Let’s take a look at the SPX daily chart with a host of my “go-to” indicators. Hopefully we will get an idea of how to interpret the current market moves. Rather than wax eloquently – I’ll list my observations in point form, and then offer my own conclusion to these observations.
- After breaking the 2.5 year trend channel in mid-2018, the S&P 500 found very significant technical resistance at 2800 through most of 2018. It hit 2800-ish 7 times (!) since January 2018, including last week’s test
- While it did break 2800 in October of 2018 to reach just over 2900, this breakthrough didn’t last long.
- The SPX is now hovering near 2800 – having stay above it for a few days last week. Start counting 3 days if it stays below 2800 – so far, it’s right on the doorstep.
- The SPX is holding above the 200 day SMA so far.
- Diverging moneyflow momentum (top indicator) has been a pretty good clue to short termed market highs that are about to give some back. We were experiencing this over the past few weeks – which is why I noted that the market was a bit overbought when I was on BNN recently. This isn’t a long termed negative, but it’s indicative of a pullback—so far, it’s been right.
- MACD (longer termed momentum indicator) and Stochastics (shorter termed momentum indicator) are diverging negatively from an overbought position. However, mid-termed momentum indicator RSI was not overly overbought before it began rolling over. Thus, this may suggest a typical correction, rather than a significant move.
- Cumulative moneyflow (bottom indicator) is bullish.
Conclusion
Indications are for a neartermed pullback. Perhaps we saw the action on Friday and that was that. Or not… there may be more to come. As you can see, there are enough mixed messages (positives like 2800 holding and cumulative moneyflow trend – vs negatives on the shorter termed indicators). We’re still at 24% cash, and looking for individual plays rather than making any bold assertions of this market. Put a gun to my head and ask me for my outlook…I’ll guess we are in a consolidation pattern that began in January of 2018, and that pattern may have more up/down swings before it breaks to new highs. I think this is a thinking person’s market right now. Those who take a broad index buy/hold strategy may make less money in this market than those who look for rotation and opportunity in overlooked securities.
9 Comments
Hi Keith,
On BNN you were asked about Westshore Terminals. You asked for a 5 year chart to be put on screen. Unfortunately, it was not discussed as they seemed to rush on to the next segment. You have recommended westshore in the past. I would appreciate it if you can assess the 5 year chart more fully. I think I fell asleep at the wheel and held the stock longer than I should have. However, the stock appears to have bounced off a 5 year resistance level. This is why I was hoping you could take another look.
Thanks
Joe
Hi Joe
I think you mean it looks to be bouncing off of support (buying pressure)–not resistance (selling pressure). Anyhow, yes, it seems to be at this moment. This stock is a trader. Buy on a bounce off of $19, sell target $25-27. Sell stop loss below $18. If it breaks $18 it will be ugly, so keep a tight eye on it.
Hi Keith, quick question, if my portfolio is set up with 50% in equities and 25% in bonds and the remaining 25% in cash which would make my portfolio 50/50, question is if I put that 25% in shorting the index would my portfolio be a 25/75 split. Thanks
Shorting requires paying interest and missed dividends if any so better to buy a single inverse
The math works (less fees and daily reset inefficiencies)
But if we take out those inefficiencies – which are actually not bad on a well run single inverse (NOT leveraged!!) ETF–the math is the same as eliminating half your stocks
We have to assume your stocks moved precisely in line with the market too. That’s called beta 1.0
And bonds make 0 return to keep it simple..so…you have $100 in the portfolio..market declines 10%
50% in equities goes to $45
25% inverse ETF goes to $27.50 (again, slightly less due to daily resets and MER.and assuming you sell at bid not an open order where you get scalped.but keeping it simple here..)
25% in bond made 0 (assuming 0 return)- $25
Your invested $100 total is now $97.50 vs if you had kept the $25 in cash and made $0, it would be worth $95.
The math reverses if the market rises 10%, as the inverse loses $2.50, while the stocks make $5 and bond still makes $0. So now instead of a $105 portfolio on that market rally, you only have $102.50
Hope that helps–again, we are assuming no fees on the inverse ETF, no daily reset inefficiencies (both of which exist), and complete market beta on your stocks and finally, no trading inefficiencies on the ETF when you buy and sell (there is always a spread) –but you get the gist…and given the costs of shorting, its still usually cheaper and better just to do an inverse (single).
Hi Keith, thanks for your in depth response, I will get your book out and reread it, I have big positions in SHOP and RY and don’t want to sell in the next downturn so was wondering your thoughts on buying PUTS and then some covered calls to offset the cost and maybe even selling some PUTS to offse the costs even more. Thanks again Anthony
I don’t trade options and dont have an options licence, so best to consult with somebody who does–Beware, though–Puts have an expiration date, and the cost reflects the time, and expected moves by market participants of the writer- so you have to calculate what you anticipate risk as, then buy if the price of the put is not so inflated to discount that potential. The reverse is true for call writing.
Keith, by ‘overlooked’ do you necessarily mean undervalued issues/markets, and does that mean that the S&P 500 has done its work (uptrending) for the year? I’m so used to growth outperforming value and the US outperforming Canada that it’s difficult to imagine things being otherwise. We’ve also seen better behaviour out of the defensive areas of late and I’m wondering if this sort of activity tends to continue in a sideways market. I’m currently quite overweight utilities, telecoms, REITs, and garbage companies, which have held up quite well since the January rocket launch, but I fear that with bank accounts paying real interest for the first time in years investors will abandon a 5% yielder with risks attached for a 3% return with no risk.
Mrs. Beck–rates are reversing now that the bOC has softened their outlook. For people who just want to collect yield, your income stocks are fine. But they come with market volatility as all equities do (mind you, there has been positive rotation into these groups of late). So you need to have a mindset of “I’m just here for the yield” when owning these stocks.
When I say overlooked stocks, I am looking at stocks that might be in the value camp, as you suggest. But obviously I am not doing fundamentals when looking at charts. If you read my book Sideways, you will see that there are 4 phases to a market cycle. I am trying to pick stocks up in the 4th phase or – better- beginning of the transition into first phase.
Here is a primer on my way of picking stocks within the phases – and if you want to read more, read the book:
https://www.valuetrend.ca/technical-analysis-explained/
Awesome! You always give us thorough responses, Keith. I will follow up on the link when I’m finished at my day job. 🙂