View from the Top – Interim Update

View from the Top – Interim Update

If I had one goal in these pages, it would be to give you advice you can actually follow and use. As I am sure you can attest, sometimes I get closer to the target than others. To a degree, all of the pontificating and speculation is pointless. And the question then becomes, why even try? Price, as it unfolds in front of us, is the best indicator of what to do next. Naturally, it takes time and experience to interpret price changes and volatility.

Also, there is nothing worse, at least in my view, than the advice “it might be this or it might be that.” I find myself saying “for God’s sakes, man, just spit it out and tell me what to do!” That is where the Navigator Algorithm is especially helpful. It is as close to the bottom line as it gets, and it has a 70% statistical probability of being correct. When you add a common sense stop-loss level to the signal, your losses are minimal even when the signal misses.

One reason the swing strategy (based on the Navigator Algorithm) allows for definitive calls is the time frame. The strategy is derived from daily data. Signals are far enough apart that you can actually execute them without living in front of your computer screens. 

With day trading, the speed of signals is such that about all I can do each morning is to identify the most important levels we are likely to encounter. Then, you can watch for a price pivot to occur if the level cannot be overtaken. If the level is overtaken, then you monitor for continuation.

All of that is well and good, but what the heck does this all mean? What does the process entail and how do you use it? What are all these crazy terms? What do you mean, “monitor for continuation?”

Very soon, both the swing and day-trading strategies will be detailed in password-protected portions of our website, along with checklists that will allow you to use these strategies to their fullest potential. In the meantime, let’s briefly review the big picture.

The Macro Narrative

The broad market peaked in early May. Currently, more the half of the stocks in the S&P 500 are trading below their 50-day moving average. Most of the 11 S&P 500 sectors are already in corrections. Only a few sectors are still holding the market up – most notably technology. 

The sector and stock weightings of the remaining positive areas are such that the indexes are still rising even though the majority of stocks are correcting. This is most pronounced in the NASDAQ 100, but also reflected in the S&P 500 index. My belief is that the few rising sectors left, such as technology, will surrender soon and we will have a more synchronous correction or pronounced trading range.

I thought it might be helpful to examine two periods from the past that are analogous to our current situation. These periods share recoveries from deep corrections such as the China Virus low we experienced last year, boosted by aggressive Fed intervention. In both cases, the nominal 18-month cycle low was not severe, as I am expecting now. I have noted that I am only expecting about a 10% correction that will eventually take us to the 200-day line.

The most notable, comparable market periods to the one at hand are the summers of 2004 and 2010. Both summers followed parabolic, Fed-policy-induced stock market recoveries from bear markets.

First, let’s look at the 2002-2004 period in the S&P 500:

In virtually the same time frame as we have recently experienced, the S&P 500 climbed 45% from the March 2003 lows. The market then peaked in the early spring of 2004 and corrected over the summer. Finally, the market ramped-up for a 15% gain into the end of the year. The March 2002 low to the late summer low in 2004 was the full, nominal 18-month cycle for the referenced time frame.

Now, let’s look at the summer of 2010:

[Insert Twilight Zone Theme]. Again, in virtually the same time frame as we have recently experienced, the S&P 500 climbed 81% off the March 2009 lows. The market also peaked in the early spring of 2010. Finally, the market corrected over the summer and then ramped up for a 15% gain into the end of the year. Once again, the March 2009 low to the late summer low in 2010 was the full, nominal 18-month cycle for the referenced time frame.

That is not all that was similar about the summers of 2004 and 2010 to current conditions. Both corrections were preceded by aggressive Fed stimulus and intervention for the economy and financial markets. In both periods, we had a summer of indigestion on speculation of the Fed pulling the reins back on the previously accommodative monetary policy, just as we are experiencing now.

A final but important point is that in both the 2004 and 2010 cases, cyclical and value stocks outperformed growth stocks in the final push into the end of the year. I don’t know if we can ring the bell three times, but let’s be alert for such a shift. Growth stocks have come back into the sun over the past few weeks, holding the S&P 500 and NASDAQ 100 indexes up by their proverbial fingernails.

So if you wondered why I am neutral to bearish, and perhaps why we have not yet achieved a buy signal in the Navigator swing strategy, now you have a little better insight into my thinking. Is this still pontificating? Speculation? Sure. But let’s hope it is “informed” speculation. It always helps to have a base case or two from the past to help understand the present. Human nature does not change – nor do the reaction and behavior of traders. Each period has its nuances, but they do tend to rhyme.

As always, however, I will do my best to keep an open mind as to all possibilities.

Stay tuned…

A.F. Thornton

AF Thornton

Website: https://tradingarchimedes.com

A.F. "Arthur" Thornton is an expert in logic, risk/reward quantification, market fractals, pattern recognition and asset class behavioral analysis with 34 years devoted to developing algorithmic and quantitative trading systems. In addition to trading his own capital, Mr. Thornton designs custom algorithmic and quantitative trading systems for a small and exclusive group of exceptionally qualified traders.

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