Avoid temptation, unless you can’t resist it.

June 3, 20138 Comments

The last two weeks of May saw a return to more volatile markets. Investors tried to absorb the US Federal Reserve’s intonations regarding the paring back of the QE3 bond buying program. This  led to a near termed selloff. That selloff was tempered after a poor GDP report, higher unemployment claims, and a lower than expected pending new homes report on Thursday. The current formula, it would seem is:

Bad economy = QE ongoing = stock market up

Good economy = QE slows or ends = stock market down

 

The question of the moment is, should one buy stocks now, or should we wait for a pullback?

It’s tempting to believe that the market may not take a breather, given its unbelievable resilience of late. My opinion regarding whether to buy or not is simple: Stick to your discipline.

If you follow seasonal patterns, as I do, and like to reduce (not eliminate) your equity exposure in the spring, don’t be tempted to sidestep this discipline. If you place faith in momentum indicators and chart patterns to identify potential turning points, and those indicators are suggesting an overbought condition, don’t deviate from your assessment.

Despite the temptation of vertically moving markets, we have the following conditions that imply a likely near termed market correction- at least according to my discipline. In fact, it does appear that such a correction may have recently begun. Click on the chart to enlarge the following observations:

  • RSI, MACD, and Stochastics have rounded over
  • Parabolic rise from mid-April  – markets need to go sideways or fall to return to trendline
  • % over 200 and 50 day MA’s indicates overbought conditions
  • Engulfing reversal pattern on May 22nd
  • Record high margin debt on the NYSE can indicate speculative environment
  • June is, according to Don Vialoux, seasonally the second weakest month of the year.

I continue to hold some cash, with my eye on the S&P 500 to provide a buying opportunity into the 1550-1600 area.

8 Comments

  • This market has proven the shorts wrong again and again. No reason for it to stop now

    Reply
    • I wouldnt want to be short now! But there is a case for a pullback, and I view the missed opportunity cost as worth it to hold some cash, to whatever comfort an investor has.
      I met an investor recently who was buying inverse ETF’s for his accounts. Too risky for me–Yikes!

      Reply
  • I agree it’s next to impossible to make money with the inverse ETF’s especially the leveraged ones. It’s another one of products engineered to draw in investors only to have them lose money

    Reply
  • Hi Keith:
    Your technical analysis supported by charts has been very helpful particularly at these lofty levels. Since you often profile individual sectors I would appreciate your comments on Canadian oil services i.e. CFW, TCW, PSI etc…as this sector seems to go against the overall market recently. Is there a technical breakout and Is it worth commiting new money given the current weakness in the overall market. They have not met your 3 day breakout rule. Thanks.

    Reply
    • they do appear to be breaking out– each chart is somewhat different of the ones you mention, but CFW and TCW are looking like classic base structures. The sector in general does appear to have some upside, and fits into my “rotational” theme-which I will blog on next. that is, former laggards becoming the next leaders.

      Reply
  • May I suggest another name that has a nice technical breakout, that of COWN. If the longer the base the bigger in space is indeed true this one could have some room.

    Reply
    • Dave-wow–nice one–this looks very, very interesting. Thanks. I did a quick quant screen (fundamental) that uncovered some variability in their earnings, will check into that to see what the situation is. But what a chart!!

      Reply
  • And one other I like now is EGO eldorado gold. It has broken above a long term down trend line and has broken above a double bottom. I only have a few long positions currently and that is one of them. My target on EGO is about 9.06

    Reply

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