Momentum Indicators

March 19, 2021No Comments

Today we are covering three subjects. These are the highlights of my blogs that I run every weekend I’m going to cover the first blog that I wrote in the week, Musings on Stocks, Commodities, and the Canadian Dollar.

I want to focus on the market, because a reader sent in a very interesting question on divergences, that he was noticing on the S&P 500, between the momentum indicators and the S&P 500. So I want to talk about that and address whether this shouldn’t be of concern to us as investors.

The other thing they want to talk about is the second blog, which was Stocks I Love to Hate. Effectively what I was highlighting are two sectors that I’ve covered very extensively in the past, the EBV stocks such as Tesla, the electric vehicle’s stock, and the clean green movement, which is the solar and alternative energy stocks.

I wrote a blog back in January, Green Energy Stocks Extremely Overbought. I want you to understand is that back in January, these sectors were massively over-bought as was Tesla. Since that point, they’ve fallen quite a bit 20 to 30%, and I addressed the question, should they be considered good buys right now? You know, they fall. In a nutshell, I’m going to direct you to the blog to read my answer.

But I can say that I do not believe that there are good buys right now though. I don’t think they have a lot of downsides. I just don’t think they have much upside from here. This market is rotational, and that was a rotation that I saw coming, But I also suggest that just because they’ve corrected doesn’t mean they’re going to continue falling. It doesn’t mean they’re going to rally right back up again. I think it’s very much like what happened to a lot of the Fang stocks, take a look at Amazon, take a look, at Facebook, Apple, Amazon, Netflix. Those stocks are pretty flat since last August.

My message is that the EBV movement and this solar movement are pretty much done for the time being. It doesn’t mean it’s going to crash and burn. What I’m suggesting is that these sectors don’t have a lot of upsides because the market is rotating into other sectors. And we’ll talk a little bit about that. But before I get started on the two blog subjects, which are going to be Bitcoin and the S&P 500 divergences, I want to show you a chart that comes out of our weekly newsletter.

I’m going to ask you, do you subscribe to our newsletter? If you go to the homepage of Valuetrend and you click on never miss an opportunity, that is the way to subscribe to the Valuetrend newsletter. One thing I’m going to promise you right now is if you subscribe to the newsletter, you’re going to be getting information that is not available on our blogs and is not available on these videos most of the time.

And the other thing I will promise is that we will never contact you with a direct solicitation. Yes, in the email newsletter, you’re going to get invites to things like our zoom webinar that we did back in January. We’re going to mention at the bottom of some of our email updates while we do. I’ll open our doors to anyone who wishes to inquire about our services because that’s what we do, but we’re not pushy We’re normal human beings and we appreciate the fact that people don’t like to be solicited and aggressively approached just because they signed onto a newsletter. So that’s a promise from me to you. Sign up for the newsletter. It’s well worth subscribing to trust me on that.

So let’s look at a chart that I sent out in one of our newsletters from two weeks ago. It’s a chart that’s going to give you an interesting investment opportunity.

This is the S&P 500 since way back in March of just after the market crash of 2020. And what I have noticed is that most months starting from April of 2020, not all of them, but most months since that March crash have seen a month and sell off where the market rises for the first half, or maybe even first three weeks and then declines into the second half. And this is an interesting phenomenon where it’s a little weaker during the second half of the cycle. And when we sell, for example, in December recently, it didn’t fall, but most of the movement you could see was in the first half of the month. And then it was more or less sideways, it does very often fall in that second half. So this is not something that I can guarantee you will continue on. This is one of those phenomena that is maybe an interesting phenomenon, but my view on this is that while it’s happening, it is a trading opportunity. So what I’m suggesting is that if you have stocks that reached your targets, sell those stocks, if you are okay. And so there are many ways it’s better to do it usually by around the middle of each month, hold some cash, and then see if the market does in fact, sell off into the latter side of the month and pick up the new stock that you are looking at, to begin with. So that’s a strategy that we have been using a Valuetrend over the past couple of months.

We just noticed these phenomena and it’s been very effective, So I’m passing this on to you. In fact, yesterday, which was the 16th of March, we sold a number of positions and were up to 10% in both our conservative equity and our aggressive equity strategies up to 10% cash. Right now, we’re looking for new opportunities as the month progressed with the idea that possibly if the trend continues for sell-off into the second half a month, we’ll have great opportunities to buy cheap stuff.

I’m going to bring you now to our second chart, which is in the Stocks I love to hate and this has Bitcoins. So the factors that I use when I’m determining if a stock is overbought and due for a correction, are the percentage, the price of the stock or the sector, or the security is above its 200 days or 40-week moving average.

