Down and Out

Down and Out

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…

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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