Weekend Strategy Review July 19, 2020

Posted by OMS  at July 19th, 2020

The markets were mixed on Friday.  The Dow finished with a loss of 63 points, closing at 26,672.  It was up 597 points for the week.  The NASDAQ gained 29 points on Friday but was down 114 points for the week. The disparity I have been talking about for weeks between the NASDAQ and the Dow continues, but appears to be at a point where things should start to turn.  The past week, we saw Netflix drop from a high of 575 to 492 after disappointing earnings. This is what happens to overvalued FANG type stocks once they begin to lose their shine.  They get clobbered. I expect we’ll see more of this in the weeks ahead as what happened to NFLX spreads to other stocks on the NASDAQ.  I’m still on Buy signals for the technology laden index, and because the pattern suggests it could have one more pop above the 15 July high of 10,604, it could trade close to 10,610 or so before falling. On Friday, the NASDAQ comp closed at 10,503.  BTW, my target for Major Wave C down on the NASDAQ, once all five waves down are complete, is below the 23 March low of 6,631.

The Dow has a slightly different pattern.  It may have already completed its retracement Wave 2 and could be starting Wave 3 down.  We should know by the end of next week. Last Wednesday, the Dow pushed to the 27,071 level and then pulled back on Thursday and Friday.  There’s a chance that the Dow could follow the NASDAQ slightly higher early next week, but it doesn’t have to as its pattern already has five complete waves for Wave 2.  One of the things I find interesting about the market’s so called ‘rally’ since the beginning of June is that it’s basically gone nowhere.  On 8 June, the Dow was trading at 27,572.  It closed at 26,672 on Friday.  So even though most TV commentators continue to talk about a ‘summer rally’ the Dow is 900 points lower than its early June high. Hmmm?  Students should understand that the actual rally that took place was in the handful of overvalued FANG socks …and now, after seeing what happened to NFLX, they could be starting to break down.

The reason I believe the market could be ready to decline by the end of next week is what I’m seeing in the sentiment indicators.  They are at historically high levels.  Levels that have not been seen for almost 20 years.  I can’t tell you how dangerous readings like this are.  If you ignore them, you do so at your own peril. For example, back in early June, I talked about the EXTREME readings of the CBOE equity Put/Call ratio. The reading of .513 was at levels I saw just before the February crash.  During the week, the P/C ratio fell to .437, the lowest level in 20 years! 

Same for the percentage of bulls in the Investors Intelligence Advisors’ Survey.  It moved to 58.1 percent, the highest level since the January extreme reading of 59.4. 

I often talk about new highs and lows.  One of the reasons I track these is to identify major divergences. Last week, the S&P came within 5 percent of its February high, but more than 60 percent of the stocks in the S&P were over 10 percent BELOW their own individual highs.  This is crazy!  It tells me that the recent retracement rally was led by a handful of stocks.  I saw the same thing happen back in September 2000, just before the DOT.COM bubble burst.  I’m telling ya…be careful.  Pay attention to these sentiment indicators.  This market is EXTREMELY overvalued and loaded with speculative optimism.  This foolish optimism is NOT justified by the sentiment indicators!

The Market Timing Indicators for the Major Indexes remain Positive.

The Dean’s List and Tide are Positive.  

The Sector Ratio fell slightly on Friday to 22-2 Positive.  Watch this indicator next week closely.  If it starts to weaken, pay attention.  BTW, my 14-period Velocity indicator for the Composite Sectors fell on Friday, the first time it has fallen since 1 July.  The indicator is still positive but when it begins to fall below zero, it usually identifies an important market turn.  I’m mentioning this today because Sector Velocity is close to turning negative and could do so this week.

The top five strong sectors were Autos, Material, Consumer Products, Healthcare and Transportation. The two weak sectors were Banks and Real Estate.  

There were NO CHANGES to the Model on Friday.  The Model continues to hold 1,200 shares of TWM, 1,600 shares of DXD, 400 shares of DUST, and a lot of cash.  It continues to look for opportunities to buy shares of inverse index ETFs.

Gold and the miners rose on Friday.  GLD rose 1.39 to 170.12.  Gold (the metal) appears to be have finished a small wave 4 triangle.  If this is the case, the metal could rally to about the 1,820 level.  Spot gold closed at 1,810.82 on Friday.  If the metal breaks below 1,800, gold will have completed five waves of rising channel pattern.  Silver is in the same boat, only the waves are even clearer.  SLV, the ETF I use to trade silver, closed at 18.01 on Friday. If it breaks below the 17.50 level, it will likely mark a major trend change.  In other words, both metals appear to be at or near the end of a five wave impulse rally.  Once this rally completes, the next wave down should take prices significantly lower.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

07-20-2020

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As always, the Professor never makes recommendations. The information is provided on an educational basis so you can have informed discussions with your financial advisors and/or accountants about your individual investment decisions.

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