Caution Flags are Up; we're holding long.

Several of our indicators got worse today.  The Navigate the Stock Market (NTSM) system is designed to show when there is a breakdown in the market that is not visible by just examining which way the market is going.  For example, even though the S&P was up almost 1% today, some of our key indicators got worse. 

If this trend continues the NTSM computer analysis will call a SELL.

We’re due for a correction and this may be all that we get.  My concern is that if you view the above TAB, “Compare the 1966 Bear Market to the Current Bear Market,” you see numerous significant drops during past bear markets.  One problem that could concern the market is the price of gasoline.

If the market gets the impression that gas prices are going higher than $4, we could be in for trouble.  In simple terms, high gas-prices may send us into a double dip recession, or at least cause some serious problems for the stock market.

The recession officially started in December 2007, 9-months before the stock market peaked.   Gas prices were about $3 per gallon at the time, about the same as now. 

My guess is that we will go higher for a while longer, but as always, we’ll have to wait and see.

Bottom line…I am ready to sell if I get a signal. 

Meade

Gasoline Price data is available at GasBuddy.com:

http://gasbuddy.com/gb_retail_price_chart.aspx

The bears showed up for Goldilocks’ porridge tasting!!!

The S&P 500 was down 1.8% on Friday.  I had to go all the way back to 11 August 2010 when the S&P was down 2.8% to find a bigger down-day.  That just makes the point that the markets have had unusually low volatility recently - especially since the first week in December.

I love how the pundits always have an easy explanation for cause of the market moves.  Friday’s explanation was the turmoil in Egypt.  Perhaps it was; but if there was a significant concern about riots expanding and affecting oil supplies, would the turn down have been so small?  Ford also had a significant miss on its earnings and that too may have caused some jitters.

Good news was ignored: The Commerce Department said GDP expanded at an inflation-adjusted annual rate of 3.2% in the fourth quarter of 2010. It was 2.6% GDP growth in the third quarter.  Consumer spending rose 4.4% in the fourth quarter, about double the pace of the prior three quarters and resulted from the best holiday retail sales since 2006.

Our 5-day moving average of sentiment is up to 53% Bulls. The %-Bulls was 63% at the close on Friday so a lot of people are buying the dip (through options).  These are elevated numbers, but by themselves, do not portend a downturn.

The Navigate the Stock Market computer analysis threw up some red flags, but it is still in a “HOLD” so I haven’t sold yet.  I’ll be watching closely next week.

The Goldilocks Rally

The Goldilocks rally keeps on going.  It’s not-too-hot and not-too-cold.  It’s just right.    

Speaking of gold, if you have been berating yourself for not buying gold back when it was $1,100 an ounce, rest easy.  Over the last six months the S&P 500 has outperformed gold (GLD) by about 5% and you could add another 1% in dividends on top of that because gold doesn’t pay dividends.

The Navigate the Stock Market system is still positive on the market and indicators improved today.  I remain 100% long in the long-term portfolio.

The Wednesday Update of the Navigate the Stock Market System

I noticed on one of the day-trader discussion boards today that someone was recommending a sell because the S&P was 12.5% above the 200-day moving average and this, according to the poster, indicated tops from 2003-2011.  While we did start the most recent correction in 2010 when the stat hit 12.5%, this is far from a reliable indicator.  The stat peaked at 19% in October 2009, months before any meaningful downturn, and hit 15% in Jan 2010 before we had a pullback.  It’s hard to draw any conclusion from this one piece of data.  It is worth watching, but I don’t think we have topped yet.    

We have a rather unique market where retail investors are starting to return.  The Investment Company Institute reported $6.5-billion flowed into equity funds in the week ending 12 Jan and $4.6-billion for the week ending 19 January so we may see some unusual bullish data as investors who are late to the party pile in.  When they all jump in…that will be the top (sad to say). 

SUMMARY OF INDICATORS:

As of today’s close, our 4-areas of market analysis present the following picture:

SENTIMENT:  Neutral. %-bulls indicator is 55%.  This is an elevated number, but not enough to issue a sell signal.  (Sentiment is a reverse indicator; a high %-bulls indicator is bearish for the market and vice versa.)

