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Readers of this blog will recall that I was cautious and expected either sideways or bearish markets through the summer. I’ve noted the strong likelihood of a significant correction before the end of the summer. I also noted that virtually every bearish technical condition that I followed in 2011 appeared again this spring. The summer of 2011 was the last time we saw a 20%+ correction.
We elected to hold nearly 50% cash this summer in our managed platform – in fact, we’ve held over 50% for much of this time period –we’re still at 47% cash right now. So far, it would appear that my bearish prognosis was correct. Because of our decision to take profits on high beta stocks back in the spring (specifically technology and discretionary holdings), we managed to sell near the high point and preserve our gains. As such, our equity platform has earned positive returns for the year, despite a loss on the S&P500 (US market) and on the TSX300 (Canadian market) YTD.
Just as importantly, we have lots and lots of cash to take advantage of the blood that’s running on the streets! It is by limiting risk when most investors are bullish -then redeploying that cash when other investors are capitulating – ValueTrend has provided market- beating performance with lower risk over both long and short termed time frames. Although we run an Individually managed platform for our clients rather than a mutual fund, Morningstar data shows we have the lowest 5-year STD Deviation compared to all “Canadian Focused Equity” mutual fund managers in Canada. This, while demonstrating the 9th highest return in that category over the past 12 months (of 66 managers – see the spreadsheet here – we are noted as “DZ90”).
We expect that the next day or two will bring an oversold rally to the markets—especially in light of the (anticipated) intraday price reversal. Momentum studies such as RSI and Stochastics are screaming oversold. The key will be to let the market rally for a few days and see if it can stick. Often in market corrections such as this we get “dead cat bounces”—where markets will stage an oversold rally and then begin a new leg down in a week or two. The S&P500 chart above shows several examples of such “dead cat bounces” during the 2009 meltdown. Such bounces usually last several days, or even a couple of weeks before the downtrend resumes. Traders catch unsophisticated investors who have been taught to “buy the dips in a trap through these misleading rallies. For this reason, as tempting as it may be to buy right now, I am holding off to see how this market plays out for at least a few days before committing. The October lows of around 1860 on the S&P500 were tested intraday today, and support held. It is crucial that this level is not violated.
13 Comments
I agree I think the correction is just starting. Looking at the longer term monthly chart the MACD shows we are just starting to roll over. I see a strong bounce like you mention followed by a break of 1860 in the next few weeks.
Great minds think alike?
Hello Keith,
I would greatly appreciate your reasoning for holding for three days (or three weeks for longer term holders) after a trend has been broken. Specifically is there data to support retracements (ie an average retracement) over that period of time. I tend to” knee jerk” after the first or second day and it is costing me.
Thank you in advance,
Chris
My 3 day rule prevents your knee-jerk consequences. Like you said, stuff gets whipsawed and that hurts. Waiting 3 days helps you avoid selling in a panic. Also I like using 3% as another filter. 3 days & 3% move = more likely to be legitimate
Thank you
I see on BNN you recommend spdr utilities. I have always liked utilities specifically for the dividend, as well capital appreciation at the right times. However my question relates to the anticipated US Fed raising interest rates. If they raise rates will there not be an immediate hit to stocks generally but even more impact to dividend based equity like utilities and REITs?
Cheers
I am playing the utilities for the summer–as noted on the show I am not bullish on bonds or interest sensitive long term, but they are attractive seasonally over September and October
Keith I was looking at your August blog on Natural Gas. At that time we had a triangle and now it appears we have broken it on the downside. Can you confirm my assessment and if so can you comment on what the technicals are telling you at this time?
Full STO is under 14 so that is positive for the future?
MACD is still trending lower so no cross on the upside yet.
RSI is above 30 and not really sure how to use RSI as an oversold indicator.
So technicals still appear to be pointing lower.
Seasonal indicators still have time before we hit Sept so still time to go lower.
Fundamentals- I heard the Almanac is forecasting cold weather in the east similar to last year. That should be positive eventually.
So I think still sit tight but the future should be promising.
Question: what would you now be waiting for to reinforce a positive upward trend, and hence a buying point?
Thanks
Nat gas has really strong support at $2.60-ish. I’d look at 2 ways to trade it–either buy off of that support point (let it bounce, buy it perhaps 10 cents higher) and sell it at resistance–which lies just under $3. That’s a 10% move–which could be accomplished in a pretty short period of time. OR…wait for a breakout of $3 (if it happens) and buy it for a longer termed trade. Seasonal trends may drive it up to at least the top of its trading range as you suggest–so that might be your safest bet.
Keith, I emailed my request into BNN on Cargojet, not sure if anyone go to it, but the investment was working quite well until a few days ago. Also you are or were a big fan of Disney, what are you doing with it now? Waiting 3 weeks to see if its a blip or are you considering selling? (I never bought that one)
-Bob
We still own DIS–the decline after earnings brought it to the trendline, then the kicking on the broad markets pushed it below–I am waiting 3 full weeks before worrying–as this is in a long termed trend.
keith
i am totally new in this field , i need to know where i should start. any class or courses i should take. any book should need. please let me know what your recommend for new people to start with.
Might I suggest my books —SmartBounce is a beginners guide to investing covering many topics such as asset allocation, understanding securities and the types, and basic entry/exit timing. Then read Sideways –it is a focused educational book on Technical Analysis. Both were written for retail investors, and basically cut to the chase – they are pragmatic, not theoretical. Every chapter of Sideways gives you the most important things you need to know about each topic (how to identify a trend, how to use momentum studies etc) and then puts it together in creating a system at the end. You’ll learn what to do and how to start trading effectively after reading them –particularly Sideways.
After that–try reading Murphy’s book —Technical Analysis of stock Trends. Its a comprehensive book, but its the classic for knowing the fine parts of our discipline. Hope that helps.