Archives December 2020

Navigator Algorithms – 100% Cash

A week ago today, we were back to cash after a beautiful buy signal and small profit off the 21-day line on the previous Friday’s S&P 500 index. With our year-to-date returns solidly north of 800% (an 8-bagger for the year as it is affectionately referenced in trading jargon) – there was no incentive to play around when the market failed to follow-through on the bounce.

But the market gyrated the rest of the week right through to Friday’s last half-hour close – eeking out a small gain. From Tesla’s inclusion into the S&P 500 index to all the year-end shuffling, even I thought the S&P 500 Futures would hold 3700 and the Dow 30,000.

After all, Santa Claus is slated to arrive for his year-end rally around December 15th or so, and what could be better than a boost from a Stimulus package, finally reached in Congress Sunday and slated to pass some time today?

Then I remembered, this is the year from hell. Nothing is what it seems or what it was. Given the equal opportunity dream killer that the market can be, what would be the best way to fool this giddy crowd right before Christmas? Voila, I wake up to the S&P 500 futures parachuting into a low volume pocket, hitting the ground at 3600. That is about 1,000 Dow points off the peak in Globex at the open Sunday night.

Granted, it is 4:00 am here in the mountains, and New York does not open for another 3.5 hours. But a cruel, downside gap appears to be awaiting the longs at morning coffee. Needless to say, I am happy we are in the audience seats, popcorn in hand, to watch this unfold. At the same time, we must also be alert for the buy, as the market has breached the mean at the 21-day line, leading us further south for the winter.

Once again, I am reminded how much smarter the Navigator Algorithms are than I am, having painted double sell alerts – warning of the market’s potential, short-term demise. The yellow down arrows on the chart below are the alerts painted, with that prominent engulfing red candle at the end showing the overnight action at this writing.

I also want to pay homage to the dumb money – that Robinhood App crowd. We need each other. Who else would feed us these wonderful profits all year? When they zig, it is best to zag and vice versa. The more new traders, the merrier. Apparently, there are 14 million of them, and we are happy to take their money. This is a zero-sum game, after all.

So, where does that leave us, and what does this sell-off mean? Is this the end of the bull? Will we revisit the bottom of the megaphone pattern from this top at Mount Everest? Are we facing the second coming of the toilet paper crisis?

Funny you should ask. Rather than focusing on my usual homework, I spent the weekend preparing my 2021 forecast. You will find it quite interesting. The theme centers around the idea that 10-years of the digital revolution have been compacted into a year, and the implications for trading, investing, and life, in general, are profound.

For now, we could blame this decline on the new lockdowns, the new strain of the virus, the election, and all manner of bad things. However, at the end of the day, there is always something to tag for a rally or decline in the markets. And perhaps the Stimulus passing later today will be the catalyst for a turn back to the north.

For now, the chart above is enough of an explanation for me. The Dumb Money has been giddy while the smart money had already headed for Christmas vacation. Once again, I am reminded of that famous quote from my mother when she didn’t like one of my friends – “tell me who you walk with, and I’ll tell you who you are.”

The 2021 forecast video will be out by the end of this week. In the meantime, be on alert for a buy signal.

AF Thornton

Navigator Algorithms – 100% Cash

We are out of the market and back to cash. Yesterday’s dramatic reversal from the morning gap higher was beyond disappointing. And it is not much of a holiday when I have to keep returning to these pages.

Yesterday, I noticed that Joe Biden was voted in by the Electoral College. For the most part, I found that no worse than the shock when I woke up from a coma in July and Donald Trump was President. I am still not entirely certain I am awake or that this is not an alternate universe. The next thing you know, we will be embracing communism. But the “Great Reset” requires a separate discussion. Fourth Turnings are just that miserable, and I wish I could skip the next 10 years or so. Rest assured, the 2030’s promise to be much better if we can make it that far.

So we caught a Navigator Algorithm buy signal in the markets on Friday. Our trade location was fabulous. Yesterday morning I looked like a genius. Always beware when you begin to feel like a genius in trading. It may mean you are about to get your head handed to you.

After blasting out of the gate to a 30-point gap and gain yesterday, the market sold off for the rest of the day. Fortunately, we had moved our stop up from Friday, and we had a small gain on the signal. It is hard to complain, with our returns north of 800% for the year. It is only the second time that we have been stopped out close to a buy signal.

So, what does the market’s behavior yesterday portend? Certainly, the WWSHD signal comes to mind – When What Should Happen Doesn’t. Many traders and investors forget this important signal – hinting that you should reverse course – a significant directional clue in and of itself. More likely, it may simply be that tax-loss selling is not yet complete. Tax loss selling is the typical pastime for money-managers going into mid-December.

If anything is truly ailing the markets, a Stimulus bill could give it a shot in the arm, at least temporarily. At the moment, more lockdowns threaten first-quarter GDP. Sentiment remains giddy, and the Dumb Money Confidence, barely off its all time high, continues to cast a shadow over the bulls. Maybe the pros wanted to sling a few arrows at the idiots yesterday – ouch! Who knows for sure?

