Get ready to sell

August 13, 201215 Comments

Through this blog, my BNN appearances, and my writings within the Investors Digest and Moneyletter publications, I strongly suggested 2 months ago that markets would rally. Going against the consensus view, which I was certainly doing at the time, usually makes us feel uneasy and uncertain about our strategy. Taking a contrarian stance when backed by evidence, however, can pay off. It certainly did this time—certainly more so than following the crowd who were net short or in cash at that time.

 

Since my original bullish prognostication the S&P500 has breached 1400. My target was for the S&P to reach either 1420 (recent highpoint) or 1500 (decade-long resistance). It is my opinion that the market is now close enough to target #1 (1420) to begin profit taking. The realization of the technical target mentioned above and the seasonal influences of September/October create a risk/reward environment that is unfavorable going forward. Please note that my caveat to this will be the Fed: any sign of QE3 in the coming weeks will likely push the S&P 500 to my second target of 1500.

Barring a QE3 announcement, my focus is to sell a few high beta sectors such as commodities at or before early September. I am maintaining my exposure to Canadian banks, utilities, infrastructure and higher-dividend payers. Further, I am watching for an opportunity to enter into a hedging strategy over the coming weeks. I’ll discuss this strategy in next weeks blog, and I’ll also be covering it on BNN’s MarketCall Tonight this Friday August 17th at 6pm.

I’ll also be covering my reasoning behind my very bearish prognostications for markets in 2013 on BNN. I’d encourage you to read my blog from July 24th for more information on a 5-year market cycle. The current stage within this cycle could suggest a significant decline over the next 2 years. Here’s the blog:  https://www.valuetrend.ca/?p=1325

By the way–I continue to invite anyone to comment with any input that either adds or disputes the thoughts presented in this blogpost.  As Red Green (aka the Canadian TV show) used to say: “We’re all in this together”!

15 Comments

  • Hi Keith,

    The VIX is getting to new low in 2 years which could imply a new dynamic for the SP500 wich could get to new highs in the next 4 months.
    Is this a possibility in your mind?

    Thanks

    Reply
    • Very good question Martin–sometimes a “mega oversold” condidtion can actually lead into a new bull market, rather than a typical reversal signal–so you have a good point. To answer this, I go back to the basics–because to me, things like the VIX and other studies are perepheral–the real meat and potatos are seen in the trend and formations. I’d encourage you to click on the link for my blog mentioned in this post covering the potential for a major correction/bear market in 2013. To me, that potential overrides any short termed momentum, sentiment or volatility studies we look at right now. The big picture looks bearish looking out 1-2 years. But, hey, I could be dead wrong and markets could enter into a big bull market soon. The Leafs could also win the cup this year.
      I’m not willing to bet on either, though!

      Reply
  • Hi Keith. With the VIX dropping to 13.70 today, do you believe that the markets are getting too complacent and a retracement to the June lows maybe in order?

    Thanks
    Marek

    Reply
    • The VIX can be a contrarian indicator. I will post something on this in the next week or two–but in a nutshell, its not the only contrarian indicator suggesting overbought conditions right now. The commercial hedgers vs. small options players ratio is showing too much “dumb money” is buying while at the same time too many “smart players” ore shorting. Between this and a low VIX reading, it suggests a pending correction. Having said that, the trend is your friend until it ends. Watch the S&P trendline for a break. I am looking to leg out by Labor Day–or thereabouts.

      Reply
  • http://stockcharts.com/h-sc/ui?s=SPY&p=D&yr=5&mn=6&dy=0&id=p02997660568

    I am not certain I agree with the concern that the markets are ready for a major downturn as neither the standard deviations nor the seem consitant with some of the downturns we’ve seen in the past. The corrections/crashes we’ve seen in the past show an upturn in both volumes and standard deviations just prior to drop in prices. the 5 period and the 10 period standard deviation are both below their 50 dma. And the volumes are well below normal.

    I would like to know if my observation has some validity.

    Reply
    • Hi Fred–thanks for the observation.
      True enough that volumes are low–of course that has also been a reason why the bears feel the current rally wont last (it indicates the “death of the retail investor” according to one guru).
      Volume confirms the trend, so it does indicate a lack of conviction in the current markets–up or down. I think you are looking at past volume patterns prior to a bubble high (eg–late 1990’s and then again up to 2007) where people crowded into markets with huge volume/participation driving things upwards, followed by major crash thereafter. In the current case, the lack of volume does not indicate speculative mass participation. Thats for sure. But lack of volume doesnt indicate relief from a bear market.

      My reasoning behind the potential for a bear market next year lies in the pattern/cycle established over the past 12 years – with major peaks at the unpeneterable resistance on the S&P at 1500 occuring in the latter stage of that cycle-aka right translation- followed by the bear trend of the cycle. The timing of this is for a peak now, or it may have occured last spring. Backing the charts are some pretty darned compelling fundamental arguments — chaos in Europe, a very real slowing of prior stalwart economies such as Germany and China –a US, mediocre earnings season, a trailing PE of 16 (not cheap–about its historic average or slightly above it) and a very high Shiller PE ratio of 22.5 vs. its historic average of around 16. All suggest there is little to look forward to as far as a valuation rally.

