It’s the end of the world,  as we know it

By now, readers know that I sometimes draw inspiration from classic rock n’ roll for my blogs. I went to high school during the 1970’s – the era that inspired the greatest rock legends of all time (with thanks to the 1950-60’s ground breakers like Elvis, The Beatles, and the Stones).

Although not from the 1970’s – REM had a hit song in the late 1980’s that inspired todays title. It does indeed look like the end of the world, as we know it, insofar as investing is concerned

After all, the rules over the past 2 years  stated that in order to invest successfully you must:

– Own at least two of the FAANG’s (FB, AAPL, AMZN, NFLX, GOOGL)

-Never, ever, ever sell ever because the market always goes up and never, ever, ever, corrects. Ever.

-Today is always the best day to buy because the market cannot have any more than 0.75% correction in a day – as noted on last Halloween’s blog. Furthermore, a corrective day will be recovered, and move onto new highs within two days henceforth. So if you don’t buy today, you miss out.

 

Perhaps those rules are changing….

 

Here are my short termed chart impressions of the market after yesterday’s pullback:

  • The S&P 500 broke its daily chart trend channel. However, it has done this to the upside before and returned. Chart above.
  • The March lows were tested but not breached in the recent correction – so far.
  • The 200 day SMA was cracked intra-day but the market finished pretty close to that line. Should the 200 day SMA crack decisively, that will imply a move below the last low (March). I do not take defensive action until that breach of both conditions lasts more than 3 days—with the discretion to act  more aggressively within 3 weeks of the breach depending on the rapidity of the move that follows.
  • Two of the market leaders (FAANG’s) have been broken. FB has broken its trendline and GOOGL has put in a double top- as discussed on this blog.
  • Three of the market leaders (FAANG’s) are largely on trend, although experiencing a healthy dose of pullback to rid themselves of their overbought conditions.
  • We recently got a bullish short termed timing signal from my Near-termed Trading System (green vertical lines are “buy” signals, red lines are “sell” signals). Chart below.

 

I’ll post the longer looking Bear-o-meter soon, although I did a recent reading of that indicator here. It was a bullish (6/8).

I covered a bit of my outlook on my BNN appearance yesterday. Here is the clip.

 

Conclusion

From the observations above, the most important notations are that the S&P 500 has held its 200 day SMA. Again –  it marginally broke that average at 2582, vs.  the MA at 2590, but it was so close I’ll call it break even. And it successfully tested its last low (2580 in March). Should both of those levels break, I will count a minimum of 3 days below their respective levels before electing to take defensive action. Upon a three week break, I will become even more defensive. From a disciplined perspective, the trend is still intact. Seasonals are still bullish. The last reading of the Bear-o-meter was mildly bullish (6 out of 8). I’m still long the market – although taking a keener interest in defensive positions such as staples – per my top picks on BNN Monday. I’m also keeping an eye open for a potential 2011 like correction, as discussed here.

6 Comments

  • I’m wondering how you handle massive spikes. (either direction) Do you use market stops?

    Reply
    • This is a good question Sally, and I addressed it specifically in my book Sideways. In a nutshell, the problem with using stop loss orders is – as you indicate – they are triggered by spikes. Now, that is a good thing if the big spike ends up leading into a downtrend. But more than often, spikes are just that….spikes. So you get a washout from a news flash (“trade wars”) then you get a reversion back to the prior trend a couple of days later. Further, sometimes you get intraday spikes that stop you out, only to see your stock go higher by the end of the day.
      So I prefer to use my “3 bar” rule. That is, if I see a spike below key support areas, I count 3 days minimum prior to taking any action (ie a sell). I will often take three weeks to get really aggressive in a trend break – but I play it by ear.
      By using my “wait 3 days” rule, you avoid the short termed spikes that reverse back to the prior high level. I affectionately call these moves “market head fakes”–like the boxer who pulls the head fake move to get an opponent to take a swing, leaving him/her open–and like you and I who get faked into a sell because of an inter day or one day move.

      Reply
  • You’re right, the stops can (and have) chipped away at my balance and it’s happened exactly as you’ve described.
    I respond with fear/greed/panic, even panic to get back in when stopped out.
    They’re a false sense of security and am removing them now.
    I have your books, but sometimes I need to ask a question in my own wording to be sure.
    You’ve got nerves of steel Keith. Thanks for your wisdom.

    Reply
    • Not so sure its nerves of steel–more like “I learned the hard way”–which it appears you are doing.
      We’ve all had to do that–and I still learn (often the hard way). So take heart!

      Reply
  • You forgot the ending part …” and I feel fine”. So if Keith feels “fine” then presumably a buying point is near.

    I pretty much guessed Trump would try to crash the market, but who knows, maybe he’s advising his buddies to buy stocks whilst he manipulates the market with a few tweets. Next week he will change his mind and go off the whole trade war thing and his friends will make a bunch of money.

    Reply
    • Read my blog tomorrow Bob–just got a sentiment buy signal!!

      Reply

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