend changes to down, I get out of my long positions in my trading accounts and sometimes go short the QQQ by buying an inverse   ETF like QID or SQQQ.

Duration

This table reveals some interesting results. There were a total of 103 up and down-trends in the study period. It is clear that up-trends lasted longer then down-trends.   For example, 23% of the up-trends lasted 2-5 days, compared with 41% of the down-trends.   I have always written that I am more sure of a change in trend when it lasts at least 5 days.   But now I know that almost one half of the down-trends end within 5 days.   I must not jump on a new down-trend too quickly.   Once an up or down-trend persists beyond 5 days, it has about a 55% to 56% chance of lasting from 6-44 days.   Finally, up-trends are 5 times more likely than down-trends (21% vs. 4%) to last 50 or more days.   The two down-trends that did last this long occurred in the huge 2008 market decline.

This table tells me that with the QQQ short term up-trend   passing its 54th day, this up-trend is likely near its end.   But keep two things in mind.   First, the up-trend could end, begin a brief down-trend, and then turn up again.   Second, just like 2008 created two extremely rare long down-trends, this market could always produce an extremely rare up-trend longer than 88 days–but I would not bet on it….

Meanwhile, the GMI remains at 6 (of 6).

GMI12272013

Given the many overbought indicators I see, I am still lightening up on my positions in my trading accounts. I am not taking on any new long positions.

53rd day of $QQQ short term up-trend

@ 6:30 am
GMI6/6
GMI-28/9
T210861%

All of my indicators remain positive, but I am pulling some funds from the market in my trading accounts.   Markets always fall faster than they climb.   When the decline finally comes, it may be rapid and steep. The up-trend that ended last April lasted 75 days, so it is possible that the current up-trend could last that long, but that length is relatively rare.

52nd day of $QQQ short term up-trend; $IEF and $TLT showing interest rates rising-getting more cautious

@ 6:30 am
GMI6/6
GMI-28/9
T210861%

As you know, I have been involved in the market since the mid 1960’s.   I have seen up and down markets.   One of the things I have noticed is that when people I know who have little interest in the market (because they are scared or cautious) begin to tell me they are buying stocks, I become a little more cautious.   Also, when most of my holdings are climbing rapidly we are near a top–and they are! The market has been in a short term up-trend for 52 straight days.   The QQQ has closed above its critical 10 week average for 25 straight weeks (including this week). I have also seen declines begin in January. So, just because it is a new year does not guarantee an immediate continuation of this up-trend.

This market is being driven by extraordinary low interest rates.   Money seeks the place with the best yield with the least risk.   For the past three years there has been no way to earn a decent return except in stocks (and some real estate).   Of course, those who bought bonds when their yields were high have seen their bond prices rise tremendously, but this situation is probably over.   The Federal Reserve members are now poised to take their collective feet off of the gas pedal.   As interest rates rise, it will begin to draw money out of this relatively risky stock market and the market will top.

Look at this weekly chart of IEF, the ETF which tracks   7-10 year treasury bonds.   As IEF declines it means interest rates are rising. IEF is clearly in an ominous   Weinstein Stage 4 decline (much like gold has been in).   The same is true of longer term rates, reflected in TLT. Thus medium to long term interest rates are clearly rising! How much will rates have to climb before people start moving their money from the stock market into treasury bonds?   It will depend on a combination of the rates available and how the market is behaving.   When a stock market decline sets in, people will become more cautious, and seek the relative safety and better yield of treasury bonds.   (Most boomers also do not have the luxury of waiting for their accounts to recover from a new extended market decline.) And then the whole cycle begins again. Rising rates lead to falling bonds which leads to a down market which leads to lower rates and a rebounding market.

IEFweekly

TLT shows 20 year bonds also in an identical Stage 4 decline:

TLTweekly

Only the very short term rates are stable, as promised by the Fed.   Check out this weekly chart of SHY, which reflects 1-3 year treasury bonds:

SHYweekly

The charts above show that the economy is clearly experiencing rising medium and long term interest rates. This scenerio will eventually hurt the stock market. Nevertheless, you know I remain a trend follower and I try to respond to the market, rather than move early in anticipation of Mr. Market’s turns. My GMI indicators are all positive, so I will stay invested long.   However, I am going to resist the temptation to add more money to my positions or take on new ones.   I will wait for at least a small general market decline and an ensuing bounce.   I will also move my stops up and exit anything showing weakness or becoming extremely extended or overbought. I remain fully invested in mutual funds in my university pension, which limits trades.