I thought I would pull some comments (excluding the individual stock names) from an update we just emailed out to our clients. I want to emphasize that these comments should not be taken as investment advice. You have to make your own decisions, or consult with a qualified advisor. I can be wrong – and I am simply offering up my personal take on the markets at this time and how I am playing it.
It’s not often that we are cash-heavy in the ValueTrend Equity Platform over the winter months. After all, the market tends, on average, to perform well from December to May. This winter has been a little atypical. That is, this winter has delivered a roller coaster ride via a massive plunge in December, followed by a sharp 50% retracement of that plunge in January. There are a few problems with the recent rally, which has inspired us to raise 40% cash in the past week. We’re not convinced that we want to be fully exposed to stocks for these reasons:
- Oversold to overbought: Stock markets have gone from being extremely oversold on December 24th, to overbought as of last week. This, according to some of the technical indicators we observe.
- Overdone markets tend to correct themselves in either direction: Just as the oversold situation corrected itself by rallying from December to last week, the overbought markets have the potential to correct themselves through a selloff.
- In a bear market, you often get a 3-leg downtrend…aka the Elliott Wave counter-trend waves: The 2nd of those 3 legs is a rally – like we just had.
- If the rally is going to fail, it will fail after retracing about half of the loss of that first selloff leg: This is not from the EWT practice surrounding Fibonacci retracements. This 50% retracement tendency is a statistical tendency first documented by Ian Farrell, a fellow Technical Analyst, who presented these findings when he did his CMT thesis. We are now at the half way point of retracing the recent selloff. This does not mean markets will fall from here, but it does mean that odds are increasing they will.
- Both the US indices and the Canadian TSX 300 reached technical resistance as they reach the 50% retracement point: This adds another hurdle against further upside, set against an already overbought market.
Below is a very busy chart illustrating all of the above points.
We sold individual stocks as they reached technical resistance points within our portfolio. We also took some of our USD off the table as well- per this blog comment.
We currently have a few stocks left on our sell list, but we are content with the 40% cash weighting at this time. Meanwhile, we are watching for a technical break to buy into emerging markets, NA index ETF’s and a few individual stocks.
- Keith was on BNN last Thursday January 24th wearing his funky new violet colored suit. Click here to watch the full show.
- Keith is speaking at the Orlando MoneyShow on Friday February 8th. Click here to read the details, and for free registration to the show, should you be in Orlando on that date.
- Here is a link to Keith’s last blog stock market analysis.
Any comments on gold? Thanks
see my blog last week on gold and oil
I agree with your analysis that the market is overbought. Yet, I have read in the stock traders almanac that as January goes, so does the rest of the year. So far, we have been on a big upswing in the markets all four weeks on the S&P 500. Market breadth and volume keep expanding, throughout the last 4 weeks. What is your take on the January barometer.
Its like any seasonal study–its a tendency, not a rule
Also, I’m not a bear–I am just temporarily cautious while markets illustrate an overbought condition.
Now that the threat of more interest rates has currently subsided, wouldn’t that be a catalyst for investors to continue investing with confidence in the recent rally even though a lot of stocks are oversold? However your analysis makes a lot of sense.
Hi Dean–I think you mean stocks are overbought, not oversold
Anyhow— possibly your comment is correct–like I said, I may be wrong, and I can always re-enter. One thought though…the street was largely looking for a dovish stance by the fed, they got it, and there was a relieve move (positive) yesterday on that Fed announcement. The question now is…what will move the market from here? It could be a positive China trade talk outcome–and that meeting is happening now so we will hear the outcome of that very shortly.
My thoughts are that we need everything to be perfect (dovish Fed, China agreement, resolution to the Great Wall of Trump, no Brexit surprises..etc) to continue moving higher into overbought territory. Yes, we may very well get that perfect scenario and thus markets will melt up from here.
But stuff happens, as you know…..not sure I will bet on a perfect world outcome to support an overbought situation. When things are not overbought, markets can brush things off. When they are overbought, it is like an overinflated balloon hoping no sharp object will come along…..
Since you put it that way….your argument for holding off, and against buying at this time is very concise and clear headed. You’ve outlined lots of big issues that have to hold when the market is overbought. It all seems so intuitive when you lay it out as you just did. Thanks for the insights.
I know you believe the markets are overbought, and so do I. One theory I have heard is the 60% of stocks in the S&P500 were in a bear market from January 2018 to Dec. 24. If you exclude the FAANG stocks that held the market up for so long last year, the majority of stocks were already in a bear market, many months before the FAANG stocks finally collapsed. Therefore, is it fair to say, the bear market has run it’s course and finished it’s final washout (VIX hit 37) Dec. 24…and now we are in a new leg of a bull market.
After all, this has been the best January in 30 years. Breadth & volume keep expanding.
Yes- I believe its overbought, and – per my blog today (dazed and confused) I am not convinced this is abear market. So, buy on a dip…so far that seems to be a thought. Then again, there might be no dip, and I will be forced in anyhow.
Waiting for the right time to re enter the market has so far been proven to been a mistake. At least on this recent January rally
“My thoughts are that we need everything to be perfect (dovish Fed, China agreement, resolution to the Great Wall of Trump, no Brexit surprises..etc) to continue moving higher into overbought territory”
If anything this rally has demonstrated how hard it is to time markets. Still all kinds of negative news swirling about that “should” have ended or at least stalled this recent rally. Yet it grinds upward defying technicals
Yeah-=-read today’s blog Dave–Dazed and confused !!!
I have often read that markets/stocks can remain overbought for quite some time. But (an observation only) oversolds, not so long.
Escalator up, elevator down!
Keith, what is the significance of your horizontal line at 2707, is that a resistance point. Now that we are there is it a good time to now buy back into the markets?
Its just a resistance point of note–possible target, Paul
I think it will be a good time to buy–personally I am finessing it a bit see if pulls back but that’s a mugs game at times!!