Archives October 2020

Navigator Algorithms – 100% Cash

The market is grumpy. We have all been there. When our significant other is grumpy, is there anything you can say or do? She will filter the bad over the good. It is best to avoid him. It is that “get out of my way or I’ll kill you” kind of mood.

And so we have avoided this latest market down-leg while the indexes try to find their footing. Facebook, Apple, and Google reported yesterday. Was it good news? Well, that depends on your mood and your filter. They all blew out their numbers, but there was something to pick on if you are in a bad mood. There always is.

iPhone sales could be better. Google has regulatory fears. Amazon indicated that it might take more lockdowns than previously expected to take over the world.

We learned yesterday that Europe is aiming to please Amazon with more lockdowns. But Europe did report a nice third-quarter GDP overnight, about half of what the US reported yesterday. The US had the best quarterly GDP ever!

But wait, isn’t the GDP expected to pop up when you are climbing out of a hole? Anyway, none of this really matters because when the market is grumpy – there is no pleasing it. We all live with someone like that, right? You have to let go of what should happen and live in what is happening at some point.

Looking at the S&P 500 cash (as opposed to futures) index above, we rounded a slow turn yesterday off a less than ideal trendline and the weekly 21-EMA. This keeps the triangle consolidation scenario alive, albeit for one more day.

But despite the great GDP and FAANGMAN group earnings reported yesterday, the futures have been off significantly overnight (as much as -400 in Dow points). We began to recover a bit in the wee morning hours after the positive European GDP arrived. That left us a spiky spine on the overnight futures candle.

On a positive note, traders explored the territory below the trendline – but it bounced back. At this writing, we are still slated for a negative opening. We will see what happens as the morning wears on.

And that magenta 200-day line, our usual appointment when the 40-week cycle tops, looks like you could reach out and practically touch it. Were the cycle to come in right on cue (and they never do, or my computer would be trading for me), we would see this correction (such a polite term) end in the third week of November. One guess would be we go to the 200-day line, rally, then retest it for good measure after the election. It is fun to speculate, but we will let the Navigator tell us what to do next. And, in furthering the speculation, let’s briefly visit the cycle chart below.

You can see the projected, composite cycle path on the gray dotted line above. The whiskers at the bottom set the range for the 40-week cycle to land. Scientifically and mathematically then, the pressure should let up a few weeks after the election. But in the topsy turvy year of 2020, I don’t think the math really paints the picture.

So pick your poison. More lockdowns, the virus surge, China tensions, Marxists, looters, or States and Cities running out of money. When the market is in a bad mood, there is never a shortage of boogie men in the closet to support it.

But as I have learned over the past 33 years, when the 40-week cycle tops, the market corrects.  The pundits simply tag the decline with the latest bad news filter. It is the proverbial chicken and egg quandary. Granted, the magnitude of a 40-week cycle decline can be impacted by the news of the day, but the decline will happen regardless. You can take that to the bank, just as the moon, sun, and planets cycle dependably. One day, I will explain why. For this morning, I prefer to avoid the moody market and do something else.

Navigator Algorithms – 100% Cash

Are you enjoying a peaceful morning? If you are following these pages, you should be in cash, excepting perhaps a few of your own, long-term holdings that you hide under the pillow for a rainy day. It is ok to have a few of those. But otherwise, you should be culling your new buy list for the next run in the bull market. I am not quite ready to yield to the dystopian future that both sides promise us if the other side wins the election.

One way to enhance your returns is to always challenge every assumption in your arsenal. In a year where everything is topsy turvy, it is a useful exercise. So I was thinking this morning, what if the financial markets have the election backward too. Wall Street, comprised of greedy money-grubbers, has contributed mightily to the Biden campaign. Wall Street loves borderless Globalism. Governments can be pesky when it comes to cross border business. The fewer governments (and borders) the better. And as to China? C’mon, man, they aren’t such bad people!

Taken together, what if the market has been rallying in favor of a Biden, rather than a Trump victory. Why not? Nothing else has made sense all year? Maybe the market doesn’t favor the status quo normally associated with the incumbent.  Maybe President Trump’s late surge in the polls might be sending the market down! Who knows in these crazy times? However, given 200 years of documented history, let’s stick with our current “stock market poll” model. It has been right 87% of the time. In that model, we have moved from Trump Strongly Favored to Trump Mildly Favored as the Dow Jones Industrial Average parachutes to its 200-day line.

