Navigate the Stock Market analysis slipped to SELL again...

Quick update today as I head out the door early….

 

No surprise here, the Navigate the Stock Market analysis slipped to SELL again today as the S&P 500 fell 1.6%.  Volatility was up nearly 15%. 

 

I went to a stock discussion site this morning that urged its visitors to buy-buy-buy, because that has been the right move in this bull market.  The folks that took that advice may not feel so good this afternoon.

 

I wouldn’t be surprised to see a couple of quick down days soon.  Today should have the “buy-the-dip” crowd worried that this may be more than just a dip.  That may bring out some sellers.

 

We’ll see.

No Change

It looks like we had below average volume today. 

I still think this is a correction even though the S&P 500 is up over 1.5% over the last 2-days.  The market never goes up or down in a straight line so we’ll have to be patient and see what happens.

 

All indicators improved a little today (except that I don’t have the Sentiment data because Rydex hasn’t posted their information yet.) Sentiment would not change our opinion anyway.

 

The Navigate the Stock Market analysis still calls a HOLD;  that means I won’t get back in the market (in a more meaningful way) until we have a BUY signal.  Curerntly, 30% invested. 

The Longer View

I’ve commented before that I have great respect for John Hussman, PhD, of Hussman funds.  Here‘s the longer term view from Mr. Hussman.

“For the third time in a decade, the Federal Reserve has embarked on a policy

that addresses structural economic problems by provoking speculation in asset prices.

The first two attempts were ultimately followed by stock market declines greater than

50% each....

My expectation is that this attempt to create what the economist Ludwig von Mises called “illusory prosperity” will end no better than it has in the past. As von Mises wrote in 1931, before the worst portion of the Great Depression: “Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods.  As a result, the upswing lacks a solid base…Sooner or later, it must become apparent that this economic situation is built on sand.”  February 21, 2011, The Hussman Funds Letter to Shareholders by John P Hussman, Ph.D. (used with permission of Hussman Funds - http://www.hussmanfunds.com)

The VIX came down 10% today and other indicators improved as well, so the NTSM system moved to HOLD.  This is not unusual for corrections, since there are many who will buy-the-dip.  At this point I have no reason to question our earlier SELL call.

The volume today was about 15% below the 20-day moving average for volume.  That shows there was not much conviction in the up-move today…I think we have more down days ahead.

"...the stock market has often been vulnerable to abrupt losses..."

Last Monday John Hussman, PhD, repeated his state-of-the-market comment that “…the market environment is characterized by a syndrome of elevated valuations, overextended price trends, overbullish investor sentiment, and rising interest rates. This combination of conditions typically does not persist for more than a few months, but when the complete set has been observed, the stock market has often been vulnerable to abrupt losses that can erase weeks or months of gains in a few trading sessions.”---- February 21, 2011, The Hussman Funds Letter to Shareholders by John P Hussman, Ph.D. (used with permission of Hussman Funds - http://www.hussmanfunds.com)

Mr.  Hussman has mentioned before that his firm doesn’t try to predict the exact time that these “abrupt losses” begin. 

They don’t; but we do. Our computer analysis issued a SELL signal this past Tuesday.  We had some clues before Tuesday though.  The volume (number of shares traded in the S&P 500) started falling at the end of January.  This is an indication that there were problems with the health of the market a good 2-weeks before the oil crisis tipped us over the edge. 

There is no change in the Navigate the Stock Market analysis…it is still calling a SELL.

The Wednesday Update of the Navigate the Stock Market System

The NTSM analysis called a SELL on the S&P 500 yesterday.  That was the first change since the 2 July 2010 buy-signal. 

Today we had another SELL signal.

SUMMARY OF NTSM INDICATORS:

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

SENTIMENT:  Neutral. %-bulls indicator is now 47%.  This is a middle of the road value for sentiment.  (Sentiment is a reverse indicator; a high %-bulls indicator is bearish for the market and vice versa.)

PRICE: Sell. The NTMS has recorded a clear deceleration in upside moves since the end of January.

VOLUME: Sell.  More volume has been going to the downside…this indicator dropped to a SELL today after being neutral yesterday.

