Weekend Strategy Review March 20, 2016

Posted by OMS  at March 20th, 2016

The Dow rose 121 points on Friday, closing at 17,602.   It was up 389 points for the week.  The NASDAQ was only up 21 points on Friday and up 47 points for the week. The technology laden NASDAQ 100 (QQQ) was actually down 0.15 cents on Friday, its second consecutive down day when the Dow was gaining over 277 points!  Very interesting!

How can this happen?  How can the Dow gain over 277 points in two days, when technology stocks on the NASDAQ lost money?

If you look at the advancing vs. declining issues on the NYSE, you will see that the internals behind Friday’s rally were actually pretty weak.  The ratio of advancers to decliners was only 1.4 :1 on Friday, where they were over 4:1 on Thursday and over 5:1 on Wednesday.  So Friday’s gain was very suspect to say the least.

Friday was a ‘triple-witching’ day where options on indexes futures, index future options, and certain stock options all expire. This can cause some pretty big swings in the stock market. 

For example, some big traders might think that the next futures contract looks expensive, and they may decide not to “roll” their contracts and instead buy the underlying stocks. That will add buying pressure to these selected stocks and, if there’s not much else happening that day, it tends to drive the index in which that stock trades higher. It doesn’t take much buying to do this, and if you look at the exceptionally low volume we saw on Wednesday and Thursday, it appears that this ‘expiration related buying’ is what has been pushing the Dow higher for the past two days.

It’s what is causing the ‘through over’ wave in the Dow’s Ending Diagonal Pattern.

The fact that this rally is not happening in the NASDAQ-100 is because it has formed an entirely different pattern. The NASDAQ’s pattern is not an Ending Diagonal.  It’s a straight a-b-c pattern. And a-b-c patterns do not usually have ‘through over’ waves.   

Friday’s triple witching option expiration is sometimes referred to as ‘Freaky Friday’. So I wouldn’t make too much out of the out-sized move in the Dow. It still looks like the final wave within an Ending Diagonal Pattern, and we know that these patterns usually end badly.

I received an email from a relatively new student who said he has been following my Comments with great interest.  Stan said, “He is a much more confident and understanding investor than he was before because of my excellent observations and analysis.”  But the part I found interesting was that he went on to say, “As I get older, now 85, I am not interested in the day trading disciplines and required regular attention. Also, extended travel frequently becomes a challenge.  My question is – do you have any process recommendations that would be more suited to a longer term investing horizon? For instance, I would be more comfortable with a monthly portfolio review with appropriate adjustments than having to daily, if not hourly, react to the market changes. Your comments would be appreciated. And, thank you for adding clarity to the investing world.”

I thought Stan’s email was great!!!  Here’s an 85-year old man that wanted to learn about the markets and took the time to attend one of my Classes. His email made my day!  But when he told me that he travels extensively and understood about trading discipline, I was amazed.  Stan, I hope I’m just like you if I get to be your age.

Anyhow, I thought about what Stan said and then sent him an email outlining a rotation strategy that I developed years ago based on the Dean’s List.  I thought I would remind students of this strategy this weekend, so if the market does start to decline in the days ahead, they can start to implement it when a few inverse index ETFs start to appear on the Dean’s List.

Here’s the rotation strategy:

Over the years I have had many students tell me the same thing you did.  They are not interested in the daily price movements of their stock and would like to take a longer term view of their portfolio.

This is exactly what an architect friend of mine asked several years ago, and what led to the development of my ETF rotation strategy. 

Basically the strategy involves staying in the top four ETFs on the Dean’s List.   So once a week, maybe on a Sunday morning, a student would look at the Dean’s List.  As long as the ETFs he is holding are on the List, no changes are made.  When one of the ETFs drop off the List, it is replaced by the highest rated ETF that the student does not own. That’s it. It’s a pretty simple strategy. 

It keeps you in the market at all times. When the market is rallying, like it is now, you are in positive ETFs. Then when the market starts to roll over, and the positive ETFs fall off the List, the strategy puts you in inverse ETFs to take advantage of the decline.

I would be selective in getting this strategy started because right now, there is a good chance that the market is in the final stages of a Major Wave 2 rally.  Major Wave 3 down could be directly ahead.

I would also be diversified in initiating this strategy.  I would have some of my funds in index ETFs, some in gold, and some in energy.  In this yesterday’s Comments, I talked about DIG and DUG, my ‘Sticks in the Sand’ for energy.  You didn’t have to be a day trader to make money in these guys.  You didn’t even have to follow indicators.  To get the bulk of the gain last year, all you had to do was watch to see which ETF was on the List.  When DUG replaced DIG, you sold DIG and bought DUG.  Same thing when DUG fell off the List, you bought DIG.  You might want to go back and look at the Dean’s List and see how this strategy worked.  I think you’ll be impressed.

BTW, you can do the same thing for gold, the Dollar, and foreign ETFs.   Just determine how much money you want to allocate to each sector and then watch the ETFs on a weekly basis.

Remember, I designed the Dean’s List to be used weekly.  I only post it daily because most of my students wanted to have the daily information.  It’s nice to have it, but it’s really not required.

Just go slowly.  Get used to how the List behaves on a weekly basis.  Evaluate it for yourself.

Then relax and spend more time with your kids and grand-kids.

They’re the most important things in life, not your stocks.  So structure your portfolio so you can spend more time with them.

Have a great weekend.

That’s what I’m doing

h

Market Signals for

03-21-2016

FAQ

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.