My, how things change

November 6, 20233 Comments

Early last week, I wrote my monthly Bear-o-meter report. The reading indicated a poor risk/reward tradeoff. However, I didn’t feel entirely confident in this lousy score. To quote my exact summary of the Bear-o-meter warnings: “We could move back to a neutral reading quickly. My point being: Things are very tentative right now.”

Two of my observations noted in the Bear-o-meter blog were (quoting myself again):

“1. Its important to note that a move ahead of the 200 days SMA, which could happen at any time, will add 2 points to the meter.

 

2. Two of the important breadth indicators – specifically cumulative moneyflow, and the Dow Industrials vs. Transports, subtracted another 2 points… that will add 2 points back to the meter”

Trend

As noted above, if the SPX moves over its 200 day SMA, this adds 2 points to the Bear-o-meter. When I wrote the Bear-o-meter blog early last week, the SPX was below that line. Now, its above the 200-day line which currently sits at 4250. This adds one positive step to the 2-step process of how ValueTrend defines a market turnaround from bearish to bullish. As such, we moved from 29% cash to 25% cash today.

Wait a moment, why add only 4% equity?

Well, as you will note on the chart below, we are still below the last peak in the downtrend channel that began in July. In order for the recent rally to prove “the real deal”, we need to see that level, which is roughly 4380, taken out – and stay there for a few days. A breakout through the old high AND a move above the 200 day SMA is, according to our rules, evidence of a “real deal rally”

Breadth

As my quote above notes, I become more encouraged of a sustainable rally when breadth widens out. My specific references were to see cumulative moneyflow (AD line) and the INDU/TRAN relationship become more bullish.

Cumulative AD Line

You can see on the chart why my system subtracts a point from the meter when the AD line crosses below its 40 week (200 day) SMA. Note I’ve circled such occurrences – note how the SPX performed surrounding the breaks in the AD line below its moving average. It is both an advance AND a coincidental indicator for negative performance on the SPX.

The AD line read bearish last week, but quickly reversed by the end of the week. Remember, the Bear-o-meter is a collective of such indicators. You don’t trade off of any one of them, but this certainly subtracted a point early last week, then revived it on Friday.

INDU vs TRAN

While the cumulative (AD) breadth line is above its 200 day, the Transports (TRAN-black line) continue to lag behind the Industrials (INDU-red line). According the Dow Theory, (as noted in the Bear-o-meter blog) “The averages must confirm each other. Both averages must exceed a previous secondary peak to confirm the inception or continuation of a bull market.

Clearly, as seen on the chart below, that ain’t happening. Breadth is improving, but its not out of the woods just yet.

Our strategy

A break through 4380 on the SPX for a few days will inspire us to buy more stocks. A move by the Transports to catch up to the Industrials will inspire us even further. If/as/when that occurs, ValueTrend will reduce our cash holdings more aggressively, Keep in mind, we always work in legs. That means that we might move from just taking on 4% in new stocks now, and add legs of 10% or so on the break of 4380.  We’ll invest the balance of our cash as the other factors in our system continue to prove a sustainable market.

Final thoughts: We continue to believe that markets might be stuck in a sideways period for several more years. If this turns out to be the case, you might see a return of the SPX – and other indices – to the 2022 highs. That’s about 4800 on the SPX. Markets could, if history is a guide, tread water OR decline thereafter. If that’s the case – individual investors need to: Follow this blog, and take my Online Course.  There’s money to be made in swinging markets. But you need to be nimble. This blog and my courses and books can help you do that.

Better, still: If you have over $500k to invest, consider letting ValueTrend take care of your portfolio. Let a seasoned team of pros do it for you. Click here to find out how to contact us. 

3 Comments

  • Hi Keith, if the markets weaken and start to drop, and you wanted to capitalize on a predicted move to the downside, what technical indicators would you look at to confirm the risk/reward setup prior to moving into an inverse ETF like the SQQQ or SDS?

    Reply
    • Mark – you use the same indicators for the upside moves–aka momentum and sentiment. But of course you are looking in this case for overbought momentum, over-confident sentiment, and traditional chart formations, etc. Please take my online course–it talks about that type of thing – aka how to time entry, and exits on all types of trades.

      Reply
  • *If* this is a new bull market versus a years-long consolidation, it’s stunning how small and mid-caps, banks, and most of the market haven’t participated. Also stunning that technology, QQQs and SPY have made so much progress with long duration Treasurys down so much. It’s a really weird moment, so you’re probably right to suspect something quite different – like a long consolidation versus the rip-roaring bull we’ve seen since 2009.

    Reply

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