The market is faring better this morning. But “fool me once, etc.” comes to mind. Our Asian and European friends, apparently unconcerned with U.S. taxes (or elections), were definitely buying last night

And that brings us back to the Santa Claus rally and our projection back a few months that the S&P 500 could eventually tag 4000 if it could break the Megaphone pattern topline. The “breaking process” is still underway (see below), if such a break is really possible. I cannot yet report that the Megaphone topline is in our rear-view mirror.

Maybe the best news is that Santa Claus is slated to arrive any time after tomorrow. As we saw yesterday, money managers are reshuffling their decks. The end of the calendar quarter, just like the end of the year, is an adventure in window dressing – which often triumphs logic.

Stepping out of the weeds (5-minute charts) just for a moment, I look to the right side of the weekly S&P 500 Futures chart above, and it bears some resemblance to a cliff. Again yesterday, someone fell off a cliff having their picture taken. Nice view, right? It happens more often than you think.

Then I ask myself, what if the crowd’s unbridled optimism is dead wrong? What if Santa skips this year due to his own Covid-19 fears? What if the market already reflects the most optimistic case – buy the rumor sell the news kind of logic?

Let me say this about that – I am not posing for pictures any time soon.

As always, stay tuned, and my next writing should be Sunday…

The market is roaring out of the gate this morning, likely to Gap nearly 30 points on the S&P 500 Index and 300 points on the Dow.  This is a quick and significant return from Friday’s Navigator Algorithm buy signal at 3645.50. Our year-to-date results in the Core Navigator Model are now approaching 850%.

For context, we had been in the Nominal 40-day Cycle markdown coming into the third week of the month, where most year-end tax-loss selling should be complete, and the market can resume its seasonal strength into the year-end Santa Claus rally. Sentiment remains frothy, so while we worked off some complacency, there is little fear in the market now, which can lead to sudden and painful liquidation breaks.

This week, the S&P 500 Index will attempt to hold 3750 and its 21-Day EMA as it makes a run back up to test the 3700 Roundie and attempt new highs. Already, the market gapped open in Globex on above-average volume and broke the downtrend on the 30-minute chart. The daily chart has made a Pivot Low so far with the overnight action, and conquering Thursday’s high would make the Pivot Low look even more plausible. Gap and Go would be a distinct possibility this morning – but the gap may be too large to trade long.

The market will encounter resistance around 3677 where the 10-day POC, Daily 5 EMA. Daily 8 EMA and the 50 / 61.8 Fib Resistance (from the recent decline) congregate. We need to monitor the market’s progress up the ladder and see if the price is accepted back up in the Value Area from last week. The 30-day RTH chart will be our key as price should stay in the upper half of the K-Bands, with the 21-EMA acting as support. 

I will put out some big picture commentary later today. Election risks continue to loom, but the market appears unconcerned at the moment, reacting favorably this morning to the US Supreme Court’s decision Saturday to reject a bid to overturn the election.  The Fed also meets this week, which will give us additional insight into the Fed’s Yield Curve Control strategy. Still, no significant change to monetary policy is expected as the risks to economic growth increase in the wake of more lockdowns through year-end.

Stay tuned, and move your stop up to two ticks below the 5-day EMA if we can hold above it at the close.

Navigator Buy Signal – 100% Invested at 3645.50

We are moving back into the S&P 500 Index Core Model on a Navigator Algorithm buy alert. Our entry for the founders group is at 3645.50 with a stop at 3643.50. Risks remain high – very high – as sentiment is still frothy and election risks loom. An attentive, hard, GTC stop is very important for this signal. More information over the weekend.

Navigator Algorithms – 100% Cash

Just a day or so after two of the most reliable fear gauges had warned of investor complacency, the Tech Monsters got quite the spanking yesterday. The NASDAQ 100 erased six days of gain in a single session, and the S&P 500 did not fare much better. With their capitalization weightings, the Tech Monsters disproportionately walloped the major market indices in the same way they carried the market off the March bottom. We enjoyed watching from the sidelines, but now we need to find the bottom and redeploy our cash.

The broader market fared better, with Bank and Energy stocks eeking out small gains. This indicates that rotation from “stay at home” to “real economy” stocks is alive and well. Rotation will cradle the downdraft for now. As long as it does, I am not expecting a full-blown meltdown. It is conceivable that the new crop of retail amateurs could panic at some point, and that could make matters worse. For now, let’s take it a day at a time.

My initial target is the mean – the 21-day Exponential Moving Average – on both the NASDAQ 100 and the S&P 500 Indices. Lets see how the market handles that rest stop on these indices to make a further forecast.

The core of the Navigator™ Algorithms is a mathematical analysis of the dance around the mean, folding in a variety of components that coincide when the market is stretched too far, ready to snap back like a rubber band. Market sentiment, as measured by the fear gauges mentioned above and others, is an important component of the algorithms, though weighted less than many others. As I have learned over the years, investors can stay giddy much longer than I can last trying to short the market.

