Pivotal week coming up–Stage 3 top?

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The current earnings report season is supporting this market while rising interest rates weigh it down. What happens after earnings season is over in a few weeks? Sell in May? The GMI2 is at 3 (of 8), indicating that only 3 of my very short term indicators are positive. A weak close of the QQQ on Monday could turn the QQQ short term trend count down after only 3 days of a new short term up-trend. I know that I timidly went to 100% cash early without waiting for the indexes’ 30 week averages to turn down. Was I wrong to exit? The jury is still out….

This weekly chart shows that the SPY is sitting right on its still rising 30 week average (red solid line) but below its 10 week average (blue dotted line). A close back below the solid red line would indicate to me considerable technical weakness and that a possible Stage 3 top is forming. Note the 4 week average (red dotted line) is below the 30 week and 10 week averages. Compare this to the pattern from last September through January, when the 4wk>10wk>30wk average, the pattern of a sustained up-trend (component #5 in GMI2) when holding stocks or index ETFs was likely to be profitable. When that pattern comes back I will be comfortable getting back into the market in my university pension and my trading accounts. (No, I never get in at the bottom, only after I think one is in  place—the fate of a trend follower.)

 

Rising rates will determine this market

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Behind the movement of the market is the move to higher short term interest rates being engineered by the Fed. This chart shows the recent steep weekly BWR decline (see glossary) in short term treasury bonds, indicating rising rates.

The QQQ remains between short term support and resistance (daily chart).The fact that the 50 (green dotted) and 30 day (red line) averages are declining and the QQQ is just below its upper declining 15.2 daily Bollinger Band suggests to me there may be more short term weakness. I remain in cash until the market reveals its intentions.

The GMI remains Red.

In cash and on the sidelines

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I have always told you that I would let you know when I have sold out my trading accounts and/or exited the mutual funds in my university pension. On Friday, I decided to move all of my university pension accounts into money market funds. I had written here that I had gone to cash in my trading accounts weeks ago. My rare decision to also exit in my very conservative pension accounts stemmed from my unwillingness to watch them erode further when I have only a few years until I will rely on them to support my retirement. I would rather sit out this market and risk missing a 10-15% gain than to ride the market down that amount or more.

Why am I concerned?  The tightening Fed and a resulting recession, a possible trade war, the weak technicals, and a large group of new investors who have never witnessed a bear market decline. The next bear market will cause many boomers to sell out (probably panic at the bottom) along with the millennials new to speculation.

The dirty little secret is that if a lot of people decide to sell their “safe” index mutual funds and ETFs at the same time, the redemptions will likely cause an avalanche of selling concentrated in the component stocks in the indexes. Instead of having individuals selling their portfolios containing a relatively small number of stocks, as occurred in the old days, there will be  selling across all of the index components. The market always finds a way to surprise and inflict the most pain. Could this be the way that the explosion of investors seeking safety in index derivatives will be punished?

Meanwhile the GMI remains at 0 (of 6) and I remain peacefully on the sidelines. I know once I exit I have to make a future decision when to reinvest. However, as I see it, if I get out now and the market declines, as long as I can get back in near or below the level I exited, I come out ahead. I do not need to get back in at the bottom! And it really feels good now to get away from the stress induced by the markets these days…..

How I track stocks at all time highs; GLB: $LULU

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During weak markets like the one we have had recently, I find it useful to mine the daily new high list to create a watchlist of stocks hitting all time highs. A stock that can come through market turmoil and still hit an all time high is a stock that might take off when the market strengthens. That is how I found and wrote about the leader GMCR in April, 2009, when it emerged to an all time high early in the new bull market. Unfortunately, I cannot easily use TC2000 to search for stocks at all-time highs because that system returns a null result on a filter if the stock did not exist in the time period examined. For example, if I wanted to write a formula that gives me all stocks that hit a 10 year high, any stock that was not trading for the full 10 years would drop out. This is a major problem for stocks that came public in the past few years.

