Weekend Strategy Review February 23, 2020
Posted by OMS at February 23rd, 2020
The markets fell hard on Friday, but not enough to turn the market timing signals negative. The Dow finished 228 points lower, closing at 28,992. It was down 406 points for the week. The NASDAQ was down 174 points on Friday and down 154 points for the week.
For the past few weeks, small investors have been pouring money into aggressive technology stocks like Apple, Tesla, and Virgin Galactic. I listened to an interview on CNBC yesterday where an analyst was asked why small investors are buying Virgin at such high multiples. The answer was interesting. Simply put, all the analyst could say was that people are optimistic about the economy and space, and don’t want to miss out. Hmmm? Just so you know, this optimism, reflected by small investors buying Call Options, is now at 46 percent. This is the highest level since 12 October 2007. We all know what happened after that.
Anyhow, with the Dow declining 406 points for the week, the question that needs to be asked is “Is the top in?” The answer is still… maybe.
Here’s why: The decline on the Dow since 12 February has NOT been impulsive. A case can still be made that the decline is part of a corrective pattern. If you look at a 30 minute chart of the Dow, you can clearly see five waves down since the 12 February high which would indicate the short-term trend is now down. If this is the case, wave 1 down of the new Bear Market could have completed on Friday or is close to completing. IF its a wave 1 down, there should be an aggressive snap back rally early next week that lasts for 1-3 days. This should give the Model a chance to exit its ‘trial’ position in DDM.
On the other hand, the five waves down could also be the completion of a 3-3-5 flat corrective pattern for wave 2 down. If this is the case, the Dow should start an impulsive rally early next week which would be wave 3 up of a five wave sequence for Wave 5 up. If the rally is the start of wave 3 up, the Dow could still push to the 29,600 – 30,000 level I mentioned last week.
So, like I said earlier…. we still don’t know. The only thing that’s clear at this point is that the market is trading on thin ice. The EXTREME measures of investor sentiment I’ve been seeing for weeks is a major cause for concern and it would be foolish for me to think otherwise. And now, the massive small investor call buying this week only adds to my concern. These Put-Call ratios are very reliable indicators. So, even IF the top is not already in, I believe it’s close at hand.
The Market Timing Indicators have still not rolled over. The timing indicator for the Dow and NASDAQ have turned neutral. Neutral is not negative….its a warning. The DMIs for the two indexes are split with the Dow being Negative while the DMI on the NASDAQ remains positive. The Tide is Negative, but QQQ is still on the Dean’s List, so overall the List is Neutral.
Same for the Sector Ratio. It didn’t change at all after Friday’s decline staying at 15-9 Positive. The Strong Sector List was led by Telecoms, Household Products, Computers, Healthcare, and Insurance. The Weak List was led by Autos, Energy, Transportation, Consumer Products, and Service.
As you know I have been cruising for the past 11 days, so I’ve been paying attention to what’s been happening with cruise line stocks. Since 21 January when the DMI turned negative on Royal Caribbean (RCL), the stock has fallen from 130 to 106. I mention this because despite what’s been happening with the coronavirus, cruise lines continue to be a wonderful experience for most travelers. I talked to hundreds of people during my vacation, and the word ‘virus’ or concern about the ‘virus’ never came up. The ships future booking office was jam packed with people every time I passed it. I found this interesting because Celebrity, which is owned by RCL, recently changed its policy on future bookings. Now, if you cancel the booking you made on the ship and transfer it to another booking, you lose all the credits you got from pre-booking on the ship. In other words, Celebrity is trying to lock you in! This makes for an interesting situation with RCL stock, because it’s likely that a large portion of its customers will keep their future bookings hoping that the coronavirus will end. At this point, the effects of the coronavirus on the economy is still unknown. But IF the DMI on RCL turns positive during the next few months, I can tell you one thing…I’m a buyer. While the coronavirus is an ugly thing, Celebrity’s ships are still magnificent!
Model Portfolio: There were NO CHANGES to the Model after Friday’s session. The Model continues to hold 350 shares of DDM with a cash balance of $109,386. The Model is up 29.5 percent after Friday’s session.
Gold (GLD) rose 2.29 on Friday to close at 154.7. Gold now appears EXTREMELY overbought now and approaching an important top. This would be Wave 5 up of a five wave sequence. Remember, my target for gold was between 1600 to 1650. On Friday, spot gold pushed to 1649.49. So, now I’m watching for the timing signal on gold to turn negative. If it does, I’m going to start shorting gold.
Have a great weekend.
That’s what I’m doing.
Market Signals for
|DOW||NEU||20 Feb 2020|
|NASDAQ||NEU||21 Feb 2020|
|GOLD||POS||17 Jan 2020|
|U.S. DOLLAR||POS||31 Jan 2020|
|BONDS||POS||07 Feb 2020|
|CRUDE OIL||NEU||12 Feb 2020|
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