We all know Wall Street talks a good game. It must be quite a dilemma when the players get into the Voting Booth. On the one hand, they want open borders and Globalism – it is good for future business. On the other side, do you really think these millionaires and billionaires want to pay significantly higher taxes?

I would love to be a fly on that voting booth wall to see the lever that the wealth monikers actually pull! By the way, I drove up to Cheyenne, Wyoming, and voted yesterday. The lines were palatable. Of course, I think there are only 550,000 people in the entire State of Wyoming. We don’t need too many police either, as we are all well-armed. In a few dystopian TV dramas, Cheyenne becomes the capital of the Western States Alliance. Things that make you go mmm…

Back to the markets, the S&P 500 (our primary market proxy) managed to find support on the “weekly” 21-day line. That is the same line that stopped the August-September leg of the decline. Also, there was enough of a tilt on the daily chart yesterday to keep a triangle consolidation pattern in play.

Again, it is highly likely that the 40-week cycle topped in September. Confirmation of the 40-week trough would come if we actually tagged the 40-week future line of demarcation (FLD). 40 trading weeks and 200 trading days are the same number. Hence a trip to the 200-day line (magenta line in the chart above) is closely related to the cycle. The level is 3122 on the S&P 500 futures.

Trading ranges and consolidations are fickle so none of the cycle stuff is written in stone. Whether a triangle or rectangle, we could be defining a trading range that lasts a long, long time.

So let’s continue to enjoy our vacation from the tape. We will see how unemployment and third-quarter GDP reports influence the game in the next few days. Fear is rising – as the put/call ratio hit its highest level since June. A solid low is around the corner, albeit some fireworks could accompany it. Once a buy signal renders, you will be the first to know.

Navigator Algorithms – 100% Cash

I could not help the political reference as we wallow through the election quagmire for another week. Both campaigns have too much money at this point because there is very little white space left between political ads. I don’t know about anyone else, but I am in favor of longer terms rather than term limits. The insanity is too much to handle every two years with Congressional elections included.

But the analogy is somewhat accurate. After five trading days on the first floor (roughly S&P 500 Futures level 3417), we took a trip to the basement yesterday. We tagged 3356 intraday before turning around just a bit. Many people (including my own wife) have phobias about the basement – especially this time of year. Many a Halloween movie reminds us that there are evil things under the bed and in the basement. At least we were down here during the daylight. Overnight, we stayed near the top of the steps.

So what does a trip to the basement mean? Well, there is no press down here asking pesky questions. Whoops, that is a different topic. For the markets – particularly the S&P 500 and the NASDAQ 100 indexes, a trip to the basement meant that we took out every important level of support other than a single trendline that you can draw connecting the March and August lows. Alright then, a trendline is better than nothing, right? We were not searching for an underground waterfall. So we will take the basement floor around S&P 500 futures level 3350.

One way we can predict – or at least try to predict – what might unfold in terms of consolidation or correction – is to observe the wave pattern of the first decline. If the wave pattern is impulsive and subdivides into five distinct moves, that predicts a more ominous correction. But if it starts out as a three-wave pattern, that tends to predict something else. In the latter case, the market could likely to be forecasting a triangle.

A triangle is a healthy, consolidation pattern. It means that there are still some stocks going up and breaking out, while others are correcting. Believe me, the situation is more palatable than when nearly every stock is singing bass notes in unison.

By the way, isn’t the term “correction” such a polite word for losing money? Even in our business – there is certain political correctness in describing losses in polite circles – at least on the sell-side. The buy-side has much less polite vernacular and terms. Deplorables the buy siders are – as the saying goes.

So the classic “Bull Market” triangle pattern unfolds as follows:

Importantly, how that first decline leads to the “A” can tell you a lot about what lies ahead. No other pattern unfolds the same way. And that brings us to our current scenario:

The fact that the first decline in the current correction occurred in three distinct waves predicted the triangle pattern consolidation to a large extent. There is no other corrective pattern that begins with three waves or continues to subdivide into three waves. As always, we deal in probabilities, not certainties, so not every three-wave pattern rewards us with a triangle but most do. Another issue might be that our “C” leg is not quite done subdividing – indicating lower prices are still possible before we flip up to the “D” leg. Only time will tell.

The important point is that a triangle foretells consolidation rather than free fall. Bulls and bears have nearly equal power when we see such patterns. The pattern is healthy, implies some rotation, and is a much better way for the market to pause. In other words, we don’t need our parachutes in this kind of corrective pattern.

