General Market Index (GMI) table

The snap-back in my indicators was quick and extraordinary. A new QQQ short term up-trend has begun. However, it has to last 5 days for me to heavily accumulate TQQQ,   the 3X leveraged bullish QQQ ETF.   I did take a small position in TQQQ at the end of the day on Friday. Buying right after a technical buy signal is actually low risk to me, because if the technical buy signal fails, I can quickly sell out with a relatively small loss. The GMI is above 3, and one more day there and the GMI will flash a Buy signal. Most important, the QQQ is now back above its critical 30 week average (red line), indicating that the Stage 2 advance is still intact. The SPY and DIA also retook their 30 week averages last week.

We are entering what is typically the strongest period for the market, the fourth quarter.   (“Buy stocks on Halloween!”) I expect the strong popular stocks to be bought   by the mutual funds so their end-of-year reports will include the winners in their portfolios. In this way the fund managers look smart for owning them, even though they may have just purchased them at high prices. It’s all about looking good so potential customers will buy their funds and pay their exorbitant management fees. (Why buy mutual funds when one can buy   index ETFs, with their cheaper management fees?)….

Speaking of stocks that institutions will want to own at year’s end, AAPL has regained its critical 10 week average.   I have repeatedly found it   profitable to own AAPL as long as it stayed above its rising 10 week average. AAPL has again broken above its green line and is well above its 10 week average (blue dotted line). Stocks can sometimes consolidate after a green line break-out (GLB), especially if the market becomes weak. The fact that AAPL came through the recent market turbulence at an all-time high shows impressive relative strength and bodes well for the end of year rally and accompanying mutual fund window dressing.

Another recent GLB that I have written about is BABY.   BABY is showing a lot of strength, having plodded higher amidst the recent market turmoil. Notice how it is hugging its rising 10 week average (blue dotted line).

AGIO is another biotech with a recent GLB, that is showing considerable strength.

A reader wrote   to thank me for posting Judy’s first comment to me about RGLS. As my long time readers know, Judy is an incredible stock picker and my stock buddy. Judy reads technical reports voraciously and uncovers gems , often bio-techs, that are working on promising drugs or inventions. She then buys a little and holds them for a long time, if she believes they have a great concept. Unfortunately, I do not have the confidence to hold such stocks for a long time through thick and thin. I have lived through too many bear market declines where everything gets decimated. Anyway, Judy talked to me again and I posted a second time   about the prospects for RGLS in Decmber, 2013. At least one reader apparently bought it. Look at what RGLS did last week. Note the GLB last week and its huge volume! Is this the start of something great? (Remember though, clinical trials are risky.)

Another stock that Judy has been urging me to buy is REGN, another recent GLB, which Judy has talked about for a long time.   REGN is running clinical trials for several new drugs, including a potential new blockbuster drug for treating high cholesterol. This weekly chart shows a GLB, followed by a multi-week consolidation.

Here is the weekly GMI table. Note that while the QQQ is back above its 10 week average, SPY is not. The large cap industrial stocks are lagging this rebound. This market is not out of the woods yet.

If anyone tells me they know   when a market decline will end, I ignore them and run the other way.   The truth is that no one knows, except by chance, when a market will turn.   The market consists of millions of “voters” all betting on stocks using different strategies and each with their own tolerance for risk. In comparison, predicting political election returns appears easy! Trend followers are always   late. We get out after the market turns down and back in after it starts up. If we can trade consistent with the general market’s trend, we have a small   advantage to enable us to profit from trading.   Technical analysis gives us an edge over the others who are the equivalent of travelers in unfamiliar territory without the aid of a map or a GPS. So we watch for signs that have in the past signaled a change in trend and have worked for us.

So what do I look at for signs of a change in the market’s trend? (I have lived through many market cycles since I started trading around 1964.)

1. Stage analysis a la Stan Weinstein.   Stage analysis has been the major strategy that I used to get me out of the market in 2000 and 2008 and back in after the market turned. We are still in a Stage 2 up-trend in the DIA, SPY and QQQ. However, the SPY and DIA have now closed below their critical 30 week averages for the first time in over a year. The QQQ may follow them below its 30 week average in the coming week.   If they remain below these averages and the averages turn down, the market could be at the beginning of a major Stage 4 decline.   I will look for that and if it occurs, will transfer my pension money out of mutual funds and into money market funds in stages.   My more nimble trading accounts are already in cash.

2. GMI   My GMI flashed a Sell signal in late September and that is when I started to move into cash in my trading accounts. The GMI measures 6 indicators that have helped me to stay on the right side of the market over the years. If the GMI goes to “0” we will be that much closer to a Stage 4 decline. The GMI is typically on a “Buy” signal for so long, that it makes sense to me to be long in the market only during those times. Why fight the market trend?   So I will look to go long individual stocks again when the GMI closes above 3 (of 6) for two consecutive days= Buy signal.

3. The Worden T2108 acts as a pendulum of market extremes.   It measures the percentage of all NYSE stocks that closed above their simple   average price over the past 40 days. When T2108 is above 80% that is usually as good as it gets and I look for a decline or leveling off in the market. When T2108 gets to single digits, a rare event, it reflects a deeply oversold market and I should be looking to get back in only via a general market index ETF, like SPY. The market always comes back, but not all individual stocks do.   So it is a good idea for me to buy a small amount of SPY and to add to it if the bottom holds. The T2108 closed Friday at 14%. In 2013, the lowest it reached was 13%. During a relatively large decline in 2011 it reached 7%. When T2108 gets into single digits the business news is quite bad.   At that time I must fight my emotions and “fly on instruments” and make an initial small investment in the index ETF whiles I grit my teeth and hold my nose.   The key is to start small and add only at higher prices if the bottom holds. Alternatively and much less stressful, I can just wait for the new Stage 2 advance to begin before I wade back in.

4. I watch the daily put/call ratio.   When it gets close to 1.2, the market at least bounces. A ratio of 1.2 means that 120 put options were traded for every 100 call options traded that day. This means that option traders are extremely bearish and the market usually confounds these people by moving up.   Think of it as a “contrary” indicator, like most other investor sentiment measures. On Friday, IBD says the ratio reached 1.16.

5. IBD Market Pulse.   I never made money trading until I started reading IBD in the 1980’s. IBD is the technical analyst’s newspaper. IBD publishes their market pulse in the paper every day.   Their methodology is very good and in contrast to the other major business papers and establishment   media, IBD will actually advise their readers to get out of the market. William O’Neil’s book (How to make money…) is listed to the right of this page and is literally a users manual for his newspaper, IBD. My university class has this book as required reading. IBD has called the market in a correction for almost as long as the GMI has been on its recent Sell signal. (We employ different technical strategies for assessing the market’s trend, yet we frequently agree.)

6. The final point I like to remember is that unless there are significant adverse tax consequences or mutual fund penalties from timing the market, there is no reason that I should not exit the market if I am uncomfortable. The media try to scare us into staying invested, perhaps because the amount of assets they manage for us usually determines the amount of management fees they take. They warn that if one gets out of the market, one will likely miss the bottom.   The way I look at it is if I get out of a fund at price “X” and the value of my fund   declines, as long as I get back in lower then X, I come out ahead. I therefore do not have to get back in at the exact bottom, and I get to sleep more soundly and watch from the sidelines as the decline continues……..