Weekend Strategy Review November 8, 2020
Posted by OMS at November 8th, 2020
The markets pulled back slightly on Friday. The Dow finished with a loss of 67 points, closing at 28,323. The large cap index was up 1,834 points for the week after being down 1,834 points the previous week. Amazing! Talk about volatility! The tech heavy NASDAQ was relatively flat on Friday, gaining 4 points. It was up 984 points for the week.
Not much changed since Thursday’s update. The election is still undecided, but it’s starting to look like Vice President Biden is on the brink of victory. If the vote count continues in his favor, it appears he will get 306 electoral votes, which is the same amount that President Trump got in 2016. They called Trump’s victory a landslide back then, but somehow this election doesn’t feel like a landslide to me, even though it appears the Vice President is well ahead in the popular vote.
Last week, I mentioned that the market usually rallies during the week of the election and then pulls back the following week. So far, we got the rally, and now the charts are suggesting some type of pullback. From a pattern perspective, the two scenarios I have been talking about prior to the election are still alive and have almost equal odds. I have to give the Bullish scenario a slight edge over the next few weeks, but because last week’s rally did not exceed the 12 October high, it’s still possible that the current rally is nothing more that minor wave 2 within Wave 3 down. In other words, nothing has changed or been resolved between the two scenarios. If the current rally is indeed minor wave 2 up, the rally should end near current levels and begin to decline hard next week.
If the market doesn’t decline hard next week, it’s likely the Bullish scenario is taking place. In this scenario, the Dow should rally above the 30,00 level, with 30,300 possible. That’s about 2,000 Dow points from current levels. If this rally is occurring, the Dow should be close to completing minor wave 1 of Wave 5 up. So, in either scenario, Bullish or Bearish, the Dow should see some type of pullback next week and that will be important to watch.
That’s because IF the pullback is corrective, it will likely be minor wave 2 within Wave 5 up. If the pullback is impulsive, it will likely be the start of Wave 3 down. An impulsive decline next week will change the odds in favor of the Bearish scenario. So, you can be sure I will be watching next week’s market action. It should tell us a lot about the future direction of this market. BTW, IF the action is NOT impulsive, and any decline is accomplished in a series of a-b-c moves, the Model will look for an opportunity to re-enter a position in the Q’s.
One more thing that I want my students to understand. Even though I have been talking about a Bullish scenario, students should understand that it’s not that Bullish. Maybe 2,000 Dow points. Once this potential Wave 5 rally completes, the market should begin a significant decline…a Major Bear Market. The Corona virus is not only impacting the health of the American people, but it has also weakened the financial condition in the U.S. All the spending on stimulus has more than tripled the deficit to $3 trillion. And even though we saw great growth numbers last week out of Washington two weeks ago (33.1 percent), that can only be temporary. The fact is that federal debt as a percentage of GDP continues to rise and will soon exceed the old record high of 106 percent, a number that hasn’t been seen in over 75 years! Students should understand that this is serious stuff. It’s what caused EXTREME financial problems in Europe several years ago…recall the financial crisis in Greece, Spain, and Italy. I believe that once Wave 5 up completes, these EXTREME problems with servicing our debt will begin to surface, probably starting in early 2021.
Once the euphoria in the markets driven by low interest rates and stimulus money wears off, stock prices will come back to earth. They must. Low interest rates motivate consumers to buy cars, houses, refrigerators now instead of in the future. Demand is pushed forward. That’s why the Sector List has been showing strength in Autos, Cap Goods and Consumer Products. People want to take advantage of the low interest rates.
Also, the Fed’s balance sheet is now up to $7.1 Trillion, the largest on record. Almost $4 Trillion of the $7.1 Trillion is left over from the last financial crisis. The easy money provided by the Fed for the past 11 years is the primary reason equity prices have continued to rise since 2009. This is about to change. I believe the Fed will start reducing its balance sheet (selling) in early 2021 when the new President takes office. This selling will take significant amounts of money out of the American economy, which will hammer stock prices, and reduce the demand for autos, real estate, and most other big ticket items. This is the reason I remain cautious going forward, as I do not believe equity prices in my Bullish scenario are going to the moon. The ‘moon’ will likely be limited to the 30,000-30,300 level.
The Market Timing Indicators for the Major Indexes are mixed. The Dow is Neutral, the NASDAQ has turned Positive. The Weekly Timing Indicators on the Dow are Neutral. The same indicators on the NASDAQ (QQQ) are Positive.
The Dean’s List and The Tide are Positive.
The Sector Ratio improved to 18-6 Positive after yesterday’s session. The top 5 strong sectors were Retail, Semiconductors, PharmaBio, Cap Goods and Autos. The top five weak sectors were Energy, Real Estate, Computers, Media, and Foods.
The Scalp Trading indicators on Gold (GLD) turned Positive on Friday. Because of this, I will be looking to establish a ‘trial’ position for the Model in gold early next week. I’m still not seeing the positive divergence that I would like to see at the start of a Wave 5 up. Without divergence, any rally will likely be modest. My current target for the metal is above the 7 August high of 2,072. On Friday, gold (the metal) closed at 1,951.
There were NO Changes to the Model after yesterday’s session. The Model remains 100 percent in cash. The Model will likely remain in cash until the conflicting patterns are resolved. The key downside level on the Dow is the 30 October low of 26,144. The same key number for the NASDAQ is the 2 November low of 10,957. A decline below these lows would support the Bearish Scenarios. Be patient and continue to protect yourself.
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
11-09-2020
DMI (DIA) | POS |
DMI (QQQ) | POS |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | POS |
Index | Signal | Signal Date |
---|---|---|
DOW | NEU | 03 Nov 2020 |
NASDAQ | POS | 06 Nov 2020 |
GOLD | POS | 05 Nov 2020 |
U.S. DOLLAR | NEG | 09 Oct 2020 |
BONDS | POS | 05 Nov 2020 |
CRUDE OIL | NEG | 27 Oct 2020 |
DISCLAIMER
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.
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, Weekend Strategy Review