“Speaking to last week’s Dow Theory sell signal, we
really cannot decide to ignore it, as we did with two previous false sell
signals, or honor it because we continue to believe this is a secular bull
market. That said, I raised more cash following last Wednesday’s Dow Theory sell
signal because of the discipline of managing risk. My left brain response to
the sell-signal was to raise some more cash even though we think the Dow Theory
sell signal was a false signal. Quite frankly, we and our models are currently
confused, a state of mind we rarely find ourselves in! Fortunately, we are old
enough to be able to admit that, unlike many pundits on the Street of Dreams.” –
Jeffrey Saut, Raymond James Chief Investment Strategist
My cmt: RE: “…we and our models are currently confused…”
Aren’t we all.
CORRECTION UPDATE
This is day 65 of this correction. The Index is down 19.8% from its prior high.
There have been 21 new-lows so far. Outside of the Financial Crisis, that has only
been matched once in the Oct 2011 correction that bottomed at 19.4% over the
last 10-years.
The average correction over the last 10-years (excluding
major crashes) lasted 52-days. The average drop over that period was 12%. The
longest correction in the last 10-years was the 19% drop in 2011. It took
108-days to complete, top to bottom.
MARKET REPORT / ANALYSIS
-Monday the S&P 500 dropped about 2.7% to 2351.
-VIX jumped 20% to 36.07.
-The yield on the 10-year Treasury slipped to 2.740%.
My daily sum of 17 Indicators declined from -2 to -5 (a
positive number is bullish; negatives are bearish) while the 10-day smoothed
version that negates the daily fluctuations slipped from -41 to -44.
RSI* is the lower than any reading in the last 9 years.
(I don’t have the number going back into the Financial Crisis. I suspect that was the last time the value
was 4 or below as it was today.)
*RSI, (SMA-14) Relative Strength, measures the size of
up-moves vs. all-moves on a 14-day moving average basis and presents the result
as a percentile. For example; if the RSI is 85, it means that the size of
up-moves are in the 85th percentile when compared to all moves over the 14-day
period. If ALL moves had been up, RSI would be 100 – a definite short term
sell indicator. For my purposes, 30 is oversold (suggesting a turn-around to
the upside) and 80 is overbought. If the up-moves and down-moves are equal in
size over the 14-day period, RSI would be 50.
My comment from last week is worth revisiting, especially
after today. We just saw back-to-back-to-back days with new-lows over 1,000
(Thursday, Friday and Monday). In the past 10-years, that has only happened
during the Financial Crisis and it didn’t happen near the bottom. Let’s hope the options expiration Friday
played a part in this rare event and that Monday was the bottom.
For now, let’s take the optimistic side. That is, we have at least made a short-term
bottom and possibly a final bottom is not far off. In 2016 when new lows were
1395 the final bottom was three weeks later (after a bounce) and about 2%
lower. In Aug 2015 when there were 1258 new-lows, the market bottomed the next
day. The key point here is that in both cases, the markets bounced the next
day. We need to see a bounce Wednesday.
Chart wise, the correction is in the waterfall
phase. The point at which the Index
drops straight down and usually makes the low or very near to it.
If there isn’t at least a bounce in the next day or two
it is time to be afraid…be very afraid. It has bothered me that normal
correction technical analysis has not worked.
We saw 2 successful tests (buy signals) at the 2633 level and one more
at 2546 on the S&P 500. None of them
stuck. Perhaps we should consider that this is not a normal correction. The
drop from the top is now 19.8%. 19% drops do happen outside of crushing bear
markets like the Dot.com or Financial Crashes, but not frequently.
There was a 19% correction that bottomed in Oct 2011. Additionally,
there was a 19.4% correction in 1998.
That one is worth mentioning, because it was in the context of an
overpriced stock market in a strong economy like we see now based on median PEs
and GDP. The chart of the 2011 correction is more similar to the current drop in
the waterfall phase, so let’s look at the 2011 correction.
Chart from Yahoo (but you’d need to adjust the dates)...
The waterfall phase (nearly straight down with little or
no bounces) took place over 3-weeks (about 15-trading sessions) and included a
17% drop with almost no relief. We are about 3-weeks into the current waterfall phase that began about 3 Dec. and
has dropped 16%. So by historic measures, we should be nearing an end…or not. With
the extreme new-low data, it appears that the selling should be over today. That too is based on prior correction data,
but there were only 2 corrections in the last 10-years that included new-lows
greater than 1000 so the sample is too small.
If we don’t see a bounce Wednesday, we need to consider
that this may be a major bear market with potential for a 50% loss, top to
bottom.
MOMENTUM ANALYSIS:
(Momentum analysis is suspect in a selloff, so I‘d be
careful using momentum data for the time being – the only reason utilities are
highly ranked among ETFs is as an alternative to stocks during the correction.) The same is true for individual stocks in the
Dow 30.
TODAY’S RANKING OF
15 ETFs (Ranked Daily)
The top ranked ETF receives 100%. The rest are then
ranked based on their momentum relative to the leading ETF. While momentum isn’t stock performance per
se, momentum is closely related to stock performance. For example, over the
4-months from Oct thru mid-February 2016, the number 1 ranked Financials (XLF)
outperformed the S&P 500 by nearly 20%. In 2017 Technology (XLK) was ranked
in the top 3 Momentum Plays for 52% of all trading days in 2017 (if I counted
correctly.) XLK was up 35% on the year while the S&P 500 was up 18%.
*For additional background on the ETF ranking system see
NTSM Page at…
TODAY’S RANKING OF THE DOW 30 STOCKS (Ranked Daily)
The top ranked stock receives 100%. The rest are then
ranked based on their momentum relative to the leading stock.
*I rank the Dow 30 similarly to the ETF ranking system.
For more details, see NTSM Page at…
MONDAY MARKET INTERNALS (NYSE DATA)
Market Internals
switched to Negative on the market.
Market Internals are a decent trend-following analysis of
current market action but should not be used alone for short term trading. They
are usually right, but they are often late.
They are most useful when they diverge from the Index. In 2014, using these internals alone would
have made a 9% return vs. 13% for the S&P 500 (in on Positive, out on
Negative – no shorting).
I increased stock allocations to 60% invested in stocks
on 27 November. I bumped up stock investments to 65% on 19 December. Both
increases were made at technical bottoms or shortly thereafter. For me, fully
invested is a balanced 50% stock portfolio so this is higher. The failure of
technical bottoms has been disappointing, to say the least.
INTERMEDIATE / LONG-TERM INDICATOR
Monday, the VIX and
Volume indicators were negative; Price and Sentiment were neutral. Overall this
is a NEGATIVE / SELL indication. The concern is that the important sell-signal
was last October. The NTSM long-term system can give sell signals near a bottom
too. Until Thursday, I am ignoring this indication.
