Time for a pullback

October 28, 201311 Comments

The noted calendar date to buy when utilizing the Best Six Months strategy is October 26th, according to Thackray’s Investors Guide. However, that date is merely an average–the actual buy date can vary anywhere around the 26th by several days or even a few weeks. This year, it made sense to allocate some of any cash you held over the summer in the period leading up to the “debt ceiling” deadline. However, there is a good chance that a new buying opportunity will appear in the next week or two.

Technically, there are a few indicators suggesting a near-termed pullback is probable for the US markets before too long. Three that I’ve been watching are:

1. Trend channel top: The market has just breached the top of its up sloping trend channel. Normally, this should be considered bullish – but we need 3 days of confirmation when a formation breakout occurs. Given the next two danger signs I present below, I’m wondering if the channel breakout will hold. This could be a head-fake.

2. Momentum signals at or approaching overbought: Stochastics, which is the fastest moving oscillator that I tend to watch, has begun hooking down from an overbought position. RSI is approaching overbought – a day or two more upside would push it into official overbought territory (14 day indicator). Finally, the Moneyflow index, which calculates price x volume and then plugs it into an RSI oscillator, is also nearing an overbought position.

3. Risk-on by notoriously incorrect investors: A few of the “smart $/dumb $” indicators that I watch  are reaching extreme levels –  including a high bullish reading on the latest AAII survey,  high amounts of options speculator trading, and mutual fund inflow readings. Rydex leveraged bullish funds have doubled their inflow over the past week, giving more evidence to the irrational exuberance. Further, NYSE margin is at all-time highs – another Halloween-style scary contrarian sign for the markets.

S&P nearterm

 

It may be a good idea to utilize any near termed pullback as a buying opportunity, given the grander uptrend that prevails. I committed a bit less than half of my cash holdings to buy new stocks at the bottom or the current trend channel in early October – prior to the debt ceiling debacle. I expect to commit the balance upon a correction in the coming days or so. A reasonable target may be for the S&P to hit the bottom of its trend channel again, which would come in somewhere in the mid to high 1600’s.

 

BTW- a considerable number of comments by readers, as well as questions I got at the recent MoneyShow presentation, have been regarding the potential for a major market top. I’ll address that potential soon. Thanks for the input, and please keep the comments coming. Your comments and questions inspire me to keep digging for answers, and help the greater community of those who read this blog to learn and explore!

11 Comments

  • Hi Keith,

    knowing there’s a pullback coming in, would it be wise to sell part of stock already bought to be bought again later on?

    Reply
    • Andre’
      I don’t “know” a correction is coming, I only look at the weight of the evidence and assign a greater probability than normal one may occur
      Also – a pullback to the bottom or that trend channel is only about 4% or so. Hardly worth an out-then back in trade. But perhaps worth a new entry point with existing cash.
      Lastly, I do hold a serious piece of cash right now (30%) so that’s enough for me to enjoy a bit of a buying opportunity.
      thanks for the comment.

      Reply
    • actually, my thoughts hark back to early October. I like Keith, but disappointed that he didn’t indicate or suggest that it might make sense to put some money to work in early October, before the machinations in Washington.

      Reply
      • Hank–I don’t always blog on the day(s) I am buying – but I did note near the end of October that a pullback was due, and it would provide a buying opportunity. That pullback did occur right on schedule about 3 weeks later (completed by October 10th), and I used it as a buying opportunity to deploy just under half of my cash–I hope you did too. Here is my heads up, given on October 23rd; “After Wednesdays big Fed announcement, the action slowed down on Thursday and Friday. There are a few factors that may create a healthy pullback and buying opportunity in the next few weeks. Keep in mind that the overall picture of the markets is very bullish – I’m simply pointing out the potential for a new buying opportunity in the coming weeks.”
        On Sept. 27th I also attached a link to my Globe & mail article outlining stocks I was buying at that time.
        here is the blog:http://www.smartbounce.ca/?p=2463

        Reply
  • Keith, thanks for todays update. Talking about the best six months coming up, consider that during the worse six months during a post election year, going back to 1950, the average return is only 1.5%. With todays action, the S & P 500 is up 10.2% so far since the end of April. My that measure alone, it tells me the markets are about 8.5% overbought.

    My research shows that there has been 81 7% plus declines in the S & P 500 since 1950, and the average is around 12%. If we have just a 7% correction, assuming that we are at THE TOP right now, would mean a decline to about 1637. If we get at least this kind of decline, and investors do not freak out about this, and I do not see the U.S. economy going back into a recession, then I probably will give it a shot, and do some buying.

    But right now monthly RSI is at 73, and my research shows that only about 15% of the time does the markets keep going higher from here. Risk is high in my opinion.

    And finally American economist Lance Roberts went to a party over the weekend, and all everyone was talking about was how rich they were by being in the market.
    Not a good sign if you ask me. Here is the article below.

    http://stawealth.com/daily-x-change/1862-the-party-conversation-indicator.html

    Reply
  • Keith: Natural Gas has had a nice pullback. I believe we remain in a seasonal period until Dec 21. What are your thoughts about the upside opportunity vs the downside risk? Is Nat Gas linked to oil in any way. Obviously oil is going down is there any reason to suggest if oil keeps retracting that Gas will also retract further?

    Do the positives out weigh the negatives at this time and by Dec 21 we should be higher then than now.
    Thanks

    Reply
    • There is some correlation between gas and oil, but I don’t rely on trading one from the other. Nat gas is back down to a support level – RSI and stochastic not yet oversold enough, nor are they hooking up–but could be any day now. I think you may get a bump on it if you time it right. Wait for the hook on momentum before trading.

      Reply
  • Hi Keith,

    Excellent piece. Can you please analyse TSX and CDNX markets, in one of your blogs.

    Thanks,
    Sean

    Reply
  • This market defies all logic with countless speculative stocks going parabolic,so i wouldn’t be surprised to see the majors creeping higher as the CAC and DAX does 10% almost every month or so on the upside.

    Reply

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