Navigator Trading Algorithms – 100% Cash
We exited the market today at SPX 3680 due to (i) lofty valuations, (ii) an expected minor correction ahead, (iii) an Algo sell alert, (iv) a rising wedge pattern, and (iv) the highest level ever recorded in the Dumb Money Index. A negative momentum divergence on today’s high also supported the exit, at least on the 195-minute (half-day candles) chart. I always prefer to sell into strength when possible, rather than give up gains into a 5-day EMA stop trigger. We will use the close today at 3666.75 for performance purposes.
So, where is the market headed? Wherever it wants – and it could care less what I think. It isn’t personal – just reality. Look, I always fade the Dumb Money. I wouldn’t say I like that crowd. It would be best if you faded them too – they are a bad influence. Like my mother used to say, “tell me who you walk with, and I will tell you who you are.”
But the caveat is that market internals remain strong. The economy was turning around (until the latest inexplicable lockdown orders). In fact, The crowd is so darn giddy that we could see a parabolic blow-off to the upside before it all comes tumbling down. That would be the guidance from the 1999 – 2000 Internet bubble.
Sure, I can trade a blow-off and likely will, but melt-ups don’t lend themselves to our core model. We could have a great gain for a week or two and then watch it evaporate or even turn to significant losses in one overnight session. Better to sit that out on a swing trading model until the dumb crowd is petrified again. As a trader, I won’t be holding overnight for now unless I have insomnia and need something to do.
What I know for sure is that this has been quite a run, and we still need to leap past that stubborn megaphone topline – a line that likes to give us 25% to 35% downdrafts. The leap past the megaphone sure seems a lot to ask, but Christmas is around the corner. Have you been naughty or nice?
Sometimes the market needs to go down to go up. If history is a guide, we are likely to have a sucker decline – a setback that makes everyone think we are headed to the bottom of the megaphone. Then the market will reverse and finally take out the megaphone highs. I am not expecting that here – more like Spring 2021 – but who knows?
And while “feelings” are for amateurs – my inner amateur is experiencing a growing feeling of dread – like something awful is about to happen, and it could negatively impact the markets. Our “inner amateur” usually leads us to losses, but I have convinced myself that I am leading with science and I cannot lose money in cash, can I? Likely, I need to turn off the news for a while.
Underscoring the science behind this exit, the next couple of weeks is the period that portfolio managers typically execute tax-loss selling trades, applying a bit of a negative bias to prices until the notorious Santa Claus rally period begins in the days surrounding the Christmas holiday.
Below is a historical composite of the day by day December S&P 500 performance. (This is part of my rarely revealed crystal ball aperture as mentioned in yesterday’s outlook). Focus on the green bars, and you will see that they tend to cumulate towards the end of the month – if history is to be a guide.
Some near term angst is not completely unjustified. After all, the world is topsy turvy at the moment. More stay at home orders? Really? Evidence of election fraud mounting? Choose your poison, but I feel like a crescendo is around the corner, and it might not be pleasant.
My dread is more likely rooted in knowing that we are in a Fourth Turning, the most unpleasant of the four generational cycles. Do not doubt the power of these cycles, persistent all the way back to Biblical times. More recently, the fourth turnings include the Revolutionary War (1774-1783), Civil War (1861 – 1865), and the Great Depression (1929 – 1941). The fourth turnings occur about 80 years apart – the span of a typical human life.
I studied these turnings many years ago along with the Kondratieff Wave (usually the midpoint of the four turnings). So absolutely nothing that is happening at the moment is a surprise to me. I fully expected it – though I was never sure what particular symptoms or events would manifest.
This final turning (each of the four turnings lasts about 20 years) started with the financial crisis and is not slated to end until about 2030. Hence, my concerns about the waterfall stock market decline that typically accompanies the turning. I will be writing a piece on this soon. In the meantime, it would be wise for you to read up on Howe and Strauss’s methods and theories on the generations. Their seminal works were written in the 1990s, but their last book “The Fourth Turning” was not only prescient, it is virtually a “fill in the blank” script to what we are currently experiencing – and will experience through the end of this decade. Here is an interview with Strauss from two weeks ago. On this – forewarned is forearmed.
Anyway, the first rule of trading is to protect your capital. Sometimes a return “of” your capital is more important than a return “on” your capital. I met my goal of popping our returns over 800%—all in all, that is not a bad year in light of the challenges presented. In fact, it is my best year as an advisor. So if I miss a little bit of gain – I will keep my FOMO (fear of missing out) in check.
I don’t know, but life without this kind of market might be like CNN without President Trump in office. Boring!
By the way, so much for the time off, right? Maybe now?