Overbought, but not over

November 13, 20195 Comments

Today’s blog is taken from the recent ValueTrend update newsletter. I’ve added a bit of colour, so even if you subscribe, bear with me.

Some of us who were born in the early 1960’s might remember the “coming of age” movies that came out during our adolescence.  One such movie (and I don’t necessarily recommend it as a movie to watch) was “Fast Times at Ridgemont High”. Lots happened in the movie, reflecting the many types of people you meet when you are in highschool. Similarly, lots and lots of things have been happening on the markets.

For instance, just 13 days ago we wrote a ValueTrend update  entitled “In we go”. BTW–you, too, can subscribe to the ValueTrend update by clicking on our newsletter subscribe button on the webpage. In it, we noted our moves into the foreign markets and some specific sectors (industrials, banks) in the USA. We felt it was time to go into these sectors and the foreign markets quickly. Charts were breaking out from consolidation patterns in formerly overlooked markets and sectors. Value was catching a bid.  So, in we went!

Well, here we are 13 days later. Our move into the above noted markets and sectors was timely. They broke out aggressively to the upside. Despite the fact that we were still holding some cash, the Equity Platform still managed a substantial gain of over 2.5% in that 13 day period. Good news, yes. But, there’s now a reason for us to be cautious. The ValueTrend Bear-o-meter moved into “cautious” territory in early November. Here is the link to a blog on that reading.

The Bear-o-meter tracks many different indicators under the headings of trend, breadth, value, seasonality and sentiment. Despite the fact that trend, seasonality and breadth are favorable – they were completely offset by the sentiment indicators. Sentiment indicators measure if the “crowd” is “too bullish”. Remember, if everyone is in on the game, there isn’t enough money on the sidelines to add to the gains. An overly optimistic market can be a riskier one. Smart/Dumb money spread (sentimentrader.com), for example, is at 5 year danger levels! There’s a really, really big spread between the rabid enthusiasm of the dumb crowd vs. the high pessimism of the smart crowd.

We think that the market’s trend will continue to be bullish for the winter. HOWEVER… we think that the pop over the past couple of weeks is rather overdone. Fast times, indeed. So, we’re taking a bit (not a lot) of “beta” (risk) off of the Equity Platform right now. We’ve raised our cash into the 17% area again. We’re still in, but we’ve taken a bit of risk off the table. We’ll be looking for a potential correction to buy into some select sectors. More on that below.

 

Out we go: What we’ve sold, what we’re watching

 VTEP (ValueTrend Equity Platform): Sold We reduced our exposure to China. Sold Japan ETF (EWJ) and some defensive US equity to take profits as they reached technical resistance zones.

VTAGS (ValueTrend Aggressive Growth Strategy): Sold Japan ETF, and some small capped stocks as they reached technical resistance points. Sold Taiwan ETF (EWT) as it became overbought technically.

 

Neartermed outlook

We are bullish. However, sentiment, as noted above, is too optimistic, and the markets are overextended. This implies the potential for a few percentage points of retracement. We’re talking 2-5% here folks, Not Armageddon. We’ll hold a wee bit of cash in the equity models for now. This affords a buying opportunity should we be right, without too much missing out if we are wrong.

One sector that we have expectations on positioning within is the gold/silver sector. Recall that we had a position in silver for most of the summer, and exited at a profit at near the top of its range. As anticipated, silver was overbought when we sold, deserving a pullback. So too was gold. Right on schedule, they are falling from their highs, as you will see on the gold chart below.

 

 

Gold might fall a bit more, possibly into the low $1400’s. Silver might break $16 before it hits support in the high-$15’s. Technical support may be successfully tested, and seasonal buy points may back that support in the next 4 weeks. We’re watching for an entry point into both of these commodities. We’ll  buy if we see our target zones successfully tested and maintained, and not until then.

As always, please feel free to post comments with any questions.

 

IMPORTANT ANNOUNCEMENT: OUR FIRST EVER VALUETREND WEBINAR!

Lately, we’ve been presenting Technical Analysis webinars for groups like the CSTA (Canadian Society of Technical Analysis), the MoneySaver Share Clubs, and others. It occurred to us that, beyond these groups, my blog readers might be interested in attending such a webinar. After all, you guys are very much the community who I “speak” to every week.

So we’ve created a webinar just for you! In fact, if this webinar ends up being well attended, you can be assured that we’ll cover many more topics through similar webinars in the future.

We’ll start off with a Technical Analysis primer on the date below. From there, assuming you like what you hear, we’ll follow up with webinars on the Bear-o-meter and its construction. We’ll talk about how to identify breakout candidates and perhaps even bring in Craig (ValueTrend’s CFA) for a review of fundamental analysis.

For now, here is the date of our first seminar. Please  Aleks Bozic at our office to register. He will register you and you will receive a link to attend the seminar a day or two prior. Here is his email.

Wednesday, December 4, 2019 2:00 PM
Eastern Time (US & Canada)
In my time zone?

5 Comments

  • Keith,

    Love the idea of a webinar. Is there any way you could record the event and post the video online for those who are unable to attend?

    Thanks.

    Reply
    • Hi Richard
      I do believe we can do that. Aleks in my office is taking care of the entire “tech” thing–but I do believe he told me it will be recorded.

      Reply
      • Excellent. Look forward to watching the seminar once it’s been posted. Thanks.

        Reply
  • Hi Keith: Each year we see plenty of enthusiasm at this time of year; more people buy into seasonality. It is to the point now where I feel we should have a “seasonally adjusted” sentiment indicator. I have not done an in-depth study of the sentiment readings at this time of year but perhaps in future one of us could. My point is that perhaps we should be more tolerant of over enthusiastic sentiment at this time of year. Just a thought.
    Terry

    Reply
    • Actually Terry–if you read my early November Bear-o-meter conclusion notes, you will see that I was, and am, thinking exactly as you say. Yes, I just raised a little more cash, but I’m still 83% invested, and really, I’m just looking for a rotational strategy. Like the gold rotation I talked about–and a couple of others. You don’t want to fight the seasonals for too long. Here is my actual comment:

      “seasonality is very, very strong in November. So I might suggest that if risk does decide to make itself known, it may hold off for a month”

      Hope that helps!

      Reply

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