Professor’s Comments August 25, 2020
Posted by OMS at August 25th, 2020
The markets gapped higher at yesterday’s open and then flat lined for the rest of the day. The sideways trading after the impulsive opening appeared to be waves 3 and 4 of final Wave 5 up of Major Wave 2 up. If this is the case, the markets should make one more thrust up within the next day or so before starting to decline.
The Dow finished with a gain of 378 points, closing at 28,308. It got as high as 28,315. The target I have been using for Wave 5 up was just above the 11 August high of 28,155, with 28,200+ possible. So, yesterday’s high satisfied the re-test requirement. Now we’ll just have to wait and see how the Dow completes the final wave(s) of its five wave sequence. It could have a rally wave today to complete the sequence or it could make one more wave up today followed by a small wave down and another small wave up. We’ll see
The NASDAQ and SPX gained 68 and 34 points, respectively. Volume on the NYSE was moderate, coming in a 103 percent of its 10-day average. There were 97 new highs and 10 new lows.
Several markets are at or near major turning points. As I mentioned above, equities are close to topping. The Dollar appears ready for a substantial rise which means Gold and the Euro should decline. This should have a major impact on Bonds which appear ready to start Major Wave 3 down. Major Wave 1 down for the long Bond dropped prices 5.5 points from the 183 level to 177.5 So Major Wave 3 down should be even greater than this, maybe a decline of 7-8 points. In other words, long term interest rates will likely start rising. How this plays out in an economy already clobbered by Covid19 will be interesting to watch, as the GDP has already declined by 33 percent in the last quarter. Rising interest rates will only add to the problems the Fed has keeping the equity markets afloat. Remember, the Fed has recently printed over 2 Trillion Dollars, most of which has found its way into the equity markets. The major benefactors have been the FAANG stocks, like Apple. The last time I saw this type of enormous money printing was back in early 2007, when the Fed pumped money into a few selected stocks like, IBM and 3M. This was one of the things that led to the market crash of 2007-2008. Right now, the Fed’s balance sheet stands at a whopping $7.2 Trillion, an increase of 50 percent in the last 4 months alone. At some point, all this new money, created out of thin air, is going to cause major problems once investors realize that the demand for their stocks has been created artificially. It’s not like it was created by increased demand (sales) for the companies product.
One way you can see this is in the Price-Earnings and Price-Sales Ratios of some of these overprice FAANG stocks. Let’s take Apple (AAPL) as an example. Most of you know that Apple’s P/E is high (over 38) as I’ve talked about this before. But I haven’t mentioned that Apple’s Price-Sales Ratio is now over 8. This is beyond insane! A ‘good’ P/S ratio is close to 1, so you’re getting a dollars’ worth of sales for each dollar of stock price. When the P/S ratio gets much above 2, the stock is usually not a good buy from a value perspective. When you get over 3 it’s considered worrisome, with a P/S ratio above 4 usually bordering on insane. So, think about what it means when a stock like Apple is now trading with a P/S ratio over 8…. over twice the level that most analysts think of as being insane. Talk about something being overpriced!
Anyhow, the Fed know its in trouble with its enormous $7.2 Trillion balance sheet. And if it begins to unwind, even by a little bit, it’s going to create major problems in the equity markets. BTW, I don’t see how it can ever unwind all its equities and bonds in the next few years. It’s almost an impossibility given the condition of the economy. Any un-winding at this time will likely drive the country into a deep depression, not a recession. So, the Fed is not in a good spot. It can’t stimulate by lowering interest rates as they’re already near zero. And if it continues to print, it’s going to create problems with inflation, which is not what you want with so many people out of work. Also, if interest rates rise, it’s going to create enormous problems with the countries huge debt.
The Debt Clock now shows the U.S debt at $26.68 Trillion. It also shows a growing deficit of 2.89 Trillion. This is the amount of money the country spends minus the income it receives in taxes. The four biggest spending pots are Healthcare, Social Security, Military, and Interest. For the past decade, our country has spent more than it receives in taxes, so the deficit continues to grow. Each year, the deficit gets added to the country’s debt of $26,680 Trillion. The interest on this debt, through August, is $338 Billion or about half of what we send on Defense. Healthcare is about $1.3 Trillion and Social Security is about $1 Trillion. So, if the debt continues to rise and interest rates also start rising, it means that there will be less money for Healthcare, Social Security, Defense, or any other programs, like infrastructure. This does not bode well for the U.S. economy or for that matter, for the equity markets. It’s the primary reason I strongly believe the markets are in for some tough times. Simply put, we have way too much debt and that debt is increasing, not decreasing. Increased spending and printing money are NOT the way to fight your way out of a recession in my book. It’s only a temporary fix that creates major problems down the road. This is the reason I believe the next 4-5 years are going to be problematic, no matter who wins in November.
The Market Timing Indicators for the Major Indexes are Positive.
The Dean’s List remains Positive while The Tide remains Neutral. Two of the four breadth indicators that make up The Tide remain negative with the Up-Down oscillator and the Hi-Lo indicator being the two positive holdouts. The important A-D oscillator remains negative with a reading of continues to decline and now has a reading of -75.2. So even though the market has been rallying for the past few days, more stocks on the NYSE are declining than advancing, something that usually occurs near the end of a major top.
The Sector Ratio stayed at 20-4 Positive after yesterday’s session. Students should continue to watch the Sector Ratio as the week progresses. IF it begins to weaken and turns negative, pay attention.
The top five strong sectors were Retail, Consumer Products, Transportation, Material, and Service. The four weakest sectors were Energy, Banks, Real Estate, and Financials.
There were NO CHANGES to the Model on Monday. The Model continues to hold trial positions of 1,200 shares of TWM, 1,600 shares of DXD, 400 shares of DUST, and $43,379 in cash. The Model continues to look for opportunities to buy shares of inverse index ETFs.
Gold (GLG) fell 1.03 points yesterday to finish at 181. Gold is now on a Sell Signal. Gold (the metal) should begin a wave 3 decline that could trade down to the 1,700 level. Spot gold closed at 1,925 yesterday.
Like I said earlier, the Euro and the Dollar still appear to be completing major reversal patterns. This would be a top for the Euro and a bottom for the Dollar. UUP, the ETF for the Dollar rose slightly yesterday and is close to generating a Buy Signal. If the Dollar turns Positive, it would be a strong negative for gold.
That’s what I’m doing,
h
The Model Portfolio is being shown for educational purposed only. The Buy/Sell actions in the Model Portfolio are made based on technical indicators that can and do change frequently and should NOT be considered as recommendations for trading an actual portfolio. Any gain or loss in the Model Portfolio should not be used to predict future performance of the Model.
Market Signals for
08-25-2020
DMI (DIA) | POS |
DMI (QQQ) | POS |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | NEU |
Index | Signal | Signal Date |
---|---|---|
DOW | POS | 20 Aug 2020 |
NASDAQ | POS | 30 Jul 2020 |
GOLD | NEG | 24 Aug 2020 |
U.S. DOLLAR | NEG | 24 Jun 2020 |
BONDS | NEG | 13 Aug 2020 |
CRUDE OIL | NEU | 14 Aug 2020 |
Not sure of the terminology we use? Check out these articles
The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ
All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.
Category: Professor's Comments