Now, as I am down here in the basement this morning I am noticing that other relic we have been discussing. On the first floor above the 3400ish level, President Trump is strongly favored to win the Presidency for a second term, but only mildly favored down here in the basement, For the numbers to flip to favor Vice President Biden, we would have to be in the bunker around 3200 or below. The analysis is based on financial market history. Socionomics Institute Director Matt Lampert is giving a seminar on the topic today at 2:30 PM MST – using the Dow Jones Industrial Average as his measure over the past 200 years. Given the lack of confidence in polls this year, the prediction promises to be interesting. One thing is for sure, Americans love a good horse race. You can register here.

And that leaves me with one, small housekeeping item. When you spend too much time in the basement, the Biden syndrome sets in and I am no exception. My senior moment was a misquote of the Navigator core model exit point and date. While the signal came intraday at 3501.75, for performance measurement we used the closing price of the day for our exit number which was 3471. The reason for this is simple – not everyone is next to the computer when the signal manifests. Moreover, the date was October 15th. Anyway, I need out of the basement to get some sunshine. Clearly, my brain needs it.

I am reminded of that old Chinese proverb. May you live in interesting times.

Navigator Algorithms – 100% Cash

Last Thursday, I introduced you to one of the best indicators around – WWSHD. When What Should Happen Doesn’t. On Weekends, I look at Friday’s S&P 500 candle, as well as the candle for the prior week. If those candles close in the upper third of the range, I expect some follow-through action in the same direction the following day, week, etc.. If the candle closes in the bottom third, I expect movement in a downward direction the next day, week, etc. If the close is in the middle of the candle – then my expectation stays neutral. There are other, important nuances better discussed in a video or class, but hopefully, you get the picture.

Last week, we were making a slow turn off some major support in the market consisting of the 21 and 50-day lines, the weekly expected move (“WEM”) low, and the previous week’s low all congregating around the roundie at S&P 500 3400. The weekly wandle and Friday’s candle all pointed to higher prices today and this week. Yet, the futures gapped down Sunday night in Globex, and promise to open this morning in decidedly negative territory.

Additionally, we are sitting at levels already tested last week and, by good arguments, levels we should not be revisiting this morning. The market will open below the 21-day line and already tested the uptrend line overnight. Think of it like that common retort we all make to our friends and family sometimes. Been There, Done That (“BTDT”). In the market, BTDT is not the retort we are looking for on what should be a follow-through day.

We also identified the slow turn off the important levels we reached last week as a slight change in market behavior. During the first phase of the China Virus rally that ended in August, the market would spend barely a nanosecond at the 21-day lines before bouncing off the level like a Super Ball (I put a link to define a Super Ball in case I am dating myself). Also, the turn stalled at the downtrend line connecting the candle tops from the latest peak on October 13, and from that level, the S&P 500 futures have been falling all night.

So, right out of the gate this morning the market is doing the opposite of what was expected. Globex trading occurs on light volume and is not always the end-all in predicting the next day. But the overnight price action is a contradiction not to be ignored. If the market drops below last week’s low, the only thing that will save it is the Expected Move Low down around 3387. The market makers will defend that price with their lives. Much below that price, even the market makers will bail and start selling futures to neutralize their portfolio deltas.

The Navigator Core S&P 500 index models are still 100% cash – not yet generating a buy signal. I am thankful for that this morning. I will drop a status report out to everyone mid-day.

Navigator Algorithms – 100% Cash

Nearly every Presidential election cycle has an October surprise, and this year is no different. But to have two Presidential elections in a row heavily influenced by emails must be some record. It was so much easier in the old days. If you were a crook or inclined toward illegal things, you picked up the phone or, if you thought they were tapped, you took a walk with your co-conspirator. True, if you broke the rules, you might end up in someone’s trunk someday.  Perhaps they would find you floating in the river. But at least life was simple and there were rules.

On the few occasions that I ventured into practicing law over the years, I often encountered legitimate people who avoided texts and emails because they could be so twisted in litigation. These smart people – not dishonest in the least – preferred to use the phone. They never feared phone taps (because they were not doing anything wrong). While my survey was anything but scientific, I noticed these clients were disproportionately more successful than many others I encountered. Maybe there is something to be said for a real conversation and genuine relationship.

