ETF

A small group (about 7) attended the IBD Meetup tonight.  Attendance usually falls off when people become disillusioned with a declining market.  What was surprising to me was that although most attendees were confused by or hurting from the current market environment, no one (except me) was considering selling stocks short.  While a few were mainly in cash, all were actively trying to find stocks to buy.  This sentiment suggests to me that the market has further to fall.  When everyone wants to short stocks, I will be looking for a bottom……………….

Surprisingly, the GMI actually increased one point as of Wednesday’s close.  This is because there were 123 new yearly highs. On the other hand, the percentage of stocks closing above their 10 week averages fell below 50%, to 47%.  This is the lowest percentage since I began tabulating it on June 16.  More ominous, all three ETF indexes (DIA, QQQQ and SPY) closed below their 50 day averages, and all on increased volume…………….

I did find one possible ray of hope.   I am not sure what it means, but all of my interest rate indicators (short and long term) are suggesting some moderation in longer term interest rates.  For example, TLT, which tracks 20+ year treasuries, has broken above its 30 day average and the 10 day has actually crossed above the 30 day average.  Rising prices here indicate lower interest rates.  (Similar patterns can be found for IRF and SHY).  Is this simply a retreat to the safety of U.S. securities or does it represent some moderation in the pressures for future rate hikes?…………………………

Regardless, I am now almost 100% in cash in my IRA.  This market is too treacherous and enigmatic for me to trade. 

Please send me your feedback at: silentknight@wishingwealthblog.com.

This week should reveal whether this short term decline deepens, or terminates.  The main indexes I follow are sandwiched in between their 30 and 50 day averages, and resting just above their 50 day averages.  Note from this chart that the QQQQ has closed below its 10 day average (dotted line) for the last 11 days.  The QQQQ has also closed below its 30 day average (red line) for the past 4 days and the 10 day is crossing below the 30 day.  Note that during the past 4 days the QQQQ has closed between the red line (30 day) and the green line (50 day).  The prior decline ended at the end of June when the QQQQ held its 50 day average.  Will it hold again?

The chart above also shows the changes in the GMI (click on chart to enlarge).  The GMI is now +2, but the IBD  Growth Mutual Fund Indicator is very close to turning negative, demonstrating that even the growth fund pros are having trouble making money.  This is a bad omen. There were also only 38 successful 10 day new highs and only 62 new yearly highs Friday, in my universe of 4,000 stocks.  Only 35% of the Nasdaq 100 stocks rose Friday, along with 55% of the S&P 500 and 40% of the Dow 30 stocks.  We are now in the fourth day (D-4) of the decline in the QQQQ.

The WPM reveals the depth of the weakness in the short term indicators.  Compared to the week ending on 8/12, all 5 indexes now trade below their 30 day averages. Furthermore, there have been considerable declines in the percentage of their component stocks that closed above their 30 day averages.  The biggest decline occurred in the small cap stocks– only 22% of them closed above their 30 day averages, compared with 42% a week earlier.  A large decline also occurred in mid cap stocks (31% vs. 47%), although the remaining 3 indicators also showed declines.  In contrast, the longer term indicators hardly budged, demonstrating that the market is till in a general up-trend.

So, what do I discern from the above?  The short term trader should probably be in cash or short.  Since August 2 when the QQQQ peaked, this Nasdaq 100 ETF has fallen 3.19%, and 73% of its 100 component stocks have declined–36% of these stocks declined more than 5%.  Why fight these odds?  This is also not the time to buy stocks breaking to new highs.  The longer term trader who tends to stay in stocks for months probably can retain positions for now, with the protection of defensive stop losses.  It remains to be seen whether this short term weakness will turn into a major decline.  Such a development would be evident to me if the GMI goes to zero.  As for me, my IRA is currently 90% in cash with my remaining funds in September and October puts.  Housing, autos and mortgage securities are in downtrends, for now.  I always become more cautious during the September/October period.  Have a great week.

Please send me your feedback at: silentknight@wishingwealthblog.com.