A Market Timing Report based on the 5-24-2013 Close published Saturday June 1st, 2013
UPDATE 6-01-2013: The Bear has reared its head. The sell-off in the form of the C wave mentioned below is now underway. The so-called C wave is the second DOWN wave in the SP500 Index (SPX, SPY) and most other stock markets. It could turn into something worse and become a 3 wave, something I’ll cover in this week’s issue.
The “Go Away” time was a bit late this May, but there will be more going away (read that “selling”) this next market week too. To get the jump on it, subscribe to the free newsletter emailed to your door by this Sunday evening (see link below).
If you feel the reaction of the market to the Fed is overdone and we are in for more gains in the immediate future, then there is no need to sell anything despite all the sell signals in the MTT table below in this week’s issue. Or you might want to trim here and there or raise cash with each lower low. Regardless of your personal choice, the fact is that the market broke down technically this past week with classic key reversal days in multiple indices. Some indices were punished particularly severely including one I highlighted just this past weekend as super stretched, the REIT Index. There was a key reversal day for the REITs on Wednesday after the Fed minute release. A key reversal is a higher high with a lower low than previous day with a close near the low.
I had warned about the REITs as the worst index in terms of the stretch above the 50 day moving average, issued a SELL, and the REIT Index (RMZ, VNQ, RWR) dropped 2.0% more. You could have sold the break of the trend line well before that. The total drop from the top was 5.6% from the recent closing high to the low on Friday. The bounce occurred almost exactly at the 50 day moving average. So now it’s sitting on support and could bounce in the coming week. I’d say a break below the 50 day moving average will be another SELL signal.
NOTE: All charts are courtesy of Worden Brothers charting system. To read more about the software that I use every night to check the charts, go to: The Chart System I Use
Big Tech is still much more stretched than the REITs are, as shown here (NDX, QQQ):
The white lines running up and down show the degree of stretch from the 50 day moving average. Note how much longer the one on the far right is than the others. There is plenty of room for a further correction to happen just to bring the price back down to the yellow line. The 200 day moving average has provided the best support though, so more damage is possible. It should not retrace to there if the economy is indeed recovering, but at times things are overdone as the momentum shifts from the recent greed of investors to fear.
Certainly the 50 day moving average could support a bounce if not a strong recovery. If rates rise further from here to 2.4%, I’d bet on the 200 day moving average target.
The SP500 Index is also stretched still, as the chart shows via the following link:
Market Timing Charts for Sunday’s Issue (opens separate window with all charts)
Men and women preserve profits. Boys and girls give them all back. I’ll get to that again just below. Remembering that truth may save your financial butt some day.
Given the pullbacks that have started, it would be wise to consider your alternatives.
Too late for the first one, but you could have reduced your risk by quickly selling the break of the up trend at a very stretched level (you could have exited intraday on the 1st break of the up trend on day 1 of the decline). There is the risk of selling early whenever we sell the very first break however.
- You could simply hold and take the losses from the prior tops believing that the economy is recovering.
- You could still sell next week, but we have no idea if the market will gap down or not. You might be selling too late. So you could sell some arbitrary amount such as ¼ or 1/3 and see if the market gives way some more and sell more lower.
- You could simply orient your strategy around preservation of profits and limiting losses to an arbitrary percentage. I would not give up more than X% of your profits. Your call on what X will be. Some use a 25% trailing stop. Others use 20%. Some cut their losses at 50% of profits if the profit was gained quickly. If your profit is small and support is close, you might decide to give it all back and even sell at a small loss below support. But if your profits are large, giving up more than 25% on a trailing stop would be dangerous to your capital. (if you don’t know what a “trailing stop” is, you need to know it, so please read my entry on how to buy stocks here: How To Buy Stocks (and when to sell them!)
Never, ever, ever give your profits all back when you have big gains.
Benjamin Graham said “Although there are good and bad companies, there is no such thing as a good stock; there are only good stock prices, which come and go.” Put a yellow sticker with that quote under the screen you use for trading. Graham did not focus on market prices as much as he focused on value, but to me the quote has a greater meaning across all investing strategies. Don’t marry yourself to your thesis.
