Trading with the odds

On this blog I noted a few technical resistance points to watch on the S&P 500. They were, 2650 (cracked), 2750 (also cracked) and finally, the most significant resistance point at 2850.  The S&P 500 is back trying to test that 2850 level today. This, as Q1 earnings season begins. Lets see if that cracks.

I’ve been staring at a lot of charts lately. And, I’ve been reading and listening to lots of analysts – coming from both technical and fundamental disciplines. Nobody has “the answer” to what the next 12 months will look like for the stock market. But, I think I have drawn a few conclusions as to the most probable (yet, still very much uncertain) potential outcome might be. Below, I will highlight some comments from a few of them – quoting directly from their research.

Jason Castelli, Technical Analyst at Raymond James

COVID-19 headlines appear to be the main driver of the positive tone in the market amid further curve flattening and expectations now shift towards when the economy will reopen. Trump said guidance will soon be provided on relaxing social distancing measures. While the market is enjoying an impressive rebound off of the March 23 low, I’m a firm believer that bottoms take time to form and that a v-shape recovery is not the probable path toward to a new bull market. As the US economy attempts to reopen will this be the “sell the news” moment that sees the market retrace it’s 20%+ gain and we make further progress in the bottoming process? I think there are high expectations that things will just return to normal, but behavioral changes will continue to weigh on economy activity until there is a vaccine. Unfortunately, reopening the economy will not be as simple as flicking a switch. See NYT article Economic Pain Will Persist Long After Lockdown Ends .


Larry McDonald, BearTraps founder, former head junk bond trader at Lehmans

Larry looks at the 4 phases of a bear market, and presents where he thinks we are right now:

  1. Surprise: Shock from SPX 3400 to the 2174 low.
  2. Hope: The recent bounce to 2800+ (massive short covering, the bear raid broken by Powell’s unlimited nukes).
  3. Recognition: EPS reality (Small business / execution risk in getting cash to masses). EPS season will have a record amount of companies offering no guidance, market uncertainty HIGH.
  4. Despair: Bottom


Jason Goepfert & Troy Bombardia at Sentimentrader

In a time like right now, it’s easy to find both bullish and bearish factors for stocks over the next 12 months. Truth is, no one knows where stocks will be 12 months later given the unprecedented challenges the global economy faces. If the government’s actions are enough to stop further economic deterioration, then stocks will probably be significantly higher in 12 months. If the economic recession worsens and more defaults are triggered, then it’s highly likely that stocks will be lower in 12 months. To pretend to have a crystal ball as to where the world will be in 12 months is, in my opinion, plainly dishonest. One can only speak in terms of probability – there is no certainty.

The biggest mitigating factor – and it’s been a factor for two weeks now – is the overwhelming thrust in buying pressure. Even if markets are being driven by algorithms making breath data less reliable, until these measures fail consistently they deserve attention. And nothing is screaming louder than these repeated days with huge buying interest. The short-term outlook is increasingly cloudy given the recoveries in so many indicators, but it’s suggesting more and more that longer-term returns should be positive.

Keith’s take

We sold a chunk of Equity into last weeks strength. We’re up to 30% cash in the equity model from the prior level of 15%, and a bit more than that in the aggressive model. We still hold about 5% in oil stocks, and now that the (somewhat disappointing) OPEC deal is known, its really just a question of how much longer we hold it. We will likely rotate that into a more attractive position from our oil stocks in the near term. Other than that, we are comfortable where we sit at this moment with most of our stocks–with the odd rotation in & out of stocks being done here and there.

We do not know if  the current rally is only a counter rally with a final selloff (not necessarily to a lower level).  But, I have reviewed enough market selloffs to conclude that one-and-done selloffs are rare. On the chart above, I note similar setups though the 2001 and 2008 selloffs as we have now. That is, a rally off of support where RSI had fallen below the “50” line–noted by my vertical lines. A hook up on RSI from 50, and then a final washout that drove RSI into its official “oversold” zone below 30–circled.

So, the odds are for a bit of profit taking soon, pushing the market down to some lower level than today– all things being equal. Still, I cant discount the potential for a V-shaped recovery. After all, we have an historic Fed stimulus program in the background, which truly supports the bull case. It may not be an “all things being equal” situation. I also note the % stocks >SPX 200 day SMA is now moving over 15%-a bullish sign-discussed in my last blog. So I’ll not go much lower than the 30% cash we currently hold.

We do know this: The virus will cause a severe economic contraction and a sharp decline in corporate earnings in 2020. What remains unknown is the extent of the damage, and how fast the economy will recover. The stock market is a forward-looking beast. The current situation is NOT what the market is pricing in–the rally of late is pricing in a better economy in the next 12 months. Perhaps this article from MarketWatch might help those who like to use PE ratios determine where the market might land in the next 12 months. To me, the verdict is out as to whether we really do see a meaningful earnings rally in 2021 after we get through the disaster that is 2020.

I’ll hold some cash while remaining 70% invested for the time being.


  • Hey Keith, thanks once again for your honest comments. There are several experiences that come to mind now that are conflicting. “Don’t fight the Fed” comes to mind. Buying thrusts recently. Your history lesson that shows rarely do we not see a further lowering of indexes. I also remember someone saying that investing at the most opportune times is among the hardest thing they have done. Lots to think about.

    • You got it Terry–that’s why I have avoided making too many “strong opinion” statements. I’m trying to balance that whole “Fed” thing with the “historic price pattern” thing. As my favorite fundamental analyst, Howard Marks, once said: “You can’t predict. You can prepare”. That’s why I keep an open mind to any potential outcome, and keep a reasonable, but not ridiculous, amount of cash on hand just in case.

  • Hi Keith. I’ve watched you for many years on TV and read your blog. Thank you for your insight to the markets.

    Do you see a rising wedge forming in the S&P500? Once completed it may start the “B” wave in the possible A-B-C pattern. How close do you think we are to completing the rising wedge pattern?



    • Thanks for the following Garth. Yes, its looking like a potential wedge formation that has formed since the March 23rd bottom. I believe we are already in the “B” wave (counter trend rally) so the wedge might imply that it will indeed turn back down soon and complete that “C” down-wave.
      FYI–normally, I don’t ascribe much to predictability of wedge-formations, mainly because they are kind of hard to identify. But, whether we are correctly identifying a rising wedge or not, I think there is enough history in prior bear market patterns to suggest a pullback from current levels to complete the washout process. We shall see.

  • I was looking at a 5 year chart of the XGD and clearly it has broken out. With this in mind would you be enticed to buy into this etf with this breakout?

    • XGD looks very good Dave–the sector has lagged the commodity, making the old trading zone near the highs $22-$26 quite possible as a target

  • Hi Keith. Thanks for the usual thought provoking analyses. You mentioned the Equity and Aggressive funds in the blog. I am a conservative retired investor. Do you have any recommendations or considerations for an Income fund?

    • We feel that our Income-model’s mix of about 50% dividend paying stocks with very strong (not over leveraged) balance sheets – along with 50% cash/neartermed bonds is a good way to go. With rates effectively heading to near “0%” in Canada and throughout the world, you need to have some dividend – stocks in the mix. The trick is to only hold stocks that are likely to maintain their dividends. That’s where Craig, our CFA at ValueTrend, comes in. He works hard to constantly review the quarterlies and listen to every conference call for the income stocks we hold in our income model. In that way, even during stock market declines, we have enough data to have conviction that the dividends will remain and perhaps even grow over time, thus suggesting an ultimate return of the stock prices to their longer termed price range.


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