PRICE: Buy. Price action has been positive since November.

VOLUME: Neutral.  The volume indicator has moved up with the up-trending S&P, but it is still in neutral territory.   We still need to see stronger up-volume vs. down volume to get this indicator into the BUY range.  It is still in positive territory though and that is good.

VIX:  Buy.  VIX moved to a Buy position based on the drop in VIX yesterday and remains a Buy today.

The overall status for the Navigate the Stock Market system is BUY.   (Our indicators are based on closing data so we generally wait until after the market close to update the system.)

MY INVESTED POSITION: I remain 100% invested in retirement funds and all cash in the trading account.  (This is an absurdly aggressive position (for an old guy) and I don’t recommend it unless you have an extremely high tolerance for risk.

Quick Update

The Navigate the Stock Market (NTSM) system moved to "BUY" Tuesday so it seems the market may continue to move up in the near term.

General Electric is up 25% since the first of December.  They are up 8% since their earnings came out on Friday.  Earnings per share were up 33% from a year earlier.   Wow!  They are widely considered as a bellwether stock because they are such a diversified industrial company.  Good news for the S&P 500. 

Consumer confidence was higher than expected Tuesday; that’s more good news.

One area of concern: the %-Bulls Sentiment indicator in the NTSM system continues to move up and that is bearish in the longer term (perhaps not too far in the future).  The 5-day %-bull value is 59%.  If a downturn were to occur now, I’d expect a short correction rather than something nasty.  We’ll see…  

Comparing the 1966-1982 Bear Market to the Current Bear Market; Backtesting the Navigate the Stock Market System & A Quick Market Update

I posted new tabs (at the top of the page) that will take you to information regarding backtesting the Navigate the Stock Market System and also a 2nd tab that will give you a look at the current Bear market vs. the 1966 Bear market.

Regarding Today's market action, there is no change to the indicators and I continue to hold my long positions.

Things were looking shaky earlier this week so I sold my long position in the trading portfolio on Thursday.  That puts me at 100% cash in the trading portfolio.  There were no signals in the system that triggered this move, I just felt that we could see a sell signal fairly soon (days or weeks) so it would be best to take profits rather than hold a volatile fund.

I have been invested in QLD since last summer and made 48% on the trade.  (Trading portfolio is my mad money that I go long or short to make some extra coin.  Trades are usually held for 3 to 4 months max…infinity for day traders, I know.)  QLD is an exchange traded fund that attempts to move in the same direction as the Nazdaq 100, but at twice the pace.

If the system generates a sell signal, I’ll short using (QID) and/or an Inverse 2xNazdaq fund with the Rydex mutual fund family with trading funds.

A QUICK UPDATE ON THE SYSTEM:

Sentiment is showing a fairly high %-bulls and that is bearish for the market. The VIX and volume analysis are still bullish, but the signal is not strong so both of these indicators are neutral.  VIX and volume could give a sell signal if they continue to deteriorate.  All else being equal, if VIX and Volume give sell signals we’ll get a SELL signal overall and it will be time to sell stocks.  Remember, in a bear market, we could see a fall to the previous low; hopefully that won't happen, or if it does, we'll reach the old highs before the drop.

As of Friday, the indicators are in a HOLD position so I am still 100% long in retirement accounts. 

The Wednesday Update of the Navigate the Stock Market System

The S&P 500 had a 1% down day today, Wednesday.   That’s always disconcerting.  It still didn’t feel like the start of a correction…maybe it’s just wishful thinking on my part.  Sometimes a 1% down day actually causes more buying…buy-the-dips…but we’ll see. 

Our indicators are based on closing data and the sentiment indicator is based on RYDEX 2x fund volumes so we generally wait until after the close and RYDEX publishes their data to update the system.

