The S&P500 is toying with the top of its 12 month trend channel. Last Friday was a “triple witching day” (when contracts for stock index futures, stock index options and stock options all expire on the same day). Friday’s markets saw a reversal from being up in the morning to a bearish close. Friday’s candlestick looks close enough to an “inverse hammer” (the precise definition would suggest no wick below the real body)- a potential sign of a market reversal. The massive volume and volatility was driven largely by the expiration of the above noted triple-witching phenomenon, so it may not be a true sign of trouble.
Research by www.sentimentrader.com shows that markets tend to remain weak during the week after a triple witching event–they’ve only been positive 7 of the past 21 occurrences. If we see too much weakness over the coming days, we may be bouncing off of the top of the aforementioned trend channel. Retracements within this channel have typically been in the 5% range to the bottom of the channel.
Adding fuel to the fire may be market excesses in low-quality IPO activity in the U.S., high investor margin levels, a high trailing PE ratio for the S&P500, and high volume by speculators. All of these indicators can be signs of an overly frothy market. While the trend remains up, there are some signs that things are getting ahead of themselves. While too early to make a major selling decision, I am keeping a close eye on things at this juncture. I have taken a little off of the table at this time, but remain 90% invested in the ValueTrend Equity Platform.
Your blog is very helpful!
Interesting data and comments from the sentimentrader. Many technicians are talking about the pending “correction”, I tend to believe you all when it seems consistent.
Are there any stocks/holdings that tend to weather corrections better than others, other than inverse ETFs or bonds/gold/silver?
What makes you take profits out of your holdings, meaning, is it too large a gain in a short time frame, high volatility stocks etc??
We take profits on positions that are some type of combination of: fairly or over valued fundamentally, or–technically reaching a target at a time when we are already nervous. Also, if we feel the overall market may correct in a month or so (as we suspect will happen), then we look at the beta of a stock. Beta is a measurement of “leverage” of sorts. A beta of 1.00 means the stock goes up or down pretty lock-step with the market. A beta of 1.5 means it is likely to move 50% more up or down vs. the market. Obviously, high beta is good in a rising market (“risk on”, as they say). Not so much in a declining market. So we took a bit of beta out the other day by selling our small caps, and we also sold our US bank ETF given its proximity to the top of a trend channel. I don’t care if I sold at the precise top–I don’t have that kind of karmic luck. Instead, I am looking to slowly, slowly exit as it looks right to do so.
Re–what might fare best in a correction—cash is king, of course-and low beta stocks, plus there are some “have your cake and eat it too” ETF’s that you might look at> I don’t hold any yet, but PHDG is a reasonable one to consider.
Hope that helps
Thanks for your prompt response, very valuable. One issue I find is determining the Beta on some holdings. The broker I deal with doesn’t seem to list them and the other place I have looked is Yahoo finance. Lowering the beta makes perfect sense.
You’re right, no one can time the market. It’s better to be close than miss making the trade.
I will look into PHDG. I have your book and quickly read through it but I need to go over it in more detail.
The TSX has beta listed for their stocks on their website somewhere–we use Thomson Reuters data and my CFA uses the TSX data to double-check. Not sure where he finds it, so search their site.
Best regards, Keith
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