Weekend Strategy Review February 24, 2019

Posted by OMS  at February 24th, 2019

The markets opened higher on Friday and then rallied into the close.  The Dow finished 181 points higher at 26,032.  It was up 149 points for the week. The Dow has now moved higher for nine consecutive weeks. BTW, it’s nice to have a ‘sky rocket’ rally, but these rallies usually end badly. So pay attention to the signals. The NASDAQ was up 68 points on Friday, and up 55 points for the week.  The relatively poor performance of the NASDAQ is being hindered by a few of the large cap tech stocks, like AMZN and GOOG which are either on or flirting with Sell Signals.

There were no changes to my market timing indicators for equities.  The Dow, NASDAQ, SPX, and RUT remain on Buy Signals.

The Tide and Dean’s List also remain on Buy Signals. Phil A. sent me a text yesterday asking when I thought the current rally would end.  I told Phil it will end when the signals change. The timing signals are my equivalent of having a Fat Lady sing.

The Sector Ratio remained at 22-2 positive after Friday’s session.  The two Weak Sectors were Foods and Food Drugs.  BTW, students should note how Kraft Heinz (KHC) plunged over 27 percent on Friday, shedding 13.23 points to 34.95.  Hmmm?  Hasn’t the Food Sector been either near or at the top of the Weak Sector List for weeks?

The Strong Sector List was led by Semiconductors, Household Products, Service, Technology and Cap Goods.

Gold and Crude Oil moved higher on Friday.  GLD was up 0.45 cents to 125.5.  The wave count suggests that GLD may have topped last Wednesday at the 127.21 level.  If this is the case, should begin to pullback next week.  Right now, GLD is still on a Buy Signal, but the Money Flow is starting to weaken.  I don’t expect a large sub-wave 2 pullback in GLD, but the 200 is currently located near the 119.5 level.  If GLD gets close to that level and re-generates its Buy Signal, I’ll add it to the Basic Portfolio.

Crude Oil (UCO) gained 0.21 cents to 19.87. If Crude pulls back next week, I’ll be looking to add it to the Model Portfolio.  Here’s my thinking on crude.  The long-term chart on crude oil (the black gooey stuff) suggests it is forming a large triangle between the 42 to 70+ level.  So, with West Texas crude trading near 57 and on a Buy Signal, it should have a bit more to run on the current leg of the triangle. This means UCO, the leveraged ETF I use to generate timing signals for crude should continue to push even higher.  Also, we’re coming into a very positive time period for energy.  Like I said, I’ll be looking to buy UCO for the Model on a pullback.

Yesterday I received and email from Dr. Tim, asking if I could include an all ETF portfolio as part of the web site.  I thought about this for a while and then responded to the Dr. with the following email.  After I sent it out, I thought it might be helpful if I included some of my thoughts about expanding the Basic Model in this WSR.  Here’s some of what I said:

Thank you for your email.  It’s always nice to receive constructive comments like yours on how we can improve our service. 

At this point, while I’m waiting for the indicators to change to establish my Basic Model Portfolio, I have a few thoughts on your suggestion for an ETF portfolio.  To begin, the model I have planned will be constructed using four ETFs for the Dow, NASDAQ, Gold and Crude Oil.   The reasons I’m doing this are: (1) to keep things simple and (2) to provide you with the flexibility to structure your portfolio the way you see fit.  My research shows that IF I provide market timing signals for the Dow and NASDAQ, the other major equity indexes, like the SPX and Russel 2K (RUT), will tend to mirror the performance of these signals.  So, there’s really no need to include signals for them or to include them in a Basic Model Portfolio.  Also, because I plan to use leveraged ETFs for the Dow and NASDAQ, like DDM, DXD, QLD, and QID in the Model, the performance should more than make up for any differences in having the other standard indexes in the Model.  The key to the above is having great market timing indicators.  Without these indicators…it really won’t matter.

I noticed that you are a Medical Doctor, so I am assuming that one of the reasons you suggested an all ETF portfolio is because of the additional diversification it could provide.  Having more ETFs in the portfolio would enable you to put your eggs into more baskets…so to speak.  On the other hand, this would take more time, make the portfolio more difficult to manage, and I’m not sure if it would result in an increase in performance.  I tend to think not.

What would increase the performance would be to concentrate on the Top Sectors on the Strong List.  For example, in late 2017, when the market was rising, if I remember correctly for about six weeks, the Semiconductor Sector was at the top of my Strong List.  To give you an idea about how they performed, the Dow was up about 6.8 percent during this period.  The Semiconductor ETF was up about 13 percent….twice the Dow.  But if you bought INTC and MU, which were the top semiconductor stocks on the Member’s Watch List, they were up about 24 and 27 percent, respectively.  So being in the Top Sectors and / or stocks in the top sectors does matter.

On the other hand, if you just used a simple approach, where you followed the market timing signals and bought a leveraged ETF for the Dow during the same period, you would have been up about 14 percent.  So,14 percent in the leveraged Dow ETF vs. 13.8 percent in a non-leveraged Semiconductor ETF.  Most of my students would be more than happy with a two month return like that. 

Anyhow, even though I don’t have any plans to establish a multiple ETF portfolio at this point, I’ll keep your suggestion in mind.  Once we get started with the Basic Model, I’ll have a better feeling for how much time it takes to manage and keep track of it.  If I feel that the performance can be improved, I can assure you that I’ll make the appropriate changes.  Meanwhile, if you want additional diversification to your portfolio, you can always add other ETFs, especially those in Strong Sectors from the Dean’s List.  This way, you can potentially use the Model Portfolio as a basic guide and spike it with ETFs from the Top Sectors.  Just make sure you pay attention to the overall market timing indicators that are driving the Basic Model.

Have a great weekend.

That’s what I’m doing,

h

One last thought…Several students have asked about adding a market timing signal for the international markets.  All I can say at this point is I’m looking into it.  I’m not sure which international markets to use and besides I haven’t evaluated whether the performance would be any better than that of the U.S. markets.  Vanguard’s European Index Fund (VGK) pretty much mirrors the direction of the Dow but falls short in performance.  So, I don’t see a point in adding a timing signal for Europe.  I’ll look at a few others, but remember, above all I want to keep things simple.

Market Signals for

02-25-2019

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