My general rule of thumb is once you get over 10% of the moving average, you’re starting to get a little overbought when you’re 15% or more, you’re very overbought and it’s more than likely overdue for a correction. Now, this is more of a general rule for the markets. When we get into these 10 and 15 and 20% movements over the moving average stocks can move higher than that off of their moving average, but there’s still a cap on it. And that cap might be 25%, 30% when a stock it’s as ridiculous as it did say with Tesla back in January or the solar panel stocks, the tan ETF. I mentioned, these were phenomenally ahead of their 200 days moving average. And I called this as a market likely market top back in January, and I was correct.

I believe that Bitcoin at 160% above its 40-week moving average is ridiculously overblown and is absolutely do a correction. So even the regular, see the problem with the regular momentum indicators is they can stay over the bottom. As you can see, stochastics did here for quite a while, but when you get a peak on anything that is this much ahead, and this was about 160, 170% ahead of the moving average at this back in 2017, late 2017, and you’ve got your resulting crash. When you get a movement above the moon average that high it’s time to take a look and see caustics is over by RSI has been overbought for a long while as it was here. Okay. Back in 2017. So I am usually concerned when you get these big spikes in above the 200-day moving average now, interesting MACD, which is a slower momentum indicator.

There’s the peak in 2017. We’ll take a look at where it is right now. So, this Bitcoin is crazy. It’s overbought, and it doesn’t mean it can’t get a little bit more overbought, but one, if I may offer one suggestion now may not be the time to take a new position in Bitcoin. And I think if you’ve made lots of profits on this, maybe it takes them off the table because there’s a good potential for at least some kind of a pullback for myself. I’m not anywhere near interested in investing in Bitcoin.

So the next thing I am going to do is I’m going to look at the S&P 500. Now,  as a result, this observations result of a reader named Sergio, so hats off to Sergio and what I want to point out as he pointed out and I have failed to notice is that a lot of the momentum indicators like stochastics RSI are slightly, and I mean, slightly diverging, you could see even more. It is slightly diverging from the new highs that are being made on the S&P 500. This is the chalk and money flow index. It’s a momentum indicator based on price, accumulations of volume, or money flow. So it digs price times volume up or down that day. And then it cumulatively measures it for money flow. And then this is the momentum of that money flow. It’s falling as well. It’s a little bit more short-term in nature, but these two indicators, there’s a particular RSI and MACD are longer-term in nature.

So there is a bit of a heads up we are saying, we’re certainly seeing that on a stochastic indicator, which is directly below the price chart that momentum’s divergent. So Sergio asked, is this something to be concerned about? And my answer is, yes, it is. Although it’s not a sell signal. Keep in mind that it ain’t over till the fat lady sings is you’ll be a bearer. This is a bull market and in an uptrend, until proven otherwise. You don’t sell until you see a lower high and a lower low, at least you can wait for a break of the 200-day moving average to confirm that if you’re concerned about a major movement, but even if you’re just looking at taking profits, small amount out of your portfolio, I wouldn’t sell while the market continues making higher highs.

Just now the divergences though have alerted us. So it’s not a sell signal, but it’s an alert. So the minute we see a failure to make a new high, maybe for those who want to be a little bit short term in their trading decisions, maybe that would be a great time to take some off the table. Meanwhile, you could use that monthly observation. I just made about the month-end being a little weaker than the front end of the month. And that might be another combination here that we can, we can observe as the market continues on its merry way.

I’m going to open again, the suggestion that if you don’t subscribe to the newsletter, please do. I think you’ll find it a value. You can always unsubscribe but I can almost guarantee you that, that it’s going to present you with information that you’re not getting on our other work. So I think it’s a valuable thing to do. Also, if you do subscribe to our blogs, that’s great. But if you just occasionally visit the blog at the bottom of the page, you will find a never miss a blog button, click on it again. They’ll come into your inbox twice a week and we don’t solicit you. So don’t worry about us using this. We don’t sell your email address, state anybody. We don’t even post ads on our website. You’ll notice this is a small family-run operation. We’re a family office and we want to treat people like they want to be treated.

Our doors are open. If you have any questions about your portfolio, we are in that business and we’re having tremendous success. Our style tends to do well in this rotation of the market. If you want to explore that for your own portfolio, please give us a call or give us an email. We’re happy to talk to you. And we’re low-pressure type people. Thanks for watching.

Never miss another video!

Get Smart Money Dumb Money videos delivered directly to your inbox.

Recent Posts

Keith's on Demand Technical Analysis course is now available

Scroll to Top