Keep in mind that stimulus looms in the background – which could punish a short position faster than your fingers can reach the keyboard. The market will welcome another $1 trillion dollars injected into the economy with open arms. Heaven only knows the price we will eventually pay for all this debt, but that is a discussion for another day.

For now, stay on alert for a buy signal.

Navigator Trading Algorithms – 100% Cash

We exited the market today at SPX 3680 due to (i) lofty valuations, (ii) an expected minor correction ahead, (iii) an Algo sell alert, (iv) a rising wedge pattern, and (iv) the highest level ever recorded in the Dumb Money Index. A negative momentum divergence on today’s high also supported the exit, at least on the 195-minute (half-day candles) chart. I always prefer to sell into strength when possible, rather than give up gains into a 5-day EMA stop trigger. We will use the close today at 3666.75 for performance purposes.

So, where is the market headed? Wherever it wants – and it could care less what I think. It isn’t personal – just reality. Look, I always fade the Dumb Money. I wouldn’t say I like that crowd. It would be best if you faded them too – they are a bad influence. Like my mother used to say, “tell me who you walk with, and I will tell you who you are.” 

But the caveat is that market internals remain strong. The economy was turning around (until the latest inexplicable lockdown orders). In fact, The crowd is so darn giddy that we could see a parabolic blow-off to the upside before it all comes tumbling down. That would be the guidance from the 1999 – 2000 Internet bubble.

Sure, I can trade a blow-off and likely will, but melt-ups don’t lend themselves to our core model. We could have a great gain for a week or two and then watch it evaporate or even turn to significant losses in one overnight session. Better to sit that out on a swing trading model until the dumb crowd is petrified again. As a trader, I won’t be holding overnight for now unless I have insomnia and need something to do.

What I know for sure is that this has been quite a run, and we still need to leap past that stubborn megaphone topline – a line that likes to give us 25% to 35% downdrafts. The leap past the megaphone sure seems a lot to ask, but Christmas is around the corner. Have you been naughty or nice? 

Sometimes the market needs to go down to go up. If history is a guide, we are likely to have a sucker decline – a setback that makes everyone think we are headed to the bottom of the megaphone. Then the market will reverse and finally take out the megaphone highs. I am not expecting that here – more like Spring 2021 – but who knows? 

And while “feelings” are for amateurs – my inner amateur is experiencing a growing feeling of dread – like something awful is about to happen, and it could negatively impact the markets. Our “inner amateur” usually leads us to losses, but I have convinced myself that I am leading with science and I cannot lose money in cash, can I? Likely, I need to turn off the news for a while.

Underscoring the science behind this exit, the next couple of weeks is the period that portfolio managers typically execute tax-loss selling trades, applying a bit of a negative bias to prices until the notorious Santa Claus rally period begins in the days surrounding the Christmas holiday.

Below is a historical composite of the day by day December S&P 500 performance. (This is part of my rarely revealed crystal ball aperture as mentioned in yesterday’s outlook). Focus on the green bars, and you will see that they tend to cumulate towards the end of the month – if history is to be a guide.

Some near term angst is not completely unjustified. After all, the world is topsy turvy at the moment. More stay at home orders? Really? Evidence of election fraud mounting? Choose your poison, but I feel like a crescendo is around the corner, and it might not be pleasant. 

My dread is more likely rooted in knowing that we are in a Fourth Turning, the most unpleasant of the four generational cycles. Do not doubt the power of these cycles, persistent all the way back to Biblical times. More recently, the fourth turnings include the Revolutionary War (1774-1783), Civil War (1861 – 1865), and the Great Depression (1929 – 1941). The fourth turnings occur about 80 years apart – the span of a typical human life.

I studied these turnings many years ago along with the Kondratieff Wave (usually the midpoint of the four turnings). So absolutely nothing that is happening at the moment is a surprise to me. I fully expected it – though I was never sure what particular symptoms or events would manifest.

This final turning (each of the four turnings lasts about 20 years) started with the financial crisis and is not slated to end until about 2030. Hence, my concerns about the waterfall stock market decline that typically accompanies the turning. I will be writing a piece on this soon. In the meantime, it would be wise for you to read up on Howe and Strauss’s methods and theories on the generations. Their seminal works were written in the 1990s, but their last book “The Fourth Turning” was not only prescient, it is virtually a “fill in the blank” script to what we are currently experiencing – and will experience through the end of this decade. Here is an interview with Strauss from two weeks ago. On this – forewarned is forearmed.

Anyway, the first rule of trading is to protect your capital. Sometimes a return “of” your capital is more important than a return “on” your capital. I met my goal of popping our returns over 800%—all in all, that is not a bad year in light of the challenges presented. In fact, it is my best year as an advisor. So if I miss a little bit of gain – I will keep my FOMO (fear of missing out) in check.

I don’t know, but life without this kind of market might be like CNN without President Trump in office. Boring!

By the way, so much for the time off, right? Maybe now?