Weekend Strategy Review November 20, 2016
Posted by OMS at November 20th, 2016
The Dow fell 36 points on Friday, closing at 18,867 It was up 20 points for the week. The NASDAQ finished down 12 points on Friday and up 84 points for the week.
Friday’s small pullback was expected. At its low, the Dow was off 49 points which set the stage for a final wave ‘c’ rally to a top into late November. I was expecting a pullback of 40-70 points to complete the small sideways pattern, and the market complied.
With five days of sideways consolidation and two consecutive days of small change signals coming from the A-D oscillator, the odds for a final wave ‘c’ rally are high. Remember, after gaining over 900 points the previous week, the Dow needed to consolidate its gains before it could move higher. So it traded sideways this week. This sideways consolidation had now formed the ‘Blade’ of a Hockey Stick Pattern which should allow prices to push higher and complete the overall Rising Wedge Pattern.
I’m still using 19,000 on the Dow as my trading target, even though 19,200+ is the theoretical target. My trading target for the SPX is the 2,225 – 2,240+ level.
The reason I’m using these lower targets is because once these patterns complete, the odds for an oversized move down are high. This market is not being driven higher by earnings or fundamentals. It’s been moving higher on emotion. The participation has been limited, mostly by stocks perceived to be winners in a Trump administration. The companies who made solar panels are being hammered, while anything related to financials, banking and bulldozers are being bought. Nothing could be sillier. This is NOT the kind of stuff real, sustainable rallies are made of.
Prior to the election, I said that the market would rally no matter who won. Now that the election is behind us and the rally has happened, I’m now suggesting caution. Yeah, next week should be positive, but I wouldn’t want to bet on anything beyond that.
On Friday, I talked about Bonds and how they are getting clobbered. TLT, the U.S. Bond ETF fell another 0.35 cents to 120.85. Back in early July, TLT was trading at 143, now its at 121. Same for TMF, a highly leveraged Bond ETF, which fell 0.16 cents on Friday. TMF was trading at 31.58 in early July. Now its at 18.71. So a Bond tracking ETF, like TLT, lost about 15 percent in less than five months and a leveraged ETF, like TMT, was cut almost in half. Wow! These are Bond ETFs we’re talking about, not cheap technology stocks. These ETFs represent the debt instruments of the United States. Are things really that bad in Bonds? Hmm? I think not.
I think the only reason they are down now is because since late June – early July, most investment money has pouring into the stock market. On June 27, the Dow closed at 17,140 after hitting a low of 17,063. Now its near 18,900. So investors, especially retirees, took money out of Bonds, which were paying nothing, and bought dividend paying equities. This chase for dividend yield pushed the market higher.
But now, if interest rates start to rise, things in the equity market could start to reverse. BTW, forget what the Fed is saying about interest rates. They only control short-term rates on the money they lend to member banks. Yes, I believe the Fed will raise rates in December. But these rates are NOT the interest rates on Treasury Bonds, which are established by the free market. Remember, the Fed didn’t do anything with respect to interest rates in the period between early July and now. They kept the rates the same. Yet a Bond ETF like TLT lost money and a leveraged Bond ETF like TMF got cut almost in half! So when you think about it, there is way too much emphasis placed on what the Fed does or will do when it comes to interest rates. The market is going to do what its going to do.
OK, where am I heading with this? Why am I talking about Bonds this weekend?
Well….they’re a bargain! They’re forming Bullish Patterns (TLB), and the indicators are firming.
Also, they’re very tradable instruments. Most people think that Bonds are boring. But that 15 percent return in less than 5 months on conservative TLT (as a short) would translate into a 35 percent yearly return. The same return on TMF trades would translate into an over 100 percent return. So Bonds are anything but boring!
And IF investment money starts to leave the equity market, we could see Bond prices start to rally.
On Friday, I mentioned how TBT, the inverse Bond ETF replaced TLT on the Dean’s List on 30 October. At the time TBT was trading at 31.60. Yesterday TBT closed at 39.32. So we have seen how paying attention to the Dean’s List can result in successful Bond trades.
We’re seeing the same thing now with gold and energy. UUP, the ETF for the U.S. Dollar remains on the Dean’s List causing gold to struggle. Seeing DUG on the List for months has told us that it’s not a good time to be trading energy.
But if I’m right, and the equity markets are close to topping, we could see several changes to the Dean’s List in the weeks ahead.
IF TLT and TMF replace TBT on the Dean’s List, I’ll be buying Bonds. If UUP falls off the List and GLD and other mining stocks start to appear, I’ll be moving into the metals aggressively. The charts continue to suggest that a significant bottom is forming in gold and silver. And if DIG replaces DUG, I’ll look to trade energy, especially as we move into early next year. If OPEC can reach an agreement on capping production with Russia and/or Iran, we could see DIG appear on the List even sooner.
Just be patient. Next week should be positive for equities, given the Bullish Holiday seasonality. But after that….? I won’t be holding a lot of ‘regular’ equities long after Wednesday.
Have a great weekend.
That’s what I’m doing,
h
Market Signals for
11-21-2016
DMI (DIA) | POS |
DMI (QQQ) | NEG |
COACH (DIA) | POS |
COACH (QQQ) | POS |
A/D OSC | |
DEANs LIST | NEU |
THE TIDE | POS |
SUM IND | POS |
VTI | POS-T |
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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.
Category: Professor's Comments, Weekend Strategy Review