General Market Index (GMI) table

I have written often that I am a chicken these days with my trading account, as I get closer to retiring. I hold three very small positions on stocks that bounced from oversold and held on Friday. If they fail to hold their bounces on Monday I will be stopped out and 100% in cash. The stock gurus I respect all say there are times to be out of the market. At times like now I sleep better while on the sidelines.

On Friday, there were 370 new lows and 46 new yearly highs among 6700+ US stocks. There were only 13 stocks at all-time-highs (ATH). Those are terrible odds for someone like me who likes to buy stocks at ATH that are bouncing off support or breaking out. Two more weak days will end the QQQ short term up-trend, currently at U-29. Remember, it is not the news itself but the market’s reaction to it that provides an indication of the health and likely direction of the market. Only 18% of stocks that hit a new high 10 days ago closed higher on Friday, what I call successful new highs. On the other hand there were 66% successful new lows–stocks that hit a new low 10 days ago and closed lower on Friday. Shorting new lows has been more likely to be profitable than buying stocks at new highs.

The put/call ratio=.84 on Friday. That was the highest since .88 on September 20, at the beginning of a 19 day QQQ short term down-trend, and a day when only 5% of Nasdaq100 stocks rose. 12% rose on Friday. The daily 10.1 stochastic reached oversold, at 7.55. I would like to see the slower daily 10.4 stochastic, now at 39.14,  be less than 20 for a real bounce to occur. See these stochastic indicators at the October low. I am also concerned to see that the MACD 12/26/9 daily histogram is now red and steadily declining. Notice how it climbed at the October bottom. If we get a recovery on Monday, I would not trust it until it proves itself.

The GMI=2 (of 6) and a second day below 3 will turn its signal Red. The Worden T2108 indicator=37%. Major bottoms are most likely to occur with T2108 below 10%.

In the past I have exited stocks when the major indexes had appeared to be entering Weinstein Stage IV down-trends. This I would determine when a major index, usually QQQ, had a declining 30 week moving average. A declining 30 week moving average occurs when the latest week’s price being added to the average is less than the 31st week being dropped. In other words, the current week’s closing price is less than its closing price 31 weeks ago, a serous sign of weakness. This is not the case now. The 30 week averages for the primary index ETFs are still rising. So what is troubling me?

The SPY and QQQ are capitalization weighted indexes, That means rather than just averaging all of the current prices for each stock in the index, they average the capitalization for each stock (total outstanding shares x price). This means that the few huge cap stocks like AAPL, MSFT etc. account for most of the movement in the index. The Dow 30 index (DIA) is price weighted so it averages each stock’s price (weighed for splits and changes in the component stocks) and the few large cap stocks have less influence on the result. Note that the DIA is not at all time highs while the QQQ and SPY are.

All of this means that the strength in the few very popular huge cap stocks are causing SPY and QQQ to not reflect the decline in most of their component stocks. On Friday, a day when SPY and QQQ hit all-time highs,  there were 150 new highs and 305 new lows among US stocks. For the past 3 days there were more new lows than highs. In the past 3 days the chances that a stock that reached a new low 10 days ago was currently trading lower than 10 days earlier was 62%-78%. This was substantially lower than the likelihood that a stock at a new high 10 days ago closed higher than it had 10 days earlier, 43%-53%, see GMI chart below. The daily RWB pattern for IWM and DIA is actually in danger of ending. See DIA below.

Why is it that while QQQ and SPY are hitting new highs, the T2108 indicator has declined to 49%. This means that only 49% of NYSE stocks closed above their 40 day simple moving averages. And the weekly chart below shows that the Russell 2000 small cap stock index ETF has now had a failed green line break-out (GLB), which had broken out on above average volume 3 weeks ago.  Failed GLBs often lead to significant declines–this is very concerning to me.

Back in the 70’s there was talk of the nifty 50, a set of glamor stocks so strong that market pundits urged the public to buy them, lock them up and hold them forever. The 1974 bear market plunge annihilated these stocks and their buy and hold investors. Today there are so many people enamored with a few famous huge cap stocks, TSLA, AAPL, FB, GOOGL, AMZN etc. There is a whole new crop of traders who have never experienced a real 10+ month bear market. History does not repeat itself, but it sure does rhyme……

The GMI has declined to 5 (of 6) but remains Green. The GMI-2 has components primarily reflecting the QQQ and has not weakened much yet. Stay tuned to see if these indicators should weaken.

I put an alert in TC2000 to text me if SEDG has a GLB (green line break-out). I intend to tweet it out as soon as I get the signal. Solar has been hot lately, (pun intended). See the weekly chart below.  MarketSmith  listed  SEDG  under their Stock Ideas tab as  a stock near  a Cup  with  Handle pivot.  MarketSmith is a great tool that my students are learning to use.

The GMI remains on a Green signal at 6 (of 6).