Professor’s Comments August 17, 2018

Posted by OMS  at August 17th, 2018

The markets rose sharply yesterday, reversing the previous day’s losses.  The Dow finished 397 points higher, closing at 25,559. The NASDAQ and SPX were up 32 and 22 points, respectively.  Volume on the NYSE was moderate, coming in at 103 percent of its 10-day moving average.  There were 94 new highs and 51 new lows.  

There were no changes to my key indicators after yesterday’s session.  The VTI-volume indicator on the DOW and NASDAQ remains neutral.   I think it’s important to say a few words about this indicator today after seeing the way it has performed for the past few months. 

If you’ve been paying attention to the VTI-volume indicator, you know that it turned positive on the markets on 5 July.  The Dow was trading at 24,357 back then.  The indicator stayed positive until 10 August, when it turned neutral with the Dow at 25,313.  In other words, it was providing us with a warning after the Dow was up just shy of 1,000 points.  But the key thing I want you to take away from this discussion is that the indicator DID NOT turn negative.  Neutral is not negative.  Neutral is not a Sell Signal.

So yesterday, with oversold conditions and a neutral VTI-volume indicator, the Dow markets rallied hard.  The Dow is now up 1,202 points since the VTI-volume indicator generated its Buy Signal. The VTI-volume indicator remains neutral; it’s still NOT telling us its time to sell.

We see this same thing going on with gold.  Gold is undergoing a significant decline.  Once this decline completes, there should be a significant rally.  But not yet.  The VTI-volume indicator for the metals remains negative.  The indicator generated a Sell Signal on 15 June with GLD trading at 121.34. Yesterday GLD closed at 111.10.  Like I’ve been saying, pay attention to the indicator.

We also have another special indicator to watch and that’s the Sector Ratio.  For the past few days, even though the market was pulling back, the Sector Ratio was at 12-12 neutral.  After yesterday’s session, the ratio stayed at 12-12 neutral.  By being neutral, the Sector Ratio was telling us that a lot of rotation was going on between the sectors.  Money was simply moving from the aggressive issues into defensive stocks.  We saw this just by looking at the top sectors.

For example, the FoodDrug Sector has been at the top of the Strong List for the past few weeks.  My favorite stock in the sector is CVS.  I mentioned the stock a few weeks back in my Comments.  I bought CVS when its VTI-volume indicator turned positive on 7 August with the stock trading at 65.45.  Yesterday, CVS closed at 73.2 after gaining 1.56 points.

So how did I spot CVS?  Hmmm? I simply looked at my overall market signal, the VTI-volume indicator, which was still positive at the time, telling me to long. I then looked for strong stocks in the strongest sectors.  I saw CVS on the Member’s Watch List. It was the highest ranking stock in the FoodDrug Sector.  Easy. 

You could have done the same thing with other stocks in the top sectors, like the Telecoms or Household Products.  Both sectors have been at or near the top of the Strong List for weeks.  Verizon (VZ), also on the MWL, generated its VTI-volume Buy Signal on 19 June with the stock at 48.5.  It went into the Trend Mode on 6/28. Yesterday VZ closed at 54.27.

Same for Clorox (CLX) from the Household Products Sector. I’m not a fan of the Household Products Sector, but if I had to pick a stock in this Sector it would be CLX.  It was on the MWL when the HP Sector moved into the top 5.  CLX generated a Buy Signal on 6 June with the stock at 121.93.  Yesterday, the stock closed at 146.77.

FoodDrugs, Telecoms, and Household Products remain at the top of the Strong Sector List along with Transportation and Utilities.  These are the sectors where the large institutional investors are moving their money.  They’re taking profits (selling) technology and putting the money into the defensive issues.  That’s why sectors like Semiconductors, Computers, Technology and Financials are all on the Weak List.  The big boys have been dumping stocks in these sectors.

If the market is going to move higher in the weeks ahead, this should change. Yesterday’s impulsive rally could have been the start of Wave 3 up within Major Wave 5 up.  If it is, the VTI-volume indicator should turn positive in the next few days, confirming the next leg up is underway.  The defensive sectors are EXTREMELY overbought now, with 2-period RSIs approaching the upper 90s.  I never like to buy overbought stocks, especially overbought defensive stocks.  So, I want to see if the ‘aggressive’ sectors, like Technology, Semis, and Financials, will mount a comeback.  I still believe IF the Dow is going to 26,600+, these sectors MUST participate.  Otherwise, there’s a strong possibility that Wave 5 up will truncate, completing the 9 ½ year old Bull Market within the next few months.

Again, remember that even though the current indicators are neutral, they are NOT negative.  So, remain positive and watch for a change in leadership.

That’s what I’m doing,

h

Market Signals for

08-17-2018

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