This week I am changing the format just a tad, I am adding sections in the "It all Shows Up in the Charts" section" based on why we use these charts. Here are the new sections
1. Big Picture 2. What the Experts are doing. 3. Timing and sectors 4. Special Interest and Experiments.
The Blah Blah Blah
U.S. stocks closed higher on Friday, with the Nasdaq setting another record as investors cheered major earnings reports. The Nasdaq Composite closed at a record for the second day in a row. The index set its first record close in 15 years on Thursday, topping the previous high from March 2000. The S&P 500 ended mildly higher for a new record close. Earlier, the index also touched a new intraday high, while the Dow struggled to shake off a decline as its top-weighted stocks lagged.
The Dow Jones Industrial Average closed up 21.45 points, or 0.12 percent, at 18,08.14, with Microsoft leading gains and Boeing the greatest laggard. The S&P 500 closed up 4.76 points, or 0.23 percent, at 2,117.69, with consumer discretionary leading four sectors higher and energy the greatest decliner. The Nasdaq closed up 36 points, or 0.71 percent, at 5,092.08, a new record.
Advancers were a touch ahead of decliners on the New York Stock Exchange, with an exchange volume of 765 million and a composite volume of 3.3 billion in the close.
What I Think
Well I real was getting ready for trouble with that big sell off last Friday, only to have the markets rally again. Clearly when the NASDAQ hits a 52 week high you can not call this a bear market. The Bull and bear lines have been telling you its a bull market and clearly being long was where to be this week. I was cautious and raised some cash and was in very stable broad ETFs, like DVY, and yes that was not optimum but it was still a good idea when the market is unstable and consolidating.
It All Shows Up In The Charts . . .
Section 1: The Big Picture
These charts tell us if we should even be in the market at all.
Bull Bear Lines
Well of course the big picture is now and has been for several years now, cant be wrong if you are long.
NYSE New High Low
Still in a long term up trend.
Section 2: What the Smart Money is Doing.
Remember most people loose money in the markets and a select few make all most all the profits. These are the big institutional investors like Mutual Finds. This is the smart money, so it is important that it participates.
Smart Money is taking off insurance, but it is anemic. The danger is that the smart guys keep getting caught on the wrong side of the market, if it goes on too much they lighten up.
The technique, originally called "continuous volume" by Woods and Vignola, was later named "on-balance volume" by Joseph Granville who popularized the technique in his 1963 book Granville's New Key to Stock Market Profits.
On Balance Volume is keeping pace with the current market. A great relief as smart money is still with this market.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12. Notice this is about where we might have a double bottom.
Don't forget this is an experimental VIX indicator. As such I recently changed the look of it to include a shorter term exponential moving average to add a market timing value to it.
Section 3: Timing and Sectors.
Consider this as fine tuning. As you learned in section one of the CME4PF School most investors don't need to plan the short term, But you can use this section to decide on ratios of risk. For example you can time a strategy of moving from a defensive ETF like DEF and an aggressive ETF like QQQ. or between a ratio of equities and bonds. You could move from broad safe indexes like DIA (the dow 30) and aggressive equities like Google and Amazon. Remember don't use these charts to anticipate, and don't do counter trend strategies like shorting the a bull market.
Aggressive Defensive Chart
Notice the pull back in the mid cap 400 (MVV) Friday just as the NASDAQ hit a 52 week high. Not a good sign but also a one day move is not a trend.
Bond vs Equities
Well equities clearly did better than bonds. You will see another take on the bond market later in the posting.
Green Arrow Chart
The Green Arrow Chart tells us when to put new money to work. You can learn about it in the CME4PIF school.
Clearly this is not a great time to enter the market. Pay special attention to the lower portion of this chart, flat performance for mid-caps vs the over all market. Where we are really seeing the market run hard is in mega-tech giants like Amazon but the little firms are being ignored.
Yes the NASDAQ hit a new 52 week high but notice it did it on a very weak upward curve. Bullish but not enthusiastic.
S&P500 Over 50 Day
Last week I called this a a fizzle but now it is on the way up again.
This chart mirrors what the Aggressive Defensive Chart says. Last week we worried that the new trend is safer stocks like the defensive ETF. Again a nice tip off. As you can see the market was due for a sell off more than it was worried about the above mentioned "Market Forces".
XLF - Financial Stocks - Dark Blue dots
QQQ - Nasdaq - Purple
XLY - Consumer discretionary - Green
XLU - Utilities - Red
DEF - Defensive stocks - Brown
Section 4: Special Interest
In this section I will introduce some new ideas or interesting things in the market.
The Long Bond Run
As I mentioned before, interest rates one day must rise. Well they must, but the fed has held off that move far longer than I would have guessed. I began reading some interesting ideas about the bond situation.
First off there is this from Keith Weiner perma bear from Forbes that in effect says there never will be interest on U.S. bonds again?
Then there is an interesting trading system based on the theories of Benjamin Graham. In this system, called the Naïve Graham system, is set up with only quarterly changes, an investor moves allocations from 25% to 75% in steps, from Bonds to broad market equities. Amazingly this very simple system only had draw downs of 14% in the 2008 crash and is now up to a point where your account would have tripled!
The idea that Graham understood is that when the market does well, bonds don't because central banks increase interest rates, as they rise to stem inflation, and when the economy stalls and equities drop, bonds do well as central bankers cut rates. For over 100 years this all worked well. But what would happen if the stock markets did very well, as they did form 2009 to now, but there was no hope of inflation and the policy makers refused to raise rates? Well the chart would look like this, a bizarre world where both bonds and equities made money. (equities are in green, bonds in gold)
BUT there is a catch, what this also says is there is nowhere to run if this falls apart. If the markets top and fall, there is no ability to cut the interest rates and it might be that both bonds and equities would fall.
Well before you panic, there is hope in the form of this chart.
It appears there might be a peak in the interest rate of bonds and that in fact the world finally expects the long run for TLT is over. Interestingly TLT has an evil twin that if TLT drops makes money, it is called TBT, think of it as short TLT.
We are in a bull market, therefor you should be long. Clearly from the VIX chart and the sector chart we are about due for a decrease in acceleration, perhaps even a pull back. On the other hand the S&P over 50 chart is telling us the market might continue up but broaden and the primary sell and OBV chart says the experts are still buying.
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