Wow. The market sure is neurotic lately. Bullish, or bearish…its like the weather in Alberta. Albertans like to say “If you don’t like the weather, just wait a few hours – and you’ll get new weather!” Similarly – If you don’t like the current market trend – just wait a couple of weeks – and you’ll get a new market trend!
Take a look at the daily chart of the SPX below. It’s just on the verge of reversing what looked to be a new neartermed downtrend. 2950 was the last major peak. But just below that, at around 2900, lies the last minor peak on the short termed chart. If it fails at or below that 2900 area, the downtrend continues.
So – will it hold, or will it fold?
To answer that question….Take a look at what happened in late 2018. The market peaked in August and began declining from its 2940-ish peak to about where the recent selloff landed. It then rallied to 2800, then fell to a lower low of 2650. After falling to 2650, it rallied back to 2800 again. Another drop to 2650 and a final rally to 2800 again in November. From there, the final drop to 2350 in December completed the selloff. A rally brought the market right back up to the old highs of 2950-ish. But no materially higher high (only nominally higher) than the prior highs. I believe the lack of a meaningful higher high tells us that the market was determined to stay below 2950 or so for a while. Sure enough – we saw the market pel back over April & May with the trade talks in the background. Depspite n resolution on the talks, the market is back in rally mode. While much of the news tells us this rally is based on interest rate easing hopes – I am one to believe that the market looks for a reason to move from an overbought or oversold level – its not the reason itself that is the cause of the move.
I wonder if the current rally may be a replay of the scenario from 2018 just described. Perhaps it won’t be an exact enactment. Perhaps the market will make it past its old highs of 2950 and break out of the sideways consolidation it’s been in since January 2018. That would be bullish.
Really, there isn’t a clear direction or trend that we can rely on right now. For this reason, we remain 18% cash equivalent (8% cash, 5% single inverse = approx.. 18% cash equiv. portfolio structure). I’ll stay in the inverse for a few more days and see how things play out. I don’t mind being a little under exposed to the market at this juncture.
BTW—if you are a subscriber to our free newsletter, you would have received an update last week explaining the net effect of using single inverse ETF’s on your portfolio – and why we chose to use an inverse rather than sell stocks to bring our effective cash levels up. Sign up for the newsletter here.
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