      Reply
  • MARK LEIBOVIT (VR TRADER) IS LOOKING FOR AN END OF AUGUST TOP IN THE MARKET AND A STEEPER CORRECTION IN SEPTEMBER-OCTOBER PERIOD (ELECTION YEAR). THE BALTIC DRY INDEX IS PUSHING TOWARDS THE LOWS OF THE YEAR (LEADING INDICATOR TO EQUITY MARKET WEAKNESS). THE DOW TRANSPORTATION INDEX HAS BEEN UNDERPERFORMING THE MARKET, HINTING OF WEAK DEMAND FOR GOODS (HIGHER PRICE FOR OIL ARE ALSO PRESSURING TRANSPORTATION STOCKS), A SITUATION WHICH IS SEASONALLY TYPICAL INTO SEPTEMBER AND OCTOBER.).LAST WEEK SAW THE LOWEST EQUITY MARKET VOLUMES FOR A NON-CHRISTMAS HOLIDAY WEEK IN YEARS (EQUITY CLOCK, AUGUST 13). COPPER HAS MAINTAINED A LONG-TERM DECLINING PATH OVER THE PAST YEAR; INVESTORS IN THE CYCLICAL METAL ARE SHOWING SIGNS OF SKEPTICISM TOWARD THE PROMINENT STIMULUS EXPECTATIONS, PERHAPS WARNING THAT FUNDAMENTAL CONCERNS ARE STILL TOO SERIOUS TO IGNORE. (…)

    Reply
    • Excellent comment Jean-Pierre – thankyou. It appears that Mr. Leibovit and I are on the same page. BTW–I was shown a report by RBC’s excellent Technical Analyst Robert Sluymer, who also sees a top near Labor Day possible. So we seem to have a consensus here.
      And yes, I did notice the divergence in the transports vs. industrials. This is often a leading bearish indicator.

      Reply
  • It makes me nervous when I hear too many people are saying the market is going to correct at 1420. When everybody expects the same thing what does the market usually do ? The exact opposite. I believe it will slice through 1420 like butter and shake out a lot of short positions in the process. In fact I think it may have a chance to take out the 1500 level as well but may have to reassess that bold call when we get there. To use your thinking beware of the consensus view which I believe at present is a correction at 1420 on the S&P

    Reply
    • Dave–you are obviously a discipline investor–this is a contrairian viewpoint, so good observation. Remember my caviat mentioned in the post–if the Fed stimulates, its 1500 next stop.
      Having said that–if Fed doesnt sitmulate yet (and my bet is they will hold off to October/November before anouncing–as they have done in the past)–then I think September will be a selloff month.
      You mention investor sentiment–a quantitative way of measuring it is through sentiment indicators. Many ore overly optimistic. Specifically, commercial hedgers vs. futures speculators (too many speculators), odd lots, and smart/dumb money compilations put out by sentimentrader.com are all too high. Further, September is a seasonally weak month, and you have Dow divergence of transports, amongst other things. I’ll cover a whack of things on my blog next week, and some on my BNN show today at 6pm.

      Reply
  • Hi Keith:
    It would appear from the market action today particularly for commodities gold/oil it is a go at least till August 30. It appears to tie in well with your prediction. If you think it has peaked already, your insight would be greatly appreciated.

    Always, thanks for your technical insights.
    Khokon

    Reply
    • I sold a few positions yesterday, but continue to hold my gold and oil–technical patterns suggest some potential for $102 +/- oil. Gold keeps trying to break the big triangle I have mentioned in the past–seasonally both s/b ok for September despite my broader market bearishness–so I am holding for a potential few points higher prices.

      Reply
  • I would like to add that if you draw a trend line for the the S&P from it’s all time high in 2007 to it’s April high in 2012, it is now above that line although only so far for 1 week. I think it may be worth watching, as it could indicate higher movement to come and could be a support line now in the event of a pull back. If so the pull back would be very light on the order of 20 or 30 points, much less than I believe the majority are expecting. Yet another reason to be cautious of trying to go short this market here.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

three × two =

Topics

Topics

Recent Posts

Ask-Me-Anything-Blog-post-crop-e1361249771400

Ask Me Anything: Zoom Seminar

SPX PE

This market might be in a bubble, so profit by it!

S&P sector weighting

TSX looks bullish in spite of itself

gold

Gold oversold: Time to be bold, or should it be sold?

TAN

Green energy stocks extremely overbought

dow theory

Bear-o-meter neutral, with some caveats

cta-bg

Never Miss an Opportunity

Sign up for our newsletter to receive valuable insights that are available only to subscribers.   Beyond the blog – beyond the videos – get the inside scoop.

Scroll to Top