Rock band REM sang a truly great song called “It’s the end of the world (as we know it)”. Many of you have heard the song, I’m sure, but if you wish to marvel at how lyrist Mike Mills can carry off a fairly rapid flow of complex lyrics – click here.
Today, I’d like to present an argument for the renewal of a highly active, trading orientated approach to investment management. At ValueTrend, we try to “go with the flow” regarding our trading. For the past two years, our trading activities, while still well above average when compared to most Portfolio Managers, was subdued. This was due to the consistency of trend, and lack of volatility on the markets from mid 2016 to early 2018. You trade less in a trending market.
I believe that the longer termed trend that has been in place since the 2009 is still very much intact for the S&P 500. A break of the lows set in February of this year would change that prognosis, but for now, we are still in a bull market – technically speaking. Despite the longer termed trend remaining intact, it is clear that the mid termed trend, which was established in mid-2016, is over. As I noted on this blog, markets pull back 10-12% fairly rhythmically, and often move into sideways consolidation patterns. These sideways periods sometimes last for more than a year. I believe that we have moved into one of these periods at this time. Sideways markets are my favorite environment to trade. They could be for you, too. Let me explain.
Trading the TSX
Let’s take a look at the TSX first. It is not in a long termed uptrend. It has, however, held a mid-termed uptrend since 2016. Note that the uptrend that began with the 2016 trough has recently ended. Note the current sideways “box” that encapsulates the movement of the TSX with a certain amount of predictability. Note the floor near 14,900, and the ceiling near 16,400 for this index. Using my trading rules, I look for a bounce off of support (14,900 or thereabouts), a positive follow-through of a few days, and a nice hookup on the key momentum oscillators RSI and stochastics. Bingo—we are nearly there for an entry! We need another couple of positive days and I expect to enter into an index ETF trade for the TSX. With this type of trade, you know your stop price (below 14,900 for 3 + days). You know your target sell price (at or near 16,400). Don’t you just love this trading stuff?!?!
Trading the S&P 500.
As noted above, the long termed trend is bullish for the S&P500. The mid termed trend that began in 2016 is, however, broken. Like the TSX, the S&P500 attempted to put in a new high (circled on the chart) before failing miserably. This index, like the TSX 300, has been trapped in a box. Support comes in at or below 2600, resistance around 2900. Like the TSX, we are setting up for an entry. You can already guess my strategy: buy after another day or so of confirmation, stop out below the Feb low of 2530, sell for a profit at 2900. Easy-peasy.
To paraphrase REM, It’s the end of the up-trending market, as we’ve known it. And I feel fine! You should too.
16 Comments
Keith, thanks for this post and your SIDEWAYS trading strategy. I also like trading ranges. I have a hard time believing that a trend is going to continue and find myself looking for reversals. This might be a bias towards “reversion to the mean”. I notice that my inclination is so different from trend followers and I have tried to learn trend following but it just does not come naturally.
Paula, you and I seem to think similarly. I also have a hard time jumping on aggressive trends. However, a nice steady uptrend at a reasonable angle of ascent is OK. Still, to me, the easiest trrades are those sideways box’s. To me, the plan is far clearer for entry and exit, so I do tend to look for them, and pass them on the Craig (resident fundamental analyst at Valuetrend) to ensure the stock is sound before entering the trade.
Do you think there is a trade in oil or has this ship passed?
I think it has room for an oversold bounce–but I’m hesitant to suggest much more. Given the look of the TSX–and energy’s influence on the index — it may be setting up for a 10% move. Not much more, though–in my opinion. Like i say on the blog–its a traders market.
Hi Keith:
Thanks for this. You follow the Sentiment trader closely. Can you tell us how much his bullish studies recently and the effect of bullish seasonality have influenced your opinion of the market You are a technical analyst but do these factors play into your subconscious to make the technicals look better?
Terry–this is a good question. Funny you would ask, because I have been studying sentiment since the late 1990’s – well before I ever discovered sentimentrader work. In fact, I wrote my thesis for the CMT designation using a sentiment indicator (put/call) combined with a modified RSI indicator. That was the origins of the “Bear-o-meter”–although I didn’t call it that back then! Obviously, I have expanded on that thesis quite a bit since I wrote my thesis paper in the year 2000.
I used to let sentiment and seasonality bias me in a less quantitative way. Nowadays, I am still influenced by them–but in a far, far more quantitative way. The Bear-o-meter gives me a range of cash I should hold (if any) within the equity platform we manage. From there, the charts guide me where within the range suggested by the Bear-o-meter I should go. For example, if the range is 10-20% cash given a mid-level risk reading on the Bear-o-meter, but the trend is steady (weekly chart higher highs and lows), I will usually choose to go to the lower end of the cash level range–ie closer to 10% cash, rather than 20%. In fact, thats where we sit now–at 12% cash. Although that will likely change next week.
Hope that helps.
Brilliant ! R.E.M. …one of our favorite bands.
The only problem, Keith, is that I always click on your music video references and then proceed to watch U Tube music videos for and hour or so before finishing the blog !
But …time well spent. Long may they continue …
Too funny, Donna! At least my blog isn’t just another boring financial blog!
Thanks for giving us the specific numbers Keith. I’ve been noticing the small rectangle from Oct 1st and thinking about playing it.
It’s good to be reminded that you’re watching the larger rectangle.
Sally, clearly you and I enjoyed taking geometry in school–rectangles, triangles, and the like.
Thankfully, it doesn’t get too complex in T.A.—there are not pentagons or polygons in technical analysis! If there were, I’d have to go back to my original plans 40 years ago of being a gym teacher!
Gym teacher! I can’t see you in a union. (chuckle)
Geometry is the only A that I ever got in math, and I love what you’re teaching now.
Ha! Yes, I would have lasted about 10 seconds in the teachers lounge, where I would argue that we should be paid on our performance measured quantitatively as compared to others in our field, not on our seniority.
Truthfully–I did own a gym (which is different from being a gym teacher) for a few years in my mid-20’s. So I got to live that dream of training people. No money in it though – plus it got boring.
I am looking at a one year chart of Tourmaline. It looks like a triple bottom may be forming. Is this generally a bullish sign?
Dave–normally I dont do individual stock commentary (unless the subject of the blog pertains to the stock) but …Tourmaline is in a downtrend. No triple bottom that I can see…
With Powell being on the dovish side this week, are you avoiding US Financials or is their trade here?
We are not in the US banks at all right now. That decision is not due to Powell’s recent comments. It is based on the chart. For example, the ZUB (BMO) US bank ETF broke support at $29 recently and hasn’t rallied back. So, it is a broken chart. That might change. But for now, the upside is to that $29 support level if it stages an oversold rally–which is a lousy risk/reward trade. If it busted above $29 and held for a while, I’d be interested. That is not the current case.
Hope that helps.