Archives 2020

Week Ahead

Navigator Algorithms – 100% Long

A quick reminder, I am still vacationing, so this outlook will be brief. I will be back to my daily commentary after the New Year. In the meantime and other than buy and sell signals, the commentaries will come weekly, and they will be brief.

Surfing the charts this weekend, I came to a few conclusions. First, there is additional confirmation that the economy is on the mend. Second, navigating the sectors right now has been a bit like a relay race – lots of stops, starts, curves and passing the baton back and forth. 

On the economic front, Dr. Copper is confirming an economic turnaround. Though not always perfect, the Doc has a fair record of predicting economic growth. Copper prices decisively broke their 10-year downtrend this month. Let me be the first to welcome Dr. Copper back to the party.

Speaking of parties, Oil is seeking an invitation as well. While it has yet to break its recent downtrend line, it is well on its way to test it. Recall that they were paying us $50 a barrel to buy oil in April, now we need to pay them $45 a barrel. Take a wistful look at the 1980’s prices at the gas pump – going, going, gone! 

I am also keeping an eye on the U.S. Dollar. The dollar index ($DXY) is throwing a pattern indicating it could break its current support and head to the 2008 lows.

So is this U.S. Dollar decline a problem? Well, if they are selling dollars, the question is, what are they doing with the proceeds? So far, global stock markets are rising. For now, I am interpreting the dollar sell-off as fear abating while investors shift into “risk-on” assets. This investor behavior endorses the buying in copper and oil as anticipating an economic turnaround. 

Nevertheless, let’s keep an eye on the dollar. If the outflows head somewhere else, we may need to reevaluate.

Turning to the sectors, the relay race is running two batons back and forth. Since the race started with investors shifting tech profits in the real economy sectors – when the real economy sectors are short-term overdone, they shift back to tech and vice versa. The baton passed back to the Tech Monsters on Thursday.

My two favs – oil and financials – do look a bit overextended at the moment, while tech looks poised to move higher. Apple (AAPL), Netflix (NFLX), and Amazon (AMZN) all look interesting after consolidating since August. Take a look. The yin-yang shift back and forth between the tech monsters and the real economy sectors is poised to continue.

My bottom line continues: the market looks healthy but lofty.

Careful tomorrow, as it is month-end. The end to an incredible month, indeed, starting with Hockey Stick Vaccine Day on November 9th. 

By the way, we have yet to kick the hockey stick high from that day, maybe tomorrow if the force is with us?

Navigator Algorithm Models – 100% Invested

Overnight, the Asians followed through on late afternoon selling in the U.S., but the Europeans scooped up the bargain right off the S&P 500 futures’ 5-day exponential moving average (“EMA”). So, the last three days left us with a triangle pattern on the 24-hour chart. 

Triangles are usually bullish, continuation patterns, likely to give us one more thrust to the upside to test last week’s hockey stick high. Notably, the Weekly Expected Move high and the 10-day volume profile value area high all congregate with the hockey stick high around 3665. The lower line of the triangle continues to ride the 5-day EMA to keep this rally leg alive.

With the holidays arriving soon, it is time to set some targets. At this writing, the S&P 500 futures are trading at 3613. We are out on this last buy signal at a profit target of 3662. Alternatively, if we experience an hourly close below the 5-day EMA during a regular day session, we will honor that as a stop signal.  The 5-day EMA sits at 3593.81 at this writing. Unlike our target price, the stop level it is a moving target – so stay alert.

I will update the target and stop as necessary, but honor these levels until further notice.

Navigator Algorithm Models – Fully Invested

As if 2020 could not possibly get stranger, the World Economic Forum (“WEM”) headquartered in Davos, Switzerland, tweeted a new video on the “Great Reset” yesterday. The video has already been deleted – as the WEM’s transparency wasn’t well-received. While the WEM claims no partisan leanings, there is no question that the forum leans left.

While leftist, the WEM is no fringe group. In the introduction to the featured video, Canadian Prime Minister Pierre Trudeau is prominently featured. President Trump and other US Presidents have both attended and spoken at the annual meeting, usually held in January. Naturally, President Trump’s 2020 speech to the group was not well-received. The next meeting has been postponed until May 2021. 

You will be hearing more and more about the Great Reset in the coming days. In short, the Great Reset is the latest attempt to coerce the world into a single, authoritarian and communist government with control over every aspect of our lives. Two notable 2030 goals are outlined in the video. First, “you won’t own anything but you will be happy.” Second, the United States will no longer be the world’s leading superpower.

I could not possibly make this up, and I want to emphasize that this is not fringe stuff. This is mainstream leftism that may be forced upon us by our own leaders, as they surrender United States sovereignty for the “Greater Good.” I am beginning to wonder – did I awaken into an alternate universe from my three-day coma in July? Can I choose another level in the multiverse?

