Professor’s Comments March 27, 2019

Posted by OMS  at March 27th, 2019

The markets staged another strong rally early yesterday but then pulled to almost even before rallying into the close.  The large early rally means that Wave 2 up might not be complete and could even be forming a small bullish triangle that would eventually lead to significantly higher prices in the months ahead.  Right now, it’s too early to tell.  However as long as the Dow stays above the 25,370 level and below 25,850, it’s possible that a Bullish sideways triangle is developing.  A break below 25,370 will likely negate the Bullish small triangle scenario and bring a large Bearish triangle into play.  Under this scenario, the Dow could decline to the 24,500 level before rising in the next rally leg.  So, 25,370 is a key level to watch.  

Remember, the market is at a very critical point now where there is NO CLEAR pattern in place.  After yesterday’s rally, the odds have moved from about 70-30 favoring the two potential downside patterns to about 50-50 with introduction of the new potentially Bullish sideways triangle.  In other words, with mixed signals on the cockpit and no clear pattern in place, this is NOT the time to be aggressive.

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

The Dow finished up 141 points at 25,658.  The NASDAQ and SPX were up 54 and 20 points, respectively. Volume on the NYSE was moderate, coming in at 91 percent of its 10-day moving average. There were 147 new highs and 23 new lows. 

The Big Move turned my market timing signals for the Dow (DIA), SPX (SPY) and Russell 2K back to Neutral from a Sell Signal. The NASDAQ-100 (QQQ), remains on a Buy Signal.  So, at this point, my market timing signals for equities are still mixed.

The Tide has turned back to Neutral joining the Dean’s List at Neutral.

Amazingly, the Sector Ratio stayed at 18-5 positive after yesterday’s session.  I would have expected that the Ratio to strengthen, but it didn’t.  The Strong List continues to be led by Household Products, Semiconductors, Utilities, Technology, and Computers.  The Weak Sectors are Media, Food Drug, Banks, Autos, and Leisure

BTW, after yesterday’s session, six of the Sectors on the Strong List had RS ratings of 1 or zero.  This tells me that even though the Sector Ratio stayed at 18-5 positive, it could still easily turn negative if the market begins to pullback. 

Gold and mining stocks fell yesterday. GLD dropped 0.62 cents to 124.3.  Gold still appears to be completing wave ‘b’ up of a Wave 2 ‘Handle’. If this is the case, wave ’c’ down could take gold (the metal) back down to the 1250 level before wave ‘c’ down completes.  This would mean that GLD could trade back down to the 120 level. The 120 level is approximately where the 200-day moving average is located.  The Money Flow indicator is just shy of turning negative. Again, this is one of the reasons the Model is on the sidelines with respect to a position in gold.  It’s just waiting for a better opportunity.

Crude Oil rose yesterday with my VTI-volume indicator re-entering the Trend Mode.  Crude Oil is acting very similar to its index sisters at this point and appears to be developing a large consolidation triangle.  The triangle appears to offer limited upside potential for the next few weeks.  However, now that UCO is back on a Buy signal, the Model will be looking for an entry point where it will buy a half position.  Remember, the 50 is still below the 200 on UCO so the ETF is technically in a down trend.  I’d feel much better about Crude Oil if it were to move above the 200, now at 22.61.  Until this happens, the pattern for Crude Oil remains unclear.

Model Portfolio:  There were NO CHANGES to the Model after yesterday’s session.  The Model continues to hold a half position (645 shares) in SKF, the 2X inverse Banking ETF.  It also holds a half position (1,234 shares) in TZA, a 3X inverse leveraged ETF for the Russell 2K and a full position (883 shares) of DXD, the inverse ETF for the Dow.    

The remainder of the theoretical $100,000 portfolio, $51,255, remains in cash. Yesterday’s rally put a large dent in the Model’s cumulative gain.  It now shows a gain of $1,986.06 without commissions, or an IRR of 1.94 percent vs. 0.80 for the SPX.  

Yesterday’s rally was another good test for the Model and demonstrates what can happen when a Model holds inverse leveraged ETF positions during a rally.  One of the things we already know about the Model is that it performs well during periods when the market is trending.  That’s what it’s designed to do.  Remember, during the ‘Test Model’ phase, the Model was up over 22 percent during a brief 2 month evaluation period.   However, what we don’t know about the Model is how it will perform during periods when the market is NOT Trending …like it is now.  With NO Trend in place, the Model is subject to whip saws that could result in significant draw downs.  So far, the average draw down to ETFs that have lost money in the Model has been 2.21 percent with the largest single loss limited to 4.24 percent.  These losses are being offset by average gains of 6.95 percent with a maximum profit of 12.03 percent, so the Model remains profitable.  The key to the future success of the Model will be to see if it can remain profitable during periods when the market is not trending so it can do what it’s designed to do once the market begins to trend.  So far that question remains unanswered.

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.

That’s what I’m doing,

h

Market Signals for

03-27-2019

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