VIX:  Sell.  Our VIX indicator moved up another 10% today after moving up 27% yesterday.

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

Looking at the overall NTMS indicators, this looks like a typical correction; but there is no way to know how far the market may fall when looking at the indicators.  We may guess that if the Sentiment values don’t get overextended, then maybe we’ll have a small correction…say in the range of 10%.  It could get a lot worse though.  There are no absolutes in this business. 

I am a little concerned that it has been about 4.2 years since the previous high on the S&P.  When we look at the 1966-Bear Market, a drop of about 25% in market prices (a 50% retracement) started at about the same 4.2 year point.  The difference is that in the 1966-Bear, the Dow made it back to the old high, so that comparison may not be warranted here.  (See the Page link at the side of this blog page, titled; “Compare 1966 Bear Market to the Current Bear Market.”  The major concern is oil price.  If the oil price remains at the current high level for too long we will likely see a significant drop in the markets.

MY INVESTED POSITION: I moved to an all cash position in retirement funds today and that makes my overall stock position about 30%.

Further, I took a 50% position in the Rydex Inverse Nazdaq 100 2x Strategy fund in my trading account.  This fund is a “bear” fund that doubles the inverse of the Nazdaq 100.  That means that it will go up twice as fast as the Naz 100 goes down…and vice versa.  (If I am wrong I’ll lose money twice as fast!)

 This moves me to a conservative position in terms of stock exposure; hedges some investments; and reduces overall risk considerably. 

Update after the SELL signal yesterday

The futures are up this morning. Even in the worst bear markets my work has shown that after a big down-day, like yesterday, the next-day-close is up about 60% of the time.

I got the sentiment data from yesterday and it shows the %-Bulls went from 47%, 2-days ago, to 57% at the close yesterday.  That means a lot of people are buying the dip.  Sentiment values are not extreme so it is possible we could go up for a few days.   Of my 8 indicators, 4 are negative within the last 2-days, so this is a fairly strong sell signal.

At this point, my guess is that this will be a short correction in the range of about 10%.  There are a lot of people who “want in” (as evidenced by the mutual fund flows over the past month and a half) and this will present a buying opportunity for them.

I also played with the NTSM system and there is no way we’ll get a BUY today even if we have an up-day as big as the down-day we had yesterday, so the SELL call remains in place.  I will follow my plan and cut back stocks to 30%.

SELL signal

Today we got a SELL signal in our Navigate the Stock Market System.  There were technical reasons and geo-political concerns.

 

VIX is a reliable indicator within our system.  The VIX is calculated from both call and put options of the S&P 500 and looks out about 30-days into the future.  The VIX is a widely used measure of market risk.  The VIX moved up 27% today and that is not good for the S&P going forward.  With the huge one-day, run-up in VIX, our VIX indicator flashed SELL.  In addition, our price indicator has been trending down since the end of January (with a lot of bouncing along the way) and it also finally called a SELL today.  One of our statistical measures went over the top to a SELL signal.  Another negative: at the close Friday the S&P 500 was over 15% above its 200-day moving average and that is the level where the correction started in January 2010.   (I wanted to get a sentiment reading tonight, but RYDEX has still not published their closing Asset Value data that we use for the Sentiment indicator.  It is probably a neutral indicator; I just wanted to see how it moved.  I’ll report on it tomorrow night.)

 

On top of that, we had geopolitical concerns from more turmoil in the Middle East and that caused a spike of about 6% in oil prices today.  That spooked the market over the expectation of $4.00 gasoline this summer and the possibility it could go higher.  

 

The key to trading stocks is to trade what you see; not what you think.  I think this will be about a 10% correction from top to bottom and we’ll be fine afterward.  What I see is the NTMS analysis giving a SELL signal.

 

So…I will be selling my retirement accounts tomorrow so I will about 30% invested overall.   Since I am now 100% invested in stocks, I am way overexposed for any rational portfolio.  The only thing that would change my mind would be a HUGE reversal that would create a BUY in the NTSM system tomorrow; that is not likely.  The odds favor an up day…but not a huge reversal.