Meanwhile, back at the final frontier of capitalism, the US Stock Market, we experienced two, strong back-to-back sessions on Friday and Monday. I was pleased to see above-average volume supporting the climb yesterday. Breadth (participation) has been terrific. As just one example, the percentage of stocks above their 50 and 200-day lines rival records set the last few years. 

We are due for some backing and filling today, so a pullback is in order. I am expecting the S&P 500 to hold the 3600 level and continue the climb to the topline of the megaphone channel.

The toughest decision for me will be when the S&P 500 reaches the megaphone topline. I would rather sell into strength to cap off the year. But let’s see how it goes. Meanwhile, our target (mental) stop remains the 5-day exponential moving average, which sits around 3587 and provides support so far this morning.

On a housekeeping note, I am taking the rest of the year easy. So my writings will be limited to once a week, significant events or signals.

Navigator Algorithm Models = 100% Cash

This morning I will discuss the continuing divergence – or under performance – of the NASDAQ 100 relative to the S&P 500, Dow Industrial, and Russell 2000 indices. Divergences tend to lead peaks in the indices – but not always. I examine the current situation and potential for a melt-up, highlighting that the divergence may be tolerable in light of healthy sector rotation. More rotation follows this morning on another positive vaccine announcement from Moderna. But is all of this what the market has already anticipated, making a peak more likely? I assess this problem as well, as we approach the top line of the megaphone channel again.

Let’s begin with a trip down memory lane. When you can’t even get a price, the market is in trouble. On this day in 1999, the NASDAQ’s total trading volume pushed toward a record of 1.5 billion shares. The NASDAQ’s trading systems melted down under strain, and electronic quotes and trade reports were unavailable for 17 minutes in the late afternoon.

Was the market in a miserable correction? No. The market and the NASDAQ 100 were melting up into the tech bubble that peaked the following year. I don’t need to remind many of you what happened next. We did not find the first bottom of that fiasco until October 2002. And we tested that bottom again all the way out in March 2009, which is where our current bull likely began.

That is seven years of attempted progress only to boomerang to the same starting point. Depending on your circumstances and timing, that can put quite a negative spin on your “buy and hold” plan, especially if you retired in 2009. For a trader, however, it was all a dream come true.

Current parallels to 1999 are a bit unsettling. We saw the 1999 NASDAQ 100 index melt-up into the Internet stock bubble.  Perhaps the Internet stocks are close cousins to the rip-roaring, stay-at-home technology stocks of our time. 1999 saw record IPOs as now. Lest I forget, 1999 saw a soon to be contested Presidential election on the horizon. Haunting, isn’t it?

Back to the future, Moderna announced a nearly 95% effective rate for its new China Virus Vaccine this morning. Rumors of the announcement had already floated over the weekend. Not surprisingly then, the equity futures markets opened strong in the first 30 minutes of trading last night and remain near that level now. Using the S&P 500 futures as our market proxy, the index conquered 3600 again, just as it did a week ago on the Pfizer announcement. Vaccines before the end of the year are nothing short of extraordinary accomplishments in these extraordinary times.

For the markets, however, there is always a caveat. As the old Wall Street saying goes – “buy the rumor and sell the news.” The genesis of the axiom is this – the stock market is a leading indicator. It anticipates the future. But what happens when that future arrives? Has that future arrived? Should we bail here?

The fabulous rally that has ensued since March was fueled by a realignment of paradigms favoring stay-at-home technologies. This accelerated uptrends in stocks already poised to benefit. The earnings that followed have not disappointed. No doubt there was a dose of vaccine optimism, and a few false rotation starts, but nothing solid. In a sense, then, the future has somewhat arrived but not completely.

Investors all along maintained a healthy skepticism about vaccines and their timing. In light of this, investors left many real economy stocks behind. The latter group is now getting its day in the sun on the vaccine news. Rotation of profits from tech into real economy sectors, alone, is no reason to bail. In fact, this is exactly how a new bull market should unfold.

Personally, I am still conflicted as to whether this is a new bull market or a continuation of the old one. It likely does not matter. Broadening the rally’s wings as the climb unfolds keeps the patient healthy.

We will follow the algorithms, but it makes sense to let the catch-up rally manifest before running for the hills. We could even be entering a melt-up phase in the current market such as we experienced in 1999. If this were 1999, there was still gas in the tank before the 2000 peak. Just remember that the Internet Bubble did peak finally, as all bubbles do.

I have mentioned my personal focus on financial and energy stocks, but index investors also are spreading their wings into the Russell 2000 Small Cap Index (IWM is the ETF symbol), now on the verge of new, all-time highs. Investors also seem to be favoring the real-economy orientation of the Dow Jones Industrial Index (DIA is the ETF symbol). The Dow index just recently achieved all-time highs and is approaching 30,000 this morning, surely another milestone.

