General Market Index (GMI) table

As many of my readers know, I began this blog after watching many of my friends be misled by the media into losing their savings in the 2000-2002 market decline.   I had safely sat out that decline in cash and did so again in 2008.   (I did get back in after each of these declines.) I am a chicken and get out of the market when my indicators signal a possible significant decline.   If I am wrong, I can always re-invest my money.   Unfortunately, the financial press maintains that one cannot time the market and should ride   the market down. While that was never palatable to me, it is even less feasible at a time when many boomers are nearing retirement and dependent upon their 401 (K) for their imminent retirement.   With the 2000 and 2008 declines in their rear view mirrors, I suspect that most boomers who rode the market up since 2009 are going to flee at the first signs of trouble.   Thus, I expect a steep decline once one begins.   I do not expect a 2008 type decline, but with the Fed starting to raise rates, boomers are going to flee the risky equity markets for the safety of bonds and savings accounts as soon as their yields climb out of the basement.

You also know that I do not like to marry an interesting story or possible scenario for the market.   None of the events I mentioned above may take place.   But I am always vigilant for the first signs of a possible significant decline.   And the market’s action the past few weeks cause me to begin to pull back from this market, even in my 401 (K) accounts where I am limited from making many trades in and out of the market. (Most of my investments are in tax deferred accounts where sales will not trigger a taxable event.)

We are in the seasonal “Sell in May” period when historically, the market has experienced smaller gains. Second, after earnings have come out, what will propel the market higher during the summer?   Too many of the market’s leaders have fallen.   And with the Fed tapering on QE, interest rates will likely rise sooner than later.   And most important to me, Friday’s failure to get through an important area of resistance was a severe sign of weakness in this market.   The QQQ, at 86.19, is   riding just above its critical 30 week average (85.93). The 4 week average is already below the 30 week average, and declining.   These are all signs of weakness.   If the QQQ closes back below its 30 week average, I will begin to move my 401 (K) money from mutual funds to money market funds.   I will do it in stages, maybe 25% at a time.   If the 30 week average then starts to decline, I will move towards 100% invested in money market funds.   I am merely telling you what I am doing, and not making any recommendations.   Each person must act in the market consistent with their own time horizons, trading strategy and tolerance for risk.   Last week I bought an option on   QID (2X leveraged bear QQQ ETF) in my most speculative trading account.   It would be nice to believe that the recent steep declines in the market leaders is healthy and that people are now merely rotating into safer sectors.   But I do not believe in fairy tales and do not think the market operates that way.   The stocks that captured investors’ imaginations in the bull rally are being decimated and that typically happens before the bear gets around to the less attractive stocks.

With all that said, is it not surprising that the GMI is on a Buy signal?   This Buy signal has occurred in the face of a short term down-trend in the QQQ, now in its 24th day.   This is a rare divergence.   The QQQ came close last week to beginning a new short term up-trend, but failed.   This failure was a significant event to me. It could still turn up next week, but right now I am making a small bet on a continuation of this down-trend. IBD also still sees the market in a correction.

An up day on Monday could trigger a GMI Buy signal.   I prefer to wait on the sidelines.   Some of my hourly indicators suggest to me that the DIA, QQQ and SPY could retreat Monday from their recent bounce peaks.   But if they hold, the market trend will turn up again.   I remain very skeptical of a prolonged advance because once earnings release is over, the market might have little to propel it higher.   And   the Sell in May period is nearly upon us.

Too many of the high flyers have been decimated. Look at what happened to CMG last Thursday when it opened at 582.70 up about $32 on good earnings and closed at 519.61, down 32.79 for the day.     Imagine if one had bought it at the open in view of the good earnings announcement.   This type of volatility in a market leader suggests to me underlying weakness in the market.   AMZN is now down from over $400 to around 325, and   TSLA is now at 198, down from a high of around 265.   These are just a few of the examples of how the winners have been decimated (see examples below too). It is possible that the bull market for these leaders is over and that people will rotate into other stocks for now.   It is also possible and more likely to me, however, that they shoot the leaders first, followed by the rest of the market.   With that as a possibility, why would I hold stocks now?

The QQQ stands at 86.20, the same level it was at last December.   In other words, this high tech index has not maintained any increase over the last 4 months.   The QQQ did advance to around 91, but took a round trip back to 86. I like to use a modified GUPPY GMMA chart to track the major trend of the indexes.   It consists of 12 exponential moving averages (3,5,8,10,12,15 = short term averages in red and 30,35,40,45,50,60= longer term averages in blue).   I also add a moving average = 1 to show the current close shown as a   gray dotted line. I plot the indexes on daily and weekly   time frames to show relatively short term and longer term trends.   An up market has a red white and blue (RWB) pattern with the red averages rising well above the longer term blue averages. When the white space between the red and blue averages disappears the advance of the index is weakening.   A reverse pattern (BWR) demonstrates considerable weakness.

The two daily GUPPY charts of the QQQ and SPY below clearly show the split market we have experienced of late.   The QQQ is much weaker than the SPY and is in a BWR pattern.   The SPY just has a convergence of the short and longer term averages and no white space separating them. Furthermore, note how long we have had recent RWB advances in both indexes.   For me, it pays to be invested long in the market   only when an RWB pattern is present.

Meanwhile, the GMI is now at 3. Note from the table below that the QQQ has closed below its critical 10 week average for 4 weeks, while the SPY has now closed above its 10 week average. I prefer to remain on the sidelines in my trading accounts until the short term trend of the QQQ   turns up. The QQQ has completed the 19th day (D-19) of its short term down-trend that began on March 24 and the QQQ has since declined -2.29%. 69% of the Nasdaq 100 stocks have declined. Eight of the 15 Naadaq 100 stocks that have declined 7% or more during this period are:   BIIB, GMCR, GOOG, SBUX, NFLX, AKAM, TSLA, WFM. This is why I do not go long in a short term down-trend–why fight the tide?