Weekend Strategy Review June 3, 2018

Posted by OMS  at June 3rd, 2018

The markets closed the week with a nice rally.  Friday’s move out of the gate was impulsive, but after the first hour, progress to the upside slowed.  I was left wondering if what we saw was sub-waves 1 and 2 of wave 1 up of Wave 5 up?  Could be.  We’ll know more on Monday if the rally continues.

The Dow finished up 219 points on Friday, closing at 24,635.  It was down 118 points for the week.  The NASDAQ was up 112 points on Friday, and up 120 points for the week.  Last week I mentioned that I was leaning more toward owning NASDAQ and small cap stocks.  It turned out to be a good decision as most of my semiconductor and healthcare stocks significantly outperformed the Dow.

OK, so where are we now?  Well, with no change in my basic indicators, it still appears that the Dow is in the process of completing wave ‘e’ down of the large triangle pattern its been in since 26 January.  Once wave ‘e’ completes, the markets should begin to rally as final Wave 5 up unfolds.  My target for this rally is still near the 26,600 level, but a final ‘through over’ wave could take it as high as 28,000.  This is all based on wave analysis theory.  It doesn’t have to happen.  Actually, it’s probably unrealistic to expect it to happen, as there are many factors that could impact a rally to the 26,000+ level, including the possibility of trade wars with China, Mexico, Canada and the EU. Through in the possibility of Italy leaving the EU, and a rising Dollar, and all of a sudden, there’s a lot for the market to be worry about.

But markets like climbing walls of worry, so I wouldn’t be too concerned about any of this for the short term.  But once Wave 5 completes, either at target levels or lower, I’d start to worry.  But its not because of China or trade wars or the Dollar.  It’s because of the Fed.  Unless things change, the market will likely see some type of major correction once Wave 5 up completes because of what the Fed is doing. 

Since mid-October 2017, the Fed has reduced its balance sheet by $132 billion.  This Fed ‘normalization’ or selling is putting a damper on the markets.  The Fed started selling last October at the rate of $10 billion a month and is increasing that by $10 billion per month every quarter. So now it’s at $30 billion per month, going to $40 billion in July and $50 billion in October.  That’s a lot of selling pressure.  If it weren’t for the tax cuts, the market would probably be tanking by now!

It’s one of the reasons the banks have been under pressure for the past few weeks.  In the past month alone, Fed reserves fell about $31 billion.  This means that there is less money available to the banks to lend for new cars, houses, etc.  Take a look at a chart of Bank America (BAC) and you’ll see how this reduction in reserves has negatively impacted stock prices.  By the end of the year the Fed plans to remove about $450 billion from the banking system.  After that, it will remove about $600 billion per year until the Fed reaches its balance sheet unwinding goal of about $1 trillion, probably sometime in mid-2020.  So ask yourself this: If removing about $31 billion from the banking system causes stock prices to fall slightly, think about what will might happen if $1 trillion or more is removed.  It’s NOT a pretty picture. 

But that’s still months away.

Right now, it still looks like the market will start a Wave 5 rally.

The Tide is still one indicator short of turning positive and my combination VTI-volume indicators on the Dow and NASDAQ are still mixed.  The NASDAQ’s VTI-volume indicator is on a Buy Signal, while the same indicator on the Dow remains neutral.  If the Tide and VTI-volume indicator on the Dow turn positive next week, I’ll get aggressive with my stock purchases.

I still believe that students using the Strong Sector List to select stocks from the Member’s Watch List will be handsomely rewarded. If the Dow starts an impulsive move to the upside early next week, I believe that stocks in the strongest sectors will lead the way higher.  So as long as my VTI-volume indicator remains positive, this will continue to be my strategy.  Right now, only the VTI-volume indicator on the NASDAQ is positive.  This is why I’ve been buying and holding NASDAQ stocks like Intel (INTC) which has a positive VTI-volume indicator and is in the Up Trend Mode.  (BTW, INTC was up 1.88 on Friday).

Basic Strategy:  When the VTI-volume indicator OR the Tide turns positive, use the Strong Sector List to help select stocks or ETFs from the Member’s Watch List or the Dean’s List.  Then once these stocks are purchased, continue to hold them as long as the trend continues.  Use a 35-period CCI to determine the Trend.  Remember, we’re looking for Wave 5 up to begin.  Wave 5 up is a place where the markets should begin to TREND.  Since late January, when the market was tracing out the waves of its triangle, it was NOT Trending.  That’s why I was scalping the market.  But now, I’m looking for the market to start trending again, so I will start holding my stocks. (This is why I’m currently holding stocks, like INTC, which is already in an uptrend.

The Sector Ratio rose to 17-7 positive on Friday.  Note: the Ratio has turned POSITIVE!   It means that most sectors are now moving up.  The Strong Sector List was led by Energy, Healthcare, Consumer Products, Computers, Utilities, and Retail.  The Semis, CapGoods, Financials, Insurance and Materials, Computers and Materials are all back on the List near the bottom.  I mention these additional sectors because the List is starting to look like what I would expect for a run higher. I would love to see the Semis, CapGoods, Computers, and Financials continue to move higher next week.  These are the sectors that usually lead a market rally, so their appearance in the top 5 would be a very positive sign.

Again, I can’t say it enough…. If the Tide or the VTI-volume indicators turns positive early next week, use the Strong Sector List to help select stocks in the strongest sectors from the Member’s Watch List.  It’s a very simple strategy and it works! 

Have a great weekend.

That’s what I’m doing.

h

Market Signals for

06-04-2018

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