From the Top Down

This new and focused publication will record my current, intermediate view of the U.S. stock market as defined by the S&P 500 index and interpreted by our proprietary Navigator Algorithm™. It will typically published over the weekend. I will issue various buy and sell signals along the way – as further discussed below. You can extrapolate the information in these pages to most U.S. equity indexes and stocks. I choose the S&P 500 index to represent the U.S. stock market because it is the most heavily traded equity index globally.

When the Navigator Algorithm™ is in a sell signal, going long the stock indexes, sectors, or individual stocks is like swimming up river. Why is this so? Because there are numerous studies that prove 60% of any stock or sector’s return is attributable to whether the market is going up or down. With so much indexing these days, the market’s influence is likely even greater than the older studies would indicate. I like to say that there is probability, plausibility, and actuality. Luck is not in my vocabulary – so why fight the headwinds of probability.

In 2020, the Navigator™ swing strategy focused on being in or out of one S&P 500 E-mini futures contract resulting in a nearly 900% return. This year, I expanded the strategy to include trades in the other major indices and options on some leading sectors, using Sector ETF’s. The returns have been rewarding, and I will have the results back today from the accountants for the first quarter. But to be frank with you, it is too much work. Just the fact that I need accountants – because the stocks, options and futures are in three different places with three different custodians – illustrates the complexities involved.

When one has a successful market model and algorithm such as the Navigator™, indeed we are open to a world of possibilities. One can broaden out to other indices, sectors, and even individual stocks. I have leaned in that direction a bit this year, mostly because I get bored.

However, I also have to remind myself that I don’t live to trade; I trade to live (the wife likely would challenge that statement). The S&P 500 index itself is diversified and safe enough that long ago, I decided that it would be less work to solely trade the index. To enhance returns, I use the leverage offered by options and futures to make all the money I need.  That approach has served me well, and I am returning to it for the rest of the year in the swing strategy. It also helps to keep these writings simple and focused on the bottom line. In or out, long or short, those are the only issues.

The chart below is the best illustration of the S&P 500’s cycle location. This particular chart shows the path of the nominal 18-month cycle, the fact that it likely is peaking, and the preliminary correction target.