Below is a chart that I’ve maintained, and posted on this blog in the past. Its updated with my current notes.
It has been my strong conviction that markets find a reason to rally when oversold, and find a reason to decline when overbought. The actual reason is immaterial. You will note that a rising market shrugs off bad news, and a falling market ignores the good news.
Korea’s missile test and a hawkish Fed tone is the excuse that gave markets the reason to decline from the current overbought period. Not coincidentally – these events motivating a selloff are occurring in the seasonal period most likely to correct. N. Korea’s prior missile testing antics caused barely a ripple when they occurred in the favorable seasonal period in periods within an environment of neutral sentiment and momentum. and the Fed has been back and forth on hawkish and dovish comments. Yet neither of these events caused a sharp selloff.
The chart below shows us that all 3 of my favorite momentum studies have been diverging against the rising wave of the S&P500. Meanwhile, volume has not been inspiring – albeit typical for the summer – it’s been declining since January.
Friday saw a minor breach of the first level of support noted on the chart. Next level of support, should 2130-ish not hold, will be around 2040.
September is the month for this type of correction. I’ve been 30% cash / equivalent for a while now. And now I’m looking for the window to re-enter. I’ve got a shopping list of potential stock purchases to execute in the coming weeks. I hope you have a list too. Its Christmas for stock pickers – if you have the cash!
Keith Speaking at Toronto MoneyShow this Friday 12:45
Join Keith Richards and other leading investment and trading experts at The MoneyShow Toronto, September 16-17, at the Metro Toronto Convention Centre. Keith will be speaking on Friday Sept. 16th at 12:45 – his topic: Have your cake and eat it too: Playing the risk/reward trade-off.
Register Free Here
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“SOME OF THE WEAKEST EQUITY SECTORS ON THE DAY WERE THE TYPICAL SAFE HAVENS THAT INVESTORS TEND TO ROTATE TO IN TIME OF VOLATILITY (UTILITIES, TELCOS. AND CONS. STAPLES). GOLD WHICH TENDS TO BENEFIT IN TIME OF VOLATILITY AND BONDS, WHICH COUNTERACTED EQUITY MARKET DECLINES, BOTH RECORDED DECLINES ON THE DAY, LEAVING INVESTORS WITH NOWHERE TO HIDE” (…).
SOURCE: EQUITY CLOCK
Keith, thanks for your updated thoughts and info as always. Any particular sectors you plan to overweight a bit more? Tech or Industrials for example? Thanks.
See my response to John
As expected 2130 held as support and up and away we go from here
Or its a dead cat bounce.
Time will tell. Risk/reward still remains unfavorable, so I remain 30% cash out of caution – as Howard Marks says “You can’t predict. You CAN prepare!”
Keith, thank you for the update … which sectors are on your shopping list? And, is this sectors on your list influenced by seasonality?
Technology, commodities, US banks
I appreciate your insightful TA.
Wondering where Oil will settle on this pullback. Watching http://stockcharts.com/h-sc/ui?s=$WTIC
$43 coming up shortly but an oversold bottom on RSI nearer to $39 looks like a better time horizon. Lower high this month suggests some further weakness so far to me.
The oil turnarounds happen quickly so I don’t want to miss, but bearish sentiment and seasonality has me leary of going in until we see lower RSI and better washout, although this year waiting for seasonality on gold proved a lousy call.. Any thoughts on oil?
Thanks in advance.
Seasonality for oil theoretically ends in early October. I like oils big-picture look. Wouldn’t be surprised if it took a while to really start moving–lots of consolidation happening, may hang $40-ish to $50-ish for a while.
We actually did go to 2130, and even a bit below. Well done, Keith! Next Wednesday is the Fed decision. I suppose volatility could go from 17 to above 20 until that day. Because of this, it seems a sure thing that we go down to 2060 support, at least. Which makes me wonder if we even get there… since markets always surprise. But better be ready, and I have my list ready. Will be looking out for a tweet pointing to another blog giving us advice.