There is another caveat though. YOU MUST BE WILLING TO RE-ENTER THE MARKET. If not, buy and hold and forget all this. No system of selling will work if there is no price at which you will rebuy the market you’ve sold. You will lose out on too much opportunity waiting for the perfect entry point. Ask the investors who sold everything at the bottom in March of 2009 how they feel today. We know how many feel. They have left the market and have not come back.
How about Tuesday in the US markets? The market could bounce on Tuesday to a lower high and then come down again. The only thing that changes the current technical picture is a new high.
I’d like to discuss the Nikkei 225 Index a bit. Their new monetary policy is not a short term job. It’s a longer term commitment to insanity. The Japanese were infected by the Bernanke Virus, isolated by the CDC and guaranteed to promote monetary illness immediately following infection. They’ve got the bug. Here’s the chart to show the big move under way in their stock market:
Monthly resistance was hit and we’re falling from there. Japan has been given the green light by the rest of the developed world to defile its currency. Dr. B said so himself. No problem. Print yen, and we’ll look away. They’ve had a tough time with zero gains in principal value in the index since March 1986! The peak was 1990, but we are at 1986 prices. That is TWENTY SEVEN YEARS of no gains! They’ve been in investment hell for far too long and funding our non-repayable debt the entire time while their population has been aging. So now the US has to look the other way. That means that after this pullback, there is more to come most likely. The pullback admittedly continued on Monday by another 3.22% in losses in the index. So I was early in re-buying more Japanese exposure, but it only represented an increase in my equity exposure of 2%. I will preserve profits at a certain point and Tweet it to you. Decide where you’ll preserve your profits. I’ve made the Pac Rim a trading sell, but have not yet sold. I will do so to preserve profits (follow my tweets if you like).
You can take a look at the level of damage on Yahoo Finance here: http://finance.yahoo.com/echarts?s=^n225+interactive#symbol=^n225;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined
Most charts don’t go back 27 years. Congratulations to Yahoo on providing this great resource!
Commodities are headed back to their prior low. “Stuff” just can’t get a break! Even gold is slipping around, while trying to bounce (see Chart Link above).
The VIX volatility index hit the lower highs in Feb., March and April and turned down. As it could go either way, it has little value to us.
Sentiment on the part of investors is eerie this week. I reported on it on Thursday, because I was surprised at the parallel I found to 2007. Read it here in the last update to this post: Sentiment Survey
The King of all Indicators is shown in this week’s Bonus Chart of the Week at the Chart Link above.
The 10 Year Treasury Note (TNX, TBT, TLT) is King now because it will tell us if the market seriously believes the Fed is going to reverse course here. If rates DECLINE this week, we’ll know the pullback is not serious. If rates crash up through the upper resistance line on the chart above, we’ll know the Fed premium is being taken out of the market and we had better take it seriously in preserving our profits and limiting losses on new positions.
The Fed premium is what stretched this market in the first place. Take it away and away goes the stretch.
Key Takeaways for the Week:
1. The markets are already less stretched than at the recent highs, but there will likely be at least one more step down before a bounce. Most pullbacks, even the brief ones are A-B-C wave moves, A down, B up or sideways and C down
2. The Treasury market is the key indicator to follow. Rising rates would tell us we’ll need to sell more to protect profits.
3. Gold can rally when stocks are selling off. Maybe it began a bounce this past week, but if it fails to hold the last low, watch out below. There will be more pain for gold investors. Rising rates are bad for gold until inflation kicks in and it hasn’t.
4. Sentiment is where it was near the 2007 high.
5. A reversal back below the 2007 SP500 Index high would NOT be taken lightly by investors should it occur.
6. Consider selling in steps, not all at once, if you do so to preserve profits and capital. We could see a bounce from the next move down for example after the C wave (see #1 above).
Have a great week investing and/or trading!
Standard Disclaimer: It’s your money and your decision as to how to invest it.
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