SUMMARY OF INDICATORS:

As of today’s close, our 4-areas of market analysis present the following picture:

SENTIMENT:  Neutral. %-bulls indicator is 53%.  This is an elevated number, but not enough to issue a sell signal.  Our indicator is a 5-day moving average.  The %-bull indicator at the close today was 60%.  I had to go all the way back to 6 May 2010 to find a close that was that high.   That was a week after the April top in the S&P, but I don’t think we’ve topped yet.

Investors Intelligence Survey (http://www.market-harmonics.com/free-charts/sentiment/investors_intelligence.htm) has a reading of 57% so we are close to their survey value. 

(Sentiment is a reverse indicator; a high %-bulls indicator is bearish for the market and vice versa.)

PRICE: Buy. Price action has been positive although we have seen some pullback in the last week.

VOLUME: Neutral.  A couple of down days have pulled the volume indicator down, but it is still in neutral territory.   I’d still like to see stronger up-volume to get this indicator into the BUY range.

VIX: Neutral.  Long term the VIX has been falling, and that is still positive for the market, even though the VIX popped up 9% today.  If the VIX continues up this indicator will quickly turn to sell.

The overall indicators are HOLD.  Last week, they were BUY. 

The indicators can turn quickly and I’ll post if we move to a SELL.  If there is no SELL signal, normally I’ll post weekly after the Wednesday close.

MY INVESTED POSITION: I remain 100% invested in retirement funds and about 15% long in the trading account.  (This is an absurdly aggressive position (for an old guy) and I don’t recommend it unless you have an extremely high tolerance for risk.)

All major indicators improved Friday so, long-term, we look good at this point.  As of the close Friday the S&P 500 is 12.3% above its 200-day moving average so we could have a short term pullback soon.  As a guess, the pullback should be fairly small, say in the 5-10% range.     

Indicators were slightly improved today, but show no significant difference from yesterday.  Still a BUY overall.  See 12 Jan SUMMARY OF INDICATORS discussion.

The Wednesay Update of the Navigate the Stock Market System

Good day today and the market indicators we track improved. 

One cautionary thought: the S&P 500 is now 11.6% above the 200-day moving average.  That is approaching the general range where pullbacks may occur.  In 2010 the 2-significant pullbacks started after the %-above-200-dMA reached 15% and 12.5%.  The catch is that this isn’t a good indicator for trading since it may remain elevated for some time before a pullback occurs and during extreme markets, this indicator can reach extreme values. 

We remain in a long-term bear trend so the watch-words are caution and capital preservation.

SUMMARY OF INDICATORS:

As of today’s close, our 4-areas of market analysis present the following picture:

SENTIMENT:  Neutral. %-bulls indicator is 51%.  This is an elevated number, but not enough to issue a sell signal.  Sentiment bottomed at 16% last July.  Surprisingly, that is about ½ of the %-bull value that occurred after the 677 closing low in Mar of 2009.  The extremely low sentiment value is one reason we have moved steadily up since the S&P 1023 low in the summer of 2010.  (Sentiment is a reverse indicator; a high %-bulls indicator is bearish for the market and vice versa.)

PRICE: Buy. Price action has been positive since late November.

VOLUME: Neutral.  While volume is neutral, we have seen more volume to the up side than down since late November, so this is positive for the market.  I’d like to see stronger up-volume to get this indicator into the BUY range.

VIX: Buy.  The VIX has been consistently falling and that is positive for the market.

The overall indicators are BUY.  This is the first buy rating we’ve had in the last 3-weeks of trading.  Previously, they were HOLD.

The indicators can turn quickly and I’ll post any changes.  If there are no changes in the overall rating, normally I’ll post weekly after the Wednesday close.

MY INVESTED POSITION: I remain 100% invested in retirement funds and about 15% long in the trading account.  This is an absurdly aggressive position (for an old guy) and I don’t recommend it unless you have an extremely high tolerance for risk.

NOTE: The market indicators are not designed for frequent trading.  Last year we had 2-sell signals and 2-buy signals.  In 2010, the system was up 36% vs. the S&P gain of 14%. 

I’ll post more information on the system in the future, especially some data on backtesting.