Category Founder’s Trading Journal

Navigator Algorithms – 100% Cash

The stock market sold off all morning and may be ready for a bounce at this writing. Regardless, the market has done quite a bit of damage absent a complete recovery this afternoon. The S&P 500 has been off nearly 100 points, the Nasdaq 100 nearly 300 points, and the Dow approaching 1000 points. The sell-off is being attributed to a rise in global China Virus cases. Yet we pointed to the change in market behavior we began to observe as much as a week ago.

Disappointment over the lack of stimulus and pre-election jitters may be more than enough to scare off buyers today – as opposed to the fluctuating level of China Virus cases. Also, today seems more of a “lack of buyers” decline as opposed to heavily motivated sellers. And perhaps a more complex correction pattern is underway, such as a large triangle, which pins the correction start all the way back to the September peak.

If we are starting into more of an extended decline, it is likely to bottom in a week or two. I don’t see the market tipping its hand either way as yet. Today’s action, if we close in the bottom of the candle range, would be decidedly negative.

It is best to be patient, and look for the Algos to bring us back in at the right time. The Navigator algorithms took us to cash at 3405 on October 12th. There is no sign of a buy signal yet and the index has been as low as 3356 today. Even the bounce underway could easily be a shorting opportunity, though the put/call ratio is rising to indicate that some healthy fear may finally be entering the markets here.

Stay tuned and be patient. Remember that you are a sniper – waiting for the kill shot. Put your pistol away.

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