Navigator Algorithms – 100% Cash
I could not help the political reference as we wallow through the election quagmire for another week. Both campaigns have too much money at this point because there is very little white space left between political ads. I don’t know about anyone else, but I am in favor of longer terms rather than term limits. The insanity is too much to handle every two years with Congressional elections included.
But the analogy is somewhat accurate. After five trading days on the first floor (roughly S&P 500 Futures level 3417), we took a trip to the basement yesterday. We tagged 3356 intraday before turning around just a bit. Many people (including my own wife) have phobias about the basement – especially this time of year. Many a Halloween movie reminds us that there are evil things under the bed and in the basement. At least we were down here during the daylight. Overnight, we stayed near the top of the steps.
So what does a trip to the basement mean? Well, there is no press down here asking pesky questions. Whoops, that is a different topic. For the markets – particularly the S&P 500 and the NASDAQ 100 indexes, a trip to the basement meant that we took out every important level of support other than a single trendline that you can draw connecting the March and August lows. Alright then, a trendline is better than nothing, right? We were not searching for an underground waterfall. So we will take the basement floor around S&P 500 futures level 3350.
One way we can predict – or at least try to predict – what might unfold in terms of consolidation or correction – is to observe the wave pattern of the first decline. If the wave pattern is impulsive and subdivides into five distinct moves, that predicts a more ominous correction. But if it starts out as a three-wave pattern, that tends to predict something else. In the latter case, the market could likely to be forecasting a triangle.
A triangle is a healthy, consolidation pattern. It means that there are still some stocks going up and breaking out, while others are correcting. Believe me, the situation is more palatable than when nearly every stock is singing bass notes in unison.
By the way, isn’t the term “correction” such a polite word for losing money? Even in our business – there is certain political correctness in describing losses in polite circles – at least on the sell-side. The buy-side has much less polite vernacular and terms. Deplorables the buy siders are – as the saying goes.
So the classic “Bull Market” triangle pattern unfolds as follows:
Importantly, how that first decline leads to the “A” can tell you a lot about what lies ahead. No other pattern unfolds the same way. And that brings us to our current scenario:
The fact that the first decline in the current correction occurred in three distinct waves predicted the triangle pattern consolidation to a large extent. There is no other corrective pattern that begins with three waves or continues to subdivide into three waves. As always, we deal in probabilities, not certainties, so not every three-wave pattern rewards us with a triangle but most do. Another issue might be that our “C” leg is not quite done subdividing – indicating lower prices are still possible before we flip up to the “D” leg. Only time will tell.
The important point is that a triangle foretells consolidation rather than free fall. Bulls and bears have nearly equal power when we see such patterns. The pattern is healthy, implies some rotation, and is a much better way for the market to pause. In other words, we don’t need our parachutes in this kind of corrective pattern.
Now, as I am down here in the basement this morning I am noticing that other relic we have been discussing. On the first floor above the 3400ish level, President Trump is strongly favored to win the Presidency for a second term, but only mildly favored down here in the basement, For the numbers to flip to favor Vice President Biden, we would have to be in the bunker around 3200 or below. The analysis is based on financial market history. Socionomics Institute Director Matt Lampert is giving a seminar on the topic today at 2:30 PM MST – using the Dow Jones Industrial Average as his measure over the past 200 years. Given the lack of confidence in polls this year, the prediction promises to be interesting. One thing is for sure, Americans love a good horse race. You can register here.
And that leaves me with one, small housekeeping item. When you spend too much time in the basement, the Biden syndrome sets in and I am no exception. My senior moment was a misquote of the Navigator core model exit point and date. While the signal came intraday at 3501.75, for performance measurement we used the closing price of the day for our exit number which was 3471. The reason for this is simple – not everyone is next to the computer when the signal manifests. Moreover, the date was October 15th. Anyway, I need out of the basement to get some sunshine. Clearly, my brain needs it.
I am reminded of that old Chinese proverb. May you live in interesting times.