Risk on

There are signs pointing towards a bullish market right now. The main ones being:

  • A definitive break over the old highs of the mid 2900’s, and a higher low since last December.
  • A market that remains above the 200 day SMA

 

At ValueTrend, we had concerns  of the SPX failing at the old highs – which it had some 3 times over the past 18 months. That fear was eliminated when the market took out 2950 and stayed above that level for the past three weeks. Our three-bar rule confirmed that the recent breakout is legitimate. That, along with adherence over the 200 day/ 40 week SMA (red line on chart).  For this reason, we reduced our cash holding from (then) an equivalent of 26%  cash  to (now) 16% cash in our conservative equity platform. For those interested, I had a 5% inverse ETF position, which I eliminated.  That 5% position effectively “doubled” the equivalent in cash to have the effect of another 10% cash – which in turn gave me a total of 26% cash equivalent from my 16% of actual cash. Caution is our middle name, and I never regret putting safety ahead of risk.  Here is the blog I wrote on how this strategy works.

 

I still think it’s prudent to hold a bit of cash for a few reasons.

  • Seasonality suggests that markets can often be volatile until late October
  • We are seeing some signs of “risk-on” again – which is good, so long as it doesn’t run away on itself. There are early signs of that potential.

 

Signs of risk-on

 

  • The long bond hit old resistance after reaching an extremely overbought condition, and has been reversing. A rising long bond price is indicative of a flight to safety. As that price declines, it indicates a flight to riskier assets and away from safety. That’s a good thing, but you don’t want it going too far towards “caution into the wind”. Note the turndown on the TLT chart below. I placed a small (3%) inverse bet against the long bond a couple of weeks ago in our Aggressive Growth Strategy (VTAGS) for this reason.

  • Some accounts of the market suggest an overbought condition. Note the % of stocks over their 50 day SMA’s chart below. This is a breadth indicator. You want breadth to be positive, but signs of “too much” participation can often signal neartermed pullbacks.

  • Some indicators, like the VIX and the CBOE put/call ratio are nearing, but not officially into “complacent” territory. They are into their danger zones, but they may be getting there if things continue as they have. The VIX is indicated as “too complacent” when below 12. Note how low it went in 2017, and how long it stayed low. It was a party that looked to never end. Until it did – as 2018 and half of 2019 brought with it a go-nowhere market.

Conclusion

With the new highs on the market, we’re back to bull market status…. Something the market was NOT seeing since the end of 2017.  A bull market is comprised of higher highs and higher lows. Recall —we had no new materially (lasting more than a few days) highs and higher lows over the past 18 months. See the top chart. We now have those conditions in place–higher highs, higher lows.

For the record:  The June 19th low took out December 24th 2018 low. The new high this month took out the prior May 3rd high.

Yes, there are signs of this market being overbought. Plus there’s that seasonal stuff….

But the trend is the trend. Thus…I’m in, but I have a bit of cash. Just in case.

 

 

 

Keith’s next BNN television appearance is tomorrow Tuesday July 16th, 6:00pm.

Keith appears regularly on BNN Bloomberg MarketCall to answer viewer questions on the technical analysis of stock trends, and to provide unique insights on the factors of technical analysis used in successful investment management. (Note: Times and Dates may be subject to change)

If you have questions about the technical analysis of stock trends for individual stocks, be sure to phone in with your questions for Keith during the show. Call Toll-Free 1-855-326-6266.

Or email your questions ahead of time (specify they are for Keith) to [email protected]

 

8 Comments

  • Keith, Thank you for sharing. One guest on BNN was saying 3100 is the near term resistance and the possible tipping point for a correction (2nd leg?). Do you agree? Thanks again.

    Reply
    • James its pretty hard to call resistance when we are at new highs. Resistance means its an area where sellers have, in the past, come in and pressured the stock down. When we are at new highs- there are no former sellers, thus no resistance. Hard to say where the market stops from any measured point of view.

      Reply
      • Yes. You are right. My mistake. The guest was referring to fair value. Thanks for correcting me.

        Reply
  • Keith, volume has been quite low even for the summer period. Might this point to a lack of conviction in the run to new highs? Also, does it mean anything going forward into fall that the typically weak summer months have been so strong? I appreciate your sharing your years of analysis and wisdom.

    Reply
  • I’m thinking the market may just go sideways as it holds the 3000 level

    Reply
  • Hello Keith,
    Thank you for this commentary.
    A friend of mine who was a portfolio manager once told me, the market will not decline until it has everyones money. This makes sense, as once everyone who wanted into the market has bought, then there is no more buyers, thus, eventually the market stalls and the downward momentum begins.
    At this point though, I do not think we are near a market top. The reason I say this is because the ‘market’ is waiting for the trade war ending and continued lower interest rates…..therefore, FOMO (fear of missing out) will keep the market up, although, it will be a very slow grind upwards from this level on the S&P 500. Add to the fact we are approaching an election year in the U.S, historically, the market are up.

    Reply
    • I totally agree Ray. Yes, we could correct in the coming weeks or months. But the ball game ain’t over until the fat lady sings.

      Reply

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