To get around this limitation I use barchart.com. I go to that site and click on “Stocks” at the top left,  then select “New highs and lows.” When the table comes up, I change the 1 month default drop down to say all-time high. Once I get the spreadsheet of stocks at all time highs, I drag down across all stocks and copy the information. I then open an Excel spreadsheet and paste the information into it. Then I select the column of symbols, copy them and open TC2000. I create a new watchlist for all time highs and paste the symbols into it. I now have a new watchlist containing all stocks that hit an all time high that day. I repeat this process periodically creating a larger watchlist of stocks.

Next I open my all time high watchlist and go to a monthly chart and perform two procedures. First, the barcharts.com list is not perfect and I delete from my watchlist any stock that is not really at an all time high. Second, I draw a horizontal green line at a monthly high that has not been surpassed for three months (3 bars). I then look at each of the stocks to find gems to focus on.  I monitor this watch list daily to see if any of the stocks exhibit any of my set-ups for purchase.

As an example, one stock on my recent all time high list had a green line break out to an all time high last Wednesday on above average volume and a green dot signal on Thursday — LULU.

As the GMI is on a Red signal and we remain in a QQQ short term down-trend (D-5), if I buy anything, I will set a very close stop loss to get out if the stock falters.

Time for cash, GMI=1 (of 6), turns Red

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The technicals for the major indexes are pretty weak even though tonight’s futures indicate an up opening on Monday.  Friday was the first day of a new QQQ short term down-trend. About 40% of these short term down-trends last under 5 days. This is a good time for me to retreat to cash in my trading accounts. However, the put/call ratio on Friday was 1.25, about as high as it gets. This means that many more put than call options were traded–relatively more traders were betting on a decline or buying insurance for their holdings. This is a contrarian indicator–extreme bearishness tends to precede a short term bounce up in the markets. Another contrarian indicator, the Worden T2108 is at 26% but it reached a more extreme 8.6% during the February decline. A T2108 below 10% is a really good sign for me of an oversold market. Finally, the 10.4 daily stochastics indicator is at 9, a level at which the market indexes I monitor tend to bounce. The QQQ has advanced in only 2 of the last 10 days. This daily chart shows the QQQ’s recent failed break-out and subsequent decline. Re-test of the February lows coming?

 

With the end of quarter coming this week, we may see some mutual fund window dressing and a respite from this decline. We could then subsequently see a rise into earnings in mid-April, leading to the “Sell in May and go away and come back at Halloween” maxim. This strategy may actually work this year, or it may not.  Either way, it appears to me that the multi-year bullishness we witnessed since 2016 (2009?) has dissipated. It amuses me when media pundits say there is no problem for stocks now because the economy still looks fine. The market always discounts the future. There were very few media bulls in 2009 when the market bottomed and began to move up. There will be few media bears at the top……..

I have not transferred from mutual funds into money market funds in my university pension— yet. I typically do so when the market indexes enter a Weinstein Stage IV decline. That has not happened yet. If it does, it might signal the beginning, not the end, of a major decline.  It is troublesome to me that the DIA and SPY have closed below their critical 30 week averages for the first time since 2016.  The QQQ remains above its 30 week average but is heading down towards it. The 30 week average is the solid red line in this chart.

In comparison, here is the SPY. The SPY may be leading the techs down. The market may be getting ready to slaughter the multitude who were told to seek refuge in this “safe” market ETF.

When the 30 week average for the QQQ curves down, it is a sign for me to exit the market even in my university pension.  That signal got me out before the 2000 and 2008 market debacles. I am a chicken and would rather retreat and reinvest later when the 30 week average turns up. Trend followers rarely exit/enter at the exact top or bottom. We follow the trend.

This weekly Guppy chart shows the market was in a strong RWB up-trend (see glossary)  for most of the time since 2013. There was a period in 2015/2016 when the market leveled off and the white band in the middle disappeared. Perhaps we are entering such a period. With the strong advance we had  since 2016, we got spoiled and it is easy to forget that the market can go sideways (or down) for many months. Perhaps we will enter such a period again.

The truth is that no one knows how long this decline will continue. It is up to all of us to analyze our tolerance for risk and to protect our capital. Contrary to popular advice, I do not have to remain in the market at all times. I am a boomer,  too close to retirement.

Meanwhile, the GMI (see glossary) is now down to 1 (of 6) and has flashed a Red signal. The Red signal can sometimes occur at a brief market bottom of a decline or at the beginning of a long term down-trend. Time will tell.