Weekend Strategy Review October 22, 2017

Posted by OMS  at October 22nd, 2017

The sky-rocket ride in the Dow continued Friday with the large cap index finishing up 166 points to close at 23,329.  It was up 457 points for the week.  The NASDAQ finished up 24 points on Friday and up only 23 points for the week.  Friday’s gain in the NASDAQ just recaptured Thursday’s loss.

Friday’s rally was the Big Move predicted by Thursday’s small change in the A-D oscillator.

Not much changed with the indicators on Friday.  The rally was enough to turn the Hi-Lo indicator and the Up-Down Oscillator positive, so 2 of the 4 breadth indicators that make up The Tide are positive, making The Tide neutral.  The A-D Oscillator and the Summation Index remain negative, so most of the stocks on the NYSE remain in short-term down trends.

It still appears that the markets are in the process of completing the final waves of their topping patterns.  The wave count suggests the Dow is in sub-wave 5 up of Wave 5 up and should complete the pattern near current levels.

Students should note that most of the positive action this past week occurred in two sectors; semiconductors and cap equipment.  These two sectors have been leading the Strong Sector List for weeks.  The other sector that got a boost on Friday was the Banks, and they too have been among the Strong Sectors, but never as high as the Semis or Cap Equipment.  The Banks jumped after the Senate approved a $4 trillion budget Thursday night by a 51-49 vote.  Passing a budget means the Republicans can now use the resolution process to pass a tax bill later this year with a simple 51-vote majority in the Senate.  This removes the need for Democratic support, which would likely sink any Republican proposal for tax reform.  But the Republicans will still need 51 votes, and right now that’s not a given.

BTW, one of the reasons that the Cap Equipment Sector has been so strong for the past two months is because of the dividends they pay.  Investors continue to push these stocks higher as they attempt to find better yields.  But have these stocks gone up too much?  I worry about the fundamentals of many of these companies and their ability to continue to pay these dividends, especially if the economy starts to slow….or if a tax cut is not forthcoming.  Students should understand the risks these stocks now have, as many are priced for absolute perfection and are paying these dividends with money based on the come.  If the outlook dims, all this could change in a hurry.  There is nothing that drops faster than a company after it announces a dividend cut. 

Friday’s Sector Report was unchanged. The Sector Ratio remains at 19-5 positive. The Strong Sector List continues to be dominated by the Semis, Cap Equipment, PharmaBio, Material, and Computers. The Weak Sectors are led by Household Goods, Media, Telecoms, Consumer Products, and Healthcare.  Continue to stay in stocks and ETFs in the strong sectors and avoid those in the weak sectors.  Watch for a change in the Sector Ratio.

BTW, I received an interesting question from Mike N. on Friday concerning sector ETFs.  Mike has been watching the Sector Report and wondered if I could post the ETFs I will be using when the market starts to decline.  One of the problems with the Sector Rotation Strategy is that many of the Sectors listed in the Sector Report do not have matching ETFs.  Many do, like the Semiconductors (PSI) and Transports (IYT), so IF these sectors start to appear on the Weak List, I’ll just short these ETFs. 

But what if the market starts to head lower and some of the sectors appearing on the Weak List that don’t have matching ETFs.  What then?  Hmmm?  Well, I could do several things.  I could short a stock from a highly ranked Weak Sector.  Or I could buy an inverse index ETF that closely matches the sector.  For example, IF I see the Cap Equipment Sector starting to weaken, I could buy something like the DXD which would effectively short the Dow (with 2X leverage), which contains a lot of these stocks.  I could also short ETFs, like PPA and XLI, which have a lot of Cap Equipment stocks in their portfolios.   The correlation between the Cap Equipment Sector, PPA and XLI has been very good on the way up.  I would expect it to be just as good when this sector starts to move down.  There will be many choices available. 

As for me, I’m probably going to short a few stocks from the Weak Sectors and then Buy several inverse index ETFs containing large and small cap stocks.  That way, if I’m right, I’ll capture most of the decline I see coming and get a potential boost from a few individual shorts.

Bottom Line:  The market, or at least the Dow, appears to be in the final phase of a Sky-Rocket rally.  Friday was the last day of a Fibonacci Cluster Window where we often see a major turn in the markets.  So, if things start to turn negative next week, be extremely careful and pay strict attention to the indicators, especially The Tide, the Money Flow indicators and the Sector Ratio.  As long as these indicators remain positive, the indexes should continue to be OK.  However, IF the indicators start to turn negative, you probably want to do some money management.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

10-23-2017

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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.