That brings me back to the divergence that is “gentle” on my mind. The NASDAQ 100 has continued to under perform the other major indices this morning and in Globex, just like last week. I think of the NASDAQ 100 as the generals and the stocks catching up as the soldiers. We often discussed that the market could not continue to live on a handful of tech stocks alone, just as you cannot fight a war with the generals alone. The soldiers must follow, and now they are.

So I am making some allowance for the NASDAQ 100 underperformance. Healthy profit-taking in these names is understandable, as long as the money rotates into the soldiers and does not leave the battlefield.

Regardless, I never sleep in the proverbial sense. I always have one eye open.

The NASDAQ 100 divergence requires our continued consideration, as do reasonable upside profit targets.

We are once again approaching the top channel line of the megaphone pattern. The line remains just under 3700 on the S&P 500 futures contract. We tagged 3668 as the all-time high on the S&P 500 futures a week ago today. Frankly, I am still straining to find another, higher target unless we are truly in a melt-up. I will continue to work at it.

What I could see happening is a looping crawl up and along the S&P 500 Index megaphone top channel line for a time. There have been other, rather long periods where the index hugs the upper channel line. Many of those periods also reflected a dose of rotation. Anyway, that is an optimistic view.

The alternative is a larger correction or continuation of the recent trading range. There is also the thought of some longer-term cycle, such as the 80-year cycle, coming down over the top of us, as we discussed last week. The possibility is no more pleasant than the roof caving in at your home. Consequently, we need to stay vigilant.

Truly, there is no rest for the weary in this undertaking of trading and investing. Yet, the endeavor remains an all-encompassing and alluring puzzle. It keeps me busy and my mind off the other craziness in the news.

For today, enjoy the market’s respite from the other problems in the spectrum. We will leave the bubble and cycle worries for another day.

Be careful.

Navigator Algorithms – 100% Cash

The market is grumpy. We have all been there. When our significant other is grumpy, is there anything you can say or do? She will filter the bad over the good. It is best to avoid him. It is that “get out of my way or I’ll kill you” kind of mood.

And so we have avoided this latest market down-leg while the indexes try to find their footing. Facebook, Apple, and Google reported yesterday. Was it good news? Well, that depends on your mood and your filter. They all blew out their numbers, but there was something to pick on if you are in a bad mood. There always is.

iPhone sales could be better. Google has regulatory fears. Amazon indicated that it might take more lockdowns than previously expected to take over the world.

We learned yesterday that Europe is aiming to please Amazon with more lockdowns. But Europe did report a nice third-quarter GDP overnight, about half of what the US reported yesterday. The US had the best quarterly GDP ever!

But wait, isn’t the GDP expected to pop up when you are climbing out of a hole? Anyway, none of this really matters because when the market is grumpy – there is no pleasing it. We all live with someone like that, right? You have to let go of what should happen and live in what is happening at some point.

Looking at the S&P 500 cash (as opposed to futures) index above, we rounded a slow turn yesterday off a less than ideal trendline and the weekly 21-EMA. This keeps the triangle consolidation scenario alive, albeit for one more day.

But despite the great GDP and FAANGMAN group earnings reported yesterday, the futures have been off significantly overnight (as much as -400 in Dow points). We began to recover a bit in the wee morning hours after the positive European GDP arrived. That left us a spiky spine on the overnight futures candle.

On a positive note, traders explored the territory below the trendline – but it bounced back. At this writing, we are still slated for a negative opening. We will see what happens as the morning wears on.

And that magenta 200-day line, our usual appointment when the 40-week cycle tops, looks like you could reach out and practically touch it. Were the cycle to come in right on cue (and they never do, or my computer would be trading for me), we would see this correction (such a polite term) end in the third week of November. One guess would be we go to the 200-day line, rally, then retest it for good measure after the election. It is fun to speculate, but we will let the Navigator tell us what to do next. And, in furthering the speculation, let’s briefly visit the cycle chart below.

You can see the projected, composite cycle path on the gray dotted line above. The whiskers at the bottom set the range for the 40-week cycle to land. Scientifically and mathematically then, the pressure should let up a few weeks after the election. But in the topsy turvy year of 2020, I don’t think the math really paints the picture.

So pick your poison. More lockdowns, the virus surge, China tensions, Marxists, looters, or States and Cities running out of money. When the market is in a bad mood, there is never a shortage of boogie men in the closet to support it.

But as I have learned over the past 33 years, when the 40-week cycle tops, the market corrects.  The pundits simply tag the decline with the latest bad news filter. It is the proverbial chicken and egg quandary. Granted, the magnitude of a 40-week cycle decline can be impacted by the news of the day, but the decline will happen regardless. You can take that to the bank, just as the moon, sun, and planets cycle dependably. One day, I will explain why. For this morning, I prefer to avoid the moody market and do something else.