On the few occasions that I ventured into practicing law over the years, I often encountered legitimate people who avoided texts and emails because they could be so twisted in litigation. These smart people – not dishonest in the least – preferred to use the phone. They never feared phone taps (because they were not doing anything wrong). While my survey was anything but scientific, I noticed these clients were disproportionately more successful than many others I encountered. Maybe there is something to be said for a real conversation and genuine relationship.

In any event, we will see if Mr. Biden survives the onslaught of text messages, emails, and “What’s App” revelations ahead. There is a lesson in this somewhere. At least Hillary was dying by her own emails. The hand of his son is slaying Mr. Biden. And the debate last night? If you missed it, there was actually some discussion of the issues our country faces. Refreshing!

That brings me to the “Trump Strongly Favored” line of our market-based Presidential election poll. We have pegged that line at 3400 on the S&P 500 index. The level was an important test for the market yesterday, as presented in our checklist in the morning outlook. Like the little engine that could, the market slowly rounded the corner and began to advance up the hill from the 3400 line. Volume wasn’t anything to write home about, but it wasn’t bad either.

Last night in Globex, the futures took out yesterday’s high – breaking a five-day losing streak. This morning, we come in with the futures on the downtrend line connecting the peaks from the October 12th blowoff high. To be sure, the line will provide some resistance. Maybe we get through the line, maybe not. Looking at the chart above, it seems more probable than not that we conquer the level.

Yet, when you step out to the monthly chart of the entire bull market that began in 2009, I ponder the old Alan Parson’s Project song, “Where do We Go From Here”? Indeed, “where do we go from here now that all of the children are growing up” as the song begins? It seems that the tech stars are hitting adulthood. I suppose that leaves a whole world of “value” children out there.

On the value list, I hinted earlier this week that I had my eye on financial and energy stocks – true infants by the current standards. I have already begun adopting some of these children.

Financials flipped above their 200-day moving average yesterday and may be poised for further gains. Interest rates are quietly climbing in the background to bolster bank profits.

Energy stocks should at least be good for a swing trade. Perhaps this sector truly is closing in on a bottom. A Biden Presidency unabashedly promises gasoline back at $6.00 per gallon, at least for as long as they allow gasoline vehicles and fossil fuels.

A Trump administration promises that oil can party on. The XLE is not as far along as the XLF in eliciting confidence, recalling our rule that the 200-day line (magenta in both charts) is the dividing line between bull and bear markets. We follow the rule even in the sectors.

I am only nibbling – adding to the positions as my confidence solidifies. While I cannot be sure this is the bottom for energy stocks, at least I have “stuck my toe in the oil,” as it were. Jed Clampett would be proud.

Perhaps if we temporarily set aside our tech obsession, there is plenty of opportunities out there. I would emphasize the word “temporarily,” as it gets lonely when you step too far away from the crowd.

There is always talk about being a contrarian – but what they forget to tell you about is timing. How can you make money if you are not with the crowd most of the time? It just that you need to be willing to go home early, and leave others to turn the music and lights off.

As mentioned above, interest rates are rising quietly in the background. rates are truly waking up, we better get them back on our radar.

As you will see below, 10-year yields are pushing the 200-day line (magenta) – though the latest climb is throwing an exhaustion (“E”) signal. Moreover, stimulus, if it ever comes, forestalls and maybe even prevents further bank loan losses.  The number of people behind on rent and mortgages is a staggering figure at the moment. So rest assured that there will be a Stimulus package soon, even if after the election. Higher rates and a Stimulus package are big boosts for bank profits.

Higher interest rates, climbing copper prices, the copper/gold ratio, business/consumer optimism – all point to economic strength ahead, not weakness. I truly believe that the broadening out of the rally from tech to real economy sectors is real this time, rather than another false start, as we have experienced several times since March. Famous last words, right?

And that brings me back to a “Tale of Two Candles.” In this story, observe the last two candles on the weekly chart below. The first tail (last week) rejects 3500 on the S&P 500 Futures. The tail this week rejects 3400. That leaves us around 3450 – stuck right in the middle. In addition, we remain in the August-September price range as we close out the week today.

A trading range is what one might expect, as investors shed some of their tech profits and rotate the funds to the children still in the orphanages. Perhaps a longer-term trading range is the best way to resolve the overbought conditions we found ourselves in last August. Clearly, a trading range is better than the deep dive